-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GKCXXdxHNbb6APRLa3vIRS7lAoJNzP6efMm4AVVQ5fnCHJ9RnOUxQolniA0WfXi3 WPg0zVhUbItis4U5/XfW/Q== 0000891618-99-004130.txt : 19990913 0000891618-99-004130.hdr.sgml : 19990913 ACCESSION NUMBER: 0000891618-99-004130 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19990910 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUINTUS CORP CENTRAL INDEX KEY: 0001024678 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770021612 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-86919 FILM NUMBER: 99709744 BUSINESS ADDRESS: STREET 1: 47212 MISSION FALLS COURT CITY: FREMONT STATE: CA ZIP: 94539 BUSINESS PHONE: 5106242800 MAIL ADDRESS: STREET 1: 47212 MISSION FALLS COURT CITY: FREMONT STATE: CA ZIP: 94539 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ QUINTUS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 77-0021612 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
47212 MISSION FALLS COURT FREMONT, CALIFORNIA 94539 (510) 624-2800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ALAN K. ANDERSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER QUINTUS CORPORATION 47212 MISSION FALLS COURT FREMONT, CALIFORNIA 94539 (510) 624-2800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: SCOTT C. DETTMER DOUGLAS H. COLLOM DAVID T. YOUNG ROBERT F. KORNEGAY DOUGLAS T. SHEEHY PRIYA CHERIAN HUSKINS KEVIN A. LUCAS SCOTT GIESLER GUNDERSON DETTMER STOUGH WILSON SONSINI GOODRICH & ROSATI VILLENEUVE FRANKLIN & HACHIGIAN, LLP PROFESSIONAL CORPORATION 155 CONSTITUTION DRIVE 650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304 (650) 321-2400 (650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(A) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------ Common Stock, $0.001 par value........................ $59,800,000 $16,624.40 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
(a) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION -- , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 1999 LOGO SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- QUINTUS CORPORATION: - - We provide a comprehensive software solution to manage customer interactions and deliver consistent customer service across multiple communication channels, including the Internet, email and advanced telephony systems. - - Quintus Corporation 47212 Mission Falls Court Fremont, California 94539 (510) 624-2800 PROPOSED SYMBOL AND MARKET: - - QNTS/Nasdaq National Market THE OFFERING: - - We are offering shares of our common stock. - - The underwriters have an option to purchase up to additional shares from Quintus to cover over-allotments. - - This is the initial public offering of our common stock. We anticipate that the initial public offering price will be between $ and $ per share. - - We plan to use the proceeds from this offering for working capital and other general purposes, and for the required payment of approximately $18.2 million to holders of some series of our preferred stock. - - Closing: , 1999.
- ------------------------------------------------------------------------------ Per Share Total - ------------------------------------------------------------------------------ Public offering price: $ $ Underwriting fees: Proceeds to Quintus: - ------------------------------------------------------------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED SG COWEN DLJDIRECT INC. WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. 3 [INSIDE FRONT COVER ARTWORK TO FOLLOW] 4 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or any sale of the common stock. In this prospectus, unless the context indicates otherwise, "Quintus," "we," "us," and "our" refer to Quintus Corporation, a Delaware corporation, and its wholly-owned subsidiaries, "Acuity" refers to Acuity Corp., a Delaware corporation, and "Nabnasset" refers to Nabnasset Corporation, a Delaware corporation. TABLE OF CONTENTS
Page Prospectus Summary.................. 3 Risk Factors........................ 7 Special Note Regarding Forward- Looking Statements................ 17 Use of Proceeds..................... 17 Dividend Policy..................... 17 Corporate Information............... 18 Capitalization...................... 19 Dilution............................ 20 Selected Consolidated Financial Data.............................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 23
Page Business............................ 36 Management.......................... 49 Certain Transactions................ 61 Principal Stockholders.............. 64 Description of Capital Stock........ 67 Shares Eligible for Future Sale..... 70 Underwriting........................ 72 Legal Matters....................... 74 Experts............................. 74 Change in Accountants............... 75 Additional Information.............. 75 Index to Consolidated Financial Statements........................ F-1
5 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding Quintus and the common stock being sold in this offering and our consolidated financial statements and the related notes included elsewhere in this prospectus. Unless otherwise indicated, all information in this prospectus assumes the closing of our acquisition of Acuity prior to the effectiveness of this offering. QUINTUS CORPORATION We provide a comprehensive e-Customer Relationship Management or eCRM solution to manage customer interactions and deliver consistent customer service across multiple communication channels, including the Internet, email and advanced telephony systems. Our Quintus eContact software suite includes customer relationship management applications that address the needs of sales and service, consumer relations, technical support and human resources contact centers and a sophisticated routing engine to manage customer interactions. eContact enables companies to handle high volumes of customer interactions, increase the efficiency of contact center resources and leverage cross-selling and up-selling opportunities. Customer service is increasingly critical to attracting and retaining customers. Many companies are re-orienting their businesses to be more responsive to customer needs and are focusing on customer satisfaction as a means of differentiation. In addition, the emergence of the Internet as a major platform for communication and commerce has increased competition for customers and reduced the importance of traditional competitive advantages such as price, location, availability and access. International Data Corporation estimates that the number of customers buying goods and services over the Internet worldwide will grow from approximately 30.8 million in 1998 to 182.6 million in 2003 and that the value of these purchases will increase from $50.4 billion to $1.3 trillion over the same period. The Internet enables customers and companies to interact in more ways than ever before. In addition to traditional, telephone-based communications, customers and companies can now interact through email, Web chat and Web self-service. The Gartner Group estimates that approximately 25% of all customer interactions will take place over the Internet via email or Web communications by 2001. As a result of the growing number of communication channels, companies are struggling to handle the volume and variety of customer interactions. Customers increasingly expect to be able to interact with companies through whichever channel best suits their needs and are likely to use a combination of communication channels. For example, a customer may request product literature via email, review marketing materials or fill in an application on the Web, call to receive more detailed information or assistance, send a signed form by fax, and check the status of an order online. We believe a significant market opportunity exists for solutions that integrate a broad range of communication channels and manage the entire customer interaction lifecycle. The Quintus eContact software suite provides a platform for the personalization, routing and management of customer interactions. Our eContact suite enables consistent customer service through the use of common workflows and business rules, shared customer profile information, uniform cross-selling and up-selling strategies, and consolidated management and reporting functions. 3 6 The Quintus eContact suite includes: - eContact engine, the foundation of our eContact suite, provides advanced routing, tracking, management and reporting functionality, and consolidates all relevant customer information into a common data repository. - Channel applications enable companies to manage customer interactions across multiple communication channels, including the Internet, email and advanced telephony systems. - Business applications address the needs of sales and service, consumer relations, technical support and human resources contact centers and are tightly integrated with our eContact engine. In addition, we provide professional services, customer service management, technical support and educational services to facilitate successful customer implementations. Our objective is to be the leading provider of eCRM software solutions. Key elements of our strategy include maintaining and extending our technology leadership, broadening our direct and indirect distribution channels, targeting Global 1000 and leading Internet-based companies, and developing and expanding strategic relationships. We sell our products through a direct sales force in North America and indirectly through resellers and distribution partners worldwide. We have over 250 customers across many industries including financial services, telecommunications and consumer products. Our customers include Anheuser-Busch, Citigroup, First Union Bank, Lucent Technologies, Procter & Gamble, Sun Microsystems and United Airlines. ACQUISITION OF ACUITY On September 10, 1999, we entered into an agreement to acquire Acuity, a provider of software products to manage Internet-based customer interactions. We are currently integrating Acuity's WebCenter and WebACD products into our Quintus eContact suite in order to provide a more comprehensive eCRM solution. The acquisition is structured as a merger in which Acuity will become our wholly-owned subsidiary and the stockholders of Acuity will become our stockholders. The total number of our shares to be issued plus the number of shares issuable upon exercise of options and warrants we will assume in connection with the acquisition will equal 18% of our fully-diluted capitalization immediately following the acquisition. The closing of the merger is subject to regulatory approval and the approval of Acuity's stockholders. We expect to close this acquisition prior to the effectiveness of this offering. 4 7 THE OFFERING Common stock offered............ shares Common stock to be outstanding after the offering.............. shares Use of proceeds................. For working capital and other general corporate purposes, and for the required cash distribution upon the completion of this offering of approximately $18.2 million to holders of some series of our preferred stock. Proposed Nasdaq National Market symbol........................ QNTS Generally, unless otherwise indicated, all information in this prospectus: - gives effect to the conversion of all outstanding shares of preferred stock into shares of common stock effective upon the closing of this offering; and - assumes no exercise of the underwriters' over-allotment option to purchase up to additional shares. The number of shares of our common stock to be outstanding after the offering includes: - shares of our common stock outstanding as of August 31, 1999; - an estimated 4,530,000 shares to be issued in connection with our acquisition of Acuity; and - 247,602 shares issuable upon the exercise of outstanding warrants that otherwise terminate upon the closing of this offering. The number of shares of our common stock to be outstanding after the offering does not include: - 3,682,772 shares issuable upon exercise of options outstanding as of August 31, 1999, including options to be assumed in connection with our acquisition of Acuity; - 613,723 shares reserved for future issuance under our stock option plans as of August 31, 1999; - 2,500,000 shares reserved for future issuance under our stock plans subsequent to August 31, 1999; - 755,043 shares issuable upon exercise of warrants outstanding as of August 31, 1999, including warrants to be assumed in connection with our acquisition of Acuity; and - 300,000 shares issuable upon exercise of warrants granted subsequent to August 31, 1999. 5 8 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ----------------------------- ------------------- 1997 1998 1999 1998 1999 STATEMENT OF OPERATIONS DATA: Revenues............................. $13,614 $ 21,890 $ 30,307 $ 7,552 $10,293 Gross profit......................... 8,443 13,600 21,130 5,521 7,654 Net loss from continuing operations........................ (3,526) (10,146) (10,586) (2,786) (690) Net loss............................. (3,526) (11,249) (11,466) (2,976) (690) Basic and diluted net loss per common share from continuing operations........................ $ (3.73) $ (0.20) ======== ======= Shares used in computation, basic and diluted........................... 2,835 3,506
The pro forma as adjusted column of the table below gives effect to the: - sale of 1,363,334 shares for proceeds of $11.2 million on August 26, 1999; - issuance of an estimated 4,530,000 shares and the assumption of approximately $1.8 million in debt in connection with our acquisition of Acuity; - issuance of 247,602 shares upon the assumed exercise of outstanding warrants that otherwise terminate upon the closing of this offering; - required payment of approximately $18.2 million to holders of some series of our preferred stock upon conversion of our preferred stock into our common stock; - sale in this offering of shares of common stock at an assumed initial public offering price of $ per share; and - conversion of all outstanding shares of our preferred stock into shares of our common stock upon the closing of this offering.
AS OF JUNE 30, 1999 --------------------- PRO FORMA AS ACTUAL ADJUSTED BALANCE SHEET DATA: Cash...................................................... $ 467 $ Working capital (deficiency).............................. (8,909) Total assets.............................................. 20,724 Long-term obligations, less current portion............... 1,649 Liability related to redeemable convertible preferred stock.................................................. 17,811 Total stockholders' equity (deficiency)................... (20,622)
6 9 RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and the other information in this prospectus before investing in our common stock. Our business and results of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment in our common stock. WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR FUTURE LOSSES. We have not had a profitable quarter and we cannot assure you that we will become profitable. We expect to increase our sales and marketing, research and development, and other expenses as we attempt to grow our business. As a result, we will need to generate significant revenues to achieve profitability, which we may be unable to do. We have funded our operations through the sale of equity securities, borrowings and the sale of our products and services. We incurred net losses from continuing operations of $3.5 million, $10.1 million, $10.6 million and $690,000 in fiscal 1997, 1998 and 1999 and for the three months ended June 30, 1999. As of June 30, 1999 we had an accumulated deficit of $37.0 million. In addition, in September 1999, we entered into an agreement to acquire Acuity which had incurred net losses of $6.6 million, $7.7 million and $2.2 million in the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1999. Acuity had an accumulated deficit of $21.7 million as of June 30, 1999. Upon the closing of the acquisition of Acuity, we will record approximately $41.5 million of intangible assets, which will be amortized on a quarterly basis over five years. In connection with the acquisition of Acuity, we expect to recognize a charge for in-process technologies of approximately $3.0 million in the quarter ending December 31, 1999. BECAUSE WE RECENTLY EXPANDED THE SCOPE OF OUR PRODUCT OFFERINGS, IT MAY BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS PROSPECTS. You should not evaluate our business prospects based on our historical operating results. In February 1999, we expanded the scope of our product offering with the introduction of the Quintus eContact suite. To date no customer has implemented our eContact suite. Prior to 1999, we sold some of the components that are included in our eContact suite, but we have only recently begun to sell the components that enable companies to manage customer interactions over Internet-based communication channels. We cannot assure you that our eContact suite will achieve market acceptance. In addition, we are still in the process of integrating Acuity's WebCenter and WebACD products and third-party providers' email and call routing functionality into our eContact suite. We may encounter technical difficulties, delays and unforeseen expenses as we continue our product integration and development efforts relating to eContact. IF OUR INITIAL IMPLEMENTATIONS OF THE QUINTUS ECONTACT SUITE SUFFER UNUSUAL PROBLEMS OR DELAYS, OUR REPUTATION AND FUTURE OPERATING RESULTS MAY BE HARMED. We are just beginning to deploy our eContact products as an integrated suite. We cannot assure you that the initial implementations of our eContact suite will succeed without problems or delays. Although we have deployed some of the components that are included in our eContact suite, we have not deployed eContact with integrated computer telephony, email, Web chat and Web self-service capabilities. To complete a full implementation of our eContact suite, we have to complete the integration of its components and will likely have to integrate eContact with a wide variety of complex systems currently used by our customers. If these implementations meet with significant technological obstacles, we may be forced to spend additional resources, which may harm our 7 10 operating results. If the ease and speed of these implementations do not meet the expectations of our customers, our reputation and ability to sell our eContact suite will be harmed. THE TRADING PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE IN RESPONSE TO FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS. We believe that quarter-to-quarter comparisons of our operating results may not be meaningful. It is likely that in some future quarter our operating results will be below the expectations of public market analysts and investors. If this happens, the trading price of our common stock may fall substantially. Our revenues and operating results are likely to vary significantly from quarter to quarter due to a variety of factors, including the risks we describe in this section. Our ability to forecast revenue is limited. We derive substantially all of our revenues from licenses of our software and related services. License revenues in any quarter are substantially dependent on orders booked and shipped in that quarter, and we cannot predict revenues for any future quarter with any significant degree of certainty. Our expenses are relatively fixed and are based, in part, on our expectations of future revenues. Consequently, if revenue levels do not meet our expectations, our financial results will be adversely effected. In addition, we expect that sales derived through indirect channels, which are more difficult to forecast, will increase as a percentage of total revenues in the future. THE FAILURE TO OBTAIN A LARGE PROSPECTIVE CUSTOMER COULD CAUSE OUR REVENUES TO DROP QUICKLY AND UNEXPECTEDLY. We depend upon a limited number of large sales for a substantial portion of our revenues in each quarter. For example, in the three months ended June 30, 1999, our largest customer accounted for 19.3% of our total revenues. Our failure to successfully close one or more large sales in any particular period could cause our revenues to drop quickly and unexpectedly. We expect to continue to be dependent upon a limited number of customers for a significant portion of our revenues and these customers are expected to vary from period-to-period. The loss of a prospective major customer could result in our failure to meet quarterly revenue expectations. THE SUCCESS OF OUR BUSINESS RELIES HEAVILY ON INDIRECT DISTRIBUTION CHANNELS, PARTICULARLY OUR DISTRIBUTION AGREEMENT WITH LUCENT TECHNOLOGIES. If Lucent Technologies were to cease reselling our products or offer competing products, our business would be harmed. Lucent Technologies accounted for 9.2%, 19.3% and 33.9% of our total revenues in fiscal 1998 and 1999 and for the three months ending June 30, 1999. Our distribution agreement with Lucent Technologies expires in May 2000 but can be terminated on 30 days' notice following a material breach of the agreement. Lucent Technologies is not obligated to make any minimum purchases. In addition, the loss of a reseller, the failure of a reseller to sell our products, or our failure to attract and retain qualified new resellers in the future could also harm our business. Typically our resellers do not have minimum purchase or resale obligations, can cease marketing our products at any time, and may offer competing products. We intend to expand our indirect distribution channels by establishing additional relationships with resellers and distribution partners. Competition for these relationships is intense, and we may be unable to establish relationships on favorable terms, if at all. Even if we are successful in establishing these relationships, they may not result in substantial increases in our revenues. 8 11 A SUBSTANTIAL PORTION OF OUR REVENUES RESULT FROM SALES OF OUR QUINTUS CTI PRODUCT. If sales of our Quintus CTI product do not meet our expectations, our operating results will be harmed. Revenues from our Quintus CTI product were 39.6% and 40.1% in fiscal 1999 and for the three months ended June 30, 1999. We expect that revenues from our Quintus CTI product will continue to account for a substantial portion of our revenues in the future. WE FACE A NUMBER OF RISKS RELATED TO OUR PENDING ACQUISITION OF ACUITY, AND WE MAY FACE SIMILAR RISKS IN THE FUTURE IF WE ACQUIRE OTHER BUSINESSES OR TECHNOLOGIES. In September 1999, we entered into an agreement to acquire Acuity and began integrating its WebCenter and WebACD products into the Quintus eContact suite. If we are unable to effectively integrate Acuity into our operations, including its products, personnel and systems, our business and operating results are likely to suffer. This integration will be made more difficult by Acuity's operations being located in Austin, Texas, where we currently have no other operations. We have just begun to integrate Acuity with our operations and we expect this integration to place a significant burden on our management team. The acquisition of Acuity will be our third acquisition within the last three years, and we may make more acquisitions in the future. If we are unable to integrate effectively any newly acquired businesses, technologies or products, our operating results could suffer. Integrating any newly acquired businesses, technologies or products may be expensive and time-consuming. Future acquisitions could also result in large and immediate write-offs for in-process research and development, increased amortization charges or the incurrence of debt and contingent liabilities, any of which could harm our operating results. To finance acquisitions, we may need to raise additional funds through public or private financings. Additional funds may not be available on favorable terms, or at all, and, in the case of equity financings, may result in dilution to our stockholders. Moreover, we may not be able to operate any acquired businesses profitably or otherwise implement our growth strategy successfully. IF WE FAIL TO SUCCESSFULLY EXPAND OUR SALES, MARKETING AND CUSTOMER SUPPORT ACTIVITIES, WE MAY BE UNABLE TO EXPAND OUR BUSINESS. We cannot expand our business without highly trained sales, marketing and customer support personnel to educate existing and prospective customers, systems integrators and resellers regarding the use and benefits of our products, and to provide effective customer support. We have replaced a large number of our sales people during the last year. As a result, the size of our sales force has not grown substantially, and many of our sales personnel are new to us. We expect our new sales personnel will require substantial training in our products and sales practices. New sales personnel tend to be less productive than those with greater experience selling our products. Moreover, we intend to hire additional direct sales force personnel in the United States. Competition for qualified sales personnel is particularly intense in the software industry. In the past, we have experienced difficulty hiring employees with appropriate qualifications in the timeframe we desired. Any delays or difficulties we encounter in these recruiting, training or retention efforts could impair our ability to attract new customers and enhance our relationships with existing customers. UNLESS WE ARE ABLE TO OVERCOME SUBSTANTIAL COMPETITION IN THE ECRM MARKET, WE WILL NOT BE ABLE TO GROW OR SUSTAIN OUR REVENUES. We cannot assure you that we will be able to compete successfully against current and future competitors. Increased competition is likely to result in price reductions, reduced margins and loss of market share, any of which could harm our business, financial condition and results of operations. In 9 12 order to be successful in the future, we must respond promptly and effectively to technological change, changing customer requirements and competitors' innovations. The introduction of new products by competitors or shifts in market demands could render our existing products obsolete. We may not be able to compete effectively in the future as current competitors expand their product offerings and new companies enter the rapidly evolving eCRM market. We currently face competition primarily from customer relationship management software vendors such as Siebel Systems and Clarify, emerging Internet customer interaction software vendors such as Kana Communications and WebLine Communications, and computer telephony software vendors such as Genesys Telecommunications Labs. Because there are relatively low barriers to entry in the software market, we expect additional competition from other established and emerging companies. Potential future competitors include traditional call center technology providers and large enterprise application vendors as well as independent systems integrators, consulting firms and in-house information technology departments that may develop solutions that compete with our products. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, sales, marketing and other resources, greater name recognition and a larger installed base of customers than we do. As a result, these competitors can devote greater resources to the development, promotion and sale of products than we can and may be able to respond to new or emerging technologies and changes in customer requirements more quickly than we can. Current and potential competitors have established and may in the future establish relationships among themselves or with third parties to increase the ability of their products to address the needs of our current or prospective customers. In addition, a number of companies with significantly greater resources than ours could attempt to increase their presence in the eCRM market by acquiring or forming strategic alliances with our competitors. As a result, it is likely that new competitors or alliances among competitors will emerge and may rapidly acquire significant market share, which would harm our business, financial condition and results of operations. WE RELY ON RESELLING BRIGHTWARE'S EMAIL MANAGEMENT PRODUCT AND CISCO SYSTEMS-GEOTEL COMMUNICATIONS' CALL ROUTING PRODUCT IN ORDER TO PROVIDE SOME OF THE FUNCTIONALITY OF OUR ECRM SOLUTION. We resell Brightware's software to provide the email management functionality of our Quintus eContact suite and resell the Cisco Systems-GeoTel Communications' Intelligent Contact Management product to provide call routing functionality. Our agreement with Brightware can be cancelled without cause upon 60 days' notice. If Brightware were to cancel our reseller agreement or be acquired by one of our competitors, or their email management product were otherwise unavailable to us, we would likely incur substantial delays and costs as we attempt to integrate alternative email management functionality into our product suite. In particular, there may be few alternative sources for Brightware's natural language text analysis and automated email response functionality. Our agreement with Cisco Systems-GeoTel Communications expires in April 2000 and may be terminated if a breach of the agreement is not resolved within 30 days' notice. If Cisco Systems-GeoTel Communications were to cancel our reseller agreement or if their call routing product were otherwise unavailable to us, we would not be able to provide call routing functionality as part of our eContact suite. In addition, if we were not able to resell Brightware's product or Cisco Systems-Geotel Communications' product, customers that require such functionality would have to purchase those products separately. As a result, the sales process with our prospective customers would be complicated by the need to coordinate with a third party. 10 13 OUR BUSINESS WILL SUFFER IF THE ECRM MARKET DOES NOT DEVELOP AND GROW. The eCRM market is new, not well defined and may not grow. The use of email, Web chat and Web self-service as channels for companies to interact with their customers is recent and may not grow as expected. Concerns about the security, reliability and quality of service may inhibit the growth of Internet-based customer service. In addition, our potential customers are just beginning to look for comprehensive solutions to manage customer interactions across multiple communication channels. Our future success will depend on the increased market acceptance of comprehensive solutions for the management of customer interactions. IF WE ARE NOT ABLE TO MAINTAIN AND DEVELOP RELATIONSHIPS WITH SYSTEMS INTEGRATORS, THE ACCEPTANCE OF OUR PRODUCTS AND GROWTH OF OUR REVENUES WILL BE IMPEDED. We rely on systems integrators to promote our solution and implement our products. If we fail to maintain and develop relationships with systems integrators, our revenues may be harmed. We currently rely on systems integrators such as AnswerThink Consulting Group, Cambridge Technology Partners and Technology Solutions Company to recommend our products to their customers and to install our products. If we are unable to rely on systems integrators to implement our products, we will likely have to provide these services ourselves. As a result, our ability to grow may be harmed. Systems integrators may develop, market or recommend products that compete with our products. Moreover, if these systems integrators fail to implement our products successfully, our reputation may be harmed. OUR LENGTHY AND VARIABLE SALES CYCLE MAKES IT DIFFICULT TO PREDICT THE TIMING OF A SALE OR WHETHER A SALE WILL BE MADE. The timing of our revenues is difficult to predict in large part due to the length and variability of the sales cycle for our products. Customers often view the purchase of our products as a significant and strategic decision. As a result, our customers tend to take significant time and effort to evaluate our products. The amount of time and effort depends in part on the size and the complexity of the deployment. This evaluation process frequently results in a lengthy sales cycle, typically ranging from three to nine months. During this time we may incur substantial sales and marketing expenses and expend significant management efforts. We do not recoup these investments if the prospective customer does not ultimately license our product. IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS OR PRODUCT ENHANCEMENTS ON A TIMELY BASIS, OR IF THESE PRODUCTS OR PRODUCT ENHANCEMENTS DO NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE MATERIALLY HARMED. Our future success will depend on our ability to effectively and timely anticipate and adapt to customer requirements and offer products and services that meet customer demands. Our failure to introduce products or services that satisfy customer requirements would harm our ability to remain competitive in the eCRM market. Some of our customers may want features and capabilities that our products do not have. As a result, we may need to develop features for our products, which may result in a longer sales cycle, increased research and development expenses and reduced margins on our products. In addition, the development of new or enhanced products is a complex and uncertain process. We may experience design, development, marketing and other difficulties that could delay or prevent the introduction of new products and enhancements. 11 14 OUR BUSINESS WOULD SUFFER IF WE DO NOT RETAIN OUR KEY PERSONNEL. Our future success depends on the continuing service of our senior management and other key personnel. The loss of the services of one or more of our key personnel could seriously harm us. Most of our key personnel are not bound by employment agreements. In addition, we do not carry key person life insurance on any of our employees. Our future success also depends on our continuing ability to attract, hire, train and retain a substantial number of highly skilled personnel. Competition for qualified personnel in our industry is intense, particularly for software development and technical personnel. Our business would be seriously harmed if we are unable to attract and retain key employees or other highly qualified personnel in the future. WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY. We have experienced rapid growth and plan to continue to significantly expand our operations. We may not be able to manage our growth effectively, which would impair our ability to attract and service customers and cause us to incur higher operating costs. Expanding our operations has placed a significant strain on our personnel and other resources. Our revenues have grown from $13.6 million in fiscal 1997 to $30.3 million in fiscal 1999. Our headcount increased from 113 at the end of fiscal 1997 to 158 at the end of fiscal 1999. For the three months ended June 30, 1999, our revenues were $10.3 million and our headcount was 181. Upon the closing of our acquisition of Acuity, we will have additional employees and operations to manage. As of June 30, 1999, Acuity had 92 employees. To manage our growth effectively, we may need to further improve our operational, financial and management systems. IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR INTERNATIONAL OPERATIONS, OUR OPERATING RESULTS MAY SUFFER. We have limited experience in international operations and may not be able to compete effectively in international markets. We currently intend to expend significant financial and management resources to expand our international operations. We believe that the future expansion of our international operations is important to the growth of our business. Most of our international sales are generated through resellers and distributors, and we expect substantial costs and resources will be required to train and support these resellers. Among the various risks we face in conducting business internationally are: - difficulties and costs of staffing and managing foreign operations; - longer accounts receivable payment cycles and possible difficulties in collecting accounts receivable, which may increase our operating costs and hurt our financial performance; - technology standards that are different from those on which our products are designed, which could require expensive redesigns of our products; - political and economic instability; - unexpected changes in regulatory requirements that could make our products and services more expensive and therefore less attractive to potential customers; and - fluctuations in currency exchange rates and the imposition of currency exchange controls. 12 15 To date, our international product sales have been denominated in U.S. dollars. To the extent the U.S. dollar appreciates against foreign currencies our products would become less competitive in foreign markets. IF WE ARE UNABLE TO LICENSE THIRD-PARTY TECHNOLOGIES, WE MAY BE REQUIRED TO EXPEND TIME AND RESOURCES TO OBTAIN SUBSTITUTE TECHNOLOGY. Our products incorporate technologies that we license from third parties. Although we believe we could obtain similar functionality from alternative sources, substituting and integrating replacement technologies could require us to divert substantial development resources. As a result, it could delay the shipment of existing products pending the integration of the replacement technology and could delay the introduction of new products or enhancements as a result of the diversion of development resources. In addition, we may be required to license replacement technologies on terms less favorable than our current terms, which would increase our expenses. If we are unable to obtain the third-party technologies necessary for the successful operation of our products, our business would be harmed. UNKNOWN SOFTWARE DEFECTS COULD HARM OUR BUSINESS AND REPUTATION. Our software interacts with other complex systems and software. Our software products may contain defects, particularly when first introduced. Despite our software testing procedures, we may not discover software defects that affect our products until after they are deployed. These defects could result in: - damage to our reputation; - lost sales or product returns; - product liability claims against us; - delays in or loss of market acceptance of our products; and - unexpected expenses and diversion of resources to remedy errors. The occurrence of any of these events would negatively impact our operating results. In addition, our customers generally use our products together with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. Therefore, even if these problems are not caused by our products, they may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel and cause significant customer relations problems. A PRODUCT LIABILITY SUIT AGAINST US COULD HARM OUR BUSINESS. A successful product liability claim brought against us could harm our reputation and business. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential liability claims. However, it is possible that the limitation of liability provisions contained in our license agreements may not be effective under the laws of certain jurisdictions. Moreover, our standard liability limitations may be reduced during contract negotiations. Although we have not experienced any product liability claims to date, we may in the future. In addition, even if not successful, a product liability suit against us could harm our reputation and business. 13 16 OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY IMPAIR OUR COMPETITIVE POSITION. Third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. We cannot be certain that the steps we have taken to prevent the misappropriation of our intellectual property are adequate, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. In addition, we enter into confidentiality agreements with our employees and certain customers, vendors and strategic partners. Quintus has one issued U.S. patent and one filed U.S. patent application. Through our acquisition of Acuity, we will acquire one additional issued U.S. patent as well as nine additional filed U.S. patent applications. We cannot assure you that any patents will be issued from these applications or that any issued patent will protect our intellectual property. Furthermore, other parties may independently develop similar or competing technology or design around any patents that may be issued to us. We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and the diversion of our technical and management personnel. WE MAY FACE COSTLY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS. If third parties claim that our products infringe on their intellectual property rights, we may be forced to seek expensive licenses, re-engineer our products, engage in expensive and time-consuming litigation or stop marketing the challenged product. Further, by contract we typically indemnify our customers against infringement claims related to our products. In the past third parties have alleged that our products infringe their patents. Third parties may make similar allegations in the future. In addition, because the contents of patent applications in the United States are not publicly disclosed until the patent is issued, we may not be aware of applications that have been filed which relate to our software products. We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time- consuming and could divert management's attention away from running our business. This litigation could also require us to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all. Our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis in a cost-effective manner would harm our business. WE COULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR THE SYSTEMS OF OUR CUSTOMERS OR MATERIAL THIRD PARTIES ARE NOT YEAR 2000 COMPLIANT. We may experience material problems and costs associated with Year 2000 compliance that could adversely affect our business, results of operations and financial condition. If systems do not correctly recognize date information when the year changes to 2000, we could experience - potential warranty or other claims by our customers; - errors in systems we use to run our business; - errors in systems used by our suppliers; - errors in systems used by our customers; and 14 17 - the potential reduced spending by other companies on contact center products as a result of significant information systems spending on Year 2000 remediation. We have not yet fully developed a contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness of our critical operations. The cost of developing and implementing such a plan may itself be material. Any of these events could significantly harm our business, financial condition and results of operations. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE. The stock markets have in general, and with respect to technology companies in particular, recently experienced substantial stock price and volume volatility. The stock markets may continue to experience volatility that may adversely affect the market price and trading volume of our common stock. Stock prices for many companies in the technology sector have experienced wide fluctuations that have often been unrelated to their financial performance. Similar fluctuations may affect the market price of our common stock. In addition, if we fail to address any of the risks described in this section, the market price of our common stock and the value of your investment could decline significantly. SALES OF OUR COMMON STOCK FOLLOWING THIS OFFERING COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. The value of your investment in our common stock and our ability to raise money through the sale of additional equity securities could be adversely affected if our existing stockholders sell large amounts of their Quintus common stock. If significant volumes of our common stock are sold into the market, the market price of our common stock and therefore the value of your investment could fall. This could impair our ability to raise capital through the sale of additional equity securities. Based on shares outstanding as of August 31, 1999, upon completion of this offering, we will have shares of common stock outstanding (or shares if the underwriters' over-allotment option is exercised in full). Our directors, executive officers and holders of substantially all of our current stock have executed lock-up agreements with the underwriters that limit their ability to sell shares of our common stock. These parties have agreed not to sell or otherwise dispose of any shares of our common stock for a period of at least 180 days after the date of this prospectus without the prior written approval of Donaldson, Lufkin & Jenrette Securities Corporation. When these lock-up agreements expire, many of these shares and the shares of common stock underlying any options held by these individuals will become eligible for sale. See "Shares Eligible for Future Sale" YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price of our common stock is expected to be substantially higher than the book value per share of our outstanding common stock immediately after this offering. Accordingly, if you purchase our common stock in this offering, you will incur immediate dilution of approximately $ in the book value per share of our common stock from the price you pay for our common stock. This calculation assumes that you purchased our common stock for $ per share. 15 18 THERE MAY BE NO ACTIVE TRADING MARKET IN OUR COMMON SHARES AFTER THIS OFFERING, WHICH MAY MAKE IT DIFFICULT FOR YOU TO RESELL YOUR SHARES. There has been no public trading market for our common shares prior to this offering, and we cannot be sure that an active trading market will develop upon completion of this offering or, if one does develop, that it will be sustained. If no public trading market for our common shares develops, or if this market is not active or sustained, it may be difficult for you to resell your shares at a price at or above the initial public offering price. CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND THE APPROVAL OF MERGERS OR OTHER BUSINESS COMBINATIONS. Upon completion of this offering, our executive officers, directors and principal stockholders and their affiliates will beneficially own shares, or approximately %, of the outstanding shares of common stock ( % if the underwriters' over-allotment option is exercised in full). If they were to act in concert, these stockholders would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW, AS WELL AS PROVISIONS OF EMPLOYMENT AGREEMENTS OF SOME OF OUR KEY EXECUTIVE OFFICERS, COULD PREVENT OR DELAY A CHANGE IN CONTROL OF QUINTUS. Provisions in our bylaws and in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in management of Quintus. These provisions include: - the requirement that a special meeting of stockholders may only be called by stockholders owning at least a majority of our outstanding shares; - the ability of our board of directors to issue preferred stock without stockholder approval; and - the right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors. Furthermore, we are subject to the provisions of section 203 of the Delaware General Corporation Law. These provisions prohibit large stockholders owning 15% or more of our outstanding voting stock, from consummating a merger or combination with a corporation unless this stockholder receives board approval for the transaction or unless 66 2/3% of the outstanding shares of our voting stock not owned by this stockholder approve the merger or combination. In addition, our 1999 Stock Incentive Plan provides for full acceleration of unvested options following certain sales or mergers of Quintus if the optionee is terminated without cause within 18 months of the closing of the sale or merger transaction. In addition, some of our officers have agreements with us that provide for acceleration of vesting following certain sales or mergers of Quintus. These provisions could make our acquisition by a third party more costly and could delay or prevent a change of control or changes in our management. 16 19 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements you should specifically consider various factors, including the risks outlined under "Risk Factors." These factors may cause our actual results to differ materially from any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform such statements to actual results or to changes in our expectations. USE OF PROCEEDS We estimate that the net proceeds from the sale of shares of common stock we are offering will be approximately $ ($ if the underwriters exercise their over-allotment option in full) at an assumed initial public offering price of $ and after deducting estimated offering expenses of $ and underwriting discounts and commissions payable by Quintus. We expect to use the net proceeds for working capital and other general corporate purposes. In addition, under the terms of our certificate of incorporation in effect prior to this offering, we are required to make a payment of approximately $18.2 million upon the closing of this offering to the current holders of our Series A, Series B, Series C and Series D preferred stock as a result of the conversion of this preferred stock into common stock. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, product lines or products. We have no current plans, agreements or commitments with respect to any such acquisitions or investments other than the pending closing of our acquisition of Acuity. We will use shares of our capital stock to complete this acquisition. Our management will have broad discretion concerning the use of the net proceeds of this offering. We intend to invest these proceeds in investment grade, interest-bearing securities pending their use. DIVIDEND POLICY We have never declared or paid any dividends on our common stock or other securities. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the future. Our existing bank line of credit prohibits the payment of cash dividends. 17 20 CORPORATE INFORMATION Quintus was incorporated in California in February 1984. Quintus became a wholly-owned subsidiary of Intergraph Corporation in October 1989 and was reincorporated in Delaware in June 1990. Quintus was purchased from Intergraph Corporation in May 1995 in a management-led buyout backed by new investors. Our principal executive offices are located at 47212 Mission Falls Court, Fremont, California 94539 and our telephone number is (510) 624-2800. We have registered the trademarks "Quintus" and "CustomerQ." Every other trademark, trade name or service mark of any other company appearing in this prospectus is the property of its holder. 18 21 CAPITALIZATION The following table sets forth our cash position, current portion of long-term obligations and total capitalization as of June 30, 1999. The pro forma column of the table gives effect to the: - sale of 1,363,334 shares of our preferred stock for proceeds of $11.2 million on August 26, 1999; - issuance of an estimated 4,530,000 shares and the assumption of approximately $1.8 million in debt in connection with our acquisition of Acuity; and - issuance of 247,602 shares upon the assumed exercise of outstanding warrants that otherwise terminate upon the closing of this offering. The pro forma as adjusted column of the table gives effect to the: - required payment of approximately $18.2 million to holders of some series of our preferred stock upon conversion of our preferred stock into our common stock; - sale in this offering of shares of common stock at an assumed initial public offering price of $ per share, less underwriting discounts and commissions and estimated offering expenses payable by Quintus; and - conversion of all outstanding shares of our preferred stock into shares of our common stock upon the closing of this offering.
AS OF JUNE 30, 1999 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED (IN THOUSANDS) Cash........................................................ $ 467 $ 14,328 $ ======== ======== ======= Current portion of long-term obligations.................... $ 1,425 $ 2,687 $ ======== ======== ======= Long-term obligations, less current portion................. $ 1,649 $ 2,215 $ Liability related to redeemable convertible preferred stock..................................................... 17,811 18,164 Stockholders' equity (deficiency): Convertible preferred stock, $0.001 par value, shares authorized 17,555,000 and 16,575,515 outstanding, actual: 10,000,000 shares authorized and no shares outstanding, pro forma: 10,000,000 shares authorized and no shares outstanding, pro forma as adjusted....... 13,707 -- Common stock, $0.001 par value, shares authorized 40,000,000 and 4,311,084 outstanding, actual; 100,000,000 shares authorized and 27,027,535 shares outstanding, pro forma; 100,000,000 shares authorized and outstanding, pro forma as adjusted.. 4,323 74,506 Note receivable from stockholder.......................... (267) (267) Deferred stock based compensation......................... (1,415) (1,415) Accumulated deficit....................................... (36,970) (39,966) -------- -------- ------- Total stockholders' equity (deficiency)................ (20,622) 32,858 -------- -------- ------- Total capitalization.............................. $ (1,162) $ 53,237 $ ======== ======== =======
This table does not include: - 3,682,772 shares issuable upon exercise of options outstanding as of August 31, 1999, including an estimated number of options to be assumed in connection with our acquisition of Acuity as if it had occurred on August 31, 1999; - 613,723 shares reserved for future issuance under our stock option plans as of August 31, 1999; - 2,500,000 shares reserved for future issuance under our stock plans, director option plan and employee stock purchase plan subsequent to August 31, 1999; - 755,043 shares issuable upon exercise of warrants outstanding as of August 31, 1999, including an estimated number of warrants to be assumed in connection with our acquisition of Acuity as if it had occurred on August 31, 1999; and - 300,000 shares issuable upon exercise of warrants granted subsequent to August 31, 1999. 19 22 DILUTION Our pro forma net tangible book value as of June 30, 1999, was $(12.9) million, or approximately $(0.48) per share. Pro forma net tangible book value per share represents the pro forma stockholders equity less pro forma intangible assets divided by the pro forma number of shares of common stock outstanding, giving effect to the conversion of all outstanding shares of preferred stock, including the 1,363,334 shares of preferred stock issued on August 26, 1999, the estimated 4,530,000 shares to be issued in connection with the closing of the acquisition of Acuity and the issuance of 247,602 shares upon the assumed exercise of outstanding warrants that otherwise terminate upon the closing of this offering. After giving effect to the sale of the shares of common stock being offered at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value at June 30, 1999, would have been , or approximately $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in net tangible book value of $ per share to new investors of common stock in this offering. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share............. $ -- Pro forma net tangible book value per share as of June 30, 1999................................................... $ (0.48) Increase attributable to new investors.................... -- Pro forma net tangible book value per share after offering.................................................. -- Dilution per share to new investors......................... $ =======
The following table sets forth, on a pro forma basis as of June 30, 1999, the differences between the number of shares of common stock purchased, the total consideration paid and the average price per share paid by existing stockholders and by the new investors purchasing shares of common stock in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, at the assumed public offering price of $ per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------- -------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing stockholders..................... % $ % $ New public investors...................... --------- ----- ---------- ----- Total........................... 100.0% 100.0% ========= ===== ========== =====
To the extent that any shares are issued upon exercise of options or warrants that were outstanding at June 30, 1999 or granted after that date, or reserved for future issuance under our stock plans, there will be further dilution to new investors. 20 23 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statements of operations data for the years ended March 31, 1997 and 1998 and consolidated balance sheet data as of March 31, 1998 are derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by Ernst & Young LLP. The consolidated statements of operations data for the year ended March 31, 1999 and consolidated balance sheet data as of March 31, 1999 are derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by Deloitte & Touche LLP. The consolidated statements of operations data for the period from May 25, 1995, the date of the acquisition of Quintus from Intergraph Corporation in a management-led buyout with the financial backing of new investors, to March 31, 1996 and balance sheet data as of March 31, 1996 and 1997 are derived from financial statements audited by Ernst & Young LLP, which are not included in this prospectus. Prior to May 25, 1995, we were a wholly-owned subsidiary of Intergraph Corporation. As a result, we believe financial data for periods prior to May 25, 1995 is not material. The consolidated statements of operations data for the three months ended June 30, 1998 and 1999 and the consolidated balance sheet data as of June 30, 1999 are derived from our unaudited consolidated financial statements which, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial position. The historical results presented below are not necessarily indicative of the results to be expected for any future period. 21 24
FOR THE PERIOD FROM MAY 25, 1995 THREE MONTHS THROUGH YEAR ENDED MARCH 31, ENDED JUNE 30, MARCH 31, ------------------------------- ------------------ 1996 1997 1998 1999 1998 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: License..................................... $ 5,174 $ 8,406 $ 12,948 $ 17,577 $ 4,790 $ 6,126 Service..................................... 1,267 5,208 8,942 12,730 2,762 4,167 ------- ------- -------- -------- ------- ------- Total revenues........................ 6,441 13,614 21,890 30,307 7,552 10,293 ------- ------- -------- -------- ------- ------- Cost of revenues: License..................................... 637 972 708 554 74 218 Service..................................... 985 4,199 7,582 8,623 1,957 2,421 ------- ------- -------- -------- ------- ------- Total cost of revenues................ 1,622 5,171 8,290 9,177 2,031 2,639 ------- ------- -------- -------- ------- ------- Gross profit.................................. 4,819 8,443 13,600 21,130 5,521 7,654 Operating expenses: Sales and marketing......................... 4,031 6,879 11,336 17,147 4,518 4,314 Research and development.................... 1,795 3,667 5,102 6,719 1,795 1,873 General and administrative.................. 1,196 1,263 3,233 3,577 803 998 Amortization of intangibles................. -- -- 1,335 3,185 796 796 Acquired in-process technologies............ 6,060 -- 2,200 -- -- -- Stock-based compensation.................... -- -- -- 171 4 169 ------- ------- -------- -------- ------- ------- Total operating expenses.............. 13,082 11,809 23,206 30,799 7,916 8,150 ------- ------- -------- -------- ------- ------- Loss from continuing operations............... (8,263) (3,366) (9,606) (9,669) (2,395) (496) Interest expense, net......................... (32) (160) (540) (917) (391) (194) ------- ------- -------- -------- ------- ------- Net loss from continuing operations........... (8,295) (3,526) (10,146) (10,586) (2,786) (690) Discontinued operations: Loss from discontinued operations........... -- -- (1,103) (1,891) (190) -- Gain on disposal of discontinued operations................................ -- -- -- 1,011 -- -- ------- ------- -------- -------- ------- ------- Net loss...................................... $(8,295) $(3,526) $(11,249) $(11,466) $(2,976) $ (690) ======= ======= ======== ======== ======= ======= Basic and diluted net loss per common share from continuing operations.................. $(72.34) $ (4.25) $ (6.88) $ (3.73) $ (1.12) $ (0.20) ======= ======= ======== ======== ======= ======= Basic and diluted net loss per common share... $(72.34) $ (4.25) $ (7.53) $ (4.04) $ (1.20) $ (0.20) ======= ======= ======== ======== ======= ======= Shares used in computation, basic and diluted..................................... 115 868 1,695 2,835 2,484 3,506
AS OF MARCH 31, AS OF ------------------------------------------- JUNE 30, 1996 1997 1998 1999 1999 (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash........................................................ $ 792 $ 3,045 $ 1,986 $ 1,785 $ 467 Working capital (deficiency)................................ 582 1,552 (11,250) (8,644) (8,909) Total assets................................................ 5,699 9,852 23,141 19,594 20,274 Long-term obligations, net of current portion............... 528 19 4,246 2,201 1,649 Redeemable convertible preferred stock...................... 9,478 14,110 17,811 17,811 17,811 Total stockholders' deficiency.............................. (7,850) (10,831) (20,333) (20,091) (20,622)
22 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We provide a comprehensive e-Customer Relationship Management or eCRM solution to manage customer interactions and deliver consistent customer service across multiple communication channels, including the Internet, email and advanced telephony systems. Our Quintus eContact software suite includes customer relationship management applications that address the needs of sales and service, consumer relations, technical support and human resources contact centers and a sophisticated routing engine to manage customer interactions. eContact enables companies to handle high volumes of customer interactions, increase the efficiency of contact center resources and leverage cross-selling and up-selling opportunities. Quintus was incorporated in 1984 to develop artificial intelligence software and was acquired in 1989 by Intergraph Corporation, a provider of interactive computer graphics systems. Quintus was purchased from Intergraph in May 1995 in a management-led buyout with the financial backing of new investors. At the time of the buyout we primarily provided application software and consulting services to the help desk market. Since then we have introduced several customer relationship management applications for call centers. In November 1997, we acquired Nabnasset, a provider of computer telephony integration software. Following the acquisition we introduced our Quintus CTI product and began integrating it with our customer relationship management applications. As new communication channels have emerged, we have introduced new products and added functionality to our existing products. In February 1999, we introduced our Quintus eContact suite as a platform for integrating our existing products with new channel applications. As part of our eContact suite, we also resell an email management product from Brightware and a call routing product from Cisco Systems-GeoTel Communications. In September 1999, we entered into an agreement to acquire Acuity, a provider of software products to manage Internet-based customer interactions. The acquisition is expected to close prior to the effectiveness of this offering. Our revenues were $13.6 million, $21.9 million, $30.3 million and $10.3 million in fiscal 1997, 1998 and 1999 and for the three months ended June 30, 1999. We derive substantially all of our revenues from licenses and services associated with our products. License revenues are derived from product sales to customers and through resellers and distributors. Service revenues are attributable to the installation, consulting, maintenance and other support services related to the sale of our products. License revenues from sales to end users are recognized upon shipment of the product, if a signed contract exists, the fee is fixed and determinable, collection is deemed probable and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. License revenues for contracts requiring us to provide significant customization services are recognized using percentage of completion accounting using labor days as the basis for determining the percentage complete. License revenues from sales to resellers and distributors are generally recognized at the time a reseller or distributor reports to us that they have sold our software and all revenue recognition criteria have been met. 23 26 Service revenues include maintenance revenues which are deferred and recognized ratably over the maintenance period, which in most cases is one year, and revenues from training and consulting services, which are recognized as services are performed. We sell our products to customers in North and South America, Europe, South Africa and Japan. Sales to customers outside of the United States represented 15.3%, 14.0%, 18.3% and 12.1% of total revenues in fiscal 1997, 1998 and 1999 and for the three months ended June 30, 1999. All of our sales are denominated in U.S. dollars. We intend to establish additional distribution relationships with partners outside of the United States and expect international revenues to continue to increase as a percent of our total revenues in the future. We sell our products through a direct sales force and indirectly through resellers and distribution partners. Lucent Technologies, which began reselling our products in November 1997, accounted for 9.2%, 19.3% and 33.9% of total revenues in fiscal 1998 and 1999 and for the three months ended June 30, 1999. In fiscal 1997, one customer, State Farm Insurance, accounted for 23.8% of total revenues. In fiscal 1998 and 1999, no customer accounted for more than 10% of total revenues. For the three months ended June 30, 1999, one customer, Procter & Gamble, accounted for 19.3% of total revenues. We expect that sales of our products to a limited number of parties will continue to account for a large percentage of total revenues for the foreseeable future. In July 1997, we acquired Call Center Enterprises, a provider of strategic call center consulting services, for $965,000 in cash. The acquisition was accounted for as a purchase. In February 1999, we sold this business to AnswerThink Consulting Group for $2.1 million in cash. The results of operations for Call Center Enterprises are presented as discontinued operations in our consolidated financial statements. In November 1997, we acquired Nabnasset for $3.5 million in cash, stock and options to purchase our common stock. The transaction was accounted for as a purchase. In this acquisition, acquired technology included both existing technology and in-process research and development. The valuation of acquired technology was made by applying the income forecast method, which considers the present value of cash flows by product lines. Acquired in-process technologies were charged to operations, as the technologies did not have alternative future uses as of the date of the acquisition. As of June 30, 1999 we had an accumulated deficit of approximately $37.0 million. Our net loss from continuing operations was $3.5 million, $10.1 million, $10.6 million and $690,000 in fiscal 1997, 1998 and 1999 and for the three months ended June 30, 1999. These losses resulted from costs incurred in the development and sale of our products and services. We expect to continue to experience significant growth in our operating expenses, particularly in the areas of sales and marketing. As a result, we expect to incur additional losses and cannot assure you that we will achieve or sustain profitability in the future. 24 27 RESULTS OF OPERATIONS The following table sets forth our results of operations as a percentage of total revenues:
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ----------------------- -------------- 1997 1998 1999 1998 1999 (UNAUDITED) Revenues: License...................................... 61.7% 59.2% 58.0% 63.4% 59.5% Service...................................... 38.3 40.8 42.0 36.6 40.5 ----- ----- ----- ----- ----- Total revenues............................ 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ----- Cost of revenues: License...................................... 7.1 3.2 1.8 1.0 2.1 Service...................................... 30.8 34.6 28.5 25.9 23.5 ----- ----- ----- ----- ----- Total cost of revenues.................... 37.9 37.8 30.3 26.9 25.6 ----- ----- ----- ----- ----- Gross profit................................... 62.1 62.2 69.7 73.1 74.4 Operating expenses: Sales and marketing.......................... 50.5 51.8 56.6 59.8 41.9 Research and development..................... 26.9 23.3 22.2 23.8 18.2 General and administrative................... 9.3 14.8 11.8 10.6 9.7 Amortization of intangibles.................. -- 6.1 10.5 10.5 7.7 Acquired in-process technologies............. -- 10.1 -- -- -- Stock-based compensation..................... -- -- 0.6 0.1 1.6 ----- ----- ----- ----- ----- Total operating expenses.................. 86.7 106.1 101.7 104.8 79.1 ----- ----- ----- ----- ----- Loss from continuing operations................ (24.6) (43.9) (32.0) (31.7) (4.7) Interest expense, net.......................... (1.2) (2.5) (3.0) (5.2) (1.9) ----- ----- ----- ----- ----- Net loss from continuing operations............ (25.8) (46.4) (35.0) (36.9) (6.6) Discontinued operations: Loss from discontinued operations............ -- (5.0) (6.2) (2.5) -- Gain on disposal of discontinued operations................................ -- -- 3.3 -- -- ----- ----- ----- ----- ----- Net loss....................................... (25.8)% (51.4)% (37.9)% (39.4)% (6.6)% ===== ===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1998 AND 1999 REVENUES Total Revenues. Total revenues increased 36.3% from $7.6 million to $10.3 million for the three months ended June 30, 1998 and 1999. License. License revenues increased 27.9% from $4.8 million to $6.1 million for the three months ended June 30, 1998 and 1999. The increase in license revenues was primarily due to a significant increase in products sold through Lucent Technologies and a large direct sale to Procter & Gamble. Service. Service revenues increased 50.9% from $2.8 million to $4.2 million for the three months ended June 30, 1998 and 1999. The growth in service revenues was due primarily to an increase in maintenance revenues as a result of our increased installed base, and an increase in consulting services to new and existing customers. In future periods, we expect service revenues to decrease as a 25 28 percentage of total revenues as we seek to have third-party systems integrators undertake a greater percentage of our product implementation. COST OF REVENUES License. Cost of licenses consists primarily of royalties, product packaging, documentation and production. Cost of licenses was $74,000 and $218,000 for the three months ended June 30, 1998 and 1999, representing 1.5% and 3.6% of license revenues in the respective periods. The increase was primarily due to an increase in license revenues and the resulting increase in third-party royalty payments and to a lesser extent increases in material costs and other related expenses. Recently, we have entered into reseller agreements with Brightware and Cisco Systems-GeoTel Communications which require significantly higher royalty rates. Although the sale of products under these agreements has been minimal to date, the cost of licenses will vary significantly in the future, depending on the mix of internally developed and third-party products. Service. Cost of services consists primarily of personnel costs and third-party consulting fees associated with implementation, customization, maintenance and other support services. Cost of services was $2.0 million and $2.4 million for the three months ended June 30, 1998 and 1999, representing 70.9% and 58.1% of service revenues in the respective periods. The dollar increase was primarily due to an increase in the number of third-party consultants we engaged. Cost of services as a percentage of service revenues declined primarily due to the higher margins for maintenance revenues. The cost of services as a percentage of services revenues may vary between periods due to the mix of services provided and the resources used to provide these services. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions, travel, public relations, marketing materials and trade shows. Sales and marketing expenses decreased 4.5% from $4.5 million to $4.3 million for the three months ended June 30, 1998 and 1999, representing 59.8% and 41.9% of total revenues in the respective periods. The decrease in sales and marketing expenses was primarily due to lower spending on marketing programs. We intend to invest substantial resources to expand our direct sales force and other distribution channels, and to conduct marketing programs to support our existing and new product offerings. As a result, sales and marketing expenses are expected to increase in absolute dollars in future periods. Research and Development. Research and development expenses consist primarily of personnel and related costs associated with the development of new products, the enhancement and localization of existing products, quality assurance and testing. Research and development expenses increased 4.3% from $1.8 million to $1.9 million for the three months ended June 30, 1998 and 1999, representing 23.8% and 18.2% of total revenues in the respective periods. The decline in research and development expenses as a percentage of total revenues was primarily due to the growth in total revenues. We anticipate that research and development expenses will increase in absolute dollars in future periods. To date, all research and development costs have been expensed as incurred. General and Administrative. General and administrative expenses consist primarily of salaries and other related costs for finance and human resource employees, as well as accounting, legal, other professional fees and allowance for doubtful accounts. General and administrative expenses increased 24.3% from $803,000 to $998,000 for the three months ended June 30, 1998 and 1999, representing 10.6% and 9.7% of total revenues in the respective periods. The dollar increase was primarily due to an increase in the allowance for doubtful accounts and increased staffing and associated expenses necessary to manage and support our increased scale of operations. We anticipate that our general 26 29 and administrative expenses will continue to increase in absolute dollars as a result of the continued expansion of our administrative staff and facilities to support growing operations. Amortization of Intangibles. Amortization of intangibles consists of costs associated with our acquisition of Nabnasset in November 1997. Amortization is recorded on a straight-line basis over a period of three years ending in October 2000. Amortization of intangibles was $796,000 for the three months ended June 30, 1998 and 1999. Stock-Based Compensation. In the three months ended June 30, 1998 and 1999, we recorded deferred stock-based compensation of $43,000 and $700,000, relating to stock options granted to employees. Such amounts represent the difference between the exercise price and the deemed fair value of our common stock at the date of grant. These amounts are being amortized over the vesting periods of the granted options. In the three months ended June 30, 1998 and 1999, we recognized stock-based compensation expense, in continuing operations, related to options granted to employees of $4,000 and $169,000. Interest Expense, Net. Interest expense consists of interest expense and other non-operating expenses. In the three months ended June 30, 1998, we recognized interest expense of $165,000 with respect to warrants granted in connection with notes payable to stockholders. There was no such expense recognized during the three months ended June 30, 1999. DISCONTINUED OPERATIONS On February 26, 1999 we sold the assets of our Call Center Enterprises division. The division was sold for $2.1 million of cash resulting in a gain on disposal of $1.0 million. We may receive an additional payment of up to $400,000 from the sale of Call Center Enterprises based on the number of former Call Center Enterprises employees who remain employed by the purchaser for one year subsequent to the date of disposition. The division had a loss of $190,000 for the three months ended June 30, 1998, which was recorded as discontinued operations. FISCAL 1997, 1998 AND 1999 REVENUES Total Revenues. Total revenues were $13.6 million, $21.9 million and $30.3 million in fiscal 1997, 1998 and 1999, increasing 60.8%, from fiscal 1997 to 1998 and 38.5% from fiscal 1998 to 1999. License. License revenues were $8.4 million, $12.9 million and $17.6 million in fiscal 1997, 1998 and 1999, increasing 54.0% from fiscal 1997 to 1998 and 35.8% from fiscal 1998 to 1999. The increase in revenues from fiscal 1997 to 1998 was primarily due to an increase in our customer base as well as an increase in sales to our existing customers. In addition, we acquired Nabnasset in November 1997 and began realizing license revenues from our newly acquired Quintus CTI product. The increase in license revenues from fiscal 1998 to 1999 was primarily due to a full year of CTI product sales in fiscal 1999 compared to fewer than five months in fiscal 1998. Service. Service revenues were $5.2 million, $8.9 million and $12.7 million in fiscal 1997, 1998 and 1999, increasing 71.7% from fiscal 1997 to 1998 and 42.4% from fiscal 1998 to 1999. The increase in service revenues was primarily due to growth in the installed base of customers with maintenance agreements, maintenance renewals from products licensed in prior periods and increased consulting revenues. The increase in service revenues from fiscal 1998 to 1999 was also due to additional consulting and maintenance revenues resulting from our acquisition of Nabnasset. 27 30 COST OF REVENUES License. Cost of licenses was $972,000, $708,000 and $554,000 in fiscal 1997, 1998 and 1999, representing 11.6%, 5.5% and 3.2% of license revenue in the respective periods. The decrease was primarily due to a decrease in royalty payments associated with the licensing of our products. Service. Cost of services was $4.2 million, $7.6 million and $8.6 million for fiscal 1997, 1998 and 1999, representing 80.6%, 84.8% and 67.7% of service revenue in the respective periods. From fiscal 1997 to 1998, the dollar increase was primarily due to increases in professional services personnel, third-party consulting expenses, and customer support staffing. From fiscal 1998 to 1999, the dollar increase was primarily due to increases in professional services personnel and third party consulting expenses. The decrease in cost of services as a percentage of service revenues from fiscal 1998 to 1999 was primarily due to a result of higher margins on our maintenance revenues. OPERATING EXPENSES Sales and Marketing. Sales and marketing expenses were $6.9 million, $11.3 million and $17.1 million in fiscal 1997, 1998 and 1999, representing 50.5%, 51.8% and 56.6% of total revenues in the respective periods. The increase was primarily due to the further expansion of our worldwide sales and marketing organization, higher sales commissions associated with increased revenues and increased marketing activities. Research and Development. Research and development expenses were $3.7 million, $5.1 million and $6.7 million in fiscal 1997, 1998 and 1999, representing 26.9%, 23.3% and 22.2% of total revenues in the respective periods. The dollar increases for each of the periods were primarily due to increases in personnel and related overhead costs and to a lesser extent increased consulting expenses. General and Administrative. General and administrative expenses were $1.3 million, $3.2 million, and $3.6 million in fiscal 1997, 1998 and 1999, representing 9.3%, 14.8% and 11.8% of total revenues in the respective periods. The increase from fiscal 1997 to 1998 was primarily due to increases in personnel, related overhead costs and expenses related to our infrastructure expansion. The percentage decrease from fiscal 1998 to 1999 was primarily due to our increased revenues. Amortization of Intangibles. Amortization of intangibles was $1.3 million and $3.2 million in fiscal 1998 and 1999, representing 6.1% and 10.5% of total revenues in the respective periods. The increase was due to a full year of amortization in fiscal 1999 versus a partial year of amortization in fiscal 1998. Acquired In-Process Technologies. In November 1997, we acquired Nabnasset for $3.5 million in cash, stock and options to purchase our common stock. The transaction was accounted for as a purchase. In this acquisition, acquired technology included both existing technology and in-process research and development. The valuation of acquired technology was made by applying the income forecast method, which considers the present value of cash flows by product lines. Acquired in-process technologies were charged to operations, as the technologies did not have alternative future uses as of the date of the acquisition. Stock-Based Compensation. During fiscal 1998 and 1999 we recorded deferred stock-based compensation of $100,000 and $1.1 million relating to stock options granted to employees. We had no deferred stock compensation relating to stock options granted to employees in fiscal 1997. We recorded $171,000 of stock-based compensation expense in operating expenses in fiscal 1999. There was no stock-based compensation expense recorded in operating expenses during fiscal 1997 or 1998. 28 31 Interest Expense, Net. Interest expense consists of interest expense and other non-operating expenses. During fiscal 1998 and 1999, we recognized interest expense of $258,000 and $165,000 with respect to warrants granted in connection with notes payable to stockholders. DISCONTINUED OPERATIONS Our Call Center Enterprises division, which was sold in February 1999, had revenues of $2.5 million and $3.2 million for fiscal 1998 and 1999, and incurred a loss from operations of $1.1 million and $1.9 million in fiscal 1998 and 1999. There were no assets or liabilities remaining as of March 31, 1999. Included within the $1.0 million gain on the sale of discontinued operations is the fair value of options granted in connection with the sale of Call Center Enterprises of $453,000. 29 32 QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited quarterly results of operations data for the five quarters ended June 30, 1999, as well as such data expressed as a percentage of our total revenues for the periods presented. The information in the table below should be read in conjunction with our annual audited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared this information on the same basis as our consolidated financial statements and the information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Our quarterly operating results have varied substantially in the past and may vary substantially in the future. You should not draw any conclusions about our future results for any period from the results of operations for any particular quarter.
QUARTER ENDED -------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 (IN THOUSANDS) Revenues: License....................... $ 4,790 $ 5,123 $ 2,930 $ 4,734 $ 6,126 Service....................... 2,762 3,185 3,024 3,759 4,167 ------- ------- ------- ------- ------- Total revenues............. 7,552 8,308 5,954 8,493 10,293 Cost of revenues: License....................... 74 194 155 131 218 Service....................... 1,957 2,219 2,426 2,021 2,421 ------- ------- ------- ------- ------- Total costs of revenues.... 2,031 2,413 2,581 2,152 2,639 Gross profit.................... 5,521 5,895 3,373 6,341 7,654 Operating expenses: Sales and marketing........... 4,518 4,098 4,639 3,892 4,314 Research and development...... 1,795 1,558 1,792 1,574 1,873 General and administrative.... 803 829 1,109 836 998 Amortization of intangibles... 796 800 798 791 796 Stock-based compensation...... 4 56 56 55 169 ------- ------- ------- ------- ------- Total operating expenses... 7,916 7,341 8,394 7,148 8,150 ------- ------- ------- ------- ------- Loss from continuing operations.................... (2,395) (1,446) (5,021) (807) (496) Interest expense, net........... (391) (134) (181) (211) (194) ------- ------- ------- ------- ------- Net loss from continuing operations.................... (2,786) (1,580) (5,202) (1,018) (690) Discontinued operations: Loss from discontinued operations................. (190) (459) (781) (461) -- Gain on disposal of discontinued operations.... -- -- -- 1,011 -- ------- ------- ------- ------- ------- Net loss........................ $(2,976) $(2,039) $(5,983) $ (468) $ (690) ======= ======= ======= ======= =======
30 33
AS A PERCENTAGE OF TOTAL REVENUES -------------------------------------------------------------- JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998 1998 1998 1999 1999 Revenues: License........................ 63.4% 61.7% 49.2% 55.7% 59.5% Service........................ 36.6 38.3 50.8 44.3 40.5 ----- ----- ------ ----- ----- Total revenues.............. 100.0 100.0 100.0 100.0 100.0 Cost of revenues: License........................ 1.0 2.3 2.6 1.5 2.1 Service........................ 25.9 26.7 40.7 23.8 23.5 ----- ----- ------ ----- ----- Total costs of revenues..... 26.9 29.0 43.3 25.3 25.6 Gross profit..................... 73.1 71.0 56.7 74.7 74.4 Operating expenses: Sales and marketing............ 59.8 49.3 77.9 45.8 41.9 Research and development....... 23.8 18.8 30.1 18.5 18.2 General and administrative..... 10.6 10.0 18.6 9.8 9.7 Amortization of intangibles.... 10.5 9.6 13.4 9.3 7.7 Stock-based compensation....... 0.1 0.7 0.9 0.6 1.6 ----- ----- ------ ----- ----- Total operating expenses.... 104.8 88.4 140.9 84.2 79.1 ----- ----- ------ ----- ----- Loss from continuing operations..................... (31.7) (17.4) (84.3) (9.5) (4.8) Interest expense, net............ (5.2) 1.6 3.0 2.5 1.9 ----- ----- ------ ----- ----- Net loss from continuing operations..................... (36.9) (19.0) (87.3) (12.0) (6.7) Discontinued operations: Loss from discontinued operations.................. (2.5) (5.5) (13.1) (5.4) -- Gain on disposal of discontinued operations..... -- -- -- 11.9 -- ----- ----- ------ ----- ----- Net loss......................... (39.4)% (24.5)% (100.4)% (5.5)% (6.7)% ===== ===== ====== ===== =====
License revenues have generally increased in each of the five quarters ended June 30, 1999, primarily due to increased market acceptance for our products. Service revenues have also generally increased in each of these quarters primarily due to the recognition of maintenance revenues attributable to our growing installed base, and to a lesser extent, consulting and training services associated with increased sales of our products. In the quarter ended December 31, 1998 we recorded a large net loss due to our inability to close a large number of license sales which had been forecasted to close in the quarter coupled with an increase in operating expenses. In the following quarter we experienced significant turnover in our sales personnel and we implemented tighter expense controls resulting in lower overall operating expenses. Our quarterly operating results have fluctuated significantly in the past, and will continue to fluctuate in the future, as a result of a number of factors, many of which are outside our control. As a result of our limited operating history, we cannot forecast operating expenses based on historical results. Accordingly, we base our anticipated level of expense in part on future revenue projections. Most of our expenses are fixed in the short term and we may not be able to quickly reduce spending if revenues are lower than we have projected. Our ability to forecast our quarterly revenues accurately is limited given our limited operating history, the length of our sales cycle and other uncertainties in our business. If revenues in a particular quarter do not meet projections, our net losses in a given quarter would be greater than expected. As a result, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful. Investors should not rely on the results of one quarter as an indication of future performance. 31 34 RECENT DEVELOPMENTS On September 10, 1999, we entered into an agreement to acquire Acuity, a provider of software products to manage Internet-based customer interactions. We expect to close this acquisition prior to the effectiveness of this offering. The acquisition is structured as a merger in which Acuity will become our wholly-owned subsidiary and the stockholders of Acuity will become our stockholders. The total number of our shares to be issued in connection with the acquisition of Acuity plus the number of shares issuable upon exercise of options and warrants we assume in the acquisition will equal 18% of our fully-diluted capitalization immediately following the acquisition. Based on our outstanding capitalization as of August 31, 1999, we expect to issue approximately 2,960,000 shares of our preferred stock and 1,570,000 shares of our common stock. In addition, we will assume warrants to purchase approximately 280,000 shares of our common and preferred stock and options to purchase approximately 950,000 shares of our common stock. The closing of the merger is subject to regulatory approval and the approval of the Acuity stockholders. The acquisition will be accounted for using the purchase method of accounting. The aggregate purchase price for the acquisition is approximately $45.5 million based on the value of our capital stock to be issued and the value of the options, warrants and liabilities to be assumed. In connection with the acquisition of Acuity, we expect to recognize a charge for in-process technologies of approximately $3.0 million in the quarter ending December 31, 1999. Acuity is located in Austin, Texas and had 92 employees on June 30, 1999. Acuity's revenues for the year ended December 31, 1998 were $6.7 million, of which $5.6 million were related to a product line that was subsequently sold in March 1999. Acuity incurred net losses of $6.6 million, $7.7 million and $2.2 million in the years ended December 31, 1997 and 1998 and for the six months ended June 30, 1999. LIQUIDITY AND CAPITAL RESOURCES Since May 1995, we have financed our operations primarily through the sale of equity securities, borrowings and the sale of our products and services. As of June 30, 1999, we have raised approximately $26.1 million, net of offering costs, from the issuance of preferred stock. As of June 30, 1999, we had $467,000 in cash. On August 26, 1999, we raised $11.2 million from the sale of shares of our preferred stock. We have a $7.5 million credit line under which $4.9 million was outstanding as of June 30, 1999. The line bears interest at prime plus 1.5% per annum and has a maturity date of September 17, 1999. We expect to extend the maturity date of the credit line to November 16, 1999. We also have a $1.1 million term loan, of which $761,000 was outstanding as of June 30, 1999. The term loan bears interest at prime plus 2.0% per annum and is due in monthly installments through September 2001. Cash used in operating activities was $2.0 million, $4.0 million, $7.3 million and $823,000 in fiscal 1997, 1998 and 1999 and for the three months ended June 30, 1999. Cash used in fiscal 1997 was primarily due to a net loss of $3.5 million and an increase in accounts receivable, offset in part by an increase in accounts payable, deferred revenues and depreciation and amortization expenses. Cash used in fiscal 1998 was primarily due to a net loss of $11.2 million and an increase in accounts receivable, offset in part by an increase of deferred revenues, depreciation and amortization expenses, and a $2.2 million non-cash charge for in-process technologies related to our acquisition of Nabnasset. Cash used in fiscal 1999 was primarily due to a net loss of $11.5 million and a $1.0 million gain on the disposal of discontinued operations, offset in part by depreciation and amortization expenses. Cash used for the three months ended June 30, 1999 was primarily due to a net loss of $690,000 million and an increase in accounts receivable offset in part by an increase in accounts payable. 32 35 Cash used in investing activities was $1.0 million, $3.7 million and $297,000 in fiscal 1997 and 1998 and for the three months ended June 30, 1999. Cash used in investing activities was primarily for purchases of property and equipment in each period. In addition, cash used in fiscal 1998 included $2.5 million for the acquisition of Nabnasset. Cash provided by investing activities of $924,000 in fiscal 1999 was primarily due to proceeds from the sale of discontinued operations, offset by purchases of property and equipment. Cash provided by financing activities was $5.2 million, $6.6 million and $6.2 million in fiscal 1997, 1998 and 1999. Cash provided by financing activities consisted primarily of proceeds from private sales of preferred stock and borrowings under a bank line of credit. Cash used in financing activities for the three months ended June 30, 1999 was $198,000. We expect to experience significant growth in our operating expenses, particularly sales and marketing and research and development expenses, for the foreseeable future in order to execute our business plan. As a result, we anticipate that such operating expenses, as well as planned capital expenditures, will constitute a material use of our cash resources. In addition, we may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. We believe that the net proceeds from this offering, together with bank financing, will be sufficient to make a required cash payment of $18.2 million to holders of some series of our preferred stock, upon the closing of this offering, and to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all. YEAR 2000 COMPLIANCE The "Year 2000 Issue" refers generally to the problems that some software may have in determining the correct century of the year. Many existing electronic systems, including computer systems, use only the last two digits to refer to a year. Therefore, these systems may recognize a date using "00" as 1900 rather than the year 2000. If not corrected, these electronic systems could fail or create erroneous results when addressing dates on and after January 1, 2000. We have developed and are implementing a company-wide program to identify and remedy the Year 2000 issues. The scope of our Year 2000 readiness program includes the review and evaluation of: - our software products; - our IT systems, such as hardware and software used in the operation of our business; - our non-IT systems or embedded technology, such as micro-controllers contained in various equipment and facilities; and - the readiness of third parties such as suppliers and other key vendors. We have tested our software products to determine that they are Year 2000 compliant, when configured and used in accordance with the related documentation, assuming that the underlying operating system of the host machine and any other software used with or in the host machine or our products are Year 2000 compliant. Based on the results of these tests, we do not expect that the current versions of our products would abnormally end or provide incorrect or invalid results due to date data, including dates that represent a different century. We have tested software obtained from third parties that we incorporate into our products. Despite our tests and assurances from developers of products incorporated into our products, our 33 36 products may contain undetected errors or defects associated with Year 2000 date functions. Known or unknown errors or defects in our products could result in financial loss, harm to our reputation, and liability to others and could seriously harm our business. We have initiated an assessment of our material internal information technology systems, including both our own software products and third party software and hardware technology, and our non-information technology systems. We expect to complete testing of our material information technology systems by November 30, 1999. To the extent that we are not able to test the technology provided by third-party vendors, we are seeking assurances from these vendors that their systems are Year 2000 compliant. We are not currently aware of any material operational issues or costs associated with preparing our internal information technology and non-information technology systems for the Year 2000. Because we are substantially dependent upon the proper functioning of our computer systems, a failure of our systems to be Year 2000 compliant could materially disrupt our operations, which could seriously harm our business. Some commentators have predicted significant litigation regarding Year 2000 compliance issues. Because of the unprecedented nature of this litigation, it is uncertain whether or to what extent we may be affected by it. We do not currently have any information concerning the Year 2000 compliance status of our customers. Our current or future customers may incur significant expenses to achieve Year 2000 compliance. If our customers are not Year 2000 compliant, they may experience material costs to remedy problems, or they may face litigation costs. In either case, Year 2000 issues could reduce or eliminate the budgets that current or potential customers could have for or delay purchases of our products and services. As a result, our business could be seriously harmed. We have funded our Year 2000 plan from operating cash flows and have not separately accounted for these costs in the past. To date, these costs have not been material. We will incur additional costs related to Year 2000 compliance for administrative personnel to manage the testing, review and remediation, and outside vendor and contractor assistance. In addition, we may experience material problems and costs with Year 2000 compliance that could seriously harm our business. Year 2000 issues affecting our business, if not adequately addressed by us, our third party vendors or suppliers or our customers, could have a number of "worst case" consequences. These include: - the inability of our customers to use our products and services to manage their call centers; - claims from our customers asserting liability, including liability for breach of warranties related to the failure of our products and services to function properly, and any resulting settlements or judgements; and - our inability to manage our own business. We are in the process of designing our Year 2000 contingency plan to address situations that may result if we are unable to achieve Year 2000 readiness for our critical operations. Although it is not yet fully developed, we expect to complete our Year 2000 contingency plan before December 31, 1999. We do not expect the cost of developing and implementing our contingency plan to be material. In addition, we cannot assure you that our contingency plan will successfully address any Year 2000 problems that may arise. 34 37 RECENT ACCOUNTING PRONOUNCEMENTS In fiscal 1998, we adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from non-owner sources. The adoption of SFAS No. 130 did not have a material impact on our consolidated financial statements. In fiscal 1998, we adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which established annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services and geographic areas and major customers. The adoption of SFAS No. 131 did not have a material impact on our consolidated financial statements. In fiscal 1998, we adopted Statement of Position, or SOP 97-2, Software Revenue Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on software transactions and supercede SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did not have a material impact on our financial results. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when such costs should be capitalized. SOP 98-1 will be effective for our fiscal year ending March 31, 2000. We believe the adoption of this statement will not have a significant impact on our financial position, results of operations or cash flows. In April 1998, the AcSEC issued SOP 98-5, Reporting on the Costs of Start-up Activities. Under SOP 98-5, the cost of start-up activities should be expensed as incurred. SOP 98-1 will be effective for our fiscal year ending March 31, 2000. We believe the adoption of this statement will not have a significant impact on our financial position, results of operations or cash flows. In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for our fiscal year ending March 31, 2001. We believe the adoption of this statement will not have a significant impact on our financial position, results of operations or cash flows. INTEREST RATE RISK At June 30, 1999, we had an outstanding balance of $4.9 million under a revolving line of credit with interest at prime plus 1.5% and a term loan with an outstanding balance of $761,000 at prime plus 2.0%. A 10% movement in market interest rates would not significantly impact our financial position or results of operations. 35 38 BUSINESS We provide a comprehensive e-Customer Relationship Management or eCRM solution to manage customer interactions and deliver consistent customer service across multiple communication channels, including the Internet, email and advanced telephony systems. Our Quintus eContact software suite includes customer relationship management applications that address the needs of sales and service, consumer relations, technical support and human resources contact centers and a sophisticated routing engine to manage customer interactions. eContact enables companies to handle high volumes of customer interactions, increase the efficiency of contact center resources and leverage cross-selling and up-selling opportunities. INDUSTRY BACKGROUND In today's competitive global marketplace, customer service is increasingly critical to attracting and retaining customers. Many companies are re-orienting their businesses to be more responsive to customer needs and are focusing on customer service and satisfaction as a means of differentiation. Moreover, companies are recognizing that every customer interaction provides an opportunity to sell additional products and services, as well as increase customer loyalty. As a result, in many industries customer service is becoming a key competitive advantage. The Internet has emerged as a major platform for communication and commerce, enabling new and highly efficient channels for companies to engage in commerce and interact directly with their customers. The growth of e-commerce has increased competition for customers and reduced the importance of traditional competitive advantages such as price, location, availability and access. International Data Corporation estimates that the number of customers buying goods and services over the Internet worldwide will grow from approximately 30.8 million in 1998 to 182.6 million in 2003 and that the value of these purchases will increase from $50.4 billion to $1.3 trillion over the same period. The Internet enables customers and companies to interact in more ways than ever before. In addition to traditional, telephone-based communications, customers and companies can now interact through email, Web chat and Web self-service. These Internet-based communication channels are growing rapidly, creating new challenges for companies attempting to provide quality customer service. The Gartner Group estimates that approximately 25% of all customer interactions will take place over the Internet via email or Web communications by 2001. Forrester Research estimates that by 2001 consumers will send companies approximately 50 million emails per day requesting product information or service. As a result of the growing number of communication channels, companies are struggling to handle the volume and variety of customer interactions. While Internet-based communications are forecast to grow substantially, telephone-based communications will remain a critical component of companies' customer service. Many companies are not equipped to address the convergence of traditional and Internet-based communication channels and, consequently, cannot offer customers the flexibility and service they demand. Customers increasingly expect to be able to interact with companies through whichever channel best suits their needs and are likely to use a combination of communication channels. For example, a customer may request product literature via email, review marketing materials or fill in an application on the Web, call to receive more detailed information or assistance, send a signed form by fax, and check the status of an order online. Companies' ability to provide consistent customer service across all these communication channels will become increasingly critical to delivering a superior customer experience. 36 39 In many industries, Internet-based companies have captured increasing market share and emerged as competitive threats to traditional "brick and mortar" companies. As a result, many Global 1000 companies are under pressure to quickly expand their online presence. These companies have typically provided customer service through telephone-based communication channels and are now looking to support new Internet-based communication channels. Many of these companies have invested considerable resources to establish call centers that manage inbound and outbound customer calls, including customer inquiries, orders and service requests, as well as telesales and telemarketing operations. As these companies move to support Internet-based communication channels and establish multi-channel customer contact centers, they will seek to leverage their existing investments in call center infrastructure and personnel. Frost and Sullivan estimates that spending on Web-enabled call centers will increase from $14.1 million in 1998 to $889.9 million in 2004. Similarly, many Internet-based companies that have grown rapidly and built sizable customer bases are faced with an increasingly competitive online market environment and are looking for ways to differentiate themselves. These Internet-based companies have relied primarily on email and Web self-service to interact with their customers and many have delivered unsatisfactory customer service. According to a recent survey of Internet sites by Jupiter Communications, more than a third had no email address listed, took longer than five days to respond or never responded to an email. To date, companies have turned to several types of products to deliver customer service. These products have primarily been point solutions targeted at discrete communication channels. For example, computer telephony integration software products, which automate call routing and reduce the time it takes to respond to customer calls, are designed for telephone-based communications and often are not able to handle or integrate with Internet-based communication channels. Similarly, email management software products, which automate email responses, typically are not integrated with other communication channels and therefore do not provide a complete and accurate view of the customer. Companies have also deployed customer relationship management applications to automate customer interactions such as problem management and to provide a repository for customer information. However, these applications are usually not integrated with the underlying communication infrastructure and therefore cannot leverage call routing or other features that enable more timely, efficient and personalized customer service. Deploying these disparate solutions requires significant integration and, as a result, they can be difficult and expensive to implement and maintain. We believe a significant market opportunity exists for solutions that provide both traditional "brick and mortar" companies and new Internet-based companies with the ability to integrate a broad range of communication channels and manage the entire customer interaction lifecycle. We refer to this market opportunity as the e-Customer Relationship Management or eCRM market. eCRM solutions enable companies to: - manage high volumes of customer interactions; - support a broad range of communication channels; - deliver consistent and integrated customer service; - leverage Internet and telephony technologies; and - capture all relevant customer information. THE QUINTUS SOLUTION We provide a comprehensive eCRM solution to manage customer interactions and deliver consistent customer service across multiple communication channels, including the Internet, email 37 40 and advanced telephony systems. Our Quintus eContact software suite includes customer relationship management applications that address the needs of sales and service, consumer relations, technical support and human resources contact centers and a sophisticated routing engine to manage customer interactions. Our eContact software suite provides a platform for the personalization, routing and management of customer interactions and is designed to leverage third party products that support email and Internet-based customer service. We recently entered into an agreement to acquire Acuity, which will extend our ability to provide customer service functionality through Web chat, Web self-service, browser-based collaboration and email. Our eContact suite enables companies to handle high volumes of customer interactions, increase the efficiency of contact center resources and leverage cross-selling and up-selling opportunities through the use of common workflows and business rules, shared customer profile information, and consolidated management and reporting functionality. We have designed Quintus eContact to be a highly scalable and flexible solution that can be easily deployed to assist companies in reducing the costs and improving the efficiency of their customer service operations. eContact is based on an open, standards-based architecture and can be integrated with other systems, enabling companies to leverage their existing customer relationship management applications and communication infrastructure. eContact addresses the customer service needs of large organizations as well as rapidly growing companies that require highly functional solutions to automate and manage high volumes of customer interactions across traditional as well as Internet-based communication channels. The key features of the Quintus eContact solution are: Broad Range of Communication Channels. Quintus eContact is a comprehensive solution that enables companies to provide sophisticated routing, tracking and reporting capabilities across their communication infrastructure and manage customer interactions via telephone, email, Web self-service, Web chat, browser-based collaboration and Web callback. Our solution also supports third- party e-commerce applications, facsimile and imaging applications, and advanced telephony systems, including automatic call distributors and interactive voice response systems. Integrated Applications and Communication Infrastructure. Quintus eContact integrates communication infrastructure with customer relationship management applications. We currently sell four customer relationship management applications that address the needs of sales and service, consumer relations, technical support and human resources contact centers. These applications provide out-of-the-box functionality and allow companies to accelerate the deployment of our solution. Consistent Customer Service Across Communication Channels. Quintus eContact allows companies to set business rules and personalization strategies to handle customer interactions and deliver a consistent level of customer service across multiple communication channels. Individual customer interactions can be managed using transaction histories, legacy data, customer profiles and resource status to offer a consistent and highly personalized level of customer service. Business rules and personalization strategies can also be defined for specific communication channels in order to leverage the attributes of each channel to provide more targeted customer service and cross-selling and up-selling opportunities. Consolidated Customer Interaction Repository. Quintus eContact provides a consolidated repository of information about each customer interaction regardless of communication channel. Companies can analyze customer interactions and determine the use and effectiveness of different channels by different customer segments. Contact center agents can access complete customer histories and review previous interactions. As a result, agents can respond more effectively when, for 38 41 example, a customer calls to discuss an email she received in response to an order she previously placed online. Highly Scalable and Flexible. Quintus eContact is designed to handle millions of customer interactions per day and support thousands of agents across multiple contact centers. eContact allows companies to increase the number of customer interactions handled by routing customer interactions to the best resource available, based on agent availability and experience, as well as prior contact history. eContact is a modular solution, providing companies the flexibility to implement the solution they need today and add functionality as they expand the scope of their contact centers. In addition, our solution is based on open standards, enabling it to share information with existing customer relationship management applications and legacy systems. OUR GROWTH STRATEGY Our objective is to be the leading provider of eCRM software solutions that manage customer interactions across a broad range of communication channels. Key elements of our strategy include: Maintain and Extend Technology Leadership. We will continue to leverage leading Internet and telephony technologies to enhance the performance and functionality of our products. We believe our Quintus eContact suite is the most comprehensive solution that enables companies to efficiently and cost-effectively manage high volumes of customer interactions across multiple communication channels. We plan to incorporate new technologies, such as Internet telephony, speech recognition and digital video, into our solution as they achieve significant market acceptance. We intend to maintain our technology leadership through focused research and development and, potentially, through the licensing or acquisition of complementary technologies or businesses. Broaden Direct and Indirect Distribution Capabilities. We intend to continue to develop and extend our distribution capabilities. We sell our solution through a direct sales force in North America and indirectly through 15 domestic and international resellers and distribution partners including IBM Japan, Lucent Technologies and Logica. We plan to increase the size of our direct sales organization and broaden our indirect distribution network with strategic resellers and other distribution partners. Target Global 1000 Companies. We plan to continue to target Global 1000 companies as they rapidly transition their businesses online. We believe that there is a significant opportunity to provide a solution that enables these companies to leverage their existing customer service infrastructure and deliver a consistent and integrated level of customer service across both traditional and Internet-based communication channels. Our customers include Global 1000 companies such as Citigroup, Lucent Technologies, Procter & Gamble and United Airlines. Target Leading Internet-based Companies. We plan to continue to target leading Internet-based companies. We believe that these companies increasingly recognize the need for higher levels of customer service in order to attract and retain customers, and are looking for highly scalable solutions that are easy to deploy and support both their existing Internet-based communication channels as well as traditional communication channels. Leading Internet-based companies that have purchased Acuity's WebCenter product line include drugstore.com, living.com and REI.com. Develop and Expand Strategic Relationships. We plan to continue to develop technology and marketing relationships with leading vendors of complementary products in order to increase our visibility in the marketplace and broaden the functionality of our solution. We currently have strategic relationships with Cisco Systems-GeoTel Communications and Brightware. We also intend to expand our strategic relationships with leading systems integrators that have significant influence over companies' purchasing decisions. We believe that systems integrators help provide industry-specific 39 42 expertise and support our growth and entry into new markets. We currently have implementation relationships with AnswerThink Consulting Group, Cambridge Technology Partners and Technology Solutions Company. PRODUCTS The Quintus eContact suite is a comprehensive eCRM solution that allows companies to provide consistent customer service across a broad range of communication channels, including voice, email, Web self-service, Web chat, browser-based collaboration and Web callback. The eContact suite includes the eContact engine, channel applications and business applications. LOGO The Quintus eContact suite is priced according to the product components purchased and the number of users. Product components are typically priced from $15,000 to $85,000 per installation, with per user prices typically ranging from $500 to $2,300. QUINTUS ECONTACT ENGINE The Quintus eContact engine is the foundation of our eContact suite and serves as a platform for managing customer interactions consistently across multiple communication channels. Our eContact engine provides advanced routing, tracking, management and reporting functionality, and consolidates all relevant customer information into a common data repository. The eContact engine includes the following features: - Personalization Services. The Quintus eContact engine allows companies to personalize each customer interaction based on sophisticated business rules and workflows that take into account customer profiles, transaction histories and resource availability. A customer interaction can be managed and routed based upon the communication channel, the customer or the purpose of that specific customer interaction. As a result, customers can receive the same level of service across multiple communication channels and companies can leverage the 40 43 attributes of each communication channel to deliver more targeted and effective customer service. - Coordination Services. For each customer interaction, the Quintus eContact engine captures all relevant customer information in real time. By sharing customer information across systems, agents and communication channels, companies can provide better informed, consistent and synchronized customer service. - Consolidated Repository and Reporting. All customer profiles and histories, as well as detailed records of every customer interaction regardless of communication channel, are stored in a common data repository. The Quintus eContact engine includes a set of reporting tools that allow companies to perform in-depth customer segmentation and trend analysis. - Centralized Customization and Administration. Companies can easily customize business rules, workflows, screen layouts, Web pages, data models and data access using Quintus eContact's drag-and-drop graphical tools. This common toolset gives companies the flexibility necessary to rapidly respond to changing business needs. Our eContact engine also provides centralized administration of our solution. Companies can control and monitor system status and availability as well as receive notification alerts when pre-defined thresholds are met. The Quintus eContact engine includes an enterprise data access layer that provides access to relational databases as well as external data sources and transactional systems, enabling companies to use their own business data to manage customer interactions. Contact center agents interact with our eContact suite through our agent console. The agent console provides an intuitive user interface that displays customer information and pre-defined scripts, and can be integrated with multiple applications, including front and back office systems and legacy applications. QUINTUS ECONTACT CHANNEL APPLICATIONS Our channel applications enable companies to manage customer interactions consistently across multiple communication channels including the Internet, email and advanced telephony systems. Our channel applications can be deployed separately or as a comprehensive solution to meet companies' evolving need for multi-channel contact centers. - ----------------------------------------------------------------------------------- CHANNEL APPLICATION PRODUCT DESCRIPTION - ----------------------------------------------------------------------------------- Computer Telephony Quintus CTI integrates eContact with advanced telephony Integration systems. - ----------------------------------------------------------------------------------- Web Interaction Quintus WebCenter provides Web self-service and online customer service through Web chat, browser-based collaboration and Web callback. - ----------------------------------------------------------------------------------- Email Management* Quintus Email Management provides email management with natural language text analysis and rule-driven automated responses. - ----------------------------------------------------------------------------------- Electronic Commerce Quintus eCommerce Connector integrates eContact with Connector e-commerce applications to capture transaction information. - ----------------------------------------------------------------------------------- Network Routing* Quintus Network Routing creates an enterprise-wide "virtual call center" with optimized routing between distributed resources. - -----------------------------------------------------------------------------------
* Third-party products that we currently resell as part of the Quintus eContact suite. Computer Telephony Integration. Quintus CTI provides a highly scalable platform for integrating advanced telephony systems such as automatic call distributors and interactive voice response systems from major telecommunications equipment vendors. Quintus CTI allows companies 41 44 to apply sophisticated business rules and workflows to qualify and route telephone-based customer communications. By integrating the telephony infrastructure with our eContact solution, Quintus CTI also enables traditional voice-only call centers to be extended to handle Web, email and other communication channels. Web Interaction. Quintus WebCenter, an Acuity product, provides a comprehensive framework to manage Internet-based customer interactions, including Web self-service, Web chat, browser-based collaboration and Web callback. WebCenter enables companies to provide live customer service on the Internet. Through Acuity's WebACD, Web-based customer interactions are routed to the appropriate resources based on agent availability and experience. Agents can collaborate with customers by synchronizing their browsers, seeing the Web pages that customers are viewing and pushing new Web pages to customers to assist them. WebCenter also allows companies to build a knowledge base of frequently asked questions, deploy it on the Web and provide customers with full search capabilities. With WebCenter companies can enhance their Web sites and deliver a more engaging and personalized customer experience by providing immediately available online customer service options. We have not yet implemented WebCenter as part of our eContact suite; however, WebCenter has been sold to over 100 customers and we are currently engaged in our first WebCenter and eContact deployment. We will acquire the WebCenter and WebACD products upon the closing of our acquisition of Acuity, which is expected to occur prior to the effectiveness of this offering. Email Management. We deliver email management functionality by reselling Brightware's software under a non-exclusive reseller agreement. Quintus Email Management provides natural language analysis and automated response capabilities, enabling companies to answer customers' emails accurately, cost-effectively and rapidly. Email Management analyzes the email message content, determines the nature of the customer request and automatically responds to the email or forwards it with a suggested response to an agent for further review. Responses can be automatically generated and include information provided by the eContact repository or other external data sources. The next version of the Quintus eContact suite, which is expected to be released in October 1999, will integrate Brightware's email management products with our eContact suite. Electronic Commerce Connector. Quintus eCommerce Connector enables our eContact solution to exchange information with e-commerce applications using standard Internet protocols. Online customer transactions and purchases can be recorded in the eContact repository and displayed to agents providing customer service. Companies can integrate our Internet-based customer service solution with their e-commerce applications to offer online customer assistance at the time of purchase as well as aftersales support. In addition, our eCommerce Connector enables companies to leverage information on customer purchasing patterns to sell additional products or services with each customer interaction. Network Routing. Quintus Network Routing provides enhanced call routing functionality to distribute inbound customer calls across different locations. We offer this functionality by reselling Cisco Systems-GeoTel Communications' Intelligent Contact Management product under a non-exclusive reseller agreement. Network Routing enables companies to create a real-time enterprise-wide "virtual call center" that is independent of carriers and telephone switches. Companies with multiple call centers can increase customer satisfaction and achieve significant cost efficiencies by optimizing call delivery and transfers between geographically dispersed resources. QUINTUS ECONTACT BUSINESS APPLICATIONS We currently market four business applications that address the needs of sales and service, consumer relations, technical support and human resources contact centers. Our business applications can run separately or be integrated with the Quintus eContact suite, can be deployed across multiple 42 45 locations and are accessed through agent desktops or via a Web browser. Companies can easily customize data models, business rules, screen forms and Web pages to meet specific requirements. Our business applications can also be integrated with third-party applications and data sources. - ----------------------------------------------------------------------------------- BUSINESS PRODUCT DESCRIPTION APPLICATION - ----------------------------------------------------------------------------------- Sales and Service Quintus CallCenterQ supports multi-function business-to-consumer sales, service and marketing contact centers. - ----------------------------------------------------------------------------------- Consumer Relations Quintus CallCenterQ for Consumer Relations supports consumer relations contact centers in the consumer product, service, travel, hospitality and other industries. - ----------------------------------------------------------------------------------- Technical Support Quintus CustomerQ supports business-to-business technical support contact centers. - ----------------------------------------------------------------------------------- Human Resources Quintus HRQ supports human resources contact centers serving employees, former employees and retirees. - -----------------------------------------------------------------------------------
Sales and Service. Quintus CallCenterQ is designed for multi-function sales, service and marketing contact centers. Targeted at business-to-consumer industries, CallCenterQ enables agents to easily access pricing and product information, process returns, track service issues and capture orders as well as qualify and manage customer leads. CallCenterQ also allows companies to define and manage marketing campaigns, and agents can be automatically prompted with targeted cross-selling and up-selling opportunities. Additional features include list management, literature fulfillment, automatic personalized letter generation, agent scripting, and outbound preview dialing. CallCenterQ is designed to help companies maximize revenue by enabling them to set up, administer and evaluate the effectiveness of their sales and marketing campaigns. Consumer Relations. Quintus CallCenterQ for Consumer Relations is designed for consumer relations contact centers and is targeted primarily at the consumer product, service, travel and hospitality industries. CallCenterQ for Consumer Relations provides agents with the information needed to resolve customer issues including customer history and product information, and the ability to issue vouchers and other forms of compensation. Additional features include scanned letter/fax viewing, frequently asked questions knowledge base, automatic personalized letter generation, and literature fulfillment. In addition, CallCenterQ for Consumer Relations enables companies to gather important customer feedback and market research to help them manage their brands. Technical Support. Quintus CustomerQ is designed for business-to-business technical support contact centers. CustomerQ provides agents with complete customer history and product information, as well as service contracts, warranties, billing and shipping information. Companies can also allow customers to search for solutions, enter issues, and track the status of their technical problems through the Internet. Other features include problem resolution, case management, access to knowledge bases, defect tracking, automatic notification and escalation, return processing and report generation. CustomerQ enables companies to increase customer loyalty by rapidly and effectively addressing customer requests for technical support. We also offer Quintus HelpQ, a technical support application, which is targeted at the internal help desk market. Human Resources. Quintus HRQ is designed for human resources contact centers serving employees, former employees and retirees. HRQ provides human resources personnel with detailed employee history as well as health care and financial benefits information. Other features include problem resolution, dependent profiles, scanned letter/fax viewing, automatic personalized letter generation and literature fulfillment. In addition, HRQ can be integrated with leading human resources applications and knowledge bases. HRQ helps companies be more responsive to their 43 46 employees while reducing administrative costs and improving the productivity of human resource departments. CUSTOMERS To date, we have licensed our software products to over 250 customers, including companies in the financial services, telecommunications and consumer product industries. The following is a representative list of companies from which we have derived more than $300,000 of license and service revenue since April 1, 1996. AMS Management Systems Engen Petroleum PricewaterhouseCoopers Anheuser-Busch First Union Bank Procter & Gamble Canada Trust Hartford Insurance Reuters Canadian Imperial Bank of Inova Healthcare Services The Santa Cruz Operation Commerce International Paper Siemens Nixdorf Capita Group Lucent Technologies Steelcase Citigroup Massachusetts Division of Sun Microsystems Clarke American Employment & Training Telefonica do Brasil Countrywide Home Loans Meca Software United Airlines Deere & Company Northern Trust
Prior to our acquisition of Acuity, Acuity licensed its WebCenter product to over 100 customers. The following case studies illustrate how some companies are using our products. PROCTER & GAMBLE Procter & Gamble is a leading food and consumer products company, marketing over 300 brands in more than 140 countries. Business Challenge. Each year, Procter & Gamble receives high volumes of calls and letters from consumers concerning its products and company policies. Procter & Gamble required a solution that could integrate its telephone, letter and facsimile interactions, and support emerging Internet communication channels. In addition, Procter & Gamble, which has over 110,000 employees worldwide, was looking for a solution to help manage human resources inquiries by both current and former employees. Solution. Procter & Gamble licensed our Quintus CallCenter for Consumer Relations application for its consumer relations contact centers. Procter & Gamble is also implementing our Quintus HRQ application in its human resources contact centers to handle inquiries such as health benefits, payroll and pension plans. Procter & Gamble expects that our solution will enable it to increase the efficiency of its contact centers and improve its service to consumers and employees by automating contact center interactions, providing detailed consumer and employee information, and tracking problem resolution to completion. 44 47 CITIGROUP Citigroup is a leading global financial services company, providing over 100 million consumers, corporations, governments and institutions in more than 100 countries with a broad range of financial products and services. Business Challenge. Citigroup relies on multiple call centers and thousands of agents to provide financial services to customers over the telephone. Citigroup needed to integrate its call center telephony systems with its back-office systems to enable agents to access detailed customer information and perform additional business functions. In addition, Citigroup required a flexible and scalable solution that could be deployed across multiple call centers. Citigroup was also looking for a solution that could be implemented in conjunction with its "e-Citi" initiative to increase its presence on the Internet and deliver financial services online. Solution. Citigroup is currently using our Quintus CTI product to integrate its telephony systems and enable approximately 1,000 agents across multiple call centers to deliver superior customer service. Our solution enables Citigroup to handle service requests quickly and cost-effectively by providing agents with detailed customer information and routing calls to the most appropriate agent. Citigroup has also deployed our Quintus CustomerQ application integrated with our Quintus CTI product as part of its e-Citi projects. In addition to increasing customer satisfaction by enabling e-Citi agents to track customer relationships and activities, our solution is designed to increase revenue by alerting agents to likely cross-selling and up-selling opportunities. TECHNOLOGY Quintus eContact is based on a scalable, multi-tiered architecture. Our eContact product suite enables eCRM features through a sequence of cooperating, distributed software servers that perform a variety of functions, including creating and manipulating data containers, routing customer contacts, allowing agents to access data and interact with customers through a Web browser. Our multi-platform solution runs on all major UNIX and Windows NT operating systems. Electronic Data Container. When a customer contacts a company, whether by telephone, fax, email or through a Web site, an electronic data container for that customer interaction is created. Existing customer information can be retrieved from the data repository to populate the data container, or new information can be obtained directly from the customer. The data container continually collects information throughout the lifecycle of the customer interaction and can be routed throughout an enterprise, carrying detailed information about the customer, including the customer's history with the company and details of this particular customer interaction. If the customer is transferred to another agent at another site or to an agent using a different communication channel, the data container accompanies the transition, ensuring that the customer perceives a seamless service process. Enterprise Data Access Layer. Quintus eContact includes a powerful enterprise data access layer that provides access to relational and legacy data sources. The enterprise data access layer creates a uniform view of third party data regardless of the data source and allows eContact to incorporate third-party customer information. Abstraction and Customization. Quintus eContact uses a sophisticated data abstraction layer that allows companies to store data entities, business rules and screen layouts as business objects. Customizations are performed on the business objects to modify them. All changes to the business objects are automatically reflected throughout our eContact suite. 45 48 Workflow and Routing Engine. Quintus eContact provides a graphical tool to create and modify customer interaction flows, define routing rules and build agent scripts. These customer interaction flows, rules and scripts are specified, distributed and stored in Extensible Markup Language, allowing eContact to leverage industry-standard tools and technologies. Customer interaction flows are defined using re-usable building blocks that can be used to create new routing rules as companies' needs evolve. High Availability. We have built our system using a modular, component-based approach. Additional contact center capabilities and applications can be introduced without requiring companies to change their computing infrastructure and, in most cases, without affecting their operations. Our system also provides multiple redundant configurations, delivering the ability to "failover" to an alternative configuration in the event of a system failure. CUSTOMER SUPPORT SERVICES We believe that high quality services and support are critical requirements for continued growth and increased sales of our products. We have made and expect to continue to make significant investments to increase our ability to service and support our customers. Our customer support services organization is organized into four groups including customer service management, professional services, technical support and education services. Customer Service Management. Our customer service management team handles many aspects of our customer relationships including answering general questions, renewing maintenance agreements, shipping product upgrades and coordinating with our other resources to meet customer needs. Professional Services. Our professional services group helps facilitate the implementation of our solution. We provide systems integration services to support our entire product suite. Our services include integration, customization, data modeling, project management and business rules development. The professional services group also provides support for our implementation partners. Technical Support. Our technical services group is dedicated to providing the highest level of support to our customers. We currently operate three technical support centers in the United States and rely upon a network of service providers internationally to provide consultations via toll-free telephone, email and the Web. Additionally, customers have 24-hour access to our online knowledge repository and the ability to directly log and track their issues through our Web site. We offer a tiered maintenance and support program. Customers can choose from our existing support packages or have a custom package developed to meet their particular needs including 24x7 coverage and other assistance options. Education Services. Our education services group offers a full spectrum of classes providing the training needed to understand, implement and use our solution. We offer lectures and teaching labs to end-users, administrators, developers and system integration partners at our facilities in California and Massachusetts. Upon request, we can also provide customized on-site training. SALES AND MARKETING Sales. We sell our products through a direct sales force and indirectly through resellers and distribution partners. To date, we have targeted our sales efforts at Global 1000 companies and other rapidly growing companies pursuing eCRM initiatives, including those in the financial services, telecommunications and consumer products industries. Our sales force consists primarily of sales people and sales engineers located in our sales offices in numerous locations across the United States. 46 49 We also maintain international offices in Amsterdam and London from which we provide sales support to our international distribution partners. We currently have relationships with 15 domestic and international reseller and distribution partners including IBM Japan, Lucent Technologies and Logica. We also enhance our sales efforts through strategic relationships with systems integrators such as AnswerThink Consulting Group, Cambridge Technology Partners and Technology Solutions Company. We intend to continue to expand our sales efforts by increasing the size of our direct sales force and broadening our indirect distribution channels. Marketing. Our marketing efforts focus on creating market awareness for eCRM solutions, promoting our products and services, and generating sales opportunities. We have a comprehensive marketing strategy that includes print advertising, public relations campaigns, direct mailings, newsletters, industry events including trade shows, analyst programs and speaking engagements, and joint marketing arrangements. We also advertise on the Internet and use our Web site to further our market presence and generate additional leads. RESEARCH AND DEVELOPMENT Our research and development efforts are focused primarily around enhancing our core technology and developing additional applications for the Quintus eContact suite. We operate development centers in California, Massachusetts and, following the acquisition of Acuity, Texas. Our software development approach consists of a well-defined methodology that provides guidelines for planning, controlling and implementing projects. This approach uses a cross-functional, team-based development and release process. Our research and development group works closely with customers, partners, our sales and marketing group and senior management to assist in defining product direction and to ensure that products are brought to market successfully. Members of our research and development group have extensive experience in customer relationship management software as well as Internet and telephony communication technologies. Our research and development expenditures were approximately $3.7 million, $5.1 million, $6.7 million and $1.9 million in fiscal 1997, 1998 and 1999 and for the three months ended June 30, 1999. We believe that our future performance will depend in large part on our ability to enhance our current product line, develop new products and maintain our technological competitiveness. As a result, we intend to continue to expend significant resources in research and development. COMPETITION The eCRM market is highly competitive and subject to rapid technological change. We expect competition to increase significantly in the future as current competitors expand their product offerings and new companies enter the market. We currently face competition primarily from customer relationship management software vendors such as Siebel Systems and Clarify, emerging Internet customer interaction software vendors such as Kana Communications and WebLine Communications, and computer telephony software vendors such as Genesys Telecommunications Labs. Because there are relatively low barriers to entry in the software market, we expect additional competition from other established and emerging companies if the eCRM market continues to develop and expand. Potential future competitors include traditional call center technology providers and large enterprise application vendors as well as independent systems integrators, consulting firms and in-house information technology departments that may develop solutions that compete with our products. 47 50 We believe that we compete favorably with respect to the principal competitive factors affecting our market, including price, product quality, product scalability and reliability, core technology and architecture, customer service and support, and ability to implement solutions. PATENTS AND PROPRIETARY RIGHTS Our success and competitiveness are dependent to a significant degree on the protection of our proprietary technology. We rely primarily on a combination of copyrights, trademarks, licenses, trade secret laws and restrictions on disclosure to protect our intellectual property and proprietary rights. We also enter into confidentiality agreements with our employees and consultants, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, others may be able to copy or reverse engineer aspects of our products, to obtain and use information that we regard as proprietary or to independently develop similar technology. Any such actions by competitors could harm our business, operating results and financial condition. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States, and effective patent, copyright, trademark and trade secret protection may not be available in these jurisdictions. We may need to take legal action in the future to enforce or defend our intellectual property and proprietary rights, to protect our trade secrets or to determine the validity and scope of the intellectual property and proprietary rights of others. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management and technical resources, either of which could harm our business, operating results and financial condition. We attempt to avoid infringing upon known intellectual property and proprietary rights of third parties in our product development efforts. However, we have not conducted and do not plan to conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by others. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. If our products were to violate the proprietary rights of others, we may be liable for substantial damages. In addition, we may be required to reengineer our products or seek to obtain licenses to continue offering our products. We cannot assure you that such efforts would be successful. EMPLOYEES As of June 30, 1999, we had a total of 181 employees, including 51 people in research and development, 63 people in sales and marketing, 42 people in customer support services and 25 people in general and administrative services. We do not have a collective bargaining agreement with any of our employees and we consider our employee relations to be good. As of June 30, 1999, Acuity had a total of 92 employees. FACILITIES Our principal administrative, sales, marketing, support and research and development facilities are located in approximately 30,000 square feet of space in Fremont, California and our lease expires on December 2000. We lease several office suites in the United States and the United Kingdom for sales and service personnel. In addition, we maintain offices in Acton, Massachusetts and have our European headquarters in Amsterdam, the Netherlands. Upon the closing of our acquisition of Acuity, we will assume a lease for 17,000 square feet in Austin, Texas, expiring in June 2000. 48 51 MANAGEMENT DIRECTORS AND OFFICERS The following table sets forth certain information regarding our directors and officers as of September 9, 1999:
NAME AGE POSITION Executive Officers Alan Anderson................... 36 Chairman and Chief Executive Officer John Burke...................... 39 President Susan Salvesen.................. 44 Chief Financial Officer and Secretary Muralidhar Sitaram.............. 36 Senior Vice President, Engineering Other Officers Lawrence Byrd................... 42 Vice President, Marketing Roger Nunn...................... 44 Vice President, Americas Operations Mark Payne...................... 44 Vice President, International Operations Candace Sestric................. 53 Vice President, Worldwide Customer Support Services Directors Paul Bartlett(a)................ 39 Director Fredric Harman(b)............... 39 Director William Herman(a)............... 39 Director Alexander Rosen(b).............. 31 Director Robert Shaw..................... 52 Director Jeanne Wohlers(b)............... 54 Director
- ------------------------- (a) Member of compensation committee (b) Member of audit committee EXECUTIVE OFFICERS Alan Anderson has served as our Chief Executive Officer since May 1995 and our Chairman since September 1999. From May 1995 to July 1999, Mr. Anderson also served as our President. From October 1992 to May 1995, Mr. Anderson served as Senior Vice President responsible for the North American operations of OpenVision Technologies, a systems management software developer. From December 1991 to October of 1992, Mr. Anderson served as a director for consulting services at Oracle Corporation, a database software company. From April 1989 to December 1991, Mr. Anderson served as a director of professional services for Sybase, a database software company. Mr. Anderson received his B.S. in information systems from the University of San Francisco. John Burke has served as our President since July 1999. From October 1996 to July 1999, Mr. Burke served as Senior Vice President for field sales and support for SAP America, a provider of enterprise resource planning software. From April 1996 to October 1996, Mr. Burke served as Senior Vice President of sales and marketing for Oneware, a software development and distribution company. From September 1990 to April 1996, Mr. Burke served as Executive Vice President of SAP America. Mr. Burke received his B.B.A. in finance and marketing from Ohio University. Susan Salvesen has served as our Chief Financial Officer and Secretary since January 1998. From April 1996 to September 1997, Ms. Salvesen served as Vice President, Finance and Administration and Chief Financial Officer and Secretary at Unify Corporation, a provider of e- 49 52 commerce software solutions. From May 1994 to April 1996, Ms. Salvesen served as Vice President of Finance and Chief Financial Officer at AG Associates, a semiconductor equipment manufacturer. From February 1988 to May 1994, Ms. Salvesen served as Corporate Controller at Aspect Telecommunications, a telecommunications equipment company. Ms. Salvesen received her B.A. in economics from Rutgers University and her M.B.A. from the University of Pittsburgh. Muralidhar Sitaram has served as our Senior Vice President, Engineering since June 1996. From January 1994 to June 1996, Mr. Sitaram served as a Director of Engineering at Quintus. Mr. Sitaram received his B.S. in physics and computer science from Bombay University, India and his M.S. in computer science from the Case Western Reserve University. OTHER OFFICERS Lawrence Byrd was a co-founder of Quintus in 1984 and has most recently served as our Vice President, Marketing since May 1998. From October 1997 to May 1998, Mr. Byrd served as our Vice President, Product Marketing, from June 1996 to October 1997, as our Chief Technology Officer, from June 1995 to June 1996, as our Vice President, Engineering and from December 1993 to June 1995, as a vice president in our consulting group. Prior to this, Mr. Byrd held a range of engineering, consulting and marketing positions for us. Mr. Byrd received his B.A. in philosophy from the University of Durham, England. Roger Nunn has served as Vice President, Americas Operations since September 1999. From January 1999 to September 1999, Mr. Nunn served as our Senior Vice President of Sales. From October 1997 to December 1998, Mr. Nunn served as our Vice President of Channel Sales. From May 1994 to September 1997, Mr. Nunn served as a Director of Marketing for Auspex Systems, a provider of network file servers. From December 1988 to April 1994, Mr. Nunn was an area channels manager for Sun Microsystems, a provider of computer workstations. Mr. Nunn received his B.Sc. in engineering and his M.Sc. in management science from Imperial College of London, England. Mark Payne has served as our Vice President, International Operations since July 1998. From June 1996 to June 1998, Mr. Payne served as Senior Vice President of International Operations for Versatility, a software development company. From July 1992 to June 1996, he served as General Manager of Northern Europe for Gupta (now Centura), an applications development software company. Candace Sestric has served as our Vice President, Worldwide Customer Support since April 1997. From April 1996 to April 1997, Ms. Sestric served as Vice President, Professional Services for Knowledge Networks, a customer relationship management systems integrator. From November 1995 to February 1996, Ms. Sestric served as Vice President, Customer Services for Siebel Systems, a sales force automation software company. From June 1993 to November 1995, Ms. Sestric served as Vice President, Worldwide Customer Support Services for Gupta (now Centura). Ms. Sestric received her B.A. in business administration from the College of Santa Fe. DIRECTORS Paul Bartlett has served as a director of Quintus since May 1995. Mr. Bartlett joined Hall Kinion & Associates, a recruiting and staffing firm, in September 1996 as President and has served as a director of Hall Kinion since January of that same year. From August 1990 to September 1996, he was with the Sprout Group, a venture capital firm, most recently as a partner. Mr. Bartlett received his A.B. in economics from Princeton University and his M.B.A. from the Stanford University Graduate School of Business. 50 53 Fredric Harman has served as a director of Quintus since September 1996. Since July 1994, Mr. Harman has served as a managing member of the general partners of venture capital funds affiliated with Oak Investment Partners. From April 1991 to June 1994, he served as a general partner of Morgan Stanley Venture Capital. Mr. Harman sits on the boards of ILOG, S.A., Inktomi Corporation, Primus Knowledge Solutions, Inc. and InterNAP Network Services. Mr. Harman received his B.S. and M.S. in electrical engineering from Stanford University and his M.B.A. from the Harvard Graduate School of Business. William Herman has served as a director of Quintus since May 1995. Since October 1998, Mr. Herman has served as President, Chief Executive Officer and a director of Viewlogic Systems, a provider of electronic design automation software. From December 1997 to October 1998, Mr. Herman served as President, Viewlogic Systems Division, of Synopsys, a provider of electronic design automation software. In October 1998, Synopsys acquired Viewlogic Systems, whose business included the products and technologies offered by the current Viewlogic. Mr. Herman served as President and Chief Executive Officer of the predecessor Viewlogic from January 1997 to December 1997, and as President and Chief Operating Officer from March 1995 to January 1997. From May 1994 to March 1995, Mr. Herman was President and Chief Operating Officer of Silerity, a computer-aided engineering software company. Mr. Herman also sits on the board of Hall Kinion & Associates. Mr. Herman received his B.S. in computer science from Temple University. Alexander Rosen has served as a director of Quintus since August 1997. Mr. Rosen has been with the Sprout Group since 1996, most recently as a general partner. From July 1993 to August 1994, he served as an associate for General Atlantic Partners, a venture capital firm, focusing on software investments. Mr. Rosen received his B.S. in electrical engineering and economics from the Massachusetts Institute of Technology and his M.B.A. from the Stanford University Graduate School of Business. Robert Shaw has served as a director of Quintus since October 1995. Since November 1998, Mr. Shaw has served as Chief Executive Officer and a director of USWeb/CKS, an Internet professional services company. From June 1992 to August 1998, Mr. Shaw served in various capacities at Oracle, most recently as Executive Vice President, Worldwide Consulting Services and Vertical Markets. Mr. Shaw received his B.B.A. in finance from the University of Texas. Jeanne Wohlers has served as a director of Quintus since October 1995. From May 1994 to July 1998, Ms. Wohlers served as partner of Windy Hill Productions, a producer of education and entertainment software. From August 1993 to June 1995, Ms. Wohlers was a consultant to Scopus Technology, a provider of customer information management systems. Ms. Wohlers currently serves as an independent director/trustee and Audit Committee Chair of 39 mutual funds managed by American Century, and as a director of Indus International. Ms. Wohlers received her B.A. in mathematics from Skidmore College and her M.B.A. from Columbia University. BOARD COMMITTEES The board of directors has a compensation committee and an audit committee. Compensation Committee. The compensation committee of the board of directors reviews and makes recommendations to the board regarding all forms of compensation provided to our executive officers and directors, including stock compensation and loans. In addition, the compensation committee reviews and approves stock compensation arrangements for all of our employees and administers our 1999 Stock Incentive Plan, Employee Stock Purchase Plan and 1999 Director Option Plan. The current members of the compensation committee are Messrs. Bartlett and Herman. 51 54 Audit Committee. The audit committee of the board of directors reviews and monitors our corporate financial reporting and our internal and external audits, including, among other things, our internal audit and control functions, the results and scope of the annual audit and other services provided by our independent auditors and our compliance with legal matters that have a significant impact on our financial reports. The audit committee also consults with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the audit committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, our independent auditors. The current members of the audit committee are Ms. Wohlers and Messrs. Harman and Rosen. DIRECTOR COMPENSATION Directors do not receive any cash fees for their service on the board or any board committee, but they are entitled to reimbursement for all reasonable out-of-pocket expenses incurred in connection with their attendance at board and board committee meetings. From time to time, certain directors who are not employees of Quintus have received grants of options to purchase shares of our common stock. Following this offering, directors will receive automatic option grants under our 1999 Director Option Plan. If a change in control of Quintus occurs, a non-employee director's option granted under our 1999 Director Option Plan will become fully vested. See "Stock Plans -- 1999 Director Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of the board of directors currently consists of Messrs. Bartlett and Herman. No interlocking relationship exists between any member of our board of directors or our compensation committee and any member of the board of directors or compensation committee of any other company, and no such interlocking relationship has existed in the past. INDEMNIFICATION In September 1999, the board of directors authorized Quintus to enter into indemnification agreements with each of our directors and executive officers. The form of indemnification agreement provides that we will indemnify our directors and executive officers against any and all of their expenses incurred by reason of their status as a director or executive officer to the fullest extent permitted by Delaware law and our bylaws. Our certificate of incorporation and bylaws each contain certain provisions relating to the limitation of liability and indemnification of our directors and officers. Our certificate of incorporation provides that our directors will not be personally liable to Quintus or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability - for any breach of the director's duty of loyalty to Quintus or our stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - in respect of certain unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or - for any transaction from which the director derives any improper personal benefit. Our certificate of incorporation also provides that if the Delaware General Corporation Law is amended after the approval by our stockholders of our certificate of incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of 52 55 our directors will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law. The foregoing provisions of our certificate of incorporation are not intended to limit the liability of our directors or officers for any violation of applicable federal securities laws. In addition, as permitted by Section 145 of the Delaware General Corporation Law, our bylaws provide that - we are required to indemnify our directors and executive officers to the fullest extent permitted by the Delaware General Corporation Law; - we may, in our discretion, indemnify other of our officers, employees and agents as provided by the Delaware General Corporation Law; - we are required to advance all expenses incurred by our directors and executive officers in connection with a legal proceeding (subject to certain exceptions); - the rights conferred in the bylaws are not exclusive; - we are authorized to enter into indemnification agreements with our directors, officers, employees and agents; and - we may not retroactively amend our bylaw provisions relating to indemnification. EXECUTIVE COMPENSATION The following table sets forth information with respect to compensation for the fiscal year ended March 31, 1999 paid by us for services by our Chief Executive Officer and our other executive officers whose total salary and bonus for such fiscal year exceeded $100,000, collectively referred to as the Named Executive Officers. Amounts in the "All Other Compensation" column represent premiums paid by us for term life insurance. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITIES --------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION Alan Anderson, Chief Executive Officer............................. $190,000 $ 11,875 -- $408 Susan Salvesen, Chief Financial Officer............................. 150,000 10,000 25,000 408 Muralidhar Sitaram, Senior Vice President, Engineering.............. 155,833 -- 85,000 255 Peter Kenyon, former Vice President, Field Operations(a)................. 89,702 304,773 -- 306
- ------------------------- (a) Mr. Kenyon resigned as our Vice President, Field Operations in October 1998. 53 56 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options during the fiscal year ended March 31, 1999 to each of the Named Executive Officers. No stock appreciation rights were granted to these individuals during this period.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ----------------------------------------------------- ANNUAL RATES OF NUMBER OF STOCK SECURITIES % OF TOTAL PRICE APPRECIATION UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(D) OPTIONS TO EMPLOYEES IN PRICE EXPIRATION --------------------- NAME GRANTED(A) FISCAL YEAR(B) ($/SH)(C) DATE 5% 10% Alan Anderson.......... -- --% $ -- -- $ -- $ -- Susan Salvesen......... 10,000 0.8 1.75 3/09/09 11,006 27,890 15,000 1.3 1.50 7/20/08 14,150 35,859 Muralidhar Sitaram..... 85,000 7.1 1.75 3/09/09 93,548 237,069 Peter Kenyon........... -- -- -- -- -- --
- ------------------------- (a) Each of the options listed in the table is immediately exercisable except to the extent exercisability was deferred to preserve incentive stock option tax benefits. The shares purchasable upon exercise of these options are subject to repurchase by us at the original exercise price paid per share upon the optionee's cessation of service prior to vesting in such shares. Other than Ms. Salvesen's option for 10,000 shares, the repurchase right lapses and the optionee vests as to 25% of the option shares upon completion of one year of service from the date of grant and the balance in a series of equal monthly installments over the next 36 months of service thereafter. Ms. Salvesen's option for 10,000 shares vests in equal monthly installments over a two-year period. The option shares will vest upon an acquisition of Quintus by merger or asset sale, unless our repurchase right with respect to the unvested option shares is transferred to the acquiring entity. Each of the options has a ten-year term, subject to earlier termination in the event of the optionee's cessation of service with us. (b) Based on an aggregate of 1,205,612 options granted to our employees under the 1995 Stock Option Plan during the 12 months ended March 31, 1999. (c) The exercise price was equal to the fair market value of our common stock as valued by our board of directors on the date of grant. The exercise price may be paid in cash, in shares of our common stock valued at fair market value on the exercise date or through a cashless exercise procedure involving a same-day sale of the purchased shares. We may also finance the option exercise by loaning the optionee sufficient funds to pay the exercise price for the purchased shares, together with any federal and state income tax liability incurred by the optionee in connection with such exercise. (d) The potential realizable value is calculated based on the term of the option at the time of grant (ten years). Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of our stock price performance. The potential realizable values at 5% and 10% appreciation are calculated by assuming that the exercise price on the date of grant appreciates at the indicated rate for the entire term of the option and that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. 54 57 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth for each of the Named Executive Officers, the number of options exercised during the fiscal year ended March 31, 1999 and the number and value of securities underlying unexercised options that were held by the Named Executive Officers as of March 31, 1999. No stock appreciation rights were exercised by the Named Executive Officers in fiscal year 1999, and no stock appreciation rights were outstanding at the end of that year.
NUMBER OF VALUE OF SECURITIES UNDERLYING UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY AT MARCH 31, OPTIONS AT SHARES 1999(B) MARCH 31, 1999(C) ACQUIRED ON VALUE ---------------------- ------------------ NAME EXERCISE REALIZED(A) VESTED UNVESTED VESTED UNVESTED Alan Anderson............. -- $ -- -- -- $ -- $ -- Susan Salvesen............ 28,000 7,000 33,499 156,501 15,239 71,011 Muralidhar Sitaram........ -- -- 5,312 94,688 2,656 4,844 Peter Kenyon.............. -- -- -- -- -- --
- ------------------------- (a) Equal to the fair market value of the purchased shares on the option exercise date, less the exercise price paid for such shares. (b) The options are immediately exercisable for all the option shares, but any shares purchased under those options will be subject to repurchase by us, at the original exercise price paid per share, upon the optionee's cessation of service with us, prior to the vesting in such shares. The heading "Vested" refers to shares no longer subject to repurchase; the heading "Unvested" refers to shares subject to repurchase as of March 31, 1999. (c) Based on the fair market value of our common stock at the end of fiscal 1999 ($1.75 per share), less the exercise price payable for such shares. EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS The Compensation Committee of the Board of Directors, as Plan Administrator of the 1999 Stock Incentive Plan, has the authority to provide for accelerated vesting of the shares of common stock subject to outstanding options held by the Named Executive Officers and any other person in connection with certain changes in control of Quintus. In connection with our adoption of the 1999 Stock Incentive Plan, we have provided that upon a change in control of Quintus, each outstanding option and all shares of restricted stock will generally become fully vested unless the surviving corporation assumes the option or award or replaces it with a comparable award. Except for Mr. Anderson and Mr. Burke, none of the Named Executive Officers has employment agreements with us, and his or her employment may be terminated at any time. We have entered into an agreement with Mr. Anderson, our Chief Executive Officer, dated May 23, 1995, which provides for payment of severance pay in the amount of nine months base salary in the event that his employment is involuntarily terminated without cause. In May 1995, we granted Mr. Anderson unvested options to purchase 1,142,858 shares of common stock. Subsequently, Mr. Anderson exercised his option to purchase all of these options subject to our right to repurchase his unvested shares should he cease his service with us. As of September 1999, Mr. Anderson had fully vested in 571,429 of these shares. Provided that Mr. Anderson remains in our service, the remaining 571,429 shares of unvested common stock will vest as follows: 142,857 will vest in equal annual installments beginning in May 2000. However, these 571,429 shares of unvested common stock could vest in full if following this offering the per share value of our common stock reaches certain targets as measured on May 25, 2000, 2001 or 2002. Mr. Anderson's agreement also provides 55 58 that these 571,429 shares of unvested common stock will vest in full following certain changes in control of Quintus. We have entered into an agreement with Mr. Burke, our President, dated June 11, 1999, which provides for payment of severance in the amount of 3 months base salary in the event that his employment is involuntarily terminated without cause before July 5, 2000. In addition, Mr. Burke has been granted unvested options to purchase 685,000 shares of common stock. Of these 685,000 options, 411,000 will vest as follows: 205,000 will vest upon completion of one year of service from the date of grant and the balance will vest in equal monthly installments over the next 36 months of service thereafter. 274,000 of these 685,000 options will vest within three to five years, depending on Quintus' achievement of certain license and revenue targets. Mr. Burke's agreement also provides for accelerated vesting of up to half of his 685,000 options if his employment is involuntarily terminated without cause within six months following certain changes in control of Quintus and he is then vested in less than half of such options. STOCK PLANS 1999 STOCK INCENTIVE PLAN Share Reserve. Our board of directors adopted our 1999 Stock Incentive Plan in September 1999 to be effective simultaneously with this offering. We will seek the approval of this plan by our stockholders. We have reserved 1,000,000 shares of our common stock for issuance under the 1999 Stock Incentive Plan. Any shares not yet issued under our 1995 Stock Option Plan on the date of this offering will also be available under the 1999 Stock Incentive Plan. On January 1 of each year, starting with the year 2000, the number of shares in the reserve will automatically increase by 5% of the total number of shares of common stock that are outstanding at that time or, if less, by 2,000,000 shares. In general, if options or shares awarded under the 1999 Stock Incentive Plan or the 1995 Stock Option Plan are forfeited, then those options or shares will again become available for awards under the 1999 Stock Incentive Plan. We have not yet granted any options under the 1999 Stock Incentive Plan. Outstanding options under the 1995 Stock Option Plan will be incorporated into the 1999 Stock Incentive Plan at the time of this offering and no further option grants will be made under the 1995 Stock Option Plan. The incorporated options will continue to be governed by their existing terms, unless the Board elects to extend one or more features of the 1999 Stock Incentive Plan to those options or to other outstanding shares. Previously, options granted under the 1995 Stock Option Plan provided that vesting of the shares would accelerate upon an acquisition only if not assumed by the acquiring entity. Administration. The compensation committee of our board of directors administers the 1999 Stock Incentive Plan. The committee has the complete discretion to make all decisions relating to the interpretation and operation of our 1999 Stock Incentive Plan. The committee has the discretion to determine who will receive an award, what type of award it will be, how many shares will be covered by the award, what the vesting requirements will be (if any), and what the other features and conditions of each award will be. The compensation committee may also reprice outstanding options and modify outstanding awards in other ways. Eligibility. The following groups of individuals are eligible to participate in the 1999 Stock Incentive Plan: - employees; - members of our board of directors who are not employees; and 56 59 - consultants. Types of Award. The 1999 Stock Incentive Plan provides for the following types of award: - incentive stock options to purchase shares of our common stock; - nonstatutory stock options to purchase shares of our common stock; - restricted shares of our common stock; and - stock appreciation rights and stock units. Options. An optionee who exercises an incentive stock option may qualify for favorable tax treatment under Section 422 of the Internal Revenue Code of 1986. On the other hand, nonstatutory stock options do not qualify for such favorable tax treatment. The exercise price for incentive stock options granted under the 1999 Stock Incentive Plan may not be less than 100% of the fair market value of our common stock on the option grant date. In the case of nonstatutory stock options, the minimum exercise price is 85% of the fair market value of our common stock on the option grant date. Optionees may pay the exercise price by using: - cash; - shares of common stock that the optionee already owns; - a full-recourse promissory note, except that the par value of newly issued shares must be paid in cash; - an immediate sale of the option shares through a broker designated by us; or - a loan from a broker designated by us, secured by the option shares. Options vest at the time or times determined by the compensation committee. In most cases, our options vest over a four-year period following the date of grant. Options generally expire ten years after they are granted, except that they generally expire earlier if the optionee's service terminates earlier. The 1999 Stock Incentive Plan provides that no participant may receive options covering more than 1,000,000 shares in the same year, except that a newly hired employee may receive options covering up to 2,000,000 shares in the first year of employment. 57 60 Stock Appreciation Rights. A participant who exercises a stock appreciation right shall receive the increase in value of our common stock over the base price. The base price for stock appreciation rights granted under the 1999 Stock Incentive Plan shall be determined by the compensation committee. The settlement value of the stock appreciation right may be paid in cash or shares of common stock. Stock appreciation rights vest at the time or times determined by the compensation committee. In most cases, our stock appreciation rights vest over a four-year period following the date of grant. Stock appreciation rights generally expire 10 years after they are granted, except that they generally expire earlier if the participant's service terminates earlier. The 1999 Stock Incentive Plan provides that no participant may receive stock appreciation rights covering more than 1,000,000 shares in the same year, except that a newly hired employee may receive stock appreciation rights covering up to 2,000,000 shares in the first year of employment. Restricted Shares. Restricted shares may be awarded under the 1999 Stock Incentive Plan in return for: - cash; - a full-recourse promissory note, except that the par value of newly issued shares must be paid in cash; - services already provided to us; and - in the case of treasury shares only, services to be provided to us in the future. Restricted shares vest at the time or times determined by the compensation committee. Stock units. Stock units may be awarded under the 1999 Stock Incentive Plan in return for: - cash; - a full-recourse promissory note, except that the par value of newly issued shares must be paid in cash; - services already provided to us; and - in the case of treasury shares only, services to be provided to us in the future. Stock units vest at the time or times determined by the compensation committee. Change in Control. If a change in control of Quintus occurs, an option or restricted stock award under the 1999 Stock Incentive Plan will generally become fully vested. However, if the surviving corporation assumes the option or award or replaces it with a comparable award, then vesting shall generally not accelerate. A change in control includes: - a merger of Quintus after which our own stockholders own 50% or less of the surviving corporation (or its parent company); - a sale of all or substantially all of our assets; - the replacement of more than one-half of our directors over a 24-month period; or - an acquisition of 50% or more of our outstanding stock by any person or group, other than a person related to Quintus (such as a holding company owned by our stockholders). 58 61 Amendments or Termination. Our board may amend or terminate the 1999 Stock Incentive Plan at any time. If our board amends the plan, it does not need to ask for stockholder approval of the amendment unless applicable law requires it. The 1999 Stock Incentive Plan will continue in effect indefinitely, unless the board decides to terminate the plan earlier. EMPLOYEE STOCK PURCHASE PLAN Share Reserve and Administration. Our board of directors adopted our Employee Stock Purchase Plan on September 9, 1999. We will seek the approval of this plan by our stockholders. Our Employee Stock Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code and will become effective simultaneously with this offering. We have reserved 1,000,000 shares of our common stock for issuance under the plan. On May 1 of each year, starting with the year 2000, the number of shares in the reserve will automatically be increased by 2% of the total number of shares of our common stock that are outstanding at that time or, if less, by 1,000,000 shares. The plan will be administered by a committee of our board of directors. Eligibility. All of our employees are eligible to participate if they are employed by us for more than 20 hours per week and for more than five months per year. Eligible employees may begin participating in the Employee Stock Purchase Plan at the start of any offering period. Each offering period lasts 24 months. Overlapping offering periods start on May 1 and November 1 of each year. However, the first offering period will start on the effective date of this offering and end on October 31, 2001. Amount of Contributions. Our Employee Stock Purchase Plan permits each eligible employee to purchase common stock through payroll deductions. Each employee's payroll deductions may not exceed 15% of the employee's cash compensation. Purchases of our common stock will occur on April 30 and October 31 of each year. Each participant may purchase up to 2,000 shares on any purchase date. However, the value of the shares purchased in any calendar year (measured as of the beginning of the applicable offering period) may not exceed $25,000. Purchase Price. The price of each share of common stock purchased under our Employee Stock Purchase Plan will be 85% of the lower of: - The fair market value per share of common stock on the date immediately before the first day of the applicable offering period, or - The fair market value per share of common stock on the purchase date. In the case of the first offering period, the price per share under the plan will be 85% of the lower of: - The price per share to the public in this offering, or - The fair market value per share of common stock on the purchase date. Other Provisions. Employees may end their participation in the Employee Stock Purchase Plan at any time. Participation ends automatically upon termination of employment with Quintus. If a change in control of Quintus occurs, our Employee Stock Purchase Plan will end and shares will be purchased with the payroll deductions accumulated to date by participating employees, unless the plan is assumed by the surviving corporation or its parent. Our board of directors may amend or terminate the Employee Stock Purchase Plan at any time. Our chief executive officer may also amend the plan in certain respects. If our board increases the number of shares of common stock reserved for issuance under the plan (except for the automatic increases described above), it must seek the approval of our stockholders. 59 62 1999 DIRECTOR OPTION PLAN Share Reserve. Our board of directors adopted our 1999 Director Option Plan on September 9, 1999. We will seek the approval of this plan by our stockholders. We have reserved 500,000 shares of our common stock for issuance under the plan. In general, if options granted under the 1999 Director Option Plan are forfeited, then those options will again become available for grants under the plan. The Director Option Plan will be administered by the compensation committee of our board of directors, although all grants under the plan are automatic and non-discretionary. Initial Grants. Only the non-employee members of our board of directors will be eligible for option grants under the 1999 Director Option Plan. Each non-employee director who first joins our board after the effective date of this offering will receive an initial option for 30,000 shares. That grant will occur when the director takes office. The initial options vest in monthly installments over the two-year period following the date of grant. Annual Grants. At the time of each of our annual stockholders' meetings, beginning in 2000, each non-employee director who will continue to be a director after that meeting will automatically be granted an annual option for 10,000 shares of our common stock. However, a new non-employee director who is receiving the 30,000-share initial option will not receive the annual option in the same calendar year. The annual options are fully vested on the first anniversary of the date of grant. Other Option Terms. The exercise price of each non-employee director's option will be equal to the fair market value of our common stock on the option grant date. A director may pay the exercise price by using cash, shares of common stock that the director already owns, or an immediate sale of the option shares through a broker designated by us. The non-employee directors' options have a 10-year term, except that they expire one year after a director leaves the board (if earlier). If a change in control of Quintus occurs, a non-employee director's option granted under the 1999 Director Option Plan will become fully vested. Vesting also accelerates in the event of the optionee's death or disability. Amendments or Termination. Our board may amend or terminate the 1999 Director Option Plan at any time. If our board amends the plan, it does not need to ask for stockholder approval of the amendment unless applicable law requires it. The 1999 Director Option Plan will continue in effect indefinitely, unless the board decides to terminate the plan. 60 63 CERTAIN TRANSACTIONS RELATIONSHIPS AMONG OFFICERS OR DIRECTORS WITH CERTAIN INVESTORS Two of our directors are associated with entities that each own more than five percent of our capital stock. Mr. Rosen is a general partner in Sprout Group, and Mr. Harman is a general partner in Oak Investment Partners. No other officer or director of Quintus has any material relationship with any other principal stockholder. The Sprout Group is affiliated with Donaldson, Lufkin & Jenrette Securities Corporation, one of the underwriters of this offering. See "Underwriting." STOCK TRANSACTIONS The following table summarizes the sales of preferred stock to our executive officers, directors and principal stockholders, and persons and entities associated with them, since our inception. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock automatically converts into one share of common stock and the right to receive a cash payment equal to approximately 92.5% of the original per share purchase price upon the closing of this offering. Each share of Series E Preferred Stock and Series F Preferred Stock automatically converts into one share of common stock upon the closing of this offering. See "Principal Stockholders" for a summary of the affiliations of each of the persons and entities described below.
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED STOCK STOCK STOCK STOCK STOCK STOCK Date of sale.......................... 5/25/95 3/7/96 9/17/96 11/10/97 5/21/98 8/26/99 Price per share....................... $1.00 $1.43 $1.91 $2.75 $4.15 $8.25 Entities associated with our directors Entities Associated with DLJ Capital Corporation (Mr. Rosen)........... 9,000,000 699,300 501,182 -- 1,304,100 -- Entities Associated with Oak Investment Partners (Mr. Harman)........................... -- -- 2,094,240 -- 669,085 -- Other 5% stockholders HarbourVest Partners IV............. -- -- -- 970,002 455,760 -- Meritech Capital Partners........... -- -- -- -- -- 1,333,334 Outside directors William Herman...................... 100,000 -- -- -- 60,241 30,000 Paul Bartlett....................... -- -- 52,356 -- 24,097 -- Jeanne Wohlers...................... -- 34,420 -- -- 12,049 -- Robert Shaw......................... -- -- -- -- 18,072 --
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS We have entered into employment agreements or compensation arrangements with Alan Anderson, our Chief Executive Officer, and John Burke, our President. See "Management--Employment and Change of Control Agreements." OPTION GRANTS We have granted options to our directors and executive officers, and we intend to grant additional options to our directors and executive officers in the future. See "Management--Option Grants in Last Fiscal Year" and "Management--Director Compensation." 61 64 INDEMNIFICATION AGREEMENTS We have entered into indemnification agreements with our directors and executive officers. Such agreements may require us, among other things, to indemnify our officers and directors, other than for liabilities arising from willful misconduct of a culpable nature, and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. See "Management--Indemnification." RIGHTS OF CERTAIN STOCKHOLDERS Certain holders of our common stock are entitled to demand and "piggyback" registration rights pursuant to an Amended and Restated Investors' Rights Agreement, dated as of August 26, 1999. The following directors are parties to this agreement: Jeanne Wohlers; William Herman; Paul Bartlett; and Robert Shaw. In addition, the following principal stockholders are party to this agreement: entities associated with the Sprout Group, in which Alexander Rosen is a general partner; entities associated with Oak Investment Partners, in which director Fredric W. Harman is a general partner; and HarbourVest Partners IV. AGREEMENTS WITH COMPANIES WITH WHICH OUR DIRECTORS ARE ASSOCIATED We have an ongoing contract with Hall, Kinion Associates, Inc., a recruiting and staffing firm. Paul Bartlett, one of our directors, is president of Hall, Kinion. In fiscal 1999, we paid an aggregate of $20,387 to Hall, Kinion under this agreement. LOANS TO CERTAIN EXECUTIVE OFFICERS On May 14, 1996, we loaned Alan Anderson, our Chief Executive Officer, a total of $37,500 for the exercise of stock options. Mr. Anderson purchased 750,000 shares of our common stock with the loan. In connection with the loan, we entered into a stock pledge agreement with Mr. Anderson on May 14, 1996 and became the holder of a full-recourse promissory note from Mr. Anderson dated May 14, 1996 in the amount of $37,500 and bearing an interest rate of 6.36%, compounded annually. Principal and interest are due on May 14, 2001, subject to acceleration upon the cessation of Mr. Anderson's employment and certain other events. As of August 31, 1999, the amount outstanding on this note was $43,016. On May 14, 1996, we loaned Alan Anderson, our Chief Executive Officer, a total of $19,643 for the exercise of stock options. Mr. Anderson purchased 392,858 shares of our common stock with the loan. In connection with the loan, we entered into a stock pledge agreement with Mr. Anderson on May 14, 1996 and became the holder of a full-recourse promissory note from Mr. Anderson dated May 14, 1996 in the amount of $19,643 and bearing an interest rate of 6.36%, compounded annually. Principal and interest are due on May 14, 2001, subject to acceleration upon the cessation of Mr. Anderson's employment and certain other events. As of August 31, 1999, the amount outstanding on this note was $22,533. 62 65 On April 20, 1999, we loaned Susan Salvesen, our Chief Financial Officer, a total of $164,868 for the exercise of a stock option. She purchased 132,000 shares of our common stock with the loan. In connection with the loan, we entered into a stock pledge agreement with Ms. Salvesen on April 20, 1999, and became the holder of a full-recourse promissory note from Ms. Salvesen dated April 20, 1999, in the amount of $164,868 and bearing an interest rate of 5.28%, compounded annually. Principal and interest are due on April 20, 2003, subject to acceleration upon the cessation of Ms. Salvesen's employment and certain other events. As of August 31, 1999, the amount outstanding on this note was $167,688. We believe that the transactions above were made on terms no less favorable to us than could have been obtained from unaffiliated parties. All future transactions, including loans between us and our officers, directors, principal stockholders and their affiliates, will be approved by a majority of the board of directors, including a majority of the independent and disinterested directors, and will continue to be made on terms no less favorable to us than could have been obtained from unaffiliated parties. 63 66 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of August 31, 1999 and as adjusted to reflect the closing of our acquisition of Acuity and the sale of the common stock offered in this offering for: - each person who is known by us to beneficially own more than 5% of our common stock; - each of the Named Executive Officers; - each of our directors; and - all of our directors and executive officers as a group (11 persons). As of August 31, 1999, there were 22,470,000 shares of our common stock outstanding. We will issue approximately 4,530,000 shares in connection with our acquisition of Acuity. Thus, the figures in the "Before Offering" column below are based on 27,000,000 shares outstanding. The information in the table below assumes no exercise of the underwriters' over-allotment option. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options currently exercisable within 60 days of August 31, 1999 are deemed outstanding for purposes of computing the percentage ownership of the person holding such option but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Except where indicated, and subject to community property laws where applicable, the persons in the table below have sole voting and investment power with respect to all common stock shown as beneficially owned by them. Unless otherwise indicated, the address of each of the individuals listed in the table is c/o Quintus Corporation, 47212 Mission Falls Court, Fremont, CA 94539.
PERCENTAGE OF SHARES ---------------------- NUMBER OF SHARES OUTSTANDING BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING Entities Affiliated with DLJ Capital Corporation(a)................................... 11,842,037 43.3% c/o Sprout Group 3000 Sand Hill Road, Suite 170, Bldg. 3 Menlo Park, CA 94025 Entities Affiliated with Oak Investment Partners(b)...................................... 2,903,516 10.7 525 University Avenue, Suite 1300 Palo Alto, CA 94301 HarbourVest Partners IV(c)......................... 1,530,908 5.6 One Financial Center Boston, MA 02111 Entities Affiliated with MeriTech Capital.......... 1,333,334 4.9 428 University Avenue Palo Alto, CA 94301 Alan K. Anderson(d)................................ 1,142,858 4.2 John J. Burke(e)................................... 685,000 2.5 Susan Salvesen(f).................................. 218,000 * Muralidhar Sitaram(g).............................. 300,000 1.1
64 67
PERCENTAGE OF SHARES ---------------------- NUMBER OF SHARES OUTSTANDING BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING Paul Bartlett(h)................................... 116,453 * Fredric Harman(i).................................. 2,903,516 10.7 Will Herman(j)..................................... 250,241 * Alexander Rosen(k)................................. 11,842,037 43.3 Robert Shaw........................................ 84,097 * Jeanne Wohlers..................................... 122,049 * All directors and executive officers as a group(l)......................................... 17,664,251 62.1%
- ------------------------- * Less than 1%. (a) Includes 653,655 shares held by DLJ Capital Corporation, of which 9,947 are held in the form of warrants to purchase Series B preferred stock, and 7,511 are held in the form of warrants to purchase common stock. Also includes 3,605,644 shares held by Sprout Capital VI, L.P., of which 62,815 are held in the form of warrants to purchase Series B preferred stock and 47,437 are held in the form of warrants to purchase common stock. Also includes 7,360,350 shares held by Sprout Capital VII, L.P., of which 119,500 are held in the form of warrants to purchase Series B preferred stock and 90,245 are held in the form of warrants to purchase common stock. Also includes 17,463 and 204,925 shares held by Sprout CEO Fund, L.P. and DLJ ESC II, L.P. DLJ Capital Corporation is the managing general partner of Sprout Capital VI, L.P., the managing general partner of Sprout Capital VII, L.P, and the General Partner of Sprout CEO Fund, L.P. (b) Includes 2,837,318 shares held by Oak Investment Partners VI, L.P., of which 136,997 are held in the form of warrants to purchase common stock. Also includes 66,198 shares held by Oak VI Affiliates Fund, L.P., of which 3,194 are held in the form of warrants to purchase common stock. Mr. Harman has indirect ownership of the shares and has shared power to vote and dispose of the shares held by Oak Investment Partners VI, L.P. and Oak VI Affiliates Fund, L.P. The parties who share power to vote and dispose of the shares held by Oak Investment Partners VI, L.P., with Mr. Harman are Bandel L. Carano, Eileen M. More, Ann H. Lamont, Edward F. Glassmeyer and Gerald R. Gallagher, all of whom are managing members of Oak Associates VI, LLC, the general partner of Oak Investment Partners VI, L.P. The parties who share power to vote and dispose of the shares held by Oak VI Affiliates Fund, L.P., with Mr. Harman are Bandel L. Carano, Eileen M. More, Ann H. Lamont, Edward F. Glassmeyer and Gerald R. Gallagher, all of whom are managing members of Oak VI Affiliates, LLC, the general partner of Oak VI Affiliates Fund, L.P. Mr. Harman, Bandel L. Carano, Eileen M. More, Ann H. Lamont, Edward F. Glassmeyer and Gerald R. Gallagher disclaim beneficial ownership of the securities held by such partnerships in which Mr. Harman, Bandel L. Carano, Eileen M. More, Ann H. Lamont, Edward F. Glassmeyer and Gerald R. Gallagher do not have a pecuniary interest. (c) Includes 105,146 shares held in the form of warrants to purchase common stock. (d) Includes 571,429 shares of unvested common stock. (e) Includes options to purchase 685,000 shares of common stock. (f) Includes options to purchase 58,000 shares of common stock. 65 68 (g) Includes options to purchase 100,000 shares of common stock. (h) Includes options to purchase 40,000 shares of common stock. (i) Includes 2,903,516 shares held by entities affiliated with Oak Investment Partners. See Note b above. Mr. Harman is a managing member of Oak Associates VI, LLC, the general partner of Oak Investment Partners VI, L.P., and a managing member of Oak VI Affiliates, LLC, the general partner of Oak VI Affiliates Fund, L.P. (j) Includes options to purchase 60,000 shares of common stock. (k) Includes 11,842,037 shares held by entities affiliated with DLJ Capital Corporation. See Note a above. Mr. Rosen is a general partner of the Sprout Group and a general partner of DLJ Associates VII, L.P., which is a general partner of Sprout Capital VII, L.P. Mr. Rosen disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest arising from his interests in the partnerships named in Note a above. (l) Includes options and warrants to purchase 1,420,646 shares. 66 69 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the closing of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares of preferred stock, $0.001 par value. The following summary of certain provisions of the common stock and the preferred stock does not purport to be complete and is subject to, and qualified in its entirety by, our certificate of incorporation and bylaws and by the provisions of applicable law. COMMON STOCK As of August 31, 1999, there were 22,470,000 shares of common stock outstanding that were held of record by approximately stockholders. There will be shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option and assuming no exercise after August 31, 1999, of outstanding options, after giving effect to the issuance of approximately 4,530,000 shares in connection with our acquisition of Acuity, the sale of shares of common stock to the public in this offering and the conversion of our preferred stock into common stock at a one-to-one ratio. The holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. We have never declared or paid cash dividends on our common stock or other securities and do not currently anticipate paying cash dividends in the future. Our bank line of credit currently prohibits the payment of dividends. In the event of the liquidation, dissolution or winding up of Quintus, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon the effectiveness of this offering will be fully paid and nonassessable. PREFERRED STOCK Our certificate of incorporation authorizes 10,000,000 shares of preferred stock. The board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Quintus without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. At present, we have no plans to issue any of the preferred stock. 67 70 WARRANTS As of August 31, 1999, the following warrants to purchase an aggregate of 1,022,645 shares of our capital stock were outstanding: - Warrants to purchase an aggregate of 5,000 shares of common stock at $0.05 per share, which expire on April 17, 2006; - Warrants to purchase an aggregate of 385,530 shares of common stock at $0.30 per share, which expire on November 10, 2001; - Warrants to purchase an aggregate of 8,466 shares of common stock at $3.94 per share, which expire on January 7, 2002; and - Warrants to purchase an aggregate of 76,047 shares of common stock at $4.54 per share, which expire on November 10, 2001. We have assumed throughout this prospectus the cash exercise of warrants to purchase an aggregate of 192,262 shares of Series B preferred stock at $1.43 per share and a warrant to purchase 55,340 shares of Series C preferred stock at $1.91 per share. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CERTIFICATE OF INCORPORATION AND BYLAWS The certificate of incorporation provides that, effective upon the closing of this offering, all stockholder actions must be effected at a duly called meeting and not by a consent in writing. The bylaws provide that our stockholders may call a special meeting of stockholders only upon a request of stockholders owning at least 50% of our capital stock. These provisions of the certificate of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of Quintus. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control of Quintus. These provisions are designed to reduce the vulnerability of Quintus to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management. See "Risk Factors--Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control of Quintus." DELAWARE TAKEOVER STATUTE We are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: - prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; 68 71 - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; - subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; - any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. REGISTRATION RIGHTS After this offering, the holders of 18,495,392 shares of common stock will be entitled to certain rights with respect to the registration of those shares under the Securities Act. If we proposed to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, we must notify these stockholders of the registration, and these stockholders may be entitled to include all or part of their shares in the registration. Additionally, holders of 18,495,392 shares of common stock have certain demand registration rights under which they may require us to use our best efforts to register shares of their common stock. Further, the holders of these demand rights may require us to file additional registration statements on Form S-3. All of these registration rights are subject to certain conditions and limitations, including the right of underwriters to limit the number of shares included in a registration and our right to not effect a requested registration within six months following an offering of our securities, including this offering. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholders Services, L.L.C. 69 72 SHARES ELIGIBLE FOR FUTURE SALE Upon the completion of this offering, we will have shares of common stock outstanding, assuming the issuance of shares of common stock offered hereby and no exercise of options or warrants after August 31, 1999, other than warrants that would otherwise expire upon the consummation of this offering. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. SALES OF RESTRICTED SHARES The remaining shares of common stock are deemed restricted shares under Rule 144. The number of shares of common stock available for sale in the public market is limited by restrictions under the Securities Act and lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. On the date of this prospectus, no shares other than the shares offered hereby will be eligible for sale. Beginning 180 days after the date of this prospectus, or earlier with the consent of Donaldson, Lufkin & Jenrette Securities Corporation, restricted shares will become available for sale in the public market subject to certain limitations of Rule 144 of the Securities Act. In general, under Rule 144 of the Securities Act as currently in effect, beginning 90 days after this offering, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three-month period a number of shares of common stock that does not exceed the greater of 1% of the then-outstanding shares of our common stock (approximately shares after giving effect to this offering) or the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding such sale. Sales under Rule 144 of the Securities Act are subject to certain restrictions relating to manner of sale, notice and the availability of current public information about us. A person who is not our affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell such shares immediately following this offering without regard to the volume limitations, manner of sale provisions or notice or other requirements of Rule 144 of the Securities Act. However, the transfer agent may require an opinion of counsel that a proposed sale of shares comes within the terms of Rule 144 of the Securities Act prior to effecting a transfer of such shares. Prior to this offering, there has been no public market for our common stock and no predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional common stock will have on the market price of our common stock. Nevertheless, sales of substantial amounts of such shares in the public market, or the perception that such sales could occur, could adversely affect the market price of the common stock and could impair our future ability to raise capital through an offering of our equity securities. OPTIONS Rule 701 under the Securities Act provides that shares of common stock acquired on the exercise of outstanding options may be resold by persons other than our affiliates, beginning 90 days after the date of this prospectus, subject only to the manner of sale provisions of Rule 144, and by affiliates, beginning 90 days after the date of this prospectus, subject to all provisions of Rule 144 except its one-year minimum holding period. We intend to file one or more registration statements on form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock 70 73 options and common stock issued or issuable pursuant to our 1995 Stock Option Plan and 1999 Stock Incentive Plan. We expect to file the registration statement covering shares offered pursuant to the Stock Plan approximately 30 days after the closing of this offering. Such registration statements are expected to become effective upon filing. Shares covered by these registration statements will thereupon be eligible for sale in the public markets, subject to the lock-up agreements, if applicable. LOCK-UP AGREEMENTS Our officers, directors and stockholders have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this offering. Donaldson, Lufkin & Jenrette Securities Corporation, however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. 71 74 UNDERWRITING Subject to the terms and conditions contained in an underwriting agreement dated , 1999, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, SG Cowen Securities Corporation and DLJdirect Inc., are serving as representatives, have severally agreed to purchase from Quintus, the respective number of shares of common stock set forth opposite their names below:
NUMBER UNDERWRITERS OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation....... Dain Rauscher Wessels, a division of Dain Rauscher Incorporated........................................... SG Cowen Securities Corporation........................... DLJdirect Inc. ........................................... -------- Total.................................................. ========
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares of common stock offered hereby are subject to approval by their counsel of legal matters concerning the offering and to condition precedents that must be satisfied by Quintus. The underwriters are obligated to purchase and accept delivery of all of the shares of common stock offered hereby, other than those shares covered by the over-allotment option described below, if any are purchased. The underwriters initially propose to offer the shares of common stock in part directly to the public at the initial public offering price set forth on the cover page of this prospectus and in part to dealers, including the underwriters, at such price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, to other dealers a concession not in excess of $ per share. After the initial offering of the common stock, the public offering price and other selling terms may be changed by the representatives at any time without notice. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. An electronic prospectus will be available on the Web site maintained by DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation. Other than the prospectus in electronic format, the information on this Web site relating to the offering is not part of this prospectus and has not been approved or endorsed by Quintus or the underwriters, and should not be relied on by prospective investors. Quintus has granted to the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of additional shares of common stock at the initial public offering price less underwriting discounts and commission. The underwriters may exercise the option solely to cover over-allotments, if any, made in connection with the offering. To the extent that the underwriters exercise the option, each underwriter will become obligated, subject to conditions contained in the underwriting agreement, to purchase its pro rata portion of such additional shares based on the underwriters' percentage underwriting commitment as indicated in the above table. 72 75 Quintus has agreed to indemnify the underwriters against liabilities which may arise in connection with the offering, including liabilities under the Securities Act of 1933, or to contribute to payments that the underwriters may be required to make. Each of Quintus, its executive officers, directors, stockholders and option holders has agreed not to: - offer, pledge sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of directly or indirectly any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or other securities, in cash or otherwise for a period of 180 days after the date of this prospectus. Donaldson, Lufkin & Jenrette Securities Corporation may release some or all of these shares from such restrictions prior to the expiration of the 180-day period lock-up period, although it has no current intention of doing so. In addition, during such 180-day period, Quintus has also agreed not to file any registration statement with respect to and each of its executive officers, directors and stockholders of Quintus have agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Prior to the offering, there has been no established trading market for the common stock. The initial public offering price of the shares of common stock offered was determined by negotiation among Quintus and the underwriters. The factors considered in determining the initial public offering price included: - the history of and the prospects for the industry in which Quintus competes; - the past and present operations of Quintus; - the historical results of operations of Quintus; - the prospectus for future earnings of Quintus; - the recent market prices of securities of generally comparable companies; and - the general condition of the securities markets at the time of the offering. Other than in the United States, no action has been taken by Quintus or the underwriters that would permit a public offering of the shares of common stock offered in any jurisdiction where action for that purpose is required. The shares of common stock offered may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such shares of common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered in any jurisdiction in which such an offer or a solicitation is unlawful. 73 76 DLJ Capital Corporation, Sprout Capital VI, L.P, Sprout Capital VII, L.P., Sprout CEO Fund, L.P. and DLJ ESC II, L.P. (collectively, the "Sprout Entities") are affiliates of Donaldson, Lufkin & Jenrette Securities Corporation, one of the underwriters. As described under "Principal Stockholders," the Sprout Entities beneficially own an aggregate of shares of the outstanding common stock, which represent more than 10% of the outstanding common stock. Of these shares, shares are subject to a voting trust agreement and are held and voted by an independent third party, Norwest Bank Indiana, N.A., as voting trustee. Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette Securities Corporation beneficially own more than 10% of the outstanding common stock, this offering is being conducted in accordance with Rule 2720 of the Conduct Rules of the National Associate of Securities Dealers, Inc., which provides that the public offering price of an equity security be no higher than that recommended by a "qualified independent underwriter" meeting certain standards. In accordance with this requirement, [ ] assumed the responsibilities of acting as qualified independent underwriter and recommended a price in compliance with the requirements of Rule 2720. In connection with the offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot the offering, creating a syndicate short position. The underwriters may bid for and stabilize the price of the common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members and selected dealers if they repurchase previously distributed common stock in syndicate covering transactions, in stabilizing transactions or otherwise. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. LEGAL MATTERS The validity of the common stock offered in this offering will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The Quintus consolidated financial statements as of and for the year ended March 31, 1999, included in this prospectus and the related financial statement schedule for the year ended March 31, 1999 included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in the reliance upon the reports of such firm given upon their authority as experts in auditing and accounting. Ernst & Young LLP, independent auditors, have audited our consolidated financial statements and schedules at March 31, 1998 and 1997, and for the years then ended, as set forth in their report. We've included our financial statements and schedule in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. The Acuity financial statements as of December 31, 1997 and 1998 and for each of the two years in the period ended December 31, 1998 included in this prospectus and registration statement 74 77 have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in auditing and accounting. CHANGE IN ACCOUNTANTS In February 1999, Quintus dismissed Ernst & Young LLP as its independent auditors and subsequently appointed Deloitte & Touche LLP as its principal accountants. There were no disagreements with the former accountants during the fiscal years ended March 31, 1998 and 1999 or during any subsequent interim period preceding their replacement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the former accountants' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports. The former independent auditors issued an unqualified report on the financial statements as of and for the years ended March 31, 1997 and 1998. Quintus did not consult with Deloitte & Touche LLP on any accounting or financial reporting matters in the periods prior to their appointment. The change in accountants was approved by our board of directors. ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission a registration statement on Form S-1 in connection with this offering. This prospectus does not contain all the information set forth in the registration statement and its exhibits and schedules. For further information with respect to Quintus and our common stock please refer to the registration statement and to its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and its exhibits and schedules may be inspected without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W. Washington, D.C. 20549, and at the SEC's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the registration statement may be obtained from such offices upon payment of the fees prescribed by the SEC. The SEC maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934 and will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the regional offices, public reference facilities and web site of the SEC referred to above. 75 78 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- QUINTUS CORPORATION: Independent Auditor's Report -- Deloitte & Touche LLP..... F-2 Report of Independent Auditors -- Ernst & Young LLP....... F-3 Consolidated Balance Sheets............................... F-4 Consolidated Statements of Operations..................... F-5 Consolidated Statements of Stockholders' Deficiency....... F-6 Consolidated Statements of Cash Flows..................... F-7 Notes to Consolidated Financial Statements................ F-8 ACUITY CORP.: Report of Independent Accountants......................... F-26 Balance Sheets............................................ F-27 Statements of Operations.................................. F-28 Statements of Changes in Stockholders' Equity............. F-29 Statements of Cash Flows.................................. F-30 Notes to Financial Statements............................. F-31 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION: Pro Forma Consolidated Balance Sheets..................... F-43 Pro Forma Consolidated Statements of Operations........... F-44 Notes to Pro Forma Consolidated Financial Statements...... F-46
F-1 79 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Quintus Corporation: We have audited the accompanying consolidated balance sheet of Quintus Corporation and subsidiaries (the Company) as of March 31, 1999, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Deloitte and Touche LLP San Jose, CA June 18, 1999 (September 10, 1999 as to Note 15) F-2 80 REPORT OF INDEPENDENT AUDITORS The Board of Directors Quintus Corporation We have audited the accompanying consolidated balance sheets of Quintus Corporation as of March 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (net capital deficiency), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Quintus Corporation at March 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California April 30, 1998, except for Note 12, as to which the date is September 18, 1998 F-3 81 QUINTUS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, ------------------- JUNE 30, 1998 1999 1999 (UNAUDITED) ASSETS CURRENT ASSETS: Cash...................................................... $ 1,986 $ 1,785 $ 467 Accounts receivable, less allowance for doubtful accounts of $848, $729 and $761.................................. 7,573 8,671 10,765 Prepaid expenses and other assets......................... 608 573 1,295 -------- -------- -------- Total current assets................................ 10,167 11,029 12,527 Property and equipment, net................................. 3,508 3,162 3,139 Purchased technology, less accumulated amortization of $556, $1,889 and $2,222......................................... 3,444 2,111 1,778 Intangible assets, less accumulated amortization of $1,059, $2,630 and $3,093......................................... 5,803 2,970 2,506 Other assets................................................ 219 322 324 -------- -------- -------- Total assets................................................ $ 23,141 $ 19,594 $ 20,274 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts payable.......................................... $ 1,762 $ 2,352 $ 3,983 Accrued compensation and related benefits................. 2,073 2,114 2,185 Other accrued liabilities................................. 1,633 2,268 2,269 Deferred revenue.......................................... 5,008 6,615 6,706 Borrowings under bank line of credit...................... 4,950 4,868 4,868 Notes payable to stockholders............................. 4,500 -- -- Current portion of capital lease obligations.............. 134 109 78 Current portion of long-term debt......................... 1,357 1,347 1,347 -------- -------- -------- Total current liabilities........................... 21,417 19,673 21,436 Capital lease obligations, less current portion............. 109 101 88 Long-term debt, less current portion........................ 2,637 1,700 1,361 Deferred revenue............................................ 1,500 400 200 Commitments and contingencies (Note 7) Redeemable convertible preferred stock...................... 17,811 17,811 17,811 STOCKHOLDERS' DEFICIENCY: Series A redeemable convertible preferred stock, $0.001 par value; authorized shares -- 9,100,000; issued and outstanding shares -- 9,100,000; aggregate liquidation preference -- $9,100.................................... 455 455 455 Series B redeemable convertible preferred stock, $0.001 par value; authorized shares -- 1,000,000; issued and outstanding shares -- 768,140; aggregate liquidation preference -- $1,098.................................... 128 128 128 Series C redeemable convertible preferred stock, $0.001 par value; authorized shares -- 3,000,000; issued and outstanding shares -- 2,647,778; aggregate liquidation preference -- $5,057.................................... 530 530 530 Series D redeemable convertible preferred stock, $0.001 par value; authorized shares -- 1,455,000; issued and outstanding shares -- 1,454,996; aggregate liquidation preference -- $4,001.................................... 1,819 1,819 1,819 Series E convertible preferred stock, $0.001 par value; authorized shares -- 3,000,000; issued and outstanding shares -- 2,604,601; aggregate liquidation preference -- $10,809................................... -- 10,775 10,775 Common stock, $0.001 par value; authorized shares -- 30,000,000 in 1998 and 40,000,000 in 1999; issued and outstanding shares -- 4,117,300 in 1998; 4,208,478 in March 1999; 4,311,084 in June 1999......... 1,686 3,468 4,323 Notes receivable from stockholders........................ (58) (102) (267) Deferred compensation..................................... (79) (884) (1,415) Accumulated deficit....................................... (24,814) (36,280) (36,970) -------- -------- -------- Total stockholders' deficiency...................... (20,333) (20,091) (20,622) -------- -------- -------- Total liabilities and stockholders' deficiency.............. $ 23,141 $ 19,594 $ 20,274 ======== ======== ========
See notes to consolidated financial statements. F-4 82 QUINTUS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ------------------------------- ------------------ 1997 1998 1999 1998 1999 (UNAUDITED) REVENUES: License.............................. $ 8,406 $ 12,948 $ 17,577 $ 4,790 $ 6,126 Service.............................. 5,208 8,942 12,730 2,762 4,167 ------- -------- -------- ------- ------- Total revenues.................... 13,614 21,890 30,307 7,552 10,293 COST OF REVENUES: License.............................. 972 708 554 74 218 Service.............................. 4,199 7,582 8,623 1,957 2,421 ------- -------- -------- ------- ------- Total cost of revenues............ 5,171 8,290 9,177 2,031 2,639 ------- -------- -------- ------- ------- Gross profit........................... 8,443 13,600 21,130 5,521 7,654 OPERATING EXPENSES: Sales and marketing.................. 6,879 11,336 17,147 4,518 4,314 Research and development............. 3,667 5,102 6,719 1,795 1,873 General and administrative........... 1,263 3,233 3,577 803 998 Amortization of intangibles.......... -- 1,335 3,185 796 796 Acquired in-process technologies..... -- 2,200 -- -- -- Stock-based compensation............. -- -- 171 4 169 ------- -------- -------- ------- ------- Total operating expenses.......... 11,809 23,206 30,799 7,916 8,150 ------- -------- -------- ------- ------- Loss from continuing operations........ (3,366) (9,606) (9,669) (2,395) (496) OTHER INCOME (EXPENSE): Interest expense..................... (157) (567) (804) (359) (195) Other income (expense), net.......... (3) 27 (113) (32) 1 ------- -------- -------- ------- ------- Total other income (expense)...... (160) (540) (917) (391) (194) ------- -------- -------- ------- ------- Net loss from continuing operations.... (3,526) (10,146) (10,586) (2,786) (690) DISCONTINUED OPERATIONS (NOTE 3): Loss from discontinued operations.... -- (1,103) (1,891) (190) -- Gain on disposal of discontinued operations........................ -- -- 1,011 -- -- ------- -------- -------- ------- ------- Net loss............................... (3,526) (11,249) (11,466) (2,976) (690) Redeemable preferred stock accretion... (167) (1,519) -- -- -- ------- -------- -------- ------- ------- Loss applicable to common stockholders......................... $(3,693) $(12,768) $(11,466) $(2,976) $ (690) ======= ======== ======== ======= ======= BASIC AND DILUTED NET LOSS PER COMMON SHARE: Continuing operations................ $ (4.25) $ (6.88) $ (3.73) $ (1.12) $ (0.20) Discontinued operations: Loss from operations.............. -- (0.65) (0.67) (0.08) -- Gain on disposal.................. -- -- 0.36 -- -- ------- -------- -------- ------- ------- Basic and diluted net loss per common share................................ $ (4.25) $ (7.53) $ (4.04) $ (1.20) $ (0.20) ======= ======== ======== ======= ======= Shares used in computation, basic and diluted.............................. 868 1,695 2,835 2,484 3,506 ======= ======== ======== ======= =======
See notes to consolidated financial statements. F-5 83 QUINTUS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES PREFERRED STOCK COMMON STOCK RECEIVABLE TOTAL -------------------- ------------------ FROM DEFERRED ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION DEFICIT DEFICIENCY BALANCE AT APRIL 1, 1996.................... 9,868,140 $ 493 191,160 $ 10 $ -- $ -- $ (8,353) $ (7,850) Issuance of common stock under stock option plan.................... -- -- 2,913,646 154 (58) -- -- 96 Issuance of preferred stock and warrants to purchase preferred stock................... 2,647,778 620 -- -- -- -- -- 620 Repurchase of common stock................... -- -- (73,688) (4) -- -- -- (4) Preferred stock accretion............... -- -- -- -- -- -- (167) (167) Net loss.................. -- -- -- -- -- -- (3,526) (3,526) ---------- ------- --------- ------ ----- ------- -------- -------- BALANCE AT MARCH 31, 1997.................... 12,515,918 1,113 3,031,118 160 (58) -- (12,046) (10,831) Issuance of common stock under stock option plan.................... -- -- 944,949 167 -- -- -- 167 Issuance of common stock and stock options in connection with business combinations............ -- -- 518,921 1,044 -- -- -- 1,044 Repurchase of common stock................... -- -- (377,688) (42) -- -- -- (42) Issuance of warrants to purchase common stock... -- -- -- 258 -- -- -- 258 Issuance of preferred stock................... 1,454,996 1,819 -- -- -- -- -- 1,819 Preferred stock accretion............... -- -- -- -- -- (1,519) (1,519) Compensatory stock arrangements............ -- -- -- 99 -- (99) -- -- Amortization of deferred compensation............ -- -- -- -- -- 20 -- 20 Net loss.................. -- -- -- -- -- -- (11,249) (11,249) ---------- ------- --------- ------ ----- ------- -------- -------- BALANCE AT MARCH 31, 1998.................... 13,970,914 2,932 4,117,300 1,686 (58) (79) (24,814) (20,333) Issuance of common stock under stock option plan.................... -- -- 303,090 151 (44) -- -- 107 Repurchase of common stock................... -- -- (211,912) (42) -- -- -- (42) Issuance of warrants to purchase common stock... -- -- -- 165 -- -- -- 165 Issuance of preferred stock................... 2,604,601 10,775 -- -- -- -- -- 10,775 Compensatory stock arrangements............ -- -- -- 1,508 -- (1,055) -- 453 Amortization of deferred compensation............ -- -- -- -- -- 250 -- 250 Net loss.................. -- -- -- -- -- -- (11,466) (11,466) ---------- ------- --------- ------ ----- ------- -------- -------- BALANCE AT MARCH 31, 1999.................... 16,575,515 13,707 4,208,478 3,468 (102) (884) (36,280) (20,091) Issuance of common stock under stock option plan*................... -- -- 148,944 160 (165) -- -- (5) Repurchase of common stock*.................. -- -- (46,338) (5) -- -- -- (5) Compensatory stock arrangements*........... -- -- -- 700 -- (700) -- -- Amortization of deferred compensation*........... -- -- -- -- -- 169 -- 169 Net loss*................. -- -- -- -- -- -- (690) (690) ---------- ------- --------- ------ ----- ------- -------- -------- BALANCE AT JUNE 30, 1999*................... 16,575,515 $13,707 4,311,084 $4,323 $(267) $(1,415) $(36,970) $(20,622) ========== ======= ========= ====== ===== ======= ======== ========
- ------------------------- * Unaudited See notes to consolidated financial statements. F-6 84 QUINTUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED MARCH 31, JUNE 30, ----------------------------- ----------------- 1997 1998 1999 1998 1999 (UNAUDITED) OPERATING ACTIVITIES: Net loss.................................................. $(3,526) $(11,249) $(11,466) $(2,976) $ (690) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 822 3,148 5,090 1,377 1,115 Stock based compensation................................ -- 20 250 4 169 Noncash interest expense................................ -- 118 231 231 -- Acquired in-process technologies........................ -- 2,200 -- -- -- Loss (gain) on disposal of property and equipment....... (6) 50 -- -- -- Gain on disposal of discontinued operations............. -- -- (1,011) -- -- Changes in operating assets and liabilities: Accounts receivable................................... (1,314) (1,114) (1,098) (1,811) (2,094) Prepaid expenses and other current assets............. (414) (68) 35 145 (722) Accounts payable...................................... 1,072 (1,110) 590 47 1,631 Accrued compensation and related benefits............. 378 1,219 41 (28) (31) Other accrued liabilities and other long-term liabilities........................................ 218 (1,145) (469) (276) (92) Deferred revenue...................................... 770 3,981 507 (642) (109) ------- -------- -------- ------- ------- Net cash used in operating activities....................... (2,000) (3,950) (7,300) (3,929) (823) ------- -------- -------- ------- ------- INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired.............. -- (2,461) -- -- -- Purchase of property and equipment........................ (990) (1,172) (1,073) (409) (295) Proceeds from sale of property and equipment.............. 27 -- -- -- -- Proceeds from sale of discontinued operations............. -- -- 2,100 -- -- Increase in other assets.................................. (25) (45) (103) 55 (2) ------- -------- -------- ------- ------- Net cash provided by (used in) investing activities......... (988) (3,678) 924 (354) (297) ------- -------- -------- ------- ------- FINANCING ACTIVITIES: Proceeds from issuance of preferred stock................. 4,085 -- 5,275 5,275 -- Proceeds from issuance of common stock.................... 96 167 107 34 160 Repurchase of common stock................................ (4) (42) (42) -- (5) Proceeds from notes payable to stockholders............... 1,000 4,500 1,000 1,000 -- Borrowings (repayments) under bank line of credit......... 668 4,950 (82) -- -- Proceeds from (repayments of) bank loan................... (577) (2,943) 51 (4,252) (340) Principal payments on capital lease obligations........... (27) (63) (134) (87) (13) ------- -------- -------- ------- ------- Net cash provided by (used in) financing activities......... 5,241 6,569 6,175 1,970 (198) ------- -------- -------- ------- ------- Net increase (decrease) in cash............................. 2,253 (1,059) (201) (2,313) (1,318) Cash at beginning of period................................. 792 3,045 1,986 1,986 1,785 ------- -------- -------- ------- ------- Cash at end of period....................................... $ 3,045 $ 1,986 $ 1,785 $ (327) $ 467 ======= ======== ======== ======= ======= Supplemental disclosure of cash flow information -- cash paid for interest......................................... $ 160 $ 282 $ 643 $ 194 $ 195 ======= ======== ======== ======= ======= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Property acquired under capital leases.................... $ -- $ -- $ 101 $ -- $ -- ======= ======== ======== ======= ======= Issuance of Series C preferred stock and warrants to purchase Series B preferred stock in exchange for notes payable................................................. $ 1,000 $ -- $ -- $ -- $ -- ======= ======== ======== ======= ======= Issuance of common stock in exchange for notes receivable.............................................. $ 58 $ -- $ 44 $ 120 $ 165 ======= ======== ======== ======= ======= Issuance of Series D preferred stock in exchange for notes payable to stockholders................................. $ -- $ 3,001 $ -- $ -- $ -- ======= ======== ======== ======= ======= Issuance of Series D preferred stock, common stock and stock options for purchase of business.................. $ -- $ 2,044 $ -- $ -- $ -- ======= ======== ======== ======= ======= Issuance of Series E preferred stock in exchange for notes payable to stockholders................................. $ -- $ -- $ 5,684 $ -- $ -- ======= ======== ======== ======= =======
See notes to consolidated financial statements. F-7 85 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quintus Corporation (Quintus or the Company) provides a comprehensive e-Customer Relationship Management ("eCRM") solution to manage customer interactions and deliver consistent customer service across multiple communication channels, including the Internet, email and advanced telephony systems. The Company was founded in Delaware in May 1995. Basis of Presentation -- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after the elimination of all significant intercompany balances and transactions. Liquidity -- As disclosed in the consolidated financial statements during the years ended March 31, 1997, 1998 and 1999, the Company incurred net losses from continuing operations of $3,526,000, $10,146,000 and $10,586,000 and had net cash outflows from continuing operations of $2,000,000, $3,950,000 and $7,300,000. The Company had a stockholders' deficiency of $20,091,000 at March 31, 1999. Management expects to incur further losses in fiscal year 2000. In addition, in September 1999 the Company entered into an agreement to acquire Acuity Corporation (see Note 15). Acuity Corporation has a history of losses and net cash outflows from operations. In August 1999, the Company secured $11,247,500 in equity financing (see Note 15). Management believes that this equity financing when combined with existing cash on hand will be sufficient to meet the Company's minimum obligations through March 31, 2000. However, the Company will seek additional financing in the near term to execute its business strategies and meet its longer term obligations. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment -- Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which are generally two to five years. Assets recorded under capital leases are amortized by the straight-line method over the shorter of their respective useful lives or the lease term. Revenue Recognition -- Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), was issued in October 1997 by the American Institute of Certified Public Accountants ("AICPA") and was amended by Statement of Position 98-4 ("SOP 98-4"). The Company adopted SOP 97-2 effective April 1, 1998 and SOP 98-4 effective March 31, 1998. The Company believes its current revenue recognition policies and practices are consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA issued SOP 98-9 in March 1998, which provides for certain amendments to SOP 97-2, and is effective for transactions entered into by the Company beginning April 1, 1999. The adoption of these amendments did not have a material impact on its financial position, results of operations or cash flows. The Company licenses software to end users under noncancelable license agreements and provides services such as installation, implementation, training, and software maintenance. Software F-8 86 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) license revenue for contracts not requiring significant customization services is recognized upon meeting each of the following criteria: an executed agreement has been signed; products have been shipped; the license fee is fixed and determinable; collection of the resulting receivable is probable; and vendor specific objective evidence exists to allocate the total fee to elements of the arrangement. Vendor-specific objective evidence is based on the price generally charged when an element is sold separately, or if not yet sold separately, is established by authorized management. For sales made through distributors the Company generally recognizes revenue at the time these partners report to the Company that they have sold the software to the end users and all revenue recognition criteria have been met. Software license revenue from contracts requiring the Company to perform significant customization services are recognized on the percentage-of-completion method based on the ratio of labor hours incurred to total estimated labor hours. Provisions for estimated losses on contracts are made in the period in which the anticipated losses become known. Actual costs and gross margins on such contracts could differ from management's estimates, and such differences could be material to the financial statements. Allowances for estimated future warranty costs are provided at the time revenue is recognized. Service revenue includes maintenance revenue, which is deferred and recognized ratably over the maintenance period, which in most cases is one year, and revenue from training services which is recognized as services are performed. Consulting revenues are recognized as services are performed. Software Development Costs -- Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Computer Software to be Sold, Leased or Otherwise Marketed. The costs to develop such software have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility. Impairment of Long-Lived Assets -- In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Intangible Assets -- Intangible assets, including purchased technology, are related to the business acquisitions described in Note 2. Amortization is recorded on a straight-line basis over a period of three years. Income Taxes -- The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is recorded to reduce net deferred tax assets to amounts that are more likely than not to be realized. Stock-Based Compensation -- The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25). F-9 87 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) Loss per Common Share -- Basic loss per common share excludes dilution and is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding, less the weighted average number of common shares subject to repurchase by the Company. Diluted loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, warrants and common stock options) were exercised or converted into common stock. Common share equivalents are excluded from the computation in loss periods as their effect would be antidilutive. Unaudited Interim Financial Information -- The interim financial information for the three months ended June 30, 1998 and 1999 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Foreign Currency Transactions -- The functional currency of the Company's foreign subsidiaries is the U.S. dollar. Accordingly, all monetary assets and liabilities are remeasured at the current exchange rate at the end of each period reported. Nonmonetary assets and liabilities are remeasured at historical rates and revenues and expenses are remeasured at average exchange rates in effect during the period, except for those expenses related balance sheet amounts that are remeasured at historical exchange rates. Transaction gains and losses, which are included in other income (expense) in the accompanying consolidated statements of operations, have not been significant. Concentration of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company sells its products to companies in diverse industries and generally does not require its customers to provide collateral to support accounts receivable. To reduce credit risk, management performs ongoing credit evaluations of its customers' financial condition. The Company maintains allowances for potential credit losses. Certain Significant Risks and Uncertainties -- The Company operates in the software industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that changes in any of the following areas could have a significant negative effect on the Company's future financial position, results of operations and cash flows: ability to obtain additional financing; regulatory changes; fundamental changes in the technology underlying software products; market acceptance of the Company's products under development; development of distribution channels; ability to implement and expand operational customer support and financial control systems to manage rapid growth, both domestically and internationally; the hiring and retention of key employees; relationship with Lucent; fundamental changes in technology underlying software products; litigation or other claims against the Company. Recently Issued Accounting Standards -- In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires an enterprise to report, by major components and as a single total, the change in net assets during the period from nonowner sources. The Company's comprehensive loss was equal to its net loss for all years presented. In 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which established annual and interim reporting standards for an enterprise's F-10 88 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) business segments and related disclosures about its products, services and geographic areas and major customers. The Company operates in two reportable segments (see Note 15). In March 1998, the Accounting Standards Executive Committee (AcSEC) issued SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 establishes the accounting for costs of software products developed or purchased for internal use, including when such costs should be capitalized. SOP 98-1 will be effective for the Company's fiscal year ending March 31, 2000. The Company believes the adoption of this statement will not have a significant impact on its financial position, results of operations or cash flows. In April 1998, the AcSEC issued SOP 98-5, Reporting on the Costs of Start-up Activities. Under SOP 98-5, the cost of start-up activities should be expensed as incurred. SOP 98-1 will be effective for the Company's fiscal year ending March 31, 2000. The Company believes the adoption of this statement will not have a significant impact on its financial position, results of operations or cash flows. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal year ending March 31, 2001. Management believes that this statement will not have a significant impact on the Company's financial position, results of operations or cash flows. 2. BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS CALL CENTER ENTERPRISES, INC. In July 1997, the Company acquired Call Center Enterprises, Inc. (CCE), a provider of strategic call center consulting services, for $965,000 in cash in a transaction that was accounted for as a purchase. Assets acquired and liabilities assumed in the acquisition were as follows (in thousands): Accounts receivable......................................... $ 826 Other assets................................................ 30 Goodwill.................................................... 1,262 Less liabilities assumed.................................... (1,153) ------- $ 965 =======
During fiscal 1999 the Company was required to make additional cash payments of approximately $962,000 to former stockholders of CCE based upon achievement of certain performance goals. These payments, which were contingent upon the continued employment of the former CCE stockholders, were recorded as charges to operations when the performance goal was attained. On February 26, 1999, the Company sold the assets of CCE, which provided implementation services for support and help-desk centers software application. The division was sold for cash of $2,100,0000 with a gain on disposal of $1,011,000. As a result, the operations of CCE have been F-11 89 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) classified as discontinued operations in the statement of operations. The Company recorded as a part of the gain on disposal of discontinued operations the fair value of options granted in connection with the disposal of $453,000. The Company may receive an additional payment of up to $400,000 from the sale of CCE based on the number of former CCE employees who remain employed by the purchaser for one year subsequent to the date of disposition. The division had revenues of $2,528,000 and $3,210,000 for the years ended March 31, 1998 and 1999, respectively. There were no assets or liabilities remaining as of March 31, 1999. NABNASSET CORPORATION In November 1997, the Company acquired Nabnasset Corporation (Nabnasset), a provider of software which integrates telephone, voice, and data for $1,496,000 in cash, preferred stock with a fair value of $1,000,000, and 518,921 shares of common stock and options to purchase 617,528 shares of common stock with an aggregate fair value of $1,044,000. The transaction was accounted for as a purchase. Assets acquired and liabilities assumed in the acquisition were as follows (in thousands): Accounts receivable......................................... $ 1,036 Property and equipment...................................... 2,062 Other assets................................................ 75 In-process technologies..................................... 2,200 Purchased technology........................................ 4,000 Intangible assets........................................... 5,599 Accounts payable and accrued liabilities.................... (4,230) Notes payable............................................... (6,070) Other liabilities........................................... (1,132) ------- $ 3,540 =======
In this acquisition, acquired technology included both existing technology and in-process research and development. The valuation of acquired technology was made by applying the income forecast method, which considers the present value of cash flows by product lines. Acquired in-process technologies were charged to operations, as the technologies did not have alternative future uses as of the date of the acquisition. The operating results of Nabnasset have been included in the consolidated statements of operations since the date of acquisition. Had the acquisition taken place at the beginning of fiscal 1997, the unaudited pro forma results of operations would have been as follows for the year ended March 31, (in thousands, except per share data):
1997 1998 Net revenues............................................... $17,439 $ 24,827 Net loss................................................... (7,807) (15,669) Basic and diluted loss per common share.................... $ (5.63) $ (7.79)
The pro forma results of operations give effect to certain adjustments, including amortization of purchased intangibles and goodwill. The $2,200,000 charge for purchased in-process technology has been excluded from the pro forma results as it is a material non-recurring charge. F-12 90 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) The pro forma amounts are based on certain assumptions and estimates and do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of results of future combined operations. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
MARCH 31, ---------------- JUNE 30, 1998 1999 1999 Land................................................. $ 170 $ 170 $ 170 Building............................................. 688 688 688 Computer equipment and software...................... 4,179 6,075 6,078 Furniture and equipment.............................. 548 1,279 1,368 Leasehold improvements............................... 184 306 306 ------ ------ ------ 5,769 8,518 8,610 Less accumulated depreciation and amortization....... 2,261 5,356 5,471 ------ ------ ------ Net property and equipment........................... $3,508 $3,162 $3,139 ====== ====== ======
4. BANK LINE OF CREDIT The Company maintains a committed revolving line with a bank that provides for borrowings of up to $7,500,000, based on a percentage of eligible accounts receivable, with interest at the bank's prime rate plus 1.5% (9.25% at March 31, 1999). At March 31, 1999, the Company had $4,868,000 in outstanding borrowings under the line of credit agreement. Borrowings under this facility may be repaid and reborrowed at any time prior to September 17, 1999 and are collateralized by substantially all of the Company's assets and are subject to the Company's compliance with certain financial and nonfinancial covenants. As of March 31, 1999, the Company obtained a waiver from the bank for noncompliance with certain covenants required by the line of credit agreement. 5. NOTES PAYABLE TO STOCKHOLDERS As of March 31, 1998, the Company had notes payable to stockholders in the amount of $4,500,000, which accrued interest at the prime rate plus 1% (9.5% at March 31, 1998). In connection with the issuance of the notes payable, the Company also issued warrants to stockholders to purchase 385,530 shares of common stock at an exercise price of $0.30 per share. The principal and accrued interest on the notes payable to stockholders were subsequently converted to Series E convertible preferred stock during the year ended March 31, 1999 at the same price as the Series E convertible preferred stock was sold to investors. During fiscal 1999 the Company had additional notes payable to stockholders in the amount of $1,000,000, which accrued interest at the prime rate plus 1% (8.75% at March 31, 1999). F-13 91 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) 6. LONG-TERM DEBT Long-term debt consists of the following (in thousands, except monthly installments and interest rates):
MARCH 31, ---------------- JUNE 30, 1998 1999 1999 Equipment loan payable to a bank, due in monthly installments of $20,062 through 2000, with interest at the prime rate plus 0.75% (8.5% at March 31, 1999). The loan is secured by the related equipment................................. $ 785 $ -- $ -- Amortizing term loan payable to a bank, due in monthly installments of $28,571 through September 2001, with interest at the prime rate plus 2% (9.75% at March 31, 1999). The loan is secured by substantially all of the Company's assets......... -- 846 761 Mortgage notes payable to a bank, due in monthly installments of $3,942 and $1,183 through 2020; interest rate is subject to adjustment every three years (8.25% at March 31, 1999). The mortgage is secured by real property.......................... 628 618 614 Note payable from Nabnasset acquisition, due in monthly installments of $55,555 and $27,778 through October 2000, with interest at 7.75%...... 2,581 1,583 1,333 ------ ------ ------ Total............................................... 3,994 3,047 2,708 Less current portion................................ 1,357 1,347 1,347 ------ ------ ------ Long-term debt...................................... $2,637 $1,700 $1,361 ====== ====== ======
At March 31, 1999, maturities of long-term debt are as follows (in thousands):
FISCAL YEARS ENDING MARCH 31, 2000................................................. $ 347 2001................................................. 355 2002................................................. 178 2003................................................. 14 2004................................................. 16 Thereafter................................................ 554 ------ Total..................................................... $1,464 ======
7. COMMITMENTS LEASES The Company leases office space under a noncancelable operating lease expiring in December 2000. The Company leases certain office equipment under noncancelable lease agreements that are F-14 92 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) accounted for as capital leases. Equipment under capital lease arrangements included in property and equipment amounted to $365,000 and $693,000 at March 31, 1998 and 1999, respectively. The related accumulated amortization was $99,000 and $425,000 at March 31, 1998 and 1999, respectively. At March 31, 1999, future minimum lease payments under noncancelable operating leases and capital leases are as follows during the years ended March 31 (in thousands):
CAPITAL OPERATING LEASES LEASES 2000........................................................ $132 $406 2001........................................................ 55 244 2002........................................................ 32 -- 2003........................................................ 29 -- 2004........................................................ 17 -- ---- ---- Total future minimum lease payments......................... 265 $650 ==== Less amount representing interest........................... (55) ---- Present value of future minimum lease payments.............. 210 Less current portion........................................ 109 ---- Long-term portion........................................... $101 ====
Rent expense was $431,000, $645,000 and $856,000 for the years ended March 31, 1997, 1998 and 1999, respectively. ROYALTIES The Company is required to pay royalties based on product revenue in excess of specified minimum levels. The royalty rates are generally 1% to 3% of product revenue, and certain agreements require royalties based upon the number of users. At March 31, 1999, required minimum payments under such royalty agreements are as follows during the years ended March 31 (in thousands): 2000........................................................ $429 2001........................................................ 80 ---- Total....................................................... $509 ====
Royalty expense totaled $416,000, $328,000 and $285,000 for the years ended March 31, 1997, 1998 and 1999, respectively. Such amounts have been included in the cost of license revenue. 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK Each share of Series A, B, C and D redeemable preferred stock is convertible into one share of common stock at any time upon the election of the holders of a majority of the then outstanding convertible preferred stock, subject to certain antidilution adjustments. At the time of conversion, the holders of the convertible preferred stock are entitled to a cash payment of $0.925 for each share of Series A convertible preferred stock, $1.325 for each share of Series B convertible preferred stock, F-15 93 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) $1.765 for each share of Series C convertible preferred stock, and $2.544 for each share of Series D convertible preferred stock. Cash payments that would be payable to convertible preferred stockholders upon conversion to common stock total $17,811,000 as of March 31, 1999. At the time of issuance, a portion of the proceeds from the sale was allocated to stockholders equity based on the then fair market value of the common stock into which the shares will be converted. The remainder was credited to redeemable preferred stock which is presented outside of stockholders' equity. For each of the years ended March 31, 1997 and 1998, accretion of preferred stock totaled $167,000 and $1,519,000, respectively, to reflect the difference between the carrying value and the redemption value of the preferred stock on the date of issuance. The accretion of the preferred stock has been recorded as increases to the carrying value of the redeemable preferred stock and accumulated deficit. There was no accretion for the year ended March 31, 1999. The holder of each share of Series A convertible preferred stock has the right to 10 votes, and the holder of each share of Series B, C, and D convertible preferred stock has the right to 14 votes for each share of common stock into which Series A, B, C, and D convertible preferred stock can be converted. The holders of Series A, B, C, and D convertible preferred stock are entitled to noncumulative annual dividends of $0.20, $0.286, $0.382 and $0.55 per share, respectively, as declared by the Board of Directors, prior to the payment of dividends to the holders of common stock. No cash dividends have been declared through March 31, 1999. In the event of any voluntary or involuntary liquidation of the Company, the Series A, B, C and D convertible preferred stockholders are entitled to a liquidation preference of $1,00, $1.43, $1.91 and $2.75 per share, respectively, plus accrued dividends, if any. 9. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK The holder of each share of Series E convertible preferred stock has the right to 14 votes for each share of common stock into which Series E convertible preferred stock can be converted. The holders of Series E convertible preferred stock are entitled to noncumulative annual dividends of $0.83 per share as declared by the Board of Directors, prior to the payment of dividends to the holders of common stock. No cash dividends have been declared through March 31, 1999. In the event of any voluntary or involuntary liquidation of the Company, the Series E convertible preferred stockholders are entitled to a liquidation preference of $4.15 per share plus accrued dividends, if any. STOCK OPTION PLAN The 1995 Stock Option Plan (the "Plan"), authorized the grant of options to purchase up to 4,185,714 shares of the Company's common stock. During the year ended March 31, 1997, the Company's Board of Directors decreased options available for issuance under the Plan by 410,715 shares. During the year ended March 31, 1998, the Company's Board of Directors increased options available under the Plan by 1,012,110 shares. Under the Plan, incentive options may be granted at a F-16 94 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) price per share no less than the fair market value of common stock at the date of grant. Nonqualified stock options may be granted at a price per share no less than 85% of the fair market value on the date of grant. Options granted to any 10% stockholder may have an exercise price per share that is not less than 110% of the fair market value per share of common stock on the date of grant. Options granted are immediately exercisable, and unvested shares are subject to repurchase by the Company at the amount originally paid. Options granted generally have a maximum term of ten years and generally vest over four or five years. At March 31, 1999, 949,998 shares of common stock were subject to repurchase by the Company. In connection with the acquisitions by the Company described in Note 2, the Company granted options outside of the Plan to purchase up to 1,202,528 shares of common stock. The options are generally exercisable immediately and have similar vesting terms as options granted under the Plan with the exception of options to purchase 486,168 shares of common stock, which vest immediately. F-17 95 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) Stock option activity is summarized as follows:
OPTIONS OUTSTANDING ---------------------------- WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE Balances, April 1, 1996............................... 2,742,352 $0.05 Granted (weighted average fair value of $0.02)........ 1,090,250 0.07 Exercised............................................. (2,913,646) 0.05 Canceled.............................................. (579,423) 0.05 ---------- Balances, March 31, 1997 (55,479 vested at a weighted average price of $0.05 per share)................... 339,533 0.07 Granted (weighted average fair value of $0.90)........ 2,699,367 0.57 Exercised............................................. (944,949) 0.20 Canceled.............................................. (270,251) 0.32 ---------- Balances, March 31, 1998 (616,824 vested at a weighted average price of $0.42 per share)................... 1,823,700 0.70 Granted (weighted average fair value of $1.35)........ 1,205,612 1.57 Exercised............................................. (303,090) 0.44 Canceled.............................................. (931,092) 0.91 ---------- Balances, March 31, 1999.............................. 1,795,130 1.22 Granted (weighted average fair value of $3.19)........ 386,500 4.61 Exercised............................................. (148,944) 1.23 Canceled.............................................. (218,185) 0.38 ---------- Balances, June 30, 1999............................... 1,814,501 $2.04 ==========
At March 31, 1999, 940,227 shares were available under the Plan for future grant. Additional information regarding options outstanding as of March 31, 1999 is as follows:
OPTIONS OUTSTANDING OPTIONS VESTED --------------------------- --------------------- WEIGHTED AVERAGE WEIGHTED REMAINING VESTED AT AVERAGE RANGE OF NUMBER CONTRACTUAL MARCH 31, EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) 1999 PRICE $0.03 - $0.10........................... 210,815 7.70 190,262 $0.05 $0.15 - $0.53........................... 174,945 7.00 135,162 0.36 $1.25 - $1.75........................... 1,409,370 9.33 168,340 1.39 --------- ---- -------- ----- 1,795,130 8.91 493,764 $0.59 ========= ==== ======== =====
ADDITIONAL STOCK PLAN INFORMATION Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) requires the disclosure of pro forma net income and earnings per F-18 96 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of the stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the minimum value method with the following weighted average assumptions for 1997, 1998 and 1999; expected life, 5.2 years for 1997 grants, 6.0 years for 1998 grants, and 6.0 years for 1999 grants; risk free interest rates of 6.4% in 1997 and 6.0% in both 1998 and 1999; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the stock-based awards had been amortized over the vesting period of the awards, pro forma net loss applicable to common stockholders would have been approximately $3,713,000 ($4.28 per basic and diluted share), $13,185,000 ($7.78 per basic and diluted share), and $11,887,000 ($4.19 per basic and diluted share) for the years ended March 31, 1997, 1998 and 1999, respectively. However, the impact of outstanding nonvested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. STOCK-BASED COMPENSATION Options Granted to Employees -- In connection with options granted to employees to purchase common stock, the Company recorded deferred stock compensation of $99,000 and $1,055,000 in fiscal years 1998 and 1999, respectively. The Company had no deferred stock compensation in fiscal year 1997. Such amounts represent the difference between the exercise price and the deemed fair value of the Company's common stock at the date of grant. The deferred charges are being amortized to expense through fiscal year 2003. Stock-based compensation expense of $20,000 was recognized as part of the Company's discontinued operations during fiscal year 1998. There was no stock-based compensation expense recognized in continuing operations during fiscal year 1998. Stock-based compensation expense of $171,000 and $79,000 was recorded as part of the Company's continuing and discontinued operations, respectively, during fiscal year 1999. Options and Warrants Granted to Nonemployees -- During fiscal years 1998 and 1999, in connection with notes payable to stockholders, the Company issued warrants to purchase 253,012 and 132,532 shares of common stock, respectively, with an exercise price of $0.30 per share. The balance outstanding on the notes payable to stockholders was converted to preferred stock in May 1998. The fair value of warrants amounting to $258,000 and $165,000 was charged to interest expense during fiscal year 1998 and 1999, respectively. F-19 97 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) WARRANTS The Company had the following outstanding warrants to purchase common stock and preferred stock at March 31, 1999:
NUMBER EXERCISE EXPIRATION OF PRICE PER DATE OF SHARES STOCK SHARE ISSUED WARRANTS 5,000 Common stock $0.05 April 1996 April 2006 192,262 Series B preferred $1.43 August 1996 August 2000 or upon stock an initial public offering of common stock 55,340 Series C preferred $1.91 September 1996 Earlier of September stock 2006 or upon the initial public offering of common stock 8,466 Common stock $3.94 February 1997 January 2002 76,047 Common stock $4.54 November 1997 November 2001 253,012 Common stock $0.30 November 1997 - November 2001 March 1998 132,518 Common stock $0.30 April 1998 - November 2001 May 1998
COMMON STOCK RESERVED At March 31, 1999, the Company has received shares of common stock for issuance as follows: Conversion of preferred stock............................... 16,575,515 Issuance available under 1995 Stock Option Plan............. 940,227 Exercise of options......................................... 1,795,130 Exercise of warrants........................................ 722,645 ---------- Total............................................. 20,033,517 ==========
F-20 98 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) 10. LOSS PER COMMON SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share from continuing operations (in thousands).
THREE MONTHS YEAR ENDED ENDED MARCH 31, JUNE 30, -------------------------------- ---------------- 1997 1998 1998 1998 1999 Net loss from continuing operations....... $(3,526) $(10,146) $(10,586) $(2,786) $ (690) Redeemable preferred stock accretion...... (167) (1,519) -- -- -- ------- -------- -------- ------- ------ Loss from continuing operations applicable to common shareholders (numerator), basic and diluted....................... $(3,693) $(11,665) $(10,586) $(2,786) $ (690) ======= ======== ======== ======= ====== Shares (denominator): Weighted average common shares outstanding.......................... 2,095 3,530 4,194 4,110 4,268 Weighted average common shares outstanding subject to repurchase.... (1,227) (1,835) (1,359) (1,626) (762) ------- -------- -------- ------- ------ Shares used in computation, basic and diluted................................. 868 1,695 2,835 2,484 3,506 ======= ======== ======== ======= ====== Loss per share from continuing operations applicable to common stockholders, basic and diluted....................... $ (4.25) $ (6.88) $ (3.73) $ (1.12) $(0.20) ======= ======== ======== ======= ======
For the above mentioned periods, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following:
YEAR ENDED THREE MONTHS ENDED MARCH 31, JUNE 30, ------------------------------------ ----------------------- 1997 1998 1999 1998 1999 Convertible preferred stock..... 12,515,918 13,970,914 16,575,515 16,575,515 16,575,515 Shares of common stock subject to repurchase................. 1,985,648 1,873,390 949,998 1,659,465 893,383 Outstanding options............. 339,533 1,823,700 1,795,130 1,863,975 1,814,501 Warrants........................ 252,602 590,127 722,645 722,645 722,645 ---------- ---------- ---------- ---------- ---------- Total........................... 15,093,701 18,258,131 20,043,288 20,821,600 20,006,044 ========== ========== ========== ========== ==========
F-21 99 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) 11. INCOME TAXES The Company's deferred income tax assets are comprised of the following at March 31:
1998 1999 (IN THOUSANDS) Net deferred tax assets: Net operating loss carryforwards.......................... $ 4,836 $ 8,394 Accruals deductible in different periods.................. 2,363 1,094 General business credits.................................. 327 327 Depreciation and amortization............................. 287 285 ------- ------- Total deferred tax assets................................... 7,813 10,100 Valuation allowance......................................... (6,320) (9,142) ------- ------- Net deferred tax assets..................................... 1,493 58 Deferred tax liability -- purchased intangibles............. (1,493) (58) ------- ------- Net deferred tax assets..................................... $ -- $ -- ======= =======
Deferred income taxes reflect the tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss and tax credit carryforwards. Due to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future tax returns, as of March 31, 1998 and 1999, the Company has fully reserved its net deferred tax assets of approximately $6,320,000 and $9,142,000, respectively. For all periods presented the Company's effective rate differs from the expected benefit at the federal statutory tax rate due primarily to state taxes of approximately 5% offset by a valuation allowance against deferred tax assets. The Company's loss from continuing operations for 1999 was generated by $9,081,000 and $1,505,000 from domestic and international operations, respectively. The Company did not have international operations in 1997 and 1998. At March 31, 1999, the Company has net operating loss (NOL) carryforwards of approximately $24,215,000 and $5,386,000 for federal and state income tax purposes, respectively. The federal NOL carryforwards expire beginning in 2011, while the state NOL carryforwards expire beginning in 2001. At March 31, 1999, the Company also has research and development credit carryforwards of approximately $242,000 and $128,000 available to offset future federal and state income taxes, respectively. The federal credit carryforward expires beginning in 2011, while the state credit carryforward has no expiration. The extent to which the loss and credit carryforwards can be used to offset future taxable income and tax liabilities, respectively, may be limited, depending on the extent of ownership changes within any three-year period. F-22 100 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) 12. SAVINGS PLAN The Company maintains a savings plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees may defer a portion of their pretax salaries. The Company makes no matching contributions. 13. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS As discussed in Note 1, the Company follows the requirements of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. As defined in SFAS No. 131, the Company operates in two reportable segments. The Company's operations were divided into two segments: Quintus and CCE. As discussed in Note 3, the Company discontinued its operations of CCE during fiscal 1999. At the end of 1999, the Company operates in one reportable segment. GEOGRAPHIC INFORMATION (IN THOUSANDS)
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30, ----------------------------------------------------------------- -------------------------------------- 1997 1998 1999 1998 1999 ----------- ------------------------ ------------------------ ----------- ------------------------ LONG-LIVED LONG-LIVED LONG-LIVED REVENUES(1) REVENUES(1) ASSETS REVENUES(1) ASSETS REVENUES(1) REVENUES(1) ASSETS United States........ $11,536 $18,830 $ 3,727 $24,749 $3,391 $6,557 $ 9,044 $3,365 Rest of the world(2)........... 2,078 3,060 -- 5,558 93 995 1,249 98 ------- ------- ------- ------- ------ ------ ------- ------ $13,614 $21,890 $ 3,727 $30,307 $3,484 $7,552 $10,293 $3,463 ======= ======= ======= ======= ====== ====== ======= ======
- ------------------------- (1) Revenues are attributed to countries based on location of customer invoiced. (2) No individual foreign country accounted for greater than 10% of total revenues or long-lived assets in any of the periods presented. SIGNIFICANT CUSTOMERS One unrelated customer accounted for 23.8% and 19.3% of total revenues in 1997 and 1999, respectively. No one customer accounted for greater than 10% of total revenues in fiscal 1998. Four customers accounted for 30.9%, 21.8%, 10.9% and 10.5% of accounts receivable at March 31, 1997. One customer accounted for 21.1% and 28.6% of accounts receivable at March 31, 1998 and 1999, respectively. 14. LITIGATION The Company is a defendant and may be a potential defendant in lawsuits and claims arising in the ordinary course of business. While the outcomes of such claims, lawsuits, or other proceedings cannot be predicted with certainty, management expects that such liability, to the extent not provided by insurance or otherwise, will not have a material adverse effect on the financial condition of the Company. F-23 101 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) 15. SUBSEQUENT EVENTS On August 26, 1999, the Company issued a total of 1,363,334 shares of Series F convertible preferred stock at $8.25 per share for cash consideration of $11,247,500. The Series F convertible preferred stock is convertible into one share of common stock and has preferences, liquidation and voting rights similar to those of Series E preferred stock. The Series F preferred stockholders are entitled to no cash payments upon conversion to common stock. On September 10, 1999, Quintus entered into an Agreement and Plan of Reorganization to acquire all of the outstanding shares and assume the outstanding options and warrants of Acuity Corp. (Acuity), a company specializing in providing Web based customer interaction software. Quintus will issue approximately 1,570,000 shares of common stock valued at approximately $13,000,000, approximately 2,960,000 shares of Series G preferred stock valued at approximately $24,400,000, and assume approximately 1,230,000 options and warrants to purchase common and preferred stock valued at approximately $7,800,000. The aggregate purchase price, including approximately $300,000 of transaction costs not paid in stock, will be approximately $45,500,000. The agreement is subject to shareholder approval and is expected to close in October 1999. The acquisition will be accounted for using the purchase method of accounting. On September 9, 1999, the Board of Directors approved, subject to stockholder approval, the following: ADOPTION OF THE 1999 STOCK INCENTIVE PLAN 1,000,000 shares of common stock were reserved for issuance under the 1999 Stock Incentive Plan. Any shares not yet issued under the 1995 Stock Option Plan on the date of this offering will also be available under the 1999 Stock Incentive Plan. On January 1 of each year, starting with the year 2000, the number of shares in the reserve will automatically increase by 5% of the total number of shares of common stock that are outstanding at that time or, if less, by 2,000,000 shares. In general, if options or shares awarded under the 1999 Stock Incentive Plan or the 1995 Stock Incentive Plan are forfeited, then those options or shares will again become available for awards under the 1999 Stock Incentive Plan. Outstanding options under the 1995 Stock Option Plan will be incorporated into the 1999 Equity Incentive Plan at the time of this offering and no further option grants will be made under the 1995 Stock Option Plan. The incorporated options will continue to be governed by their existing terms, unless the Board elects one or more features of the 1999 Stock Incentive Plan to those options or to other outstanding shares. The Board has elected to extend the change in control acceleration feature of the 1999 Stock Inventive Plan to all outstanding options and unvested shares. Previously, options granted under the 1995 Stock Option Plan provided that vesting of the shares would accelerate upon an acquisition only if not assumed by the acquiring entity. F-24 102 QUINTUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED MARCH 31, 1997, 1998 AND 1999 AND THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) ADOPTION OF THE EMPLOYEE STOCK PURCHASE PLAN Under the purchase plan, eligible employees are allowed to have salary withholdings of up to 15% of their cash compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock on the first date immediately before the first day of the applicable offering period or the fair market value on the purchase date. The initial offering period commences upon the effective date for the initial public offering of the Company's common stock. For the first offering period, shares of common stock may be purchased at a price equal to 85% of the lower of the price per share in the initial public offering or the market value on the purchase date. The Company has initially reserved 1,000,000 shares of common stock under this plan, plus an annual increase to be added on May 1st beginning with the year 2000 equal to the lesser of (i) 1,000,000 shares, or (ii) 2% of the shares of common stock outstanding on May 1st. ADOPTION OF THE DIRECTORS OPTION PLAN 500,000 shares of common stock have been reserved under the Director Option Plan. The plan provides for an initial automatic grant of an option to purchase 30,000 shares of common stock to a nonemployee director who first becomes a director after the Company's initial public offering. The grant will occur when the director takes office. The initial option will vest monthly over the two-year period following the date of grant. In addition, at the time of the annual stockholders' meeting beginning in 2000, each nonemployee director who continues to be a director after that meeting will automatically be granted an annual option to purchase 10,000 shares of common stock. However, a nonemployee director who is receiving the 30,000 option initial grant will not receive the annual option in the same calendar year. The annual options are fully vested on the first anniversary of the date of grant. F-25 103 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Acuity Corp. In our opinion, the accompanying balance sheets and the related statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Acuity Corp. (the "Company"), at December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has sustained recurring losses from operations in the years then ended December 31, 1997 and 1998 which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Austin, Texas February 8, 1999, except as to Note 11, for which the date is March 31, 1999 F-26 104 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) BALANCE SHEETS
DECEMBER 31, --------------------------- JUNE 30, 1997 1998 1999 ------------ ------------ ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents............................... $ 2,135,448 $ 2,173,101 $ 2,232,231 Accounts receivable, net of allowance for doubtful accounts of $73,215, $60,340 and $0, respectively..... 1,703,075 944,024 292,190 Note receivable......................................... -- -- 350,000 Prepaid expenses and other current assets............... 182,100 176,701 259,204 ------------ ------------ ------------ Total current assets.................................. 4,020,623 3,293,826 3,133,625 Computer equipment, furniture and fixtures, net........... 1,171,168 1,233,464 1,103,048 Note receivable -- related party.......................... 75,000 -- -- Deposits and other assets................................. 64,478 56,013 49,300 ------------ ------------ ------------ Total assets.......................................... $ 5,331,269 $ 4,583,303 $ 4,285,973 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Borrowings under line of credit......................... $ -- $ 721,240 $ 721,240 Current maturities of capital lease obligations......... -- 96,570 90,671 Current maturities of long-term obligations............. 533,534 518,182 450,000 Accounts payable........................................ 495,463 362,225 445,043 Accrued expenses........................................ 771,664 959,748 404,889 Accrued expenses -- related party....................... -- -- 226,968 Deferred revenue and customer advances.................. 1,345,809 762,776 576,874 ------------ ------------ ------------ Total current liabilities............................. 3,146,470 3,420,741 2,915,685 Capital lease obligations, net of current maturities...... -- 239,863 203,564 Long-term obligations, net of current maturities.......... 1,185,785 587,500 362,500 ------------ ------------ ------------ Total liabilities..................................... 4,332,255 4,248,104 3,481,749 ------------ ------------ ------------ Commitments (Note 7) Stockholders' Equity: Convertible preferred stock, $.001 par value: 8,680,644 shares authorized at December 31, 1997 and 1998 and 9,823,502 shares at June 30, 1999; 6,220,994 and 8,252,074 shares issued at December 31, 1997 and 1998 and 9,037,789 at June 30, 1999, 6,173,994 and 8,252,074 outstanding in 1997 and 1998 and 9,037,789 at June 30, 1999; liquidation value 19,857,196 at December 31, 1998 and 22,607,199 at June 30, 1999........................ 6,221 8,252 9,038 Common stock, $.001 par value, 15,000,000 shares authorized at December 31, 1997 and 1998, and 20,065,969 shares at June 30, 1999; 4,852,383, 5,253,430 and 5,305,127 shares issued and 4,852,383, 4,853,430 and 4,905,127 outstanding at December 31, 1997 and 1998 and June 30, 1999, respectively....................................... 4,852 5,253 5,305 Additional paid-in capital............................ 12,847,565 20,069,214 22,780,735 Treasury stock -- at cost Series B-1, 25,000, 0 and 0 shares, Series B-2, 22,000, 0 and 0 shares, and common stock, 0, 400,000 and 400,000 shares, respectively......... (76,000) (280,000) (280,000) Accumulated deficit................................... (11,783,624) (19,467,520) (21,710,854) ------------ ------------ ------------ Total stockholders' equity....................... 999,014 335,199 804,224 ------------ ------------ ------------ Total liabilities and stockholders' equity....... $ 5,331,269 $ 4,583,303 $ 4,285,973 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-27 105 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------- ------------------------- 1997 1998 1998 1999 ----------- ----------- ----------- ----------- Revenue: License........................... $ 3,085,200 $ 4,212,501 $ 1,825,845 $ 947,647 Service........................... 819,488 1,743,199 816,319 129,310 Consulting........................ 906,487 763,391 447,222 221,817 ----------- ----------- ----------- ----------- Total revenue................ 4,811,175 6,719,091 3,089,386 1,298,774 Cost of revenue: License........................... 252,536 91,547 26,085 31,043 Service........................... 564,375 427,858 214,132 190,103 Consulting........................ 595,871 861,382 499,745 346,562 ----------- ----------- ----------- ----------- Total cost of revenue........ 1,412,782 1,380,787 739,962 567,708 Gross profit........................ 3,398,393 5,338,304 2,349,424 731,066 Operating expenses: Research and development.......... 1,542,199 4,389,983 2,054,385 1,971,432 Sales and marketing............... 6,373,790 6,311,540 2,715,236 2,971,363 General and administrative........ 2,020,157 2,377,393 1,097,521 745,212 ----------- ----------- ----------- ----------- Total operating expenses..... 9,936,146 13,078,916 5,867,142 5,688,007 ----------- ----------- ----------- ----------- Operating loss...................... (6,537,753) (7,740,612) (3,517,718) (4,956,941) Other income (expense): Gain on sale of assets............ -- -- -- 2,737,144 Interest expense.................. (91,452) (124,137) (44,952) (69,748) Interest income................... 73,296 164,356 67,283 45,992 Other income (expense)............ (10,581) 16,497 13,388 219 ----------- ----------- ----------- ----------- Net loss..................... $(6,566,490) $(7,683,896) $(3,481,999) $(2,243,334) =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-28 106 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL ------------------ ------------------ PAID-IN TREASURY ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY --------- ------ --------- ------ ----------- --------- ------------ ------------- Balance at January 1, 1997..... 3,843,994 $3,844 4,145,000 $4,145 $ 5,920,897 $ -- $ (5,217,134) $ 711,752 Issuance of Series B-2 convertible preferred stock, net of issuance costs........ 127,000 127 -- -- 252,123 -- -- 252,250 Issuance of Series C convertible preferred stock, net of issuance costs, and related issuance of common stock to Series B holders under anti-dilution provisions................... 2,250,000 2,250 400,000 400 6,613,915 -- -- 6,616,565 Exercise of stock options...... -- -- 307,383 307 60,630 -- -- 60,937 Purchase of treasury stock..... -- -- -- -- -- (76,000) -- (76,000) Net loss....................... -- -- -- -- -- -- (6,566,490) (6,566,490) --------- ------ --------- ------ ----------- --------- ------------ ----------- Balance at December 31, 1997... 6,220,994 6,221 4,852,383 4,852 12,847,565 (76,000) (11,783,624) 999,014 Issuance of Series C convertible preferred stock to vendors................... 6,650 7 -- -- 13,468 -- -- 13,475 Issuance of Series D convertible preferred stock, net of issuance costs........ 2,071,430 2,071 -- -- 7,203,319 -- -- 7,205,390 Exercise of stock options, net.......................... -- -- 401,047 401 80,815 -- -- 81,216 Purchase of treasury stock..... -- -- -- -- -- (280,000) -- (280,000) Retirement of treasury stock... (47,000) (47) -- -- (75,953) 76,000 -- -- Net loss....................... -- -- -- -- -- -- (7,683,896) (7,683,896) --------- ------ --------- ------ ----------- --------- ------------ ----------- Balance at December 31, 1998... 8,252,074 8,252 5,253,430 5,253 20,069,214 (280,000) (19,467,520) 335,199 Issuance of Series E convertible preferred stock, net of issuance costs (unaudited).................. 785,715 786 -- -- 2,696,478 -- -- 2,697,264 Exercise of stock options (unaudited).................. -- -- 51,697 52 15,043 -- -- 15,095 Net loss (unaudited)........... -- -- -- -- -- -- (2,243,334) (2,243,334) --------- ------ --------- ------ ----------- --------- ------------ ----------- Balance at June 30, 1999 (unaudited).................. 9,037,789 $9,038 5,305,127 $5,305 $22,780,735 $(280,000) $(21,710,854) $ 804,224 ========= ====== ========= ====== =========== ========= ============ ===========
The accompanying notes are an integral part of these financial statements. F-29 107 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------- ------------------------- 1997 1998 1998 1999 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................. $(6,566,490) $(7,683,896) $(3,481,999) $(2,243,334) Adjustments to reconcile net loss to net cash used in operating activities: Forgiveness of related party receivable........................... -- 75,000 75,000 -- Gain on sale of assets................. -- -- -- (2,737,144) Depreciation........................... 540,723 745,917 386,539 354,365 Provision for doubtful accounts........ 226,567 155,574 66,756 79,666 Stock compensation expense............. -- 13,475 -- -- Changes in assets and liabilities: Accounts receivable.................. (1,353,251) 603,477 569,713 572,168 Prepaid expenses and other current assets............................ (157,991) 5,399 (76,892) (82,503) Accounts payable..................... 189,594 (133,238) 76,087 82,818 Accrued expenses..................... 387,596 188,084 (71,773) (607,556) Deferred revenue and customer advances.......................... 843,009 (583,033) (334,121) (78,134) ----------- ----------- ----------- ----------- Net cash used in operating activities....... (5,890,243) (6,613,241) (2,790,690) (4,659,654) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of computer equipment, furniture and fixtures........................... (1,218,550) (808,213) (622,337) (223,949) Cash received from the sale of assets, net of transaction costs................... -- -- -- 2,559,041 Change in deposits and other assets....... (34,655) 8,465 (5,870) 6,713 ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities................................ (1,253,205) (799,748) (628,207) 2,341,805 ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of short-term debt................................... 1,000,000 721,240 721,240 -- Repayment of short-term debt.............. (1,000,000) -- -- -- Proceeds from issuance of long-term note................................... 450,000 -- -- -- Amounts paid on installment obligation.... (275,000) (300,000) (150,000) (150,000) Repayment of other long-term debt......... (105,682) (313,637) (157,153) (143,182) Proceeds from sales -- leaseback.......... -- 386,280 386,280 -- Repayment of capital lease obligation..... -- (49,847) (12,128) (42,198) Proceeds from issuance of preferred stock.................................. 7,002,250 7,250,005 7,250,005 2,750,003 Financing costs related to preferred stock issuance............................... (133,434) (44,615) (44,615) (52,739) Proceeds from issuance of common stock.... 60,937 81,216 48,564 15,095 Purchase of treasury stock................ (76,000) (280,000) (280,000) -- ----------- ----------- ----------- ----------- Net cash provided by financing activities... 6,923,071 7,450,642 7,762,193 2,376,979 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................... (220,377) 37,653 4,343,296 59,130 Cash and cash equivalents at beginning of period.................................... 2,355,825 2,135,448 2,135,448 2,173,101 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period.................................... $ 2,135,448 $ 2,173,101 $ 6,478,744 $ 2,232,231 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-30 108 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Acuity Corp., a Delaware corporation (the "Company") was incorporated on August 2, 1995 as ichat, Inc. The Company is a provider of Web-based customer interaction software. In June 1998 the Company changed its name to Acuity Corp. to reflect a strategic change in its core product offerings from internet chat software to its WebCenter customer interaction software. Shortly thereafter, the Company commenced shipment of its WebCenter products that enable users to interact with their customers over the Internet. During the year ended December 31, 1998, WebCenter revenue was approximately $1,215,000 and ichat revenue was $5,504,000. BASIS OF PRESENTATION The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred operating losses since inception related primarily to the development and marketing of its products and has an accumulated deficit of $19,467,520 as of December 31, 1998. These factors raise substantial doubt about the Company's ability to continue as a going concern. In February 1999, the Company completed a sale of preferred stock and in March 1999 completed the sale of an exclusive license to its chat technology (see note 11). The Company's management has developed a fiscal 1999 operating plan in which the Company has placed significant reliance on obtaining additional outside financing. Management is actively pursuing additional debt and equity financing from institutional investors as necessary and intends to increase revenues and eventually achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. UNAUDITED INTERIM FINANCIAL INFORMATION The accompanying interim statements of operations and cash flows for the six months ended June 30, 1998 and 1999 are unaudited but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations and cash flows for the six months ended June 30, 1998 and 1999. The results of operations and cash flows for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. The data disclosed in these notes to the financial statements for these periods are unaudited. CERTAIN RISKS AND UNCERTAINTIES The Company's operating results are significantly dependent on the Company's ability to market and develop its products. The life cycles of the Company's products are difficult to estimate due in part to the effect of future product enhancements and competition. The inability of the Company to successfully develop and market its products as a result of competition or other factors would have a material adverse effect on the Company's business, financial condition and results of operations. F-31 109 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of customers, short payment terms, and their dispersion across geographic areas. During 1998, sales to one customer was $1,064,000, or 16%, with a related receivable balance of approximately $18,000. Two other customers had receivable balances totaling approximately $590,000 at December 31, 1998. REVENUE RECOGNITION The Company's revenues are derived from product licensing fees, fees for maintenance and support, training and consulting. Product licensing fees are recognized upon delivery, net of allowances for estimated future returns, provided that no significant vendor obligations remain and collection of the resulting receivable is deemed probable. Revenues from ongoing maintenance and support are recognized ratably over the term of the maintenance period, typically 12 months. Payments for maintenance and support are generally made in advance and are nonrefundable. Revenues generated from training and consulting are recognized upon completion and customer acceptance. ADVERTISING EXPENSES Advertising expenses consist primarily of costs incurred promoting the Company's products, including public relations, trade shows, lead generation and promotional materials. The Company expenses all advertising costs as incurred. The Company's advertising expenses were approximately $1,035,189 for the year ended December 31, 1997 and $687,080 for the year ended December 31, 1998. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand and on deposit at local banks. The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents consist of deposits in money market funds at December 31, 1997 and 1998 and at June 30, 1999. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Management does not believe there is undue risk of loss because in management's opinion, the financial institutions in which cash is deposited are high credit quality institutions and the securities are obligations of the United States government. However, cash and cash equivalents exceeded FDIC insurance coverage limits. The Company has not experienced any losses on its deposits. Although the Company does not require collateral on accounts receivable, it does maintain reserves for credit losses. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts and notes receivable, accounts payable and accrued liabilities, approximated fair value as of December 31, 1997 and 1998, because of the relatively short maturity of these instruments. F-32 110 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The carrying amounts of the Company's borrowings under variable rate long-term debt instruments approximate their fair value. The fair value of the Company's other long-term obligation is estimated using discounted cash flow analyses, based upon the Company's approximate incremental borrowing rates for similar types of borrowing arrangements. COMPUTER EQUIPMENT, FURNITURE AND FIXTURES Computer equipment, furniture and fixtures, software and leasehold improvements are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Expenditures that increase the value or extend the life of the asset are capitalized, while the cost of maintenance and repairs are expensed as incurred. Upon disposal, assets and related accumulated depreciation are removed from the accounts and the related gain or loss is included in operations. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. The Company capitalizes certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. INCOME TAXES The Company accounts for income taxes in accordance with the liability method. This method requires that deferred taxes be computed annually utilizing the liability method and adjusted when new tax laws or rates are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company recorded no income tax expense for both the years ended December 31, 1997 or 1998 and has provided a valuation allowance to fully offset the net deferred tax asset because the realization of tax benefits associated with net operating loss carryforwards is not assured. COMPREHENSIVE INCOME The Company has had no items of comprehensive income other than its net loss for each of the two years in the period ended December 31, 1998. RECLASSIFICATION Certain amounts previously reported in 1997 have been reclassified to conform to the 1998 presentation. F-33 111 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. COMPUTER EQUIPMENT, FURNITURE AND FIXTURES: Computer equipment, furniture and fixtures is comprised of the following:
DECEMBER 31, ------------------------- JUNE 30, 1997 1998 1999 ---------- ----------- ----------- Computer equipment.............................. $1,129,599 $ 1,624,785 $ 1,669,207 Furniture and fixtures.......................... 168,957 219,819 249,865 Office equipment................................ -- 130,030 157,684 Software........................................ 105,790 233,343 353,393 Leasehold improvements.......................... 376,920 376,920 376,920 ---------- ----------- ----------- 1,781,266 2,584,897 2,807,069 Less: accumulated depreciation.................. (610,098) (1,351,433) (1,704,021) ---------- ----------- ----------- $1,171,168 $ 1,233,464 $ 1,103,048 ========== =========== ===========
During 1998, the Company entered into capital leases for computer equipment with a capitalized cost of $386,280. Amortization expense and accumulated amortization are included in depreciation expense and accumulated depreciation, respectively. Accumulated amortization on these capitalized leases totaled $96,570 at December 31, 1998. Future minimum lease payments as of December 31, 1998 are as follows: 1999........................................................ $147,867 2000........................................................ 147,867 2001........................................................ 95,643 2002........................................................ 23,177 -------- 414,554 Less amount representing interest........................... (78,121) -------- Present value of minimum lease payments................ 336,433 Less current portion........................................ (96,570) -------- $239,863 ========
3. NOTE RECEIVABLE -- RELATED PARTY: In August 1996, the Company issued a note receivable in the amount of $75,000, due from a shareholder and officer of the Company ("Maker"), which bore interest at 5.76% per annum and was collateralized by a stock pledge agreement covering certain shares of common stock held by the Maker. During 1998, the note was forgiven by the Company as part of the consideration given for a noncompete agreement between the officer and the Company. The Company has received interest payments during the year ended December 31, 1997 and 1998 of $4,320 and $2,160, respectively. 4. LINE OF CREDIT: The Company has a revolving line of credit arrangement with a commercial bank that enables the Company to borrow against eligible trade accounts receivable up to a total of $2,500,000. As of December 31, 1998, the Company had $721,240 outstanding under the revolving line of credit. The credit arrangement contains certain financial covenants and restrictions as to various matters, F-34 112 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) including the Company's net worth. The credit facility bears interest at prime plus .5% (8.75% at December 31, 1998) and expires on March 25, 1999. 5. LONG-TERM OBLIGATIONS: Long-term obligations are comprised of the following:
DECEMBER 31, ----------------------- JUNE 30, 1997 1998 1999 ---------- ---------- ---------- Term loans: Variable rate term loan with a commercial bank, bearing interest at the bank's prime rate plus 1% per annum (8.75% at December 31, 1998). The loan requires monthly principal and interest payments through May 1999................................. $ 231,819 $ 68,182 $ -- Variable rate term loan with a commercial bank, bearing interest at prime plus 1% per annum (8.75% at December 31, 1998). The loan requires monthly principal and interest payments through August 2001...................................... 412,500 262,500 187,500 Installment obligation: Non-interest bearing installment obligation to a minority shareholder of the Company. The note is payable in quarterly installments and is scheduled to be paid in full in May 2001....... 1,075,000 775,000 625,000 ---------- ---------- ---------- 1,719,319 1,105,682 812,500 Less: current maturities............................ (533,534) (518,182) (450,000) ---------- ---------- ---------- $1,185,785 $ 587,500 362,500 ========== ========== ==========
The term loans and line of credit are collateralized by substantially all the assets of the Company and contain certain financial covenants and restrictions as to various matters, including the Company's net worth. At December 31, 1998 the Company was not in compliance with its minimum quick ratio and maximum loss covenants, which were waived by the bank in a letter dated February 18, 1999. Should the Company continue to be in non-compliance with its debt covenants, the bank has various remedies including the acceleration of the due dates of principal payments that are currently classified as non-current liabilities in the Company's financial statements. 6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest payments of $91,452, $124,137, $44,953 and $67,748 were made for the years ended December 31, 1997 and 1998 and during the six months ended June 30, 1997 and 1998, respectively. No tax payments were made during the same periods. F-35 113 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a detail of non-cash financing activities:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------- ------------------- 1997 1998 1997 1998 Issuance of 400,000 common shares to Series B convertible preferred stock and warrant holders.................................... $120,000 $ -- $ -- $ -- Issuance of 6,650 Series C convertible preferred stock to vendors................. -- 13,475 -- -- Deferred revenue liability extinguished in the sale of assets......................... -- -- -- 107,768 Accrued commission-related party associated with the sale of assets.................... -- -- -- 279,665 Note received in exchange for the sale of assets..................................... -- -- -- 350,000
7. COMMITMENTS: The Company leases its facilities and certain other equipment under operating lease agreements. Rental expense for the years ended December 31, 1997 and 1998 was approximately $159,134 and $356,080, respectively. Future minimum rental commitments as of December 31, 1998 under these leases are as follows: 1999........................................................ $350,368 2000........................................................ 283,781 2001........................................................ 188,884 2002........................................................ 86,757 2003........................................................ 29,184 -------- $938,974 ========
8. STOCKHOLDERS' EQUITY: PREFERRED STOCK The Company currently has authorization for the issuance of 8,680,644 shares of $.001 par value preferred stock. At December 31, 1998 the following series of convertible preferred stock were authorized:
SHARES SHARES ISSUED AND LIQUIDATION SERIES DESIGNATED OUTSTANDING PREFERENCE - -------------------------------------------- ---------- ----------- ----------- Series A.................................... 750,000 750,000 750,000 Series B-1.................................. 1,868,994 1,868,994 2,803,491 Series B-2.................................. 1,305,000 1,305,000 2,283,750 Series C.................................... 2,256,650 2,256,650 6,769,950 Series D.................................... 2,500,000 2,071,430 7,250,005
Each series of preferred stock is convertible into common stock at the option of the holder on a one-for-one basis, subject to certain adjustments. Each series of preferred stock will automatically convert upon the earliest of (i) the closing date of an underwritten public offering of the Company's F-36 114 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) common stock with aggregate proceeds of more than $18,000,000 and a per share offering price of at least $9.00 or (ii) the date of an affirmative election of the holders of 75% of the outstanding shares of preferred stock. The Company has reserved 8,296,274 shares of common stock at December 31, 1998 to permit conversion of the preferred stock in accordance with these terms. Holders of the preferred stock are entitled to one vote for each share of common stock into which such shares may be converted. Each share of preferred stock entitles the holder to receive noncumulative dividends, if and when declared by the board of directors, prior to any dividend paid on the common stock. Dividends, if any, on preferred stock shall be declared at an annual rate of 10% of the original price paid per share. As of December 31, 1998, no dividends have been declared. In the event of liquidation, the preferred stock has preference over the common stock in the amount equal to the original issue price plus declared but unpaid dividends. During 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan (the "Plan"), providing for two separate equity programs: (i) the Option Grant Program providing for the granting of both incentive and non-statutory stock options, as defined by the Internal Revenue Code, and (ii) the Stock Issuance Program providing for the issuance of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Company. The Plan, as amended, provides for a maximum number of common shares to be optioned/issued of 3,950,000. Accordingly, the Company has reserved a sufficient number of shares of common stock to permit exercise of options or issuance of shares in accordance with the terms of the Plan. If an option expires or becomes unexercisable for any reason, options related to the unpurchased shares become available for grant. Each option granted under the Plan has a term of ten years from the date of grant and an exercise price and vesting schedule as determined by the Plan Administrator, at the date of grant, with the exception that incentive stock options can not be granted for less than 100% of the fair market value of the stock and non-statutory stock options can not be granted for less than 110% of the fair market value of the stock to any shareholder of the Company with a 10% or greater interest in the common stock of the Company. The number of common stock options exercised and unvested was 313,437 and 176,033 at December 31, 1997 and 1998, respectively. F-37 115 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) STOCK OPTION PLAN Option activity under the Company's Plan follows:
WEIGHTED- AVAILABLE EXERCISE AVERAGE FOR GRANT SHARES PRICE EXERCISE PRICE AMOUNT ---------- ---------- ------------- -------------- ---------- Balance at January 1, 1997... 991,500 1,183,500 $0.10 - $0.20 $0.13 $ 151,700 Options granted......... (1,634,750) 1,634,750 0.10 - 0.30 0.27 442,273 Options exercised....... -- (307,383) 0.10 - 0.30 0.20 (60,937) Options cancelled....... 766,382 (766,382) 0.10 - 0.30 0.15 (115,455) ---------- ---------- ---------- Balance at December 31, 1997....................... 123,132 1,744,485 417,581 Options approved for grant................. 1,350,000 -- -- -- -- Options granted......... (2,775,000) 2,775,000 0.30 - 0.70 0.48 1,320,450 Options exercised....... (403,547) 0.10 - 0.50 0.20 (81,816) Options cancelled....... 1,328,273 (1,328,273) 0.10 - 0.70 0.33 (432,724) Options repurchased..... 2,500 0.20 0.20 -- ---------- ---------- ---------- Balance at December 31, 1998....................... 28,905 2,727,665 1,223,491 Options approved for grant (unaudited)..... 1,000,000 -- -- -- -- Options granted (unaudited)........... (914,106) 914,106 0.70 0.70 636,607 Options exercised (unaudited)........... -- (51,697) 0.10 - 0.70 0.29 (15,095) Options cancelled (unaudited)........... 693,659 (693,659) 0.10 - 0.70 0.54 (377,439) ---------- ---------- ---------- Balance at June 30, 1999 (unaudited)................ 808,458 2,956,415 $1,467,564 ========== ========== ==========
The weighted-average fair value of options granted during the years ended December 31, 1997 and 1998 was $0.27 and $0.48 per share, respectively. The following table summarizes information with respect to stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ------------------------------- OPTIONS WEIGHTED-AVERAGE EXERCISABLE EXERCISE NUMBER REMAINING NUMBER PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - --------------------------------------- ----------- ---------------- ----------- $0.10................................. 20,000 6.9 20,000 0.15................................. 43,031 7.7 43,031 0.20................................. 25,874 8.1 25,874 0.30................................. 1,603,927 9.0 1,603,927 0.50................................. 168,500 9.3 168,500 0.70................................. 926,333 9.8 928,333 --------- --------- Number outstanding at December 31, 1998................................. 2,787,665 2,787,665 ========= =========
F-38 116 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) At December 31, 1997, options to purchase 1,744,485 shares of common stock were exercisable at a weighted average exercise price of $0.24 per share. PRO FORMA STOCK BASED COMPENSATION The Company has applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for the Plan. Accordingly, no compensation expense has been recognized for the Plan. Had compensation cost for the Plan been determined based upon the fair value at the grant date for awards under the Plan consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," such amount would not have been materially different. The fair value of each option grant is estimated on the date of grant using the minimum value method with the following weighted average assumptions used for grants in 1997 and 1998: dividend yield of 0.0%, risk-free interest rate of 6.39% in 1997 and 6.00% in 1998 and expected lives of five years. Volatility of the Company common stock underlying the options was not considered because the Company's equity is not publicly traded as of December 31, 1998. COMMON STOCK WARRANTS The B-1 Series Preferred Stock Agreement was amended to provide for the issuance of warrants to certain Series B-2 holders to purchase 465,153 shares of the Company's common stock in consideration for terminating their rights to purchase shares of Series B-3 Preferred Stock upon the Company's achievement of designated milestone events in fiscal year 1997. The warrants are exercisable at $2.75 per share. The Company has reserved a sufficient number of shares of Series B-1 to permit exercise of this warrant. 9. EMPLOYEE BENEFITS: The Company has established a 401(k) retirement savings plan for its full time employees. All employees meeting minimum age requirements are eligible to enroll in the Plan sixty days after commencement of employment. As of December 31, 1998, the Company has not provided matching contributions to employee accounts. 10. INCOME TAXES: The Company has not recorded the tax benefits attributable to its taxable losses incurred during the years ended December 1997 or 1998 due to the uncertainty surrounding the recoverability of these deferred tax assets. At December 31, 1998 the Company had federal net operating loss carryforwards of approximately $18,500,000 available to offset future taxable income. The Company's federal operating loss carryforwards begin to expire starting in the year 2011. As a result of ownership changes in prior years as defined by Internal Revenue Code Section 382, approximately $4,365,000 in net operating loss carryforwards are subject to a maximum annual utilization of approximately $1,000,000 at December 31, 1998. F-39 117 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The components of the net deferred tax asset are as follows at December 31, 1997 and 1998:
1997 1998 ----------- ----------- Deferred tax assets: Net operating loss carryforwards.......................... $ 3,505,193 $ 6,292,559 Non-recurring charge related to purchased technology...... 672,093 570,883 Allowance for doubtful accounts and returns............... 131,930 124,699 Capitalization of software development costs.............. 6,479 3,906 Depreciation.............................................. 57,050 135,727 ----------- ----------- Net deferred tax asset before valuation allowance........... 4,372,745 7,127,774 Valuation allowance......................................... (4,372,745) (7,127,774) ----------- ----------- Net deferred tax asset...................................... $ -- $ -- =========== ===========
The following is a reconciliation of the amount of the income tax benefit that would result from applying the statutory Federal income tax rates to pretax loss and the reported amount of income tax benefit:
DECEMBER 31, ------------------------- 1997 1998 ----------- ----------- Tax benefit at statutory rate of 34%........................ $ 2,235,089 $ 2,612,524 State income tax benefit.................................... 196,343 229,140 Permanent difference........................................ (9,861) (15,603) Other....................................................... -- (71,032) Net increase in valuation allowance......................... (2,421,571) (2,755,029) ----------- ----------- $ -- $ -- =========== ===========
11. SUBSEQUENT EVENTS: AUTHORIZATION AND SALE OF SERIES E PREFERRED STOCK On February 22, 1999 the Company's board of directors designated 1,142,858 shares of the Company's authorized preferred stock as Series E preferred stock. On February 25, 1999 the Company sold 785,715 shares of Series E preferred stock and warrants to purchase 392,858 shares of common stock for an aggregate purchase price of $2,750,000. The warrants are exercisable through February 27, 2001 at an exercise price of $0.70 per share. Each share of Series E preferred stock is entitled to receive noncumulative dividends, when and if declared by the Company's board of directors, at a rate of $0.35 per share per annum. Each share of Series E preferred stock is convertible at the option of the holder into common shares of the Company on a one for one basis, subject to certain anti-dilution provisions as described in the Company's articles of incorporation. Conversion of the Series E preferred stock is automatic upon either i) the sale of the Company's common stock in a firmly underwritten public offering in which the offering price is not less than $9.00 per share and which results in aggregate proceeds to the Company of at least $18,000,000 net of underwriting discounts, commissions and fees, or ii) the written consent of 75% of the outstanding shares of Series E preferred stock. F-40 118 ACUITY CORP. (FORMERLY KNOWN AS ICHAT, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) Upon any liquidation, dissolution or winding up of the Company, the Series E preferred shareholders are entitled to a liquidation preference of $3.50 per share plus all declared but unpaid dividends thereon. SALE OF EXCLUSIVE TECHNOLOGY LICENSE In March 1999, the Company entered into an agreement to sell exclusive source and object code licenses for the ichat software. Under the terms of the agreement, the Company received $1.3 million in cash at the time of purchase, notes receivable in the principal amounts of $1 million due on June 30, 1999, $700,000 due on December 15, 1999, and $600,000 of preferred stock from the next issuance of the purchaser. In connection with this sale, the Company entered into a commission agreement with a stockholder under which the stockholder will receive a total of $354,665 for negotiating the sale of these assets. 12. SUBSEQUENT EVENTS (UNAUDITED) On September 10, 1999 the Company entered into an agreement to have all of its outstanding capital stock acquired by Quintus Corporation. In September, 1999 the Company's board of directors designated and sold 482,625 shares of the Company's authorized preferred stock as Series F preferred stock for an aggregate purchase price of $1,250,000. The board also issued warrants to purchase 178,570 shares of the Company's common stock. * * * * * F-41 119 QUINTUS CORPORATION PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS YEAR ENDED MARCH 31, 1999 AND THREE MONTHS ENDED JUNE 30, 1999 On September 10, 1999, Quintus entered into an Agreement and Plan of Reorganization to acquire all of the outstanding shares and assume the outstanding options and warrants of Acuity Corp. (Acuity), a company specializing in providing Web based customer interaction software. Quintus will issue approximately 1,570,000 shares of common stock valued at approximately $13,000,000, approximately 2,960,000 shares of Series G preferred stock valued at approximately $24,400,000, and assume approximately 1,230,000 options and warrants to purchase common and preferred stock valued at approximately $7,800,000. The aggregate purchase price, including approximately $300,000 of transaction costs not paid in stock, will be approximately $45,500,000. The agreement is subject to shareholder approval and will close prior to the effectiveness of this offering. The acquisition will be accounted for using the purchase method of accounting. The aggregate purchase price will be allocated to the assets and liabilities acquired based on their fair value. The total consideration is expected to exceed the fair value of the net assets acquired by approximately $44.5 million. Approximately $3.0 million will be allocated to purchased in-process technology, which has not yet reached technological feasibility and does not have alternative future uses. This amount will be charged to Quintus' operations in the period in which the transaction is consummated. The allocation of the purchase price is preliminary and will not be finalized until the transaction is consummated. The accompanying pro forma financial statements are presented in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combining balance sheet has been prepared as if the acquisition was completed as of June 30, 1999. The unaudited pro forma condensed combining statements of operations were prepared as if the acquisition was completed at the beginning of the periods presented. To prepare the pro forma unaudited condensed combining statements of operations, the Quintus statement of operations for the year ended March 31, 1999 has been combined with the statement of operations of Acuity for the year ended December 31, 1998. Acuity's revenue of $6,719,000 for the year ended December 31, 1998 includes $5,504,000 of revenue related to a product line that was sold during the first quarter of 1999. Also, the statement of operations of both Quintus and Acuity have been combined for the quarter ended June 30, 1999. The statement of operations of Acuity for the quarter ended March 31, 1999 which has been excluded from these pro forma financial statements included revenues, operating loss and net income of $765,000, $2.4 million, and $321,000, respectively. This method of combining the companies is only for presentation of pro forma unaudited condensed combining financial statements. Actual statements of operations of the companies will be combined from the effective date of the acquisition. The unaudited pro forma condensed combining financial statements should be read in conjunction with the historical financial statements of Quintus and Acuity. The unaudited pro forma condensed combining statements of operations do not include the one-time $3.0 million charge for purchased in-process technology arising from this acquisition, as it is a material nonrecurring charge. This charge will be included in the actual consolidated statement of operations of Quintus when the acquisition is consummated. The unaudited pro forma condensed balance sheet reflects the 1,363,334 shares of Series F convertible preferred stock issued on August 26, 1999, at $8.25 per share for cash consideration of $11,247,500. F-42 120 QUINTUS CORPORATION PRO FORMA CONDENSED COMBINING BALANCE SHEETS JUNE 30, 1999
SERIES F PREFERRED PRO FORMA PRO FORMA QUINTUS ACUITY STOCK ADJUSTMENTS NOTES COMBINED (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash.............................. $ 467 $ 2,232 $11,248 $ -- $ 13,947 Accounts receivable, less allowance for doubtful accounts....................... 10,765 292 -- -- 11,057 Prepaid expenses and other assets......................... 1,295 610 -- -- 1,905 -------- -------- ------- ------- -------- Total current assets........... 12,527 3,134 11,248 -- 26,909 Property and equipment, net......... 3,139 1,103 -- -- 4,242 Purchased technology, less accumulated amortization.......... 1,778 -- -- -- 1,778 Intangible assets, less accumulated amortization...................... 2,506 -- -- 41,500 3 44,006 Other assets........................ 324 49 -- -- 373 -------- -------- ------- ------- -------- Total assets................... $ 20,274 $ 4,286 $11,248 $41,500 $ 77,308 ======== ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Accounts payable.................. $ 3,983 $ 445 $ -- $ -- $ 4,428 Other accrued liabilities......... 4,454 632 -- 300 5 5,386 Deferred revenue.................. 6,706 577 -- (200) 6 7,083 Borrowings under bank line of credit......................... 4,868 -- -- -- 4,868 Current portion of long-term debt........................... 1,425 1,262 -- -- 2,687 -------- -------- ------- ------- -------- Total current liabilities...... 21,436 2,916 -- 100 24,452 Long-term debt, less current portion........................... 1,449 566 -- -- 2,015 Deferred revenue.................... 200 -- -- -- 200 Redeemable convertible preferred stock............................. 17,811 -- -- -- 17,811 STOCKHOLDERS' EQUITY (DEFICIENCY): Preferred stock................... 13,707 9 11,248 24,391 1, 2, 8 49,355 Common stock...................... 4,323 5 -- 20,795 1, 2 25,123 Additional paid-in capital........ -- 22,781 -- (22,781) 1 -- Notes receivable from stockholder.................... (267) -- -- -- (267) Deferred stock-based compensation................... (1,415) -- -- -- (1,415) Treasury stock.................... -- (280) -- 280 1 -- Accumulated deficit............... (36,970) (21,711) -- 18,715 1, 4 (39,966) -------- -------- ------- ------- -------- Total stockholders' equity (deficiency)................. (20,622) 804 11,248 41,400 32,830 -------- -------- ------- ------- -------- Total liabilities and stockholders' equity (deficiency)................. $ 20,274 $ 4,286 $11,248 $41,500 $ 77,308 ======== ======== ======= ======= ========
See notes to pro forma consolidated financial statements. F-43 121 QUINTUS CORPORATION PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS YEAR ENDED MARCH 31, 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
QUINTUS ACUITY YEAR ENDED YEAR ENDED MARCH 31, DECEMBER 31, PRO FORMA 1999 1998 ADJUSTMENTS NOTES PRO FORMA (UNAUDITED) COMBINED Revenue.............................. $ 30,307 $ 6,719 $ 400 6 $ 37,426 Cost of revenue...................... 9,177 1,381 -- 10,558 -------- ------- ------- -------- Gross profit......................... 21,130 5,338 400 26,868 Operating Expenses: Sales and marketing................ 17,147 6,312 -- 23,459 Research and development........... 6,719 4,390 -- 11,109 General and administrative......... 3,577 2,377 -- 5,954 Amortization of intangibles........ 3,185 -- 8,300 7 11,485 Stock-based compensation........... 171 -- -- 171 -------- ------- ------- -------- Total operating expenses... 30,799 13,079 8,300 52,178 -------- ------- ------- -------- Loss from operations................. (9,669) (7,741) (7,900) (25,310) Other income (expense), net.......... (917) 57 (860) -------- ------- ------- -------- Net loss from continuing operations......................... $(10,586) $(7,684) $(7,900) $(26,170) ======== ======= ======= ======== Basic and diluted loss per common share from continuing operations... $ (3.73) (6.01) ======== ======== Shares used in basic and diluted loss per common share................... 2,835 4,355 ======== ========
See notes to pro forma consolidated financial statement of operations. F-44 122 QUINTUS CORPORATION PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PRO FORMA PRO FORMA QUINTUS ACUITY ADJUSTMENTS NOTES COMBINED Revenue.................................... $10,293 $ 534 $ 200 6 $11,027 Cost of revenue............................ 2,639 313 -- 2,952 ------- ------- ------- ------- Gross profit............................... 7,654 221 200 8,075 Operating Expenses: Sales and marketing...................... 4,314 1,339 5,653 Research and development................. 1,873 989 2,862 General and administrative............... 998 442 -- 1,440 Amortization of intangibles.............. 796 -- 2,075 7 2,871 Stock-based compensation................. 169 -- 169 ------- ------- ------- ------- Total operating expenses......... 8,150 2,770 2,075 12,995 ------- ------- ------- ------- Loss from operations....................... (496) (2,549) (1,875) (4,921) Other income (expense), net................ (194) (15) (209) ------- ------- ------- ------- Net loss from continuing operations........ $ (690) $(2,564) $(1,875) $(5,130) ======= ======= ======= ======= Basic and diluted loss per common share from continuing operations............... $ (0.20) $ (1.02) ======= ======= Shares used in basic and diluted loss per common share............................. 3,506 5,026 ======= =======
See notes to pro forma consolidated financial statement of operations. F-45 123 QUINTUS CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 1999 AND STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) The following pro forma adjustments have been made to the pro forma condensed combining financial statements: 1. Reflects the elimination of Acuity's shareholders' equity comprised of preferred stock of $9,000, common stock of $5,000, additional paid in capital of $22,781,000, treasury stock of $280,000 and accumulated deficit of $21,711,000. 2. Reflects the issuance of approximately 2,960,000 shares of preferred stock valued at approximately $24,400,000, approximately 1,570,000 shares of common stock valued at approximately $13,000,000 and the assumption of approximately 1,230,000 options and warrants to purchase common and preferred stock valued at approximately $7,800,000. 3. Reflects the allocation of purchase price to the intangible assets identified in the purchase price allocation. 4. Reflects the one-time charge of $3,000,000 for purchased in-process technology identified in the purchase 5. Reflects the accrual of estimated costs to be paid in cash directly attributable to the completion of the acquisition. 6. Reflects an adjustment to conform to Quintus' accounting policy for revenue recognition. 7. Reflects pro forma amortization of the purchased intangibles over the estimated useful life of five years of $8,300,000 for the year ended March 31, 1999 and $2,075,000 for the quarter ended June 30, 1999. 8. Reflects the issuance on August 26, 1999 of 1,363,334 shares of Series F convertible preferred stock at $8.25 per share for total cash consideration of $11,247,500. F-46 124 [INSIDE BACK COVER ARTWORK TO COME] 125 APPENDIX TO GRAPHICS Page 41: "The Quintus eContact Suite" appears above the rectangular graphic. Across the top of the graphic (from left to right), the phrases "Channel Applications," eContact Engine" and "Business Applications" break up the rectangular box into three main columns. The left-hand column is broken into five vertical segments entitled (from top to bottom) "Computer Telephony Integration," "Web Interaction," "Email Management," "Electronic Commerce Connector" and "Network Routing." The word "eContact" appears in the center of the large middle column. In the corners of the middle column, appearing above and below "eContact," are the phrases "Personalization Services," "Coordination Services," Centralized Customization & Administration" and "Consolidated Repository & Reporting." The right-hand column contains the phrases (from top to bottom) "Sales & Service," "Consumer Relations," "Technical Support" and "Human Resources." Two narrow sub-columns, vertically labeled "Enterprise Data Access" and "Agent Console" separate the large middle column from the right-hand column. 126 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- , 1999 LOGO SHARES OF COMMON STOCK ------------------------- PROSPECTUS ------------------------- DONALDSON, LUFKIN & JENRETTE DAIN RAUSCHER WESSELS A DIVISION OF DAIN RAUSCHER INCORPORATED SG COWEN DLJDIRECT INC. - -------------------------------------------------------------------------------- We have not authorized any dealer, sales person or other person to give you written information other than this prospectus or to make representations as to matter not stated in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of you offer to buy the securities in any jurisdiction where that would not be permitted or legal. Neither the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create an implication that the information contained herein or the affairs of Quintus have not changed since the date hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these shares of common stock may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- 127 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by Quintus in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fees. SEC Registration fee........................................ $ 16,624 NASD fee.................................................... 7,228 Nasdaq National Market listing fee.......................... Printing and engraving expenses............................. Legal fees and expenses..................................... Accounting fees and expenses................................ Blue sky fees and expenses.................................. Transfer agent fees......................................... Miscellaneous fees and expenses............................. ---------- Total............................................. $ ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers, including reimbursement for expenses incurred, in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's bylaws provides for mandatory indemnification of its directors and permissible indemnification of officers and employees to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's certificate of incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to Quintus and its stockholders. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to Quintus for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into indemnification agreements with its officers and directors, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The indemnification agreements provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since September 1996, we have issued and sold the following securities: 1. On September 17, 1996, we issued and sold an aggregate of 2,595,422 shares of our Series C Preferred Stock to a group of five investors for an aggregate purchase price of $4,957,256.02. On II-1 128 December 18, 1996, we issued and sold 52,356 shares of our Series C Preferred Stock to one investor for an aggregate purchase price of $99,999.96. 2. On November 10, 1997, we issued and sold an aggregate of 1,091,362 shares of our Series D Preferred Stock to a group of three investors for an aggregate purchase price of $3,000,000.00. On that same date, in connection with our acquisition of Nabnasset Corporation, we issued an additional aggregate of 363,634 shares of our Series D Preferred Stock to the same three investors in exchange for the outstanding shares of Series A preferred stock of Nabnasset Corporation. 3. On November 10, 1997, in connection with the acquisition of Nabnasset Corporation, we assumed two warrants issued by Nabnasset on February 12, 1997. These two warrants are exercisable for an aggregate of 8,466 shares of our common stock. 4. On November 10, 1997, we issued and sold six warrants to purchase an aggregate of 72,287 shares of our common stock to a group of six investors at a per share exercise price of $4.54. 5. On November 10, 1997, in connection with our acquisition of Nabnasset, we assumed a warrant issued by Nabnasset to its financial advisor on that same date. The assumed warrant is exercisable for 76,047 shares of our common stock. On March 9, 1998, Nabnasset's financial advisor transferred warrants to purchase an aggregate of 18,252 shares of our common stock to a group of four investors. 6. On March 12, 1998, we issued and sold two warrants to purchase an aggregate of 13,142 shares of our common stock to two investors at a per share exercise price of $0.30. 7. On March 16, 1998, we issued and sold a warrant to purchase an aggregate of 9,857 shares of our common stock to an investor at a per share exercise price of $0.30. 8. On March 17, 1998, we issued and sold three warrants to purchase an aggregate of 13,143 shares of our common stock to an investor at a per share exercise price of $0.30. 9. On April 30, 1998, we issued and sold six warrants to purchase an aggregate of 24,093 shares of our common stock to six investors at a per share exercise price of $0.30. 10. On May 21, 1998, we issued and sold an aggregate of 2,538,335 shares of our Series E Preferred Stock to a group of thirteen investors for an aggregate purchase price of $10,534,090.25. On May 27, 1998, we issued and sold an additional aggregate of 66,266 shares of our Series E Preferred Stock to a group of three investors for an aggregate purchase price of $275,003.90. 11. On May 21, 1998, we issued and sold twelve warrants to purchase an aggregate of 253,008 shares of our common stock to twelve investors at a per share exercise price of $0.30. 12. On August 26, 1999, we issued and sold an aggregate of 1,363,334 shares of our Series F Preferred Stock to a group of three investors for an aggregate purchase price of $11,247,505.50. 13. On September 2, 1999, we issued and sold a warrant to purchase an aggregate of 300,000 shares of our common stock at a per share exercise price of $7.50. 14. We issued and sold an aggregate of 4,282,843 shares (assuming no exercise of stock options after August 31, 1999) of common stock to our employees, consultants and other service providers pursuant to stock grants and exercises of options under our 1995 Stock Option Plan (Exhibit 10.2). 15. We granted options to purchase 9,121,443 shares of common stock to employees, consultants and other service providers of Quintus under our 1995 Stock Option Plan, of which 4,342,242 shares have been exercised as of August 31, 1999. The sale of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or II-2 129 Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving any public offering or transactions under compensation benefit plans and contracts relating to compensation as provided under Rule 701, or Section 3(a)(10) of the Securities Act as a security issued after a ruling by an authorized authority upon the fairness of the transaction's terms and conditions. With regard to the sales of securities exempted by Section 4(2) of the Securities Act, the recipients of securities in each transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution and appropriate legends were affixed to the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1* Form of Underwriting Agreement. 2.1 Agreement and Plan of Reorganization by and among Registrant, Acuity Corp., Ribeye Acquisition Corp. and certain stockholders of Acuity Corp., dated September 10, 1999. 3.1 Certificate of Incorporation of Registrant, as amended to date. 3.2 Form of Registrant's Restated Certificate of Incorporation to be filed upon the closing of Registrant's acquisition of Acuity Corp. 3.3 Form of Registrant's Restated Certificate of Incorporation to be filed upon the closing of this offering. 3.4 Amended and Restated Bylaws of Registrant. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4. 4.2* Specimen Common Stock certificate. 4.3 Form of Registrant's Amended and Restated Investors Rights Agreement to be adopted upon the closing of Registrant's acquisition of Acuity Corp. 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. 10.1 Form of Indemnification Agreement to be entered into between Registrant and each of its directors and officers. 10.2 1995 Stock Option Plan and form of stock purchase agreement thereunder. 10.3 1999 Stock Incentive Plan and forms of agreements thereunder. 10.4 Employee Stock Purchase Plan. 10.5 1999 Director Option Plan. 10.6 Light Industrial Lease between Registrant and Teachers Insurance and Annuity Association of America, dated October 6, 1995. 10.7 Sublease Agreement between Pavilion Technologies, Inc. and Acuity Corporation, dated December 19, 1996. 10.8* Software Distribution Agreement dated May 5, 1997, between Nabnasset Corporation and Lucent Technologies Inc. 10.9* Distribution Agreement for ICR and SICR Programs dated April 26, 1999, between Registrant and GeoTel Communications Corporation. 10.10* Authorized OEM/Reseller Agreement dated December 22, 1998, between Registrant and Brightware, Inc. 10.11 Employment agreement between Registrant and Alan Anderson, dated May 23, 1995 and Notice of Grant of Stock Option. 10.12 Employment agreement between Registrant and John Burke, dated June 11, 1999. 10.13 Loan and Security Agreement between Registrant and Silicon Valley Bank, dated as of September 18, 1998.
II-3 130
EXHIBIT NUMBER DESCRIPTION ------- ----------- 16.1 Letter regarding change in certifying accountant. 21.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP, Independent Auditor 23.2 Consent of Ernst & Young LLP Independent Auditors 23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.4* Consent of Counsel. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see page II-7). 27.1 Financial Data Schedule.
- ------------------------- * To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 131 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on this 10th day of September, 1999. QUINTUS CORPORATION By: /s/ ALAN K. ANDERSON ------------------------------------ Alan K. Anderson Chief Executive Officer II-5 132 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Alan K. Anderson and Susan Salvesen, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE /s/ ALAN K. ANDERSON Chief Executive Officer September 10, 1999 - -------------------------------------------------------- (Principal Executive Alan K. Anderson Officer) and Director /s/ SUSAN SALVESEN Chief Financial Officer September 10, 1999 - -------------------------------------------------------- (Principal Financial Susan Salvesen and Accounting Officer) and Secretary /s/ PAUL H. BARTLETT Director September 10, 1999 - -------------------------------------------------------- Paul H. Bartlett /s/ FREDRIC W. HARMAN Director September 10, 1999 - -------------------------------------------------------- Fredric W. Harman /s/ WILLIAM HERMAN Director September 10, 1999 - -------------------------------------------------------- William Herman /s/ ALEXANDER ROSEN Director September 10, 1999 - -------------------------------------------------------- Alexander Rosen /s/ ROBERT W. SHAW Director September 10, 1999 - -------------------------------------------------------- Robert W. Shaw /s/ JEANNE WOHLERS Director September 10, 1999 - -------------------------------------------------------- Jeanne Wohlers
II-6 133 REPORT ON SCHEDULE OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITOR To the Board of Directors and Stockholders of Quintus Corporation: We have audited the consolidated financial statements of Quintus Corporation (the Company) as of and for the year ended March 31, 1999, and have issued our report thereon dated June 18, 1999 (September 10, 1999 as to Note 15) (included elsewhere in this registration statement). Our audit also included the financial statement schedule of the Company for the year ended March 31, 1999, listed in Item 16(b). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP San Jose, California June 18, 1999 S-1 134 REPORT OF INDEPENDENT AUDITORS The Board of Directors Quintus Corporation We have audited the consolidated financial statements of Quintus Corporation as of March 31, 1998 and 1997, and for the years then ended, and have issued our report thereon dated April 30, except for Note 12, as to which the date is September 18, 1999 (included elsewhere in this Registration Statement). Our audits also included the data for the two years ended March 31, 1998 included in the financial statement schedules listed in Item 16(b) of this Registration Statement. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Palo Alto, California April 30, 1998 S-2 135 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE CHARGED BALANCE AT TO COST AT BEGINNING AND END OF OF PERIOD EXPENSES WRITE-OFFS PERIOD --------- -------- ---------- ------- Year ended March 31, 1997 Allowance for doubtful accounts............. $569 $255 $(299) $525 ==== ==== ===== ==== Year ended March 31, 1998 Allowance for doubtful accounts............. $525 $408 $ (85) $848 ==== ==== ===== ==== Year ended March 31, 1999 Allowance for doubtful accounts............. $848 $235 $(354) $729 ==== ==== ===== ====
S-3 136 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1* Form of Underwriting Agreement. 2.1 Agreement and Plan of Reorganization by and among Registrant, Acuity Corp., Ribeye Acquisition Corp. and certain stockholders of Acuity Corp., dated September 10, 1999. 3.1 Certificate of Incorporation of Registrant, as amended to date. 3.2 Form of Registrant's Restated Certificate of Incorporation to be filed upon the closing of Registrant's acquisition of Acuity Corp. 3.3 Form of Registrant's Restated Certificate of Incorporation to be filed upon the closing of this offering. 3.4 Amended and Restated Bylaws of Registrant. 4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4. 4.2* Specimen Common Stock certificate. 4.3 Form of Registrant's Amended and Restated Investors Rights Agreement to be adopted upon the closing of Registrant's acquisition of Acuity Corp. 5.1* Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. 10.1 Form of Indemnification Agreement to be entered into between Registrant and each of its directors and officers. 10.2 1995 Stock Option Plan and form of stock purchase agreement thereunder. 10.3 1999 Stock Incentive Plan and forms of agreements thereunder. 10.4 Employee Stock Purchase Plan. 10.5 1999 Director Option Plan. 10.6 Light Industrial Lease between Registrant and Teachers Insurance and Annuity Association of America, dated October 6, 1995. 10.7 Sublease Agreement between Pavilion Technologies, Inc. and Acuity Corporation, dated December 19, 1996. 10.8* Software Distribution Agreement dated May 5, 1997, between Nabnasset Corporation and Lucent Technologies Inc. 10.9* Distribution Agreement for ICR and SICR Programs dated April 26, 1999, between Registrant and GeoTel Communications Corporation. 10.10* Authorized OEM/Reseller Agreement dated December 22, 1998, between Registrant and Brightware, Inc. 10.11 Employment agreement between Registrant and Alan Anderson, dated May 23, 1995 and Notice of Grant of Stock Option. 10.12 Employment agreement between Registrant and John Burke, dated June 11, 1999. 10.13 Loan and Security Agreement between Registrant and Silicon Valley Bank, dated as of September 18, 1998. 16.1 Letter regarding change in certifying accountant. 21.1 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP, Independent Auditor 23.2 Consent of Ernst & Young LLP Independent Auditors 23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.4* Consent of Counsel. Reference is made to Exhibit 5.1. 24.1 Power of Attorney (see page II-7). 27.1 Financial Data Schedule.
- ------------------------- * To be filed by amendment. EX-2.1 2 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG QUINTUS CORPORATION, RIBEYE ACQUISITION CORP., ACUITY CORP. AND THE UNDERSIGNED STOCKHOLDERS OF ACUITY CORP. SEPTEMBER 10, 1999 2 TABLE OF CONTENTS
Page ---- ARTICLE I THE MERGER......................................................................................... 1 1.1 The Merger...................................................................................... 1 1.2 Closing; Effective Time......................................................................... 2 1.3 Effect of the Merger............................................................................ 2 1.4 Certificate of Incorporation; Bylaws............................................................ 2 1.5 Directors and Officers.......................................................................... 2 1.6 Effect on Capital Stock......................................................................... 2 1.7 Surrender of Certificates....................................................................... 5 1.8 No Further Ownership Rights in Target Capital Stock............................................. 7 1.9 Lost, Stolen or Destroyed Certificates.......................................................... 7 1.10 Tax Consequences............................................................................... 7 1.11 Exemption from Registration.................................................................... 8 1.12 Taking of Necessary Action; Further Action..................................................... 8 ARTICLE II REPRESENTATIONS AND WARRANTIES OF TARGET.......................................................... 8 2.1 Organization, Standing and Power................................................................ 8 2.2 Capital Structure............................................................................... 9 2.3 Authority....................................................................................... 10 2.4 Financial Statements............................................................................ 10 2.5 Absence of Certain Changes...................................................................... 11 2.6 Absence of Undisclosed Liabilities.............................................................. 11 2.7 Accounts Receivable............................................................................. 11 2.8 Litigation...................................................................................... 12 2.9 Restrictions on Business Activities............................................................. 12 2.10 Governmental Authorization..................................................................... 12 2.11 Title to Property.............................................................................. 12 2.12 Intellectual Property.......................................................................... 13 2.13 Environmental Matters.......................................................................... 13 2.14 Taxes.......................................................................................... 14 2.15 Employee Benefit Plans......................................................................... 16 2.16 Employees and Consultants...................................................................... 18 2.17 Related-Party Transactions..................................................................... 19 2.18 Insurance...................................................................................... 20 2.19 Compliance with Laws........................................................................... 20 2.20 Brokers' and Finders' Fees..................................................................... 20 2.21 Voting Agreement; Irrevocable Proxies.......................................................... 20 2.22 Vote Required.................................................................................. 20 2.23 Trade Relations................................................................................ 20 2.24 Customers and Suppliers........................................................................ 20 2.25 Material Contracts............................................................................. 21 2.26 No Breach of Material Contracts................................................................ 22 2.27 Third-Party Consents........................................................................... 22
i 3 2.28 Minute Books................................................................................... 22 2.29 Complete Copies of Materials................................................................... 23 2.30 Year 2000 Compliance........................................................................... 23 2.32 Representations Complete....................................................................... 23 ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB........................................ 23 3.1 Organization, Good Standing and Qualification................................................... 24 3.2 Capitalization and Voting Rights................................................................ 24 3.3 Subsidiaries.................................................................................... 25 3.4 Authority....................................................................................... 25 3.5 Litigation...................................................................................... 26 3.6 Proprietary Information and Employee Stock Purchase Agreements.................................. 26 3.7 Patents and Trademarks.......................................................................... 26 3.8 Compliance with Other Instruments............................................................... 27 3.9 Agreements; Action.............................................................................. 27 3.10 Related Party Transactions..................................................................... 27 3.11 Permits........................................................................................ 28 3.12 Environmental and Safety Laws.................................................................. 28 3.13 Manufacturing and Marketing Rights............................................................. 28 3.14 Registration Rights............................................................................ 28 3.15 Title to Property and Assets................................................................... 28 3.16 Financial Statements........................................................................... 28 3.17 Changes........................................................................................ 29 3.18 Employee Benefit Plans......................................................................... 30 3.19 Tax Returns, Payments and Elections............................................................ 31 3.20 Insurance...................................................................................... 31 3.21 Labor Agreements and Actions................................................................... 32 3.22 Real Property Holding Company.................................................................. 32 3.23 Representations Complete....................................................................... 32 3.24 Brokers' and Finders' Fees..................................................................... 32 ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME............................................................... 32 4.1 Conduct of Business of Target and Acquiror...................................................... 32 4.2 Conduct of Business of Target................................................................... 33 4.3 Notices......................................................................................... 35 ARTICLE V ADDITIONAL AGREEMENTS.............................................................................. 36 5.1 No Solicitation................................................................................. 36 5.2 Preparation of Information Statement............................................................ 36 5.3 Stockholders Meeting or Consent Solicitation.................................................... 37 5.4 Access to Information........................................................................... 37 5.5 Confidentiality................................................................................. 37 5.6 Public Disclosure............................................................................... 38 5.7 Consents........................................................................................ 38 5.8 Update Disclosure; Breaches..................................................................... 38 5.9 Voting Agreement................................................................................ 38
ii 4 5.10 Legal Requirements............................................................................. 41 5.11 Tax-Free Reorganization........................................................................ 41 5.12 Stock Options.................................................................................. 41 5.13 Fairness Hearing............................................................................... 42 5.14 Escrow Agreement............................................................................... 42 5.15 Additional Agreements; Best Efforts............................................................ 42 5.16 Employee Benefits.............................................................................. 42 5.17 Market Stand-Off Agreement..................................................................... 42 5.18 Delivery of Financial Information.............................................................. 43 5.19 Koz Inc. Stock Distribution.................................................................... 43 ARTICLE VI CONDITIONS TO THE MERGER.......................................................................... 44 6.1 Conditions to Obligations of Each Party to Effect the Merger.................................... 44 6.2 Additional Conditions to Obligations of Target.................................................. 45 6.3 Additional Conditions to the Obligations of Acquiror............................................ 45 ARTICLE VII TERMINATION, EXPENSES, AMENDMENT AND WAIVER...................................................... 47 7.1 Termination..................................................................................... 47 7.2 Effect of Termination........................................................................... 48 7.3 Expenses and Termination Fees................................................................... 48 7.4 Amendment....................................................................................... 48 7.5 Extension; Waiver............................................................................... 48 ARTICLE VIII ESCROW AND INDEMNIFICATION...................................................................... 48 8.1 Survival of Representations, Warranties and Covenants........................................... 48 8.2 Indemnity....................................................................................... 49 8.3 Escrow Fund..................................................................................... 49 8.4 Damage Threshold................................................................................ 50 8.5 Escrow Period................................................................................... 50 8.6 Claims upon Escrow Fund......................................................................... 50 8.7 Objections to Claims............................................................................ 51 8.8 Resolution of Conflicts; Arbitration............................................................ 51 8.9 Stockholders' Agent............................................................................. 52 8.10 Distribution Upon Termination of Escrow Period................................................. 53 8.11 Actions of the Stockholders' Agent............................................................. 53 8.12 Third-Party Claims............................................................................. 53 8.13 Maximum Liability and Remedies................................................................. 54 ARTICLE IX GENERAL PROVISIONS................................................................................ 54 9.1 Notices......................................................................................... 54 9.2 Interpretation.................................................................................. 55 9.3 Counterparts.................................................................................... 56 9.4 Entire Agreement; No Third Party Beneficiaries.................................................. 56 9.5 Severability.................................................................................... 56 9.6 Remedies Cumulative............................................................................. 56 9.7 Governing Law................................................................................... 56 9.8 Assignment...................................................................................... 57
iii 5 9.9 Rules of Construction........................................................................... 57
SCHEDULES Target Disclosure Letter Acquiror Disclosure Letter Option Schedule iv 6 EXHIBITS Exhibit A - Certificate of Merger Exhibit B - Compensation Agreement Exhibit C - Escrow Agreement Exhibit D - Acquiror's Legal opinion Exhibit E - Target's Legal opinion Exhibit F - FIRPTA Notice Exhibit G - Target Notice to Internal Revenue Service Exhibit H Restated Certificate of Incorporation Exhibit I Investors Rights Agreement v 7 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of September 10, 1999, by and among Quintus Corporation, a Delaware corporation ("Acquiror"), Ribeye Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Acquiror ("Merger Sub"), Acuity Corp., a Delaware corporation ("Target"), Andrew Busey as "Stockholders' Representative," and each of the undersigned affiliates of Target (each an "Affiliate" and collectively the "Affiliates"). RECITALS A. The Boards of Directors of Target, Acquiror and Merger Sub believe it is in the best interests of their respective companies and the stockholders of their respective companies that Target and Merger Sub combine into a single company through the statutory merger of Merger Sub with and into Target (the "Merger"). B. Pursuant to the Merger, among other things, each outstanding share of capital stock of Target ("Target Capital Stock"), shall be converted into shares of capital stock of Acquiror ("Acquiror Capital Stock"), as set forth below. C. Target, Acquiror, Merger Sub and the Affiliates desire to make certain representations and warranties and other agreements in connection with the Merger. D. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"), and to cause the Merger to qualify as a reorganization under the provisions of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code. F. Concurrent with the execution of this Agreement and as an inducement to Acquiror to enter into this Agreement, certain of the stockholders of Target are entering into an agreement to vote the shares of Target's Capital Stock owned by such person to approve the Merger and against any competing proposals. NOW, THEREFORE, in consideration of the covenants and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I. THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement, the Certificate of Merger attached hereto as Exhibit A (the "Certificate of Merger") and the applicable provisions of the Delaware General Corporation Law ("Delaware Law"), Merger Sub shall be merged with and into Target, the separate corporate existence of Merger Sub shall cease and Target shall continue as the 8 surviving corporation. Target as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." 1.2 Closing; Effective Time. The closing of the transactions contemplated hereby (the "Closing") shall take place as soon as practicable after the satisfaction or waiver of each of the conditions set forth in Article VI hereof or at such other time as the parties hereto agree (the date on which the Closing shall occur, the "Closing Date"). The Closing shall take place at the offices of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian in Menlo Park, California, or at such other location as the parties hereto agree. On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing the Certificate of Merger, together with the required officers' certificates, with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of Delaware Law (the time and date of such filing being the "Effective Time" and the "Effective Date," respectively). 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of Target and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of Target and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Certificate of Incorporation; Bylaws. (a) At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by Delaware Law and such Certificate of Incorporation. (b) The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended. 1.5 Directors and Officers. At the Effective Time, the directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, to hold office until such time as such directors resign, are removed or their respective successors are duly elected or appointed and qualified. The officers of Merger Sub immediately prior to the Effective Time shall be the officers of the Surviving Corporation, to hold office until such time as such officers resign, are removed or their respective successors are duly elected or appointed and qualified. 1.6 Effect on Capital Stock. By virtue of the Merger and without any action on the part of Acquiror, Merger Sub, Target or the holders of any of Target's securities: (a) Conversion of Target Capital Stock. The "Total Consideration" shall equal the number of shares of Acquiror Capital Stock to be issued pursuant to this Section 1.6 plus the number of shares of Acquiror Capital Stock to be reserved for issuance upon exercise of unexpired and unexercised (whether vested or unvested and assuming the satisfaction of any conditions to exercisability, including, without limitation, the passage of time) Target Options (the "Target Option Reserve") and Target Warrants (each as defined below) following 2 9 consummation of the Merger. The Total Consideration shall equal the product of (i) 0.2195121 and (ii) the sum of (A) the total number of outstanding shares of Acquiror Capital Stock on an as-if-converted basis ("Acquiror Outstanding Stock") as of the Exchange Ratio Date (as defined below) and (B) the total number of shares of Acquiror Capital Stock issuable pursuant to the exercise of outstanding options or other rights to acquire by purchase, exchange, conversion or otherwise Acquiror Stock ("Acquiror Options") and outstanding warrants for Acquiror Stock ("Acquiror Warrants") as of the Exchange Ratio Date. The "Total Target Consideration" shall equal the product of (0.985) and the Total Consideration. The "Financial Advisor Fee" shall equal the product of (0.015) and the Total Consideration. The "Exchange Ratio" shall equal that number derived by dividing the Total Target Consideration by the sum of the total number of shares of Target Common Stock (as defined below) outstanding on an as-if-converted basis ("Target Outstanding Stock") as of the Exchange Ratio Date and the number of shares of Target Common Stock issuable pursuant to the exercise of the Target Options and Target Warrants outstanding as of the Exchange Ratio Date. The Exchange Ratio Date shall be the business day immediately preceding the Effective Date. At the Effective Time, each share of Target Capital Stock issued and outstanding immediately prior to the Effective Time (other than (i) shares of Target Capital Stock to be cancelled pursuant to Section 1.6(b) and (ii) shares of Target Capital Stock held by persons who have not approved by vote or written consent the Merger and with respect to which shares such persons remain entitled to exercise dissenters' rights in accordance with Section 262 of the Delaware Law (collectively, the "Dissenting Shares")) will be converted automatically into the right to receive shares of Acquiror Capital Stock as follows: - each share of common stock of Target ("Target Common Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Common Stock equal to the Exchange Ratio; - each share of Series A Preferred Stock of Target ("Target Series A Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Series G-1 Preferred Stock equal to the Exchange Ratio; - each share of Series B-1 Preferred Stock of Target ("Target Series B-1 Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Series G-2 Preferred Stock equal to the Exchange Ratio - each share of Series B-2 Preferred Stock Preferred Stock of Target ("Target Series B-2 Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Series G-3 Preferred Stock equal to the Exchange Ratio - each share of Series C Preferred Stock of Target ("Target Series C Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Series G-4 Preferred Stock equal to the Exchange Ratio; 3 10 - each share of Series D Preferred Stock of Target ("Target Series D Stock") and Series E Preferred Stock of Target ("Target Series E Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Series G-5 Preferred Stock equal to the Exchange Ratio; and - each share of Series F Preferred Stock of Target ("Target Series F Stock") issued and outstanding will be converted automatically into the right to receive that fraction of one share of Acquiror Series G-6 Preferred Stock equal to the Exchange Ratio. At the Effective Time, the Acquiror shall deliver that number of shares of Acquiror Series G-3 Preferred Stock equal to the Financial Advisor Fee to Dain Rauscher Wessels, financial advisor to Target, pursuant to a compensation agreement attached hereto as Exhibit B ("Compensation Agreement"). The rights, preferences and privileges of the Acquiror Series G Preferred Stock shall be as stated in the Acquiror Restated Certificate of Incorporation, the form of which is attached hereto as Exhibit H (the "Acquiror Restated Certificate"). (b) Cancellation of Target Capital Stock Owned by Acquiror or Target. At the Effective Time, all shares of Target Capital Stock that are owned by Target as treasury stock, each share of Target Capital Stock owned by Acquiror or any direct or indirect wholly owned subsidiary of Acquiror or of Target immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (c) Target Stock Option Plans. At the Effective Time, the Target 1995 Stock Option Plan, as amended (the "Target Stock Option Plan") shall be terminated and all options to purchase Target Common Stock ("Target Options") then outstanding under the Target Stock Option Plan shall be converted into options to purchase shares of Acquiror Common Stock in accordance with Section 5.12. (d) Target Warrants. At the Effective Time, each outstanding warrant to purchase shares of Target Capital Stock (the "Target Warrants") shall be assumed by Acquiror. Each such warrant so assumed by Acquiror under this Agreement shall continue to have, and be subject to, the same terms and conditions as those that existed immediately prior to the Effective Time, except that (i) such warrant shall be exercisable for that number of whole shares of Acquiror Capital Stock of such class and series as set forth in Section 1.6(a) equal to the product of the number of shares of Target Capital Stock that were issuable upon exercise of such option immediately prior to the Effective Time multiplied by the Exchange Ratio and rounded down to the nearest whole number of shares of Acquiror Capital Stock, and (ii) the per share exercise price for the shares of Acquiror Capital Stock issuable upon exercise of such assumed warrant shall be equal to the quotient determined by dividing the exercise price per share of Target Capital Stock at which such warrant was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. (e) Capital Stock of Merger Sub. At the Effective Time, each share of Common Stock of Merger Sub ("Merger Sub Common Stock"), issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly 4 11 issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Acquiror Common Stock or Target Capital Stock), reorganization, recapitalization or other like change with respect to Acquiror Common Stock or Target Capital Stock occurring after the date hereof and prior to the Effective Time. (g) Fractional Shares. No fraction of a share of Acquiror Capital Stock will be issued, but in lieu thereof each holder of shares of Target Capital Stock who would otherwise be entitled to a fraction of a share of Acquiror Capital Stock (after aggregating all fractional shares of Acquiror Capital Stock to be received by such holder) shall receive from Acquiror an amount of cash (rounded to the nearest whole cent) equal to the product of (i) such fraction, multiplied by (ii) the fair market value of one share of Acquiror Common Stock on the Closing Date, as determined by the Acquiror's Board of Directors. (h) Dissenters' Rights. Any Dissenting Shares shall not be converted into Acquiror Capital Stock but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to Delaware Law. Target agrees that, except with the prior written consent of Acquiror, or as required under Delaware Law, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such purchase demand. Each holder of Dissenting Shares ("Dissenting Stockholder") who, pursuant to the provisions of Delaware law, becomes entitled to payment of the fair value for shares of Target Capital Stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). If, after the Effective Time, any Dissenting Shares shall lose their status as Dissenting Shares, Acquiror shall issue and deliver, upon surrender by such stockholder of the certificate or certificates representing shares of Target Capital Stock, the number of shares of Acquiror Capital Stock to which such stockholder would otherwise be entitled under this Section 1.6 and the Certificate of Merger less the number of shares allocable to such stockholder that have been or will be deposited in the Escrow Fund (as defined below) in respect of such shares of Acquiror Capital Stock pursuant to Section 1.7(b) and Article VIII hereof. 1.7 Surrender of Certificates. (a) Acquiror to Provide Common Stock and Cash. Promptly after the Effective Time, Acquiror shall make available in accordance with this Article I, through such reasonable procedures as Acquiror may adopt, (i) the shares of Acquiror Capital Stock issuable pursuant to Section 1.6 in exchange for shares of Target Capital Stock outstanding immediately prior to the Effective Time less the number of shares of Acquiror Capital Stock to be deposited into an escrow fund (the "Escrow Fund") pursuant to the requirements of Article VIII hereof and (ii) cash in an amount sufficient to permit payment of cash in lieu of fractional shares pursuant to Section 1.6(g). 5 12 (b) Exchange Procedures. Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record ("Former Target Stockholders") of a certificate or certificates (the "Certificates") which immediately prior to the Effective Time represented outstanding shares of Target Capital Stock, whose shares were converted into the right to receive shares of Acquiror Capital Stock (and cash in lieu of fractional shares) pursuant to Section 1.6, (i) a letter of transmittal and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Acquiror Capital Stock (and cash in lieu of fractional shares). Upon surrender of a Certificate for cancellation to Acquiror or such agent or agents as may be appointed by Acquiror, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of Acquiror Capital Stock less the number of shares of Acquiror Capital Stock to be deposited in the Escrow Fund on such holder's behalf pursuant to Article VIII hereof and payment in lieu of fractional shares which such holder has the right to receive pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be canceled. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Target Capital Stock will be deemed from and after the Effective Time, for all corporate purposes, including the payment of dividends, to evidence the ownership of the number of full shares of Acquiror Capital Stock into which such shares of Target Capital Stock shall have been so converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.6. As soon as practicable after the Effective Time, and subject to and in accordance with the provisions of Section 8.3 hereof, Acquiror shall cause to be delivered to the Escrow Agent (as defined in Section 8.3 hereof) a certificate or certificates representing the Total Escrow Shares (as defined below) which shall be registered in the name of the Escrow Agent as nominee for the holders of Certificates cancelled pursuant to this Section 1.7. The "Total Escrow Shares" shall be that number of shares of Acquiror Capital Stock to be obtained by Former Target Stockholders in the Merger equal to ten percent (10%) of the Total Target Consideration (excluding Target Option Reserve). Such shares shall be beneficially owned by such holders and shall be held in escrow and shall be available to compensate Acquiror for certain damages as provided in Article VIII. To the extent not used for such purposes, such shares shall be released, all as provided in Article VIII hereof. (c) Distributions with Respect to Unexchanged Shares. No dividends or other distributions with respect to Acquiror Capital Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Acquiror Capital Stock represented thereby until the holder of record of such Certificate surrenders such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Acquiror Capital Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of any such dividends or other distributions with a record date after the Effective Time which would have been previously payable (but for the provisions of this Section 1.7(c)) with respect to such shares of Acquiror Capital Stock. (d) Transfers of Ownership. If any certificate for shares of Acquiror Capital Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the Certificate so surrendered is properly endorsed and otherwise in proper form for transfer and that the person 6 13 requesting such exchange will have paid to Acquiror or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Acquiror Capital Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of Acquiror or any agent designated by it that such tax has been paid or is not payable. (e) No Liability. Notwithstanding anything to the contrary in this Section 1.7, neither the Surviving Corporation nor any party hereto shall be liable to any person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. (f) Dissenting Shares. The provisions of this Section 1.7 shall also apply to Dissenting Shares that lose their status as such, except that the obligations of Acquiror under this Section 1.7 shall commence on the date of loss of such status and the holder of such shares shall be entitled to receive in exchange for such shares the number of shares of Acquiror Capital Stock to which such holder is entitled pursuant to Section 1.6 hereof. 1.8 No Further Ownership Rights in Target Capital Stock. After the Effective Time, there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Target Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates (other than certificates representing Dissenting Shares) are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates shall have been lost, stolen or destroyed, the Acquiror shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Acquiror Capital Stock (and cash in lieu of fractional shares) as may be required pursuant to Section 1.6; provided, however, that if the number of shares represented by a lost Certificate exceeds 10,000, Acquiror may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Acquiror or the Surviving Corporation with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.10 Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368 of the Code. No party shall take any action which would, to such party's knowledge, cause the Merger to fail to qualify as a reorganization within the meaning of Section 368 of the Code. 1.11 Exemption from Registration. The parties hereto expect that the shares of Acquiror Capital Stock to be issued in connection with the Merger will be issued in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), by reason of Section 3(a)(10) thereof, and that the issuance of the Acquiror Capital Stock and Acquiror's substitution of Target Option hereunder will be qualified under the securities laws of the State of California pursuant to Section 25121 thereof, after a fairness hearing (the "Fairness Hearing") has been held pursuant to the authority granted by Section 25142 of such law. Each of 7 14 Acquiror, Merger Sub and Target shall use their respective best efforts (a) to file an application for such hearing and qualification as soon as reasonably practicable after the date of this Agreement and (b) to obtain such qualification. 1.12 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Target, the officers and directors of Target and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and shall take, all such lawful and necessary action, so long as such action is not inconsistent with this Agreement or the Transaction Documents (as defined below). ARTICLE II. REPRESENTATIONS AND WARRANTIES OF TARGET Target represents and warrants to Acquiror and Merger Sub that the statements contained in this Article II are true and correct, except as set forth in the disclosure letter delivered by Target to Acquiror prior to the execution and delivery of this Agreement (the "Target Disclosure Letter"). The Target Disclosure Letter shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article II, and the disclosure in any paragraph shall qualify only the corresponding paragraph in this Article II; provided, however, that any item disclosed under any paragraph of the Target Disclosure Letter shall be deemed to be disclosed with respect to every other applicable paragraph if the disclosure in respect of such one paragraph of the Target Disclosure Letter is sufficient on its face to reasonably inform the reader of the Target Disclosure Letter of the information required to be disclosed in respect of other paragraphs of the Target Disclosure Letter. Any reference in this Article II to an agreement being "enforceable" shall be deemed to be qualified to the extent such enforceability is subject to (i) laws of general application relating to bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the availability of specific performance, injunctive relief and other equitable remedies. In the remainder of this Article II, "Target" will be deemed to include (and each representation and warranty will apply separately and collectively to) Target and each of Target's subsidiaries, unless the context otherwise requires. 2.1 Organization, Standing and Power. Target is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Target has the corporate power to own its properties and to carry on its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a Material Adverse Effect (as defined herein) on Target. Target has delivered to Acquiror a true and correct copy of the Certificate of Incorporation and Bylaws or other charter documents, as applicable, of Target, each as amended to date. Target is not in violation of any of the provisions of its Certificate of Incorporation or Bylaws or equivalent organizational documents. Target does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. 8 15 2.2 Capital Structure. The authorized capital stock of Target consists of 20,727,164 shares of Common Stock, 4,900,471 of which are issued and outstanding, and 10,306,127 shares of Preferred Stock, 750,000 shares of which are designated Target Series A Stock, all of which are issued and outstanding, 1,868,994 shares of which are designated Target Series B-1 Stock, all of which are issued and outstanding, 1,305,000 shares of which are designated Target Series B-2 Stock, all of which are issued and outstanding, 2,256,650 shares of Target Series C Stock, all of which are issued and outstanding, 2,500,000 shares of which are designated Target Series D Stock, 2,071,430 of which are issued and outstanding, 1,142,858 shares of which are designated Target Series E Stock, 785,715 of which are issued and outstanding, and 482,625 shares of Target Series F Stock, none of which are issued and outstanding. There are no other outstanding shares of capital stock or voting securities and no outstanding commitments obligating Target to issue any shares of capital stock or voting securities after the date of this Agreement other than pursuant to the exercise of (i) outstanding Target Warrants and (ii) options outstanding as of the date of this Agreement under the Target Stock Option Plan. All outstanding shares of Target Capital Stock are duly authorized, validly issued, fully paid and non-assessable and are free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof, and are not subject to preemptive rights, rights of first refusal, rights of first offer or similar rights created by statute, the Certificate of Incorporation or Bylaws of Target or any agreement to which Target is a party or by which it is bound. As of the date of this Agreement, Target has reserved (i) 10,306,127 shares of Common Stock for issuance upon conversion of the Preferred Stock, and (ii) 4,950,000 shares of Common Stock for issuance to employees, directors and consultants pursuant to the Target Stock Option Plan, of which 3,030,794 shares are subject to outstanding, unexercised options, (iii) 1,016,501 shares of Common Stock for issuance upon exercise of outstanding Target Warrants and (iv) 20,080 shares of Target Series E Stock for issuance upon exercise of outstanding Target Warrants. Except for (i) the rights created pursuant to this Agreement and (ii) Target's right to repurchase any unvested shares under the Target Stock Option Plan, there are no other options, warrants, calls, rights, commitments or agreements of any character to which Target is a party or by which it is bound obligating Target to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of Target Capital Stock or obligating Target to grant, extend, accelerate the vesting of, change the price of, or otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. There are no contracts, commitments or agreements relating to the voting, purchase or sale of Target Capital Stock (i) between or among Target and any of its stockholders and (ii) to Target's knowledge, among any of Target's stockholders or between any of Target's stockholders and any third party, except for the stockholders delivering Irrevocable Proxies (as defined below). The terms of the Target Stock Option Plan permit the assumption of such Target Stock Option Plan by Acquiror or the substitution of options to purchase Acquiror Common Stock as provided in this Agreement, without the consent or approval of the holders of the outstanding options, the Former Target stockholders, or otherwise and without any acceleration of the exercise schedule or vesting provisions in effect for such options. True and complete copies of all agreements and instruments relating to or issued under the Target Stock Option Plan have been made available to Acquiror, and such agreements and instruments have not been amended, modified or supplemented, and there are no agreements to amend, modify or supplement such agreements or instruments from the form made available to Acquiror. All outstanding Common Stock, Target Series A Stock, Target Series B-1 Stock, Target Series B-2 9 16 Stock, Target Series C Stock, Target Series D Stock, Target Series E Stock and Target Series F Stock was issued in compliance with all applicable federal and state securities laws. 2.3 Authority. (a) Target has all requisite corporate power and authority to enter into this Agreement and the Certificate of Merger (collectively, the "Transaction Documents") and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Target, subject only to the approval of the Merger by Target's stockholders as contemplated by Section 6.2(a). This Agreement and the other Transaction Documents to which Target is a party have been duly executed and delivered by Target and constitute the valid and binding obligations of Target enforceable against Target in accordance with their terms. (b) The execution and delivery of this Agreement and the other Transaction Documents by Target do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (i) any provision of the Certificate of Incorporation or Bylaws of Target, as amended, (ii) any Material Contract (as defined in Section 2.25) to which Target is bound, or (iii) any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target or any of its properties or assets. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality ("Governmental Entity") is required by or with respect to Target in connection with the execution and delivery by Target of this Agreement and the other Transaction Documents to which Target is a party or the consummation of the transactions contemplated hereby or thereby, except for (i) the filing of the Certificate of Merger, together with the required officers' certificates, as provided in Section 1.2; and (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and the securities laws of any foreign country. 2.4 Financial Statements. Target has delivered to Acquiror its audited financial statements (balance sheet, statement of operations, statement of stockholders' equity and statement of cash flows) for the fiscal years ended December 31, 1996, December 31, 1997 and December 31, 1998 and its unaudited financial statements (balance sheet, statement of operations, statement of stockholders' equity and statement of cash flows) on a consolidated basis as at, and for the 7-month period ended July 31, 1999 (collectively, the "Target Financial Statements"). The Target Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") (except that the unaudited financial statements do not have notes thereto and subject to year-end adjustments) applied on a consistent basis throughout the periods indicated and with each other. The Target Financial Statements fairly present the financial condition and operating results of Target as of the dates, and for the periods, indicated therein, subject; in the case of the unaudited financing statements, to normal year-end audit 10 17 adjustments. Target maintains a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.5 Absence of Certain Changes. Since July 31, 1999, (the "Target Balance Sheet Date"), Target has conducted its business in the ordinary course consistent with past practice and there has not occurred: (i) any change, event or condition (whether or not covered by insurance) that has resulted in, or might reasonably be expected to result in, a Material Adverse Effect (as defined in Section 9.2) on Target; (ii) any acquisition, sale or transfer of any material asset of Target; (iii) any change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Target or any revaluation by Target of any of its assets; (iv) any declaration, setting aside, or payment of a dividend or other distribution with respect to the shares of Target Capital Stock, or any direct or indirect redemption, purchase or other acquisition by Target of any of its shares of Target Capital Stock; (v) any Material Contract entered into by Target, other than as provided to Acquiror, or any material amendment or termination of, or default under, any Material Contract to which Target is a party or by which it is bound; (vi) any amendment or change to the Certificate of Incorporation or Bylaws of Target; (vii) any increase in or modification of the compensation or benefits payable or to become payable by Target to any of its directors, employees or consultants, (viii) capital expenditures or capital commitments by Target exceeding $25,000 individually or $100,000 in the aggregate; (ix) destruction of, damage to or loss of any material assets, business or customer of Target (whether or not covered by insurance); (x) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; or (xi) any negotiation or agreement by Target to do any of the things described in the preceding clauses (i) through (xi) (other than negotiations with Acquiror and its representatives regarding the transactions contemplated by this Agreement). 2.6 Absence of Undisclosed Liabilities. Target has no material obligations or liabilities of any nature (matured or unmatured, fixed or contingent) other than (i) those set forth or adequately provided for in the Balance Sheet for the period ended July 31, 1999 (the "Target Balance Sheet"), and (ii) those incurred in connection with the execution of this Agreement. 2.7 Accounts Receivable. The accounts receivable shown on the Target Balance Sheet arose in the ordinary course of business and have been collected or are collectible in the book amounts thereof, less the allowance for doubtful accounts and returns provided for in such balance sheet. To Target's knowledge, allowances for doubtful accounts and returns are adequate and have been prepared in accordance with the past practices of Target. The accounts receivable of Target arising after the date of the Target Balance Sheet and prior to the date hereof arose, in the ordinary course of business and have been collected or are collectible in the book amounts thereof, less allowances for doubtful accounts and returns determined in accordance with the past practices of Target. None of the accounts receivable are subject to any material claim of offset or recoupment, or counterclaim and Target has no knowledge of any specific facts that would be reasonably likely to give rise to any such claim. No material amount of accounts receivable are contingent upon the performance by Target of any obligation. No agreement for deduction or discount has been made with respect to any accounts receivable. 2.8 Litigation. There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or 11 18 domestic, or, to the knowledge of Target, threatened against Target or any of its properties or officers or directors (in their capacities as such), nor does Target have any reason to expect that any such activity, threat or allegation will be forthcoming. There is no judgment, decree or order against Target, or, to the knowledge of Target, any of its directors or officers (in their capacities as such), that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on Target. All litigation to which Target is a party (or, to the knowledge of Target, threatened to become a party) is disclosed in the Target Disclosure Letter. Target does not have any plans to initiate any litigation, arbitration or other proceeding against any third party. 2.9 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon Target that has or could reasonably be expected to have the effect of prohibiting or impairing any current business practice of Target, any acquisition of property by Target or the conduct of business by Target as currently conducted. 2.10 Governmental Authorization. Target has obtained each federal, state, county, local or foreign governmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Target currently operates or holds any interest in any of its properties or (ii) that is required for the operation of Target's business or the holding of any such interest ((i) and (ii) herein collectively called "Target Authorizations"), and all of such Target Authorizations are in full force and effect, except where the failure to obtain or have any such Target Authorizations could not reasonably be expected to have a Material Adverse Effect on Target. 2.11 Title to Property. Target has good and marketable title to all of its properties, interests in properties and assets, real and personal, necessary for the conduct of its business as presently conducted or which are reflected in the Target Balance Sheet or acquired after the Target Balance Sheet Date (except properties, interests in properties and assets sold or otherwise disposed of in the ordinary course of business since the Target Balance Sheet Date), or with respect to leased properties and assets, valid leasehold interests therein, in each case free and clear of all mortgages, liens, pledges, charges or encumbrances of any kind or character, except (i) the lien of current taxes not yet due and payable, (ii) liens arising by operation of law or statutory liens, (iii) liens securing debt that are reflected on the Target Balance Sheet and (iv) liens which do not materially detract from or interfere with the use of the properties subject thereto. All material plants, property and equipment of Target that are used in the operations of its business are in good operating condition and repair. All properties used in the operations of Target are reflected in the Target Balance Sheet to the extent generally accepted accounting principles require the same to be reflected. The Target Disclosure Letter identifies each parcel of real property owned by Target. 2.12 Intellectual Property. (a) Target is the sole and exclusive owner of all Target Intellectual Property (defined below) free of all contingent and noncontingent liens, restrictions, interests, rights of reversion or termination, and all other encumbrances of any nature. The conduct of Target's business as currently conducted will not infringe, misappropriate or violate any 12 19 Intellectual Property (defined below) of others. All Target Intellectual Property is free from any challenge (or threat thereof) and Target is not aware of any specific basis therefor. With respect to patent rights, moral rights and Mark rights (defined below), the foregoing representations and warranties of this paragraph are made only to Target's knowledge. Target has not licensed any Target Intellectual Property to any third party, except for object code licenses in the ordinary course of business. Target is not a party to any license of Intellectual Property belonging to any third party, except licenses for readily available commercial software. (b) All Target Intellectual Property that is the subject of any application, registration or issuance with or from any governmental entity is identified on the Target Disclosure Letter. All such applications, registrations and issuances have been properly maintained. Target has adequately protected all other Target Intellectual Property through the use of confidentiality agreements and otherwise and Target is not aware of any use, exercise or exploitation of any Target Intellectual Property, except as authorized by Target. Target has not disclosed any source code to any third party. (c) Each current and former employee and contractor of Target has executed and delivered (and to Target's knowledge, is in compliance with) an enforceable agreement in substantially the form of Target's standard Proprietary Information and Inventions Agreement (in the case of an employee) or Target's standard Consulting Agreement (in the case of a contractor) (which agreement provides assignment of all title and rights to any Target Intellectual Property conceived or developed thereunder or otherwise in connection with his or her consulting or employment). (d) "Intellectual Property" means patent rights; trade name, trademark, service mark and similar rights ("Mark" rights); copyrights; mask work rights; sui generis database rights; trade secret rights; moral rights; and all other intellectual and industrial property rights of any sort throughout the world, and all applications, registrations, issuances and the like with respect thereto. "Target Intellectual Property" means all Intellectual Property that has been or is owned by Target, or used in Target's business as currently conducted. 2.13 Environmental Matters. To Target's knowledge, Target is and has at all times operated its business in material compliance with all Environmental Laws and no material expenditures are or will be required in order to comply with such Environmental Laws. "Environmental Laws" means all applicable statutes, rules, regulations, ordinances, orders, decrees, judgments, permits, licenses, consents, approvals, authorizations, and governmental requirements or directives or other obligations lawfully imposed by governmental authority under federal, state or local law pertaining to the protection of the environment, protection of public health, protection of worker health and safety, the treatment, emission and/or discharge of gaseous, particulate and/or effluent pollutants, and/or the handling of hazardous materials, including without limitation, the Clean Air Act, 42 U.S.C. Section 7401, et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 U.S.C. Section 9601, et seq., the Federal Water Pollution Control Act, 33 U.S.C. Section 1321, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. ("RCRA"), and the Toxic Substances Control Act, 15 U.S.C. Section 2601, et seq. 13 20 2.14 Taxes. (a) All Tax returns, statements, reports, declarations and other forms and documents (including without limitation estimated Tax returns and reports and material information returns and reports) required to be filed with any Tax authority with respect to any Taxable period ending on or before the Closing, by or on behalf of Target (collectively, "Tax Returns" and individually a "Tax Return"), have been or will be completed and filed when due (including any extensions of such due date) and all amounts shown due on such Tax Returns on or before the Effective Time have been or will be paid on or before such date. The Target Financial Statements (i) fully accrue all actual and contingent liabilities for Taxes with respect to all periods through the Target Balance Sheet Date and Target has not and will not incur any Tax liability in excess of the amount reflected on the Target Balance Sheet included in the Target Financial Statements with respect to such periods (excluding any amount thereof that reflects a timing difference between book and taxable income) and (ii) properly accrues in accordance with GAAP all material liabilities for Taxes payable after Target Balance Sheet Date with respect to all transactions and events occurring on or prior to such date. All information set forth in the notes to the Target Financial Statements relating to Tax matters is true, complete and accurate in all material respects. No material Tax liability since the Target Balance Sheet Date has been incurred by Target other than in the ordinary course of business, and adequate provision has been made by Target for all Taxes since that date in accordance with GAAP on at least a quarterly basis. (b) Target has previously provided or made available to Acquiror true and correct copies of all income, franchise, and sales Tax Returns, and, as reasonably requested by Acquiror, prior to or following the date hereof, presently existing information statements and reports. Target has withheld and paid to the applicable financial institution or Tax authority all amounts required to be withheld. To the best knowledge of Target, no Tax Returns filed with respect to Taxable years of Target through the Taxable year ended December 31, 1995 in the case of the United States, have been examined and closed. Target (or any member of any affiliated or combined group of which Target has been a member) has not granted any extension or waiver of the limitation period applicable to any Tax Returns that is still in effect. There is no material claim, audit, action, suit, proceeding, or (to the knowledge of Target) investigation now pending or (to the knowledge of Target) threatened against or with respect to Target in respect of any Tax or assessment. No notice of deficiency or similar document of any Tax authority has been received by Target, and there are no liabilities for Taxes (including liabilities for interest, additions to Tax and penalties thereon and related expenses) with respect to the issues that have been raised (and are currently pending) by any Tax authority that could, if determined adversely to Target, materially and adversely affect the liability of Target for Taxes. There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of Target. Target has never been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code. Target is in full compliance with all the terms and conditions of any Tax exemptions or other Tax-sharing agreement or order of a foreign government and the consummation of the Merger will not have any adverse effect on the continued validity and effectiveness of any such Tax exemption or other Tax-sharing agreement or order. Neither Target nor any person on behalf of Target has entered into or will enter into any agreement or consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state, local or foreign income tax law) or agreed to have 14 21 Section 341(f)(2) of the Code (or any corresponding provision of state, local or foreign income tax law) apply to any disposition of any asset owned by Target. None of the assets of Target is property that Target is required to treat as being owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Code. None of the assets of Target directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. None of the assets of Target is "tax-exempt use property" within the meaning of Section 168(h) of the Code. Target has not made and will not make a deemed dividend election under Treas. Reg. Section 1.1502-32(f)(2) or a consent dividend election under Section 565 of the Code. Target has never been a party to any transaction intended to qualify under Section 355 of the Internal Revenue Code or any corresponding provision of state law. Target has not participated in (and will not participate in) an international boycott within the meaning of Section 999 of the Code. No Target stockholder is other than a United States person within the meaning of the Code. Target does not have and has not had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States of America and such foreign country and Target has not engaged in a trade or business within any foreign country. Target has never elected to be treated as an S-corporation under Section 1361 of the Code or any corresponding provision of federal or state law. All material elections with respect to Target's Taxes made during the fiscal years ending, December 31, 1998, 1997 and 1996 are reflected on the Target Tax Returns for such periods, copies of which have been provided or made available to Acquiror. After the date of this Agreement, no material election with respect to Taxes will be made without the prior written consent of Acquiror, which consent will not be unreasonably withheld or delayed. Target is not party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. Target is not currently and never has been subject to the reporting requirements of Section 6038A of the Code. There is no agreement, contract or arrangement to which Target is a party that could, individually or collectively, result in the payment of any amount that would not be deductible by reason of Sections 280G (as determined without regard to Section 280G(b)(4), 162 (other than 162(a)) or 404 of the Code. Target is not a party to or bound by any Tax indemnity, Tax sharing or Tax allocation agreement (whether written or unwritten or arising under operation of federal law as a result of being a member of a group filing consolidated Tax returns, under operation of certain state laws as a result of being a member of a unitary group, or under comparable laws of other states or foreign jurisdictions) which includes a party other than Target nor does Target owe any amount under any such Agreement. Target has previously provided to Acquiror true and correct copies of all income, franchise, and sales Tax Returns, and, as reasonably requested by Acquiror, prior to or following the date hereof, presently existing information statements and reports. Target is not, and has not been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Other than by reason of the Merger, Target has not been and will not be required to include any material adjustment in Taxable income for any Tax period (or portion thereof) pursuant to Section 481 or 263A of the Code or any comparable provision under state or foreign Tax laws as a result of transactions, events or accounting methods employed prior to the Merger. (c) For purposes of this Agreement, the following terms have the following meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any and all taxes including, without limitation, (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, value added, 15 22 net worth, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Entity (a "Tax authority") responsible for the imposition of any such tax (domestic or foreign), (ii) any liability for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any Taxable period or as the result of being a transferee or successor thereof and (iii) any liability for the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other person. As used in this Section 2.14, the term "Target" means Target and any entity included in, or required under GAAP to be included in, any of the Target Financial Statements. 2.15 Employee Benefit Plans. (a) For all purposes under this Section 2.15 "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) that, together with Target, is treated as a single employer under Section 4001(b) of ERISA or Section 414 of the Code. Except for the plans and agreements listed in Schedule 2.15 (collectively, the "Plans"), Target and its ERISA Affiliates do not maintain, are not a party to, do not contribute to and are not obligated to contribute to, and are employees or former employees of Target and its ERISA Affiliates and their dependents or survivors do not receive benefits under, any of the following (whether or not set forth in a written document): (i) Any employee benefit plan, as defined in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii) Any bonus, deferred compensation, incentive, restricted stock, stock purchase, stock option, stock appreciation right, phantom stock, supplemental pension, executive compensation, cafeteria benefit, dependent care, director or employee loan, fringe benefit, sabbatical, severance, termination pay or similar plan, program, policy, agreement or arrangement; or (iii) Any plan, program, agreement, policy, commitment or other arrangement relating to the provision of any benefit described in section 3(1) of ERISA to former employees or directors or to their survivors, other than procedures intended to comply with the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or applicable state law. (b) Neither Target nor any ERISA Affiliate has, since January 1, 1993, terminated, suspended, discontinued contributions to or withdrawn from any employee pension benefit plan, as defined in section 3(2) of ERISA, including (without limitation) any multiemployer plan, as defined in section 3(37) of ERISA. (c) Target has provided to Acquiror complete, accurate and current copies of each of the following: (i) The text (including amendments) of each of the Plans, to the extent reduced to writing; 16 23 (ii) A summary of each of the Plans, to the extent not previously reduced to writing; (iii) With respect to each Plan that is an employee benefit plan (as defined in section 3(3) of ERISA), the following: (1) The most recent summary plan description, as described in section 102 of ERISA; (2) Any summary of material modifications that has been distributed to participants but has not been incorporated in an updated summary plan description furnished under Subparagraph (1) above; and (3) The annual report, as described in section 103 of ERISA, and (where applicable) actuarial reports, for the three most recent plan years for which an annual report or actuarial report has been prepared; and (iv) With respect to each Plan that is intended to qualify under section 401(a) of the Code the most recent determination letter concerning the plan's qualification under section 401(a) of the Code, as issued by the Internal Revenue Service, and any subsequent determination letter application. (d) With respect to each Plan that is an employee benefit plan (as defined in section 3(3) of ERISA), the requirements of ERISA applicable to such Plan have been satisfied in all material respects. (e) With respect to each Plan that is subject to COBRA, the requirements of COBRA applicable to such Plan have been satisfied in all material respects. (f) With respect to each Plan that is subject to the Family Medical Leave Act of 1993, as amended, the requirements of such Act applicable to such Plan have been satisfied in all material respects. (g) Each Plan that is intended to qualify under section 401(a) of the Code meets the requirements for qualification under section 401(a) of the Code and the regulations thereunder, except to the extent that such requirements may be satisfied by adopting retroactive amendments under section 401(b) of the Code and the regulations thereunder. Each such Plan has been administered in accordance with its terms (or, if applicable, such terms as will be adopted pursuant to a retroactive amendment under section 401(b) of the Code) and the applicable provisions of ERISA and the Code and the regulations thereunder. (h) Neither Target nor any ERISA Affiliate has any accumulated funding deficiency under section 412 of the Code or any termination or withdrawal liability under Title IV of ERISA. (i) All contributions, premiums or other payments due from the Target to (or under) any Plan as of the date hereof have been fully paid or adequately provided for on 17 24 the books and financial statements of Target. All accruals (including, where appropriate, proportional accruals for partial periods) have been made in accordance with prior practices. 2.16 Employees and Consultants. (a) Target has provided Acquiror with a true and complete list of all individuals employed by Target as of the date hereof and the position and base compensation payable to each such individual. The Target Disclosure Letter contains a description of any written employment agreements, consulting agreements or termination or severance agreements to which Target is a party. (b) Target is not a party to or subject to a labor union or a collective bargaining agreement or arrangement and is not a party to any labor or employment dispute. (c) The consummation of the transactions contemplated herein will not result in (i) any amount becoming payable to any employee, director or independent contractor of Target, (ii) the acceleration of payment or vesting of any benefit, option or right to which any employee, director or independent contractor of Target may be entitled (including without limitation the acceleration of vesting under any stock option, stock purchase, or stock restriction agreement to which such person is a party), (iii) the forgiveness of any indebtedness of any employee, director or independent contractor of Target or (iv) to Target's knowledge, any cost becoming due or accruing to Target or the Acquiror with respect to any employee, director or independent contractor of Target. (d) Target is not obligated and upon consummation of the Merger will not be obligated to make any payment or transfer any property that would be considered a "parachute payment" under section 280G(b)(2) of the Code. (e) To the knowledge of Target, no employee of Target has been injured in the work place or in the course of his or her employment except for injuries which are covered by insurance or for which a claim has been made under workers' compensation or similar laws. (f) Target has complied in all material respects with the verification requirements and the record-keeping requirements of the Immigration Reform and Control Act of 1986 ("IRCA"); to the knowledge of Target, the information and documents on which Target relied to comply with IRCA are true and correct; and there have not been any discrimination complaints filed against Target pursuant to IRCA, and to the knowledge of Target, there is no basis for the filing of such a complaint. (g) Target has not received or been notified in writing of any complaint by any employee, applicant, union or other party of any discrimination or other conduct forbidden by law or contract. (h) Target's action in complying with the terms of this Agreement will not violate any agreements with any of Target's employees. 18 25 (i) To Target's knowledge, Target has filed all required reports and information with respect to its employees that are due prior to the Closing Date and otherwise has complied in its hiring, employment, promotion, termination and other labor practices with all applicable federal and state law and regulations, including without limitation those within the jurisdiction of the United States Equal Employment Opportunity Commission and the United States Department of Labor. Target has filed and shall file any such reports and information that are required to be filed prior to the Closing Date. (j) Target is not aware that any of its employees or contractors is obligated under any agreement, commitments, judgment, decree, order or otherwise (an "Employee Obligation") that would interfere with the use of his or her reasonable efforts to promote the interests of Target or that would conflict with any of Target's business as conduct or proposed to be conducted. Neither the execution nor delivery of this Agreement nor the conduct of Target's business as conducted, will, to Target's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any Employee Obligation. 2.17 Related-Party Transactions. No employee, officer, or director of Target or member of his or her immediate family is indebted to Target, nor is Target indebted (or committed to make loans or extend or guarantee credit) to any of them other than advances for reasonable business expenses in the ordinary course of business consistent with past practices. To Target's knowledge, none of such persons owns directly or indirectly more than one percent (1%) of the equity securities of any firm or corporation with which Target is affiliated or with which Target has a material business relationship, or any firm or corporation that competes with Target, except to the extent that employees, officers, or directors of Target and members of their immediate families own stock in publicly traded companies that may compete with Target. 2.18 Insurance. Target has policies of insurance and bonds of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Target. There is no material claim pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and, to its knowledge, Target is otherwise in compliance with the terms of such policies and bonds. Target has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 2.19 Compliance with Laws. To its knowledge, Target has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state, local or foreign statute, law or regulation with respect to the conduct of its business, or the ownership or operation of its business, except for such violations or failures to comply as could not be reasonably expected to have a Material Adverse Effect on Target. 2.20 Brokers' and Finders' Fees. Target has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. 19 26 2.21 Voting Agreement. All of the persons and/or entities deemed "Affiliates" of Target within the meaning of Rule 145 promulgated under the Securities Act have agreed in writing to vote for approval of the Merger by executing this Agreement. 2.22 Vote Required. The affirmative vote of the holders of at least (i) seventy-five percent (75%) of the outstanding Target Preferred Stock, voting separately as class and (ii) a majority of the outstanding shares of the Target Capital Stock, in each case outstanding on the record date set for the special meeting of Target stockholders (or any written consent in lieu thereof), is the only vote (or consent) of the holders of any Target Capital Stock necessary to approve this Agreement and the transactions contemplated hereby (the "Required Target Stockholder Approval"). 2.23 Trade Relations. Target has not within the past three years terminated its relationship with or refused to ship products to any dealer, distributor, OEM, third party marketing entity or customer which had theretofore paid or been obligated to pay Target in excess of Twenty Thousand Dollars ($20,000) over any consecutive twelve (12) month period. No claims have been communicated or, to Target's knowledge, threatened against Target with respect to wrongful termination of any dealer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other material violation of any laws or regulations relating to anti-competitive practices or unfair trade practices of any kind. 2.24 Customers and Suppliers. As of the date hereof, no customer which individually accounted for more than 5% of Target's gross revenues during the twelve (12) month period preceding the date hereof, and no material supplier of Target, has canceled or otherwise terminated, or made any written threat to Target to cancel or otherwise terminate its relationship with Target for any reason including, without limitation the consummation of the transactions contemplated hereby, or has at any time on or after December 31, 1998 decreased materially its services or supplies to Target in the case of any such supplier, or its usage of the services or products of Target in the case of such customer, and to Target's knowledge, no such supplier or customer intends to cancel or otherwise terminate its relationship with Target or to decrease materially its services or supplies to Target or its usage of the services or products of Target, as the case may be. Target has not knowingly breached, so as to provide a benefit to Target that was not intended by the parties, any agreement with, or engaged in any fraudulent conduct with respect to, any customer or supplier of Target. 2.25 Material Contracts. Except for the material contracts described in the Target Disclosure Letter (collectively, the "Material Contracts"), Target is not a party to or bound by any material contract, including without limitation: (a) any distributor, sales, advertising, agency or manufacturer's representative contract; (b) any continuing contract for the purchase of materials, supplies, equipment or services involving in the case of any such contract more than $20,000 over the life of the contract; 20 27 (c) any contract that expires or may be renewed at the option of any person other than the Target so as to expire more than one year after the date of this Agreement; (d) any trust indenture, mortgage, promissory note, loan agreement or other contract for the borrowing of money, any currency exchange, commodities or other hedging arrangement or any leasing transaction of the type required to be capitalized in accordance with GAAP; (e) any contract for capital expenditures in excess of $20,000 in the aggregate; (f) any contract limiting the freedom of the Target to engage in any line of business or to compete with any other Person as that term is defined in the Exchange Act, as defined herein, or any confidentiality, secrecy or non-disclosure contract; (g) any contract pursuant to which Target leases any real property; (h) any contract pursuant to which the Target is a lessor of any machinery, equipment, motor vehicles, office furniture, fixtures or other personal property; (i) any contract with any person with whom the Target does not deal at arm's length within the meaning of the Code; (j) any agreement of guarantee, support, indemnification, assumption or endorsement of, or any similar commitment with respect to, the obligations, liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness of any other Person; (k) any license, sublicense or other agreement to which Target is a party (or by which it or any Target Intellectual Property is bound or subject) and pursuant to which any person has been or may be assigned, authorized to Use, or given access to any Target Intellectual Property; (l) any license, sublicense or other agreement pursuant to which Target has been or may be assigned or authorized to Use, or has incurred any obligation in connection with, (A) any third party Intellectual Property that is incorporated in or forms a part of any current product, service or Intellectual Property offering of Target or (B) any Target Intellectual Property; (m) any agreement pursuant to which Target has deposited or is required to deposit with an escrow holder or any other person or entity, all or part of the source code (or any algorithm or documentation contained in or relating to any source code) of any Target Intellectual Property ("Source Materials"); and (n) any agreement to indemnify, hold harmless or defend any other person with respect to any assertion of personal injury, damage to property or Intellectual Property infringement, misappropriation or violation or warranting the lack thereof. 21 28 2.26 No Breach of Material Contracts. The Target has performed all of the obligations required to be performed by it and is entitled to all accrued benefits under, and to Target's knowledge is not alleged to be in default with respect to, any Material Contract. Each of the Material Contracts is in full force and effect, unamended, and there exists no default or event of default or event, occurrence, condition or act, with respect to Target or to Target's knowledge with respect to the other contracting party, or otherwise that, with or without the giving of notice, the lapse of the time or the happening of any other event or conditions, would (A) become a default or event of default under any Material Contract, which default or event of default would have a Material Adverse Effect on Target or (B) result in the loss or expiration of any right or option by Target (or the gain thereof by any third party) under any Material Contract or (C) the release, disclosure or delivery to any third party of any part of the Source Materials (as defined in Section 2.25(m)). True, correct and complete copies of all Material Contracts have been delivered to the Acquiror. 2.27 Third-Party Consents. The Target Disclosure Letter lists all Material Contracts that require a novation or consent to assignment, as the case may be, prior to the Effective Time so that Acquiror shall be made a party in place of Target or as assignee (the "Contracts Requiring Novation or Consent to Assignment"). 2.28 Minute Books. The minute books of Target made available to Acquiror contain a complete and accurate summary of all meetings of directors and stockholders or actions by written consent since the time of incorporation of Target through the date of this Agreement, and accurately reflect all actions taken by the directors and the stockholders in such minutes in all material respects. 2.29 Complete Copies of Materials. Target has delivered or made available true and complete copies of each document which has been requested by Acquiror or its counsel in connection with their legal and accounting review of Target. 2.30 Year 2000 Compliance. All of the Target's products (including products currently under development) are able to record, store, process and calculate and present calendar dates falling on and after January 1, 2000, and are able to calculate any information dependent on or relating to such dates in the same manner and with the same functionality, data integrity and performance as the products are able to record, store, process, calculate and present calendar dates on or before December 31, 1999, or calculate any information dependent on or relating to such dates (collectively "Year 2000 Compliant"). (a) All of the Target material products lose no functionality with respect to the introduction of records containing dates falling on or after January 1, 2000. (b) All of the Target's internal computer systems, including without limitation, its accounting systems, are Year 2000 Compliant. 2.31 Representations Complete. None of the representations or warranties made by Target herein or in any Schedule hereto, including the Target Disclosure Letter, or certificate furnished by Target pursuant to this Agreement, when all such documents are read together in their entirety, contains any untrue statement of a material fact, or omits to state any 22 29 material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND MERGER SUB Acquiror and Merger Sub represent and warrant to Target that the statements contained in this Article III are true and correct, except as set forth in the disclosure schedule delivered by Acquiror to Target prior to the execution and delivery of this Agreement (the "Acquiror Disclosure Letter"). The Acquiror Disclosure Letter shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III, and the disclosure in any paragraph shall qualify only the corresponding paragraph in this Article III; provided, however, that any item disclosed under any paragraph of the Acquiror Disclosure Letter shall be deemed to be disclosed with respect to every other applicable paragraph if the disclosure in respect of such one paragraph of the Acquiror Disclosure Letter is sufficient on its face to reasonably inform the reader of the Acquiror Disclosure Letter of the information required to be disclosed in respect of other paragraphs of the Acquiror Disclosure Letter. Any reference in this Article III to an agreement being "enforceable" shall be deemed to be qualified to the extent such enforceability is subject to (i) laws of general application relating to bankruptcy, insolvency, moratorium and the relief of debtors, and (ii) the availability of specific performance, injunctive relief and other equitable remedies. 3.1 Organization, Good Standing and Qualification. Acquiror is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted. Acquiror is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect on Acquiror. 3.2 Capitalization and Voting Rights. The authorized capital of Acquiror consists, or will consist immediately prior to the Closing, of: (a) The authorized capital stock of the Acquiror consists of 9,100,000 shares of Series A Preferred Stock ("Acquiror Series A Preferred Stock"), all of which are issued and outstanding, 1,000,000 shares of Series B Preferred Stock ("Acquiror Series B Preferred Stock"), of which 768,140 are issued and outstanding, 3,000,000 shares of Series C Preferred Stock ("Acquiror Series C Preferred Stock"), 2,647,778 of which are issued or outstanding, 1,455,000 shares of Series D Preferred Stock ("Acquiror Series D Preferred Stock"), 1,454,996 of which are issued or outstanding, 3,000,000 shares of Series E Preferred Stock ("Acquiror Series E Preferred Stock"), 2,604,601 of which are issued or outstanding, 1,500,000 shares of Series F Preferred Stock ("Acquiror Series F Preferred Stock"), 1,363,334 of which are issued or outstanding, and 40,000,000 shares of Common Stock ("Acquiror Common Stock"), 4,282,843 of which are issued or outstanding. The outstanding shares of Acquiror Series A Preferred Stock, Acquiror Series B Preferred Stock, Acquiror Series C Preferred Stock, Acquiror Series D Preferred Stock, Acquiror Series E Preferred Stock, Acquiror Series F Preferred Stock and Acquiror Common Stock are duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance with the registration or qualification provisions of 23 30 the Act, and any relevant state securities laws or pursuant to valid exemptions therefrom. Except for (A) the conversion privileges of the outstanding shares of Acquiror Series A Preferred Stock, Acquiror Series B Preferred Stock, Acquiror Series C Preferred Stock, Acquiror Series D Preferred Stock, Acquiror Series E Preferred Stock, and Acquiror Series F Preferred Stock (B) the conversion privileges of the Acquiror Series G Preferred Stock to be issued in the Merger, (C) the rights provided in Section 2.2 of the Acquiror's Amended and Restated Investors Rights Agreement dated August 26 1999, (D) currently outstanding warrants to purchase (i) 192,262 shares of Acquiror Series B Preferred Stock, (ii) 775,043 shares of Acquiror Common Stock and (iii) 55,340 shares of Acquiror Series C Preferred Stock, and (E) currently outstanding options to purchase 2,627,917 shares of Acquiror Common Stock to certain of Acquiror's directors, officers, employees and consultants, there are not outstanding any options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from Acquiror of any shares of its capital stock. In addition to the aforementioned options, Acquiror has reserved an aggregate of an additional 45,365 shares of Acquiror Common Stock for purchase upon exercise of options to be granted in the future under Acquiror's 1995 Stock Option Plan and 1995 Special Performance Option Grant Plan. (b) Other than as set forth above and the commitment to issue shares of Acquiror Capital Stock pursuant to this Agreement; there are no other options, warrants, calls, rights, commitments or agreements of any character to which Acquiror or Merger Sub is a party or by which either of them is bound obligating Acquiror or Merger Sub to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Acquiror or Merger Sub or obligating Acquiror or Merger Sub to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. The shares of Acquiror Capital Stock to be issued pursuant to the Merger will be duly authorized, validly issued, fully paid, and non-assessable, will not be subject to any preemptive or other statutory right of stockholders, will be issued in compliance with applicable U.S. Federal and state securities laws and will be free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holders thereof. There are no contracts, commitments or agreements relating to voting, registration, purchase or sale of Acquiror Capital Stock (i) between or among Acquiror and any of its stockholders or (ii) to the best of Acquiror's knowledge, between or among any of Acquiror's stockholders or between any of Acquiror's stockholders and any third party. 3.3 Subsidiaries. Acquiror does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. Acquiror is not a participant in any joint venture, partnership, or similar arrangement. 3.4 Authority. (a) Each of Acquiror and Merger Sub has all requisite corporate power and authority to enter into this Agreement and the other Transaction Documents and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of each of Acquiror and Merger Sub. This Agreement and the other Transaction 24 31 Documents have been duly executed and delivered by each of Acquiror and Merger Sub and constitute the valid and binding obligations of each of Acquiror and Merger Sub. (b) The execution and delivery of this Agreement and the other Transaction Documents do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a benefit under (i) any provision of the Certificate of Incorporation or Bylaws of Acquiror or any of its subsidiaries, as amended, or (ii) any material mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Acquiror or any of its subsidiaries or their properties or assets. (c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to Acquiror or any of its subsidiaries in connection with the execution and delivery of this Agreement or the other Transaction Documents by Acquiror or the consummation by Acquiror of the transactions contemplated hereby or thereby, except for (i) the filing of the Certificate of Merger, together with the required officers' certificates, as provided in Section 1.2 or (ii) any filings as may be required under applicable state securities laws and the securities laws of any foreign country. 3.5 Litigation. There is no action, suit, proceeding or investigation pending or, to Acquiror's knowledge, currently threatened against Acquiror or any of its properties or officers or directors (in their capacities as such) that questions the validity of the Transaction Documents, or the right of Acquiror to enter into such agreements, or to consummate the transactions contemplated hereby or thereby, or that might result, either individually or in the aggregate, in any Material Adverse Effect on Acquiror, or any change in the current equity ownership of Acquiror. The foregoing includes, without limitation, actions, suits, proceedings or investigations pending or threatened involving the prior employment of any of Acquiror's employees, their use in connection with Acquiror's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. Acquiror is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by Acquiror currently pending or that Acquiror intends to initiate. 3.6 Proprietary Information and Employee Stock Purchase Agreements. Each employee of Acquiror has executed Acquiror's standard form Proprietary Information and Inventions Agreement. Acquiror, after reasonable investigation, is not aware that any of such employees are in violation thereof. 3.7 Patents and Trademarks. To the knowledge of Acquiror (but without having conducted any special investigation or patent search) with respect to patents, trademarks, service marks and trade names only, Acquiror has sufficient title and ownership of all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted without any conflict with or infringement of the rights of others. There are no outstanding options, licenses, or agreements of 25 32 any kind relating to the foregoing, nor is Acquiror bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. Acquiror has not received any written communications alleging that Acquiror has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. Acquiror is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her reasonable efforts to promote the interests of Acquiror or that would conflict with Acquiror's business as proposed to be conducted. Neither the execution nor delivery of this Agreement or the other Transaction Documents, nor the carrying on of Acquiror's business by the employees of Acquiror, nor the conduct of Acquiror's business as proposed, will, to Acquiror's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. Acquiror does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by Acquiror. 3.8 Compliance with Other Instruments. Acquiror is not in violation or default of any provision of its Restated Certificate or Bylaws, or in any material respect of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound, or, to its knowledge, of any provision of any federal or state statute, rule or regulation applicable to Acquiror. The execution, delivery and performance of the Transaction Documents, and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of Acquiror or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to Acquiror, its business or operations or any of its assets or properties. 3.9 Agreements; Action. (a) Except for the Transaction Documents, there are no agreements, understandings or proposed transactions between Acquiror and any of its officers, directors, affiliates, or any affiliate thereof. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which Acquiror is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to Acquiror in excess of, $100,000, or (ii) the license of any patent, copyright, trade secret or other proprietary right to or from Acquiror, or (iii) provisions restricting or affecting the development, manufacture or distribution of Acquiror's products or services. (c) Acquiror has not (i) declared or paid any dividends or authorized or made any distribution upon or with respect to any class or series of its capital 26 33 stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $100,000 or, in the case of indebtedness and/or liabilities individually less than $100,000, in excess of $500,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. 3.10 Related-Party Transactions. No employee, officer, or director of Acquiror or member of his or her immediate family is indebted to Acquiror, nor is Acquiror indebted (or committed to make loans or extend or guarantee credit) to any of them. To Acquiror's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which Acquiror is affiliated or with which Acquiror has a business relationship, or any firm or corporation that competes with Acquiror, except that employees, officers, or directors of Acquiror and members of their immediate families may own stock in publicly traded companies that may compete with Acquiror. No member of the immediate family of any officer or director of Acquiror is directly or indirectly interested in any material contract with Acquiror. 3.11 Permits. Acquiror has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects, or financial condition of Acquiror, and Acquiror believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. Acquiror is not in default in any material respect under any of such franchises, permits, licenses, or other similar authority. 3.12 Environmental and Safety Laws. To its knowledge, Acquiror is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 3.13 Manufacturing and Marketing Rights. Acquiror has not granted rights to manufacture, produce, assemble, license, market, or sell its products to any other person and is not bound by any agreement that affects Acquiror's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 3.14 Registration Rights. Except as provided in the Investors Rights Agreement, Acquiror has not granted or agreed to grant any registration rights, including piggyback rights, to any person or entity. 3.15 Title to Property and Assets. Acquiror owns its property and assets free and clear of all mortgages, liens, loans and encumbrances, except (i) the lien of current taxes not yet due and payable, (ii) liens arising by operation of law or statutory liens, (iii) liens securing debt that are reflected on the Acquiror Financial Statements and (iv) liens which do not materially detract from or interfere with the use of the properties subject thereto. With respect to the property and assets it leases, Acquiror is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances. 27 34 3.16 Financial Statements. Acquiror has delivered or made available to Target its audited financial statements (balance sheet and profit and loss statement, statement of stockholders' equity and statement of cash flows, including notes thereto) at March 31, 1999 and for the fiscal year then ended, and its unaudited financial statements (balance sheet and profit and loss statement) as at and for the three month period ended June 30, 1999 ("the Acquiror Financial Statements"). The Acquiror Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Acquiror Financial Statements for the three month period ended June 30, 1999 (the "Interim Acquiror Financial Statements") may not contain all footnotes required by generally accepted accounting principles. The Acquiror Financial Statements fairly present the financial condition and operating results of Acquiror as of the dates, and for the periods, indicated therein, subject in the case of Interim Acquiror Financial Statements to normal year end audit adjustments. Except as set forth in the Acquiror Financial Statements, Acquiror has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1999 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Acquiror Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of Acquiror. Except as disclosed in the Acquiror Financial Statements, Acquiror is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. Acquiror maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 3.17 Changes. Since June 30, 1999 there has not been: (a) any change in the assets, liabilities, financial condition or operating results of Acquiror from that reflected in the Acquiror Financial Statements, except changes in the ordinary course of business that have not been, in the aggregate, materially adverse; (b) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of Acquiror (as such business is presently conducted and as it is proposed to be conducted); (c) any waiver by Acquiror of a valuable right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by Acquiror, except in the ordinary course of business and that is not material to the assets, properties, financial condition, operating results or business of Acquiror (as such business is presently conducted and as it is proposed to be conducted); (e) any material change or amendment to a material contract or arrangement by which Acquiror or any of its assets or properties is bound or subject; 28 35 (f) any material change in any compensation arrangement or agreement with any employee; (g) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (h) any resignation or termination of employment of any key officer of Acquiror; (i) any mortgage, pledge, transfer of a security interest in, or lien, created by Acquiror, with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (j) any loans or guarantees made by Acquiror to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; (k) any declaration, setting aside or payment or other distribution in respect of any of Acquiror's capital stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by Acquiror; (l) to Acquiror's knowledge, any other event or condition of any character that might materially and adversely affect the assets, properties, financial condition, operating results or business of Acquiror (as such business is presently conducted and as it is proposed to be conducted); or (m) any agreement or commitment by Acquiror to do any of the things described in this Section 3.17. 3.18 Employee Benefit Plans. (a) Neither Acquiror nor any ERISA Affiliate has, since January 1, 1993, terminated, suspended, discontinued contributions to or withdrawn from any employee pension benefit plan, as defined in section 3(2) of ERISA, including (without limitation) any multiemployer plan, as defined in section 3(37) of ERISA. (b) With respect to each employee benefit plan (as defined in section 3(3) of ERISA) of Acquiror, the requirements of ERISA applicable to such plan have been satisfied. (c) With respect to each plan of Acquiror that is subject to COBRA, the requirements of COBRA applicable to such plan have been satisfied. (d) With respect to each plan of Acquiror that is subject to the Family Medical Leave Act of 1993, as amended, the requirements of such Act applicable to such plan have been satisfied. 29 36 (e) Each plan of Acquiror that is intended to qualify under section 401(a) of the Code meets the requirements for qualification under section 401(a) of the Code and the regulations thereunder, except to the extent that such requirements may be satisfied by adopting retroactive amendments under section 401(b) of the Code and the regulations thereunder. Each such plan of Acquiror has been administered in accordance with its terms (or, if applicable, such terms as will be adopted pursuant to a retroactive amendment under section 401(b) of the Code) and the applicable provisions of ERISA and the Code and the regulations thereunder. (f) Neither Acquiror nor any ERISA Affiliate has any accumulated funding deficiency under section 412 of the Code or any termination or withdrawal liability under Title IV of ERISA. (g) All contributions, premiums or other payments due from the Acquiror to (or under) any plan of Acquiror have been fully paid or adequately provided for on the books and financial statements of Acquiror. All accruals (including, where appropriate, proportional accruals for partial periods) have been made in accordance with prior practices. 3.19 Tax Returns, Payments and Elections. Each Tax Return required to be filed with any Tax authority by or on behalf of Acquiror, has been or will be completed and filed when due (including any extensions of such due date) and all amounts shown due on each such Tax Return has been or will be paid on or before such date. Acquiror has withheld and paid to the applicable financial institution or Tax authority all amounts required to be withheld. No material Tax liability since June 30, 1999 has been incurred by Acquiror other than in the ordinary course of business. There is no material claim, audit, action, suit, proceeding, or (to the knowledge of Acquiror) investigation now pending or (to the knowledge of Acquiror) threatened against or with respect to Acquiror in respect of any Tax or assessment. No notice of deficiency or similar document of any Tax authority has been received by Acquiror, and there are no liabilities for Taxes (including liabilities for interest, additions to Tax and penalties thereon and related expenses) with respect to the issues that have been raised (and are currently pending) by any Tax authority that could, if determined adversely to Acquiror, materially and adversely affect the liability of Acquiror for Taxes. There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of Acquiror. Acquiror is in full compliance with all the terms and conditions of any Tax exemptions or other Tax-sharing agreement or order of a foreign government and the consummation of the Merger will not have any adverse effect on the continued validity and effectiveness of any such Tax exemption or other Tax-sharing agreement or order. Acquiror is not party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. Acquiror is not a party to or bound by any Tax indemnity, Tax sharing or Tax allocation agreement (whether written or unwritten or arising under operation of federal law as a result of being a member of a group filing consolidated Tax returns, under operation of certain state laws as a result of being a member of a unitary group, or under comparable laws of other states or foreign jurisdictions) which includes a party other than Acquiror nor does Acquiror owe any amount under any such Agreement. Acquiror has not elected pursuant to the Code, to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect 30 37 on Acquiror, its financial condition, its business as presently conducted or proposed to be conducted or any of its properties or material assets. 3.20 Insurance. Acquiror has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. 3.21 Labor Agreements and Actions. Acquiror is not bound by or subject to (and none of its assets or properties is bound by or subject to) any contract, commitment or arrangement with any labor union, and no labor union has requested or, to Acquiror's knowledge, has sought to represent any of the employees, representatives or agents of Acquiror. There is no strike or other labor dispute involving Acquiror pending, or to the best of Acquiror's knowledge, threatened, that could have a Material Adverse Effect on Acquiror (as such business is presently conducted and as it is proposed to be conducted), nor is Acquiror aware of any labor organization activity involving its employees. To its knowledge, Acquiror has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. 3.22 Real Property Holding Company. Acquiror is not a real property holding company within the meaning of Section 897 of the Code. 3.23 Representations Complete. None of the representations, warranties or statements made by Acquiror herein or in any Schedule hereto, including the Acquiror Disclosure Letter, or certificate furnished by Acquiror pursuant to this Agreement, when all such documents are read together in their entirety, contains any untrue statement of a material fact, or omits to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. 3.24 Brokers' and Finders' Fees. Acquiror has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or investment bankers' fees or any similar charges in connection with this Agreement or any transaction contemplated hereby. ARTICLE IV. CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1 Conduct of Business of Target and Acquiror. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Target and Acquiror each agree (except to the extent expressly contemplated by this Agreement or as consented to in writing by the other), to carry on its and its subsidiaries' business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted. Target further agrees to (i) pay and to cause its subsidiaries to pay debts and Taxes when due subject to good faith disputes over such debts or Taxes, (ii) subject to Acquiror's consent to the filing of material Tax Returns if applicable, to pay or perform other obligations when due, and (iii) to use all reasonable efforts consistent with past practice and policies to preserve intact its and its subsidiaries' present business organizations, use commercially 31 38 reasonable efforts to keep available the services of its and its subsidiaries' present officers and key employees and preserve its and its subsidiaries' relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it or its subsidiaries, to the end that its and its subsidiaries' goodwill and ongoing businesses shall be unimpaired at the Effective Time. Target agrees to promptly notify Acquiror of any event or occurrence not in the ordinary course of its or its subsidiaries' business, and of any event which could reasonably be expected to have a Material Adverse Effect on Target. Without limiting the foregoing, except as expressly contemplated by this Agreement, neither Target nor Acquiror shall do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of the other: (a) Dividends; Changes in Capital Stock. Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock (other than any issuance of capital stock upon exercise of outstanding options, warrants or rights therefor), or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares in connection with any termination of service to it or its subsidiaries; (b) Other. Take, or agree in writing or otherwise to take, any of the actions described above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.2 Conduct of Business of Target During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, except as expressly contemplated by this Agreement, Target shall not do, cause or permit any of the following, or allow, cause or permit any of its subsidiaries to do, cause or permit any of the following, without the prior written consent of Acquiror: (a) Charter Documents. Cause or permit any amendments to its Certificate of Incorporation or Bylaws other than the amendment of Target's Certificate of Incorporation contemplated by Section 6.3(i) hereof; (b) Material Contracts. Enter into any material contract, agreement, license or commitment, or violate, amend or otherwise modify or waive any of the terms of any of its material contracts, agreements or licenses other than in the ordinary course of business consistent with past practice; (c) Stock Option Plans, etc. Accelerate, amend or change the period of exercisability or vesting of options or other rights granted under its stock plans or authorize cash payments in exchange for any options or other rights granted under any of such plans; (d) Issuance of Securities. Issue, deliver or sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its 32 39 capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the issuance of shares of its Common Stock pursuant to the exercise of stock options, warrants or other rights therefor outstanding as of the date of this Agreement, (ii) the issuance of options to purchase up to 20,000 shares of Target Common Stock in any one instance or up to 50,000 shares of Target Common Stock in the aggregate, so long as such issuances are in the ordinary course of business and consistent with past practice and the exercise price per share of each such option is equal to the then fair market value of Target's Common Stock as determined by Acquiror and (iii) the issuance of up to 482,625 shares of Target Series F Stock and warrants to purchase up to 482,625 shares of Common Stock; (e) Intellectual Property. Transfer to or license any person or entity or otherwise extend, amend or modify any rights to its Intellectual Property other than the grant of non-exclusive licenses in the ordinary course of business consistent with past practice; (f) Exclusive Rights. Enter into or amend any agreements pursuant to which any other party is granted exclusive marketing, manufacturing or other exclusive rights of any type or scope with respect to any of its products or technology; (g) Dispositions. Sell, lease, license or otherwise dispose of or encumber any of its properties or assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole, other than the sale of licenses of Target's products that are in the ordinary course of business and consistent with past practice, other than the Koz Distribution so long as the Koz Distribution is effected in accordance with Section 5.19 hereof. (h) Indebtedness. Incur or commit to incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others other than accounts payable arising in the ordinary course of business and consistent with past practice; (i) Leases. Enter into any single operating lease requiring payments in excess of $5,000 per month; (j) Payment of Obligations. Pay, discharge or satisfy in an amount in excess of $20,000 in any one case or $50,000 in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in the Target Financial Statements; (k) Capital Expenditures. Incur or commit to incur any capital expenditures in excess of $50,000 in the aggregate; (l) Insurance. Materially reduce the amount of any material insurance coverage provided by existing insurance policies; 33 40 (m) Termination or Waiver. Terminate or waive any right of substantial value, other than in the ordinary course of business; (n) Employee Benefits; Severance. Take any of the following actions: (i) increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of non-officer employees in the ordinary course of business and in accordance with past practices, (ii) grant any additional severance or termination pay to, or enter into any employment or severance agreements with, any officer or employee, (iii) enter into any collective bargaining agreement, or (iv) establish, adopt, enter into or amend in any material respect any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (o) Lawsuits. Commence a lawsuit or arbitration proceeding other than (i) for the routine collection of bills, or (ii) for a breach of this Agreement; (p) Acquisitions. Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to its and its subsidiaries' business, taken as a whole; (q) Taxes. Make any material tax election other than in the ordinary course of business and consistent with past practice, change any material tax election, adopt any tax accounting method other than in the ordinary course of business and consistent with past practice, change any tax accounting method, file any tax return (other than any estimated tax returns, immaterial information returns, payroll tax returns or sales tax returns) or any amendment to a tax return, enter into any closing agreement, settle any Tax claim or assessment or consent to any Tax claim or assessment provided that Acquiror shall not unreasonably withhold or delay approval of any of the foregoing actions, except as required by law; (r) Revaluation. Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; or (s) Other. Take or agree in writing or otherwise to take, any of the actions described in Sections 4.2(a) through (r) above, or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or prevent it from performing or cause it not to perform its covenants hereunder. 4.3 Notices. Target shall give all notices and other information required to be given to the employees of Target, any collective bargaining unit representing any group of employees of Target, and any applicable government authority under the National Labor Relations Act, the Internal Revenue Code, the Consolidated Omnibus Budget Reconciliation Act, and other applicable law in connection with the transactions provided for in this Agreement. 34 41 ARTICLE V. ADDITIONAL AGREEMENTS 5.1 No Solicitation. (a) From and after the date of this Agreement until the earlier of (x) the termination of this Agreement in accordance with Section 7.1 or (y) the Effective Time, Target shall not, directly or indirectly, through any officer, director, employee, representative or agent, (i) solicit, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of all or substantially all of the assets, sale of shares of capital stock (including without limitation by way of a tender offer) or similar transactions involving Target, other than the transactions contemplated by this Agreement (any of the foregoing inquiries or proposals being referred to in this Agreement as a "Takeover Proposal"), (ii) engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Takeover Proposal, or (iii) agree to, approve or recommend any Takeover Proposal. (b) Without limiting the foregoing, it is understood that any violations of the restrictions set forth in this paragraph by any officer, director, employee, financial advisor, attorney, representative or agent, whether or not acting on behalf of Target, shall be deemed to be a breach of this Section 5.1 by Target. (c) Target shall notify Acquiror immediately (and no later than 24 hours) after receipt by Target (or its advisors or agents) of any Takeover Proposal or any request for information in connection with a Takeover Proposal or for access to the properties, books or records of Target by any person or entity that informs Target that it is considering making, or has made, a Takeover Proposal. Such notice shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. 5.2 Preparation of Information Statement. As soon as practicable after the execution of this Agreement, Target and Acquiror shall prepare an Information Statement for the stockholders of Target to approve this Agreement, the Certificate of Merger and the transactions contemplated hereby and thereby. The Information Statement shall constitute a disclosure document for the offer and issuance of the shares of Acquiror Common Stock to be received by the holders of Target Capital Stock in the Merger. Acquiror and Target shall each use its best efforts to cause the Information Statement to comply with applicable federal and state securities laws requirements. Each of Acquiror and Target agrees to provide promptly to the other such information concerning its business and financial statements and affairs as, in the reasonable judgment of the providing party or its counsel, may be required or appropriate for inclusion in the Information Statement, or in any amendments or supplements thereto, and to cause its counsel and auditors to cooperate with the other's counsel and auditors in the preparation of the Information Statement. Target will promptly advise Acquiror, and Acquiror will promptly advise Target, in writing if at any time prior to the Effective Time either Target or Acquiror shall obtain knowledge of any facts that might make it necessary or appropriate to amend or supplement the Information Statement in order to make the statements contained or incorporated 35 42 by reference therein not misleading or to comply with applicable law. The Information Statement shall contain the recommendation of the Board of Directors of Target that the Target stockholders approve the Merger and this Agreement and the conclusion of the Board of Directors that the terms and conditions of the Merger as contained herein are fair and reasonable to the stockholders of Target. Anything to the contrary contained herein notwithstanding, Target shall not include in the Information Statement any information with respect to Acquiror or its affiliates or associates, the form and content of which information shall not have been approved by Acquiror prior to such inclusion. 5.3 Stockholders Meeting or Consent Solicitation. As soon as permitted by the Commissioner (as defined in Section 5.13), Target shall promptly take all actions necessary to either (i) call a meeting of its stockholders to be held for the purpose of voting upon this Agreement and the Merger or (ii) commence a consent solicitation to obtain such approvals in order to effect consummation of the Merger on or before November 10, 1999, or as soon thereafter as is practicable. Target will, through its Board of Directors, recommend to its stockholders approval of such matters as soon as practicable after the date hereof. Target shall use all reasonable efforts to solicit from its stockholders proxies or consents in favor of such matters. 5.4 Access to Information. (a) Target shall afford Acquiror and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (i) all of Target's and its subsidiaries' properties, books, contracts, commitments and records, and (ii) all other information concerning the business, properties and personnel of Target and its subsidiaries as Acquiror may reasonably request. Target agrees to provide to Acquiror and its accountants, counsel and other representatives copies of internal financial statements promptly upon request. (b) Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Acquiror and Target shall confer on a regular and frequent basis with one or more representatives of the other party to report operational matters of materiality and the general status of ongoing operations. (c) No information or knowledge obtained in any investigation pursuant to this Section 5.4 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. 5.5 Confidentiality. The parties each agree that all information provided by one party to the other in the course of pursuing this transaction that is marked or otherwise identified as confidential will be deemed confidential and proprietary to the providing party, and will not be disclosed to any other person or entity (other than the receiving party's attorneys, accountants, or other advisers subject to similar confidentiality restrictions), and such information will not be used by the receiving party except for the limited purpose of evaluating the desirability of completing this proposed transaction; provided, however, that these confidentiality restrictions will not apply to information that the receiving party can demonstrate is publicly available or was already known by the receiving party through a third party with no 36 43 confidentiality obligations to the other party. All documents and other written information (and all copies thereof, including copies on electronic media) received by one party from the other shall promptly be returned to the disclosing party upon the written request of the disclosing party. The parties further acknowledge that the provisions of this Section 5.5 shall be in addition to, and not in substitution for, the provisions of the non-disclosure agreement dated April 27, 1999 between Target and Acquiror (the "Non-Disclosure Agreement"), and that to the extent there is a conflict between this Section 5.5 and the Non-Disclosure Agreement, the provisions of this Section 5.5 shall prevail. 5.6 Public Disclosure. Unless otherwise permitted by this Agreement, Acquiror and Target shall consult with each other before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure (whether or not in response to an inquiry) regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except as may be required by law or required by Acquiror to comply with the rules and regulations of the SEC or to comply with disclosure obligations under applicable securities laws. 5.7 Consents. Each of Acquiror and Target shall promptly apply for or otherwise seek, and use its reasonable commercial efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the Merger, and shall use commercially reasonable efforts to obtain all necessary consents, waivers and approvals under any of its material contracts in connection with the Merger for the assignment thereof or otherwise. 5.8 Update Disclosure; Breaches. From and after the date of this Agreement until the Effective Time, Target and Acquior shall promptly notify the other party, by written update to the Target Disclosure Letter or Acquiror Disclosure Letter, as applicable, of (i) the occurrence or non-occurrence of any event which would be likely to cause any condition to the obligations of any party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied, or (ii) the failure of Target or Acquiror, as the case may be, to comply with or satisfy any covenant, condition or agreement required to be complied with or satisfied by it pursuant to this Agreement which would be likely to result in any condition to the obligations of any party to effect the Merger and the other transactions contemplated by this Agreement not to be satisfied. The delivery of any notice pursuant to this Section 5.8 shall not cure any breach of any covenant, representation or warranty requiring disclosure of such matter prior to the date of this Agreement or otherwise limit or affect the remedies available hereunder to the party receiving such notice. 5.9 Voting Agreement. (a) Transfer of Shares. (i) Definitions. (1) "Shares" shall mean all issued and outstanding shares of Target Capital Stock owned of record or beneficially (over which beneficially-owned 37 44 shares the Affiliate exercises voting power) by the Affiliate as of the record date for persons entitled (A) to receive notice of, and to vote at the meeting of the stockholders of Target called for the purpose of voting on the matter referred to in subsection 5.9(b), or (B) to take action by written consent of the stockholders of Target with respect to the matter referred to in subsection 5.9(b). (2) "Subject Securities" shall mean: (i) all securities of the Target (including all shares of Target Capital Stock and all options, warrants and other rights to acquire shares of Target Capital Stock) beneficially owned by Affiliate as of the date of this Agreement; and (ii) all additional securities of Target (including all additional shares of Target Capital Stock and all additional options, warrants and other rights to acquire shares of Target Capital Stock) of which Affiliate acquires ownership during the period from the date of this Agreement through the Expiration Date. As used herein, the term "Expiration Date" shall mean the earlier to occur of (i) the Effective Time and (ii) the date on which this Agreement shall be terminated in accordance with Article VII hereof. (3) A person shall be deemed to have effected a "Transfer" of a security if such person directly or indirectly: (i) sells, pledges, encumbers, grants an option with respect to, transfers or disposes of such security or any interest in such security; or (ii) enters into an agreement or commitment providing for the sale of, pledge of, encumbrance of, grant of an option with respect to, transfer of or disposition of such security or any interest therein. (4) "Opposing Proposal" shall mean (i) any proposal made in opposition to or in competition with consummation of the Merger; (ii) any merger, consolidation, sale of assets, reorganization or recapitalization, with any party other than with Acquiror and its affiliates; or (iii) any liquidation or winding up of Target. (ii) Additional Purchases. The Affiliate agrees that any shares of Target Capital Stock that the Affiliate shall purchase or with respect to which the Affiliate shall otherwise acquire beneficial ownership after the execution of this Agreement and prior to the Expiration Date ("New Shares") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. (iii) Transferee of Subject Securities to be Bound by this Agreement. Affiliate agrees that, during the period from the date of this Agreement through the Expiration Date, Affiliate shall not cause or permit any Transfer of any of the Subject Securities to be effected unless each person to which any of such Subject Securities, or any interest in any of such Subject Securities, is or may be transferred shall have: (a) executed a counterpart of this Agreement (with such modifications as Acquiror may reasonably request); and (b) agreed in writing to hold such Subject Securities (or interest in such Subject Securities) subject to all of the terms and provisions of this Agreement. (b) Agreement to Vote Shares and Grant Proxy. At every meeting of the stockholders of Target called with respect to any of the following, and on every action or approval by written consent of the stockholders of Target with respect to any of the following, the Affiliate agrees to vote the Shares and any New Shares in favor of approval of this 38 45 Agreement and the Merger and any matter necessary to facilitate the Merger. In order to effectuate the foregoing, the Affiliate does hereby constitute and appoint Acquiror, or any nominee of Acquiror, with full power of substitution, from the date hereof to the Expiration Date, as its true and lawful proxy, for and in its name, place and stead, including the right to sign its name (as stockholder) to any consent, certificate or other document relating to Target that the laws of the State of Delaware may permit or require, to cause the Shares and any New Shares to be voted in the manner contemplated by this subsection 5.9(b). The parties and proxies named above shall not exercise this proxy on any other matter except as provided above. The parties acknowledge that the proxy provided for here is irrevocable and coupled with an interest. (c) Representations, Warranties and Covenants of each Affiliate. Each Affiliate represents, warrants and covenants to Acquiror and Merger Sub as follows: (i) Ownership of Shares. Affiliate (together with such Affiliate's spouse, if applicable) (i) is the sole beneficial and record owner and holder of the Shares and has full voting power with respect thereto, and (ii) does not own any shares of capital stock of Target other than the Shares (excluding shares as to which Affiliate currently disclaims beneficial ownership). (ii) Authority; Due Execution. Affiliate has full power and authority to make, enter into and carry out the terms of this Agreement. Affiliate has duly executed and delivered this Agreement and (assuming the due authorization, execution and delivery of this Agreement by Acquiror) this Agreement constitutes a valid and binding obligation of such Affiliate. (iii) No Proxy Solicitations. Affiliate will not, and will not permit any entity under such Affiliate's control to (i) solicit proxies or become a "participant" in a "solicitation," as such terms are defined in Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to an Opposing Proposal; (ii) initiate a stockholder's vote or action by consent of Target stockholders with respect to an Opposing Proposal; or (iii) become a member of a "group" (as such term is used in Section 13(d) of the Exchange Act) with respect to any voting securities of Target with respect to an Opposing Proposal. (d) Specific Performance; Injunctive Relief. Each Afiliate acknowledges that Acquiror will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of the Affiliate set forth in this Section 5.9. Therefore, it is agreed that, in addition to any other remedies that may be available to Acquiror upon any such violation, Acquiror shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to Acquiror at law or in equity. (e) Termination. This Section 5.9 shall terminate and shall have no further force or effect as of the Expiration Date. 5.10 Legal Requirements. Each of Acquiror and Target will, and will cause their respective subsidiaries to, take all reasonable actions necessary to comply promptly with all 39 46 legal requirements which may be imposed on them with respect to the consummation of the transactions contemplated by this Agreement and will promptly cooperate with and furnish information to any party hereto necessary in connection with any such requirements imposed upon such other party in connection with the consummation of the transactions contemplated by this Agreement and will take all reasonable actions necessary to obtain (and will cooperate with the other parties hereto in obtaining) any consent, approval, order or authorization of, or any registration, declaration or filing with, any Governmental Entity or other person, required to be obtained or made in connection with the taking of any action contemplated by this Agreement. 5.11 Tax-Free Reorganization. Neither Target, Acquiror nor Merger Sub will, either before or after consummation of the Merger, take any action which, to the knowledge of such party, would cause the Merger to fail to constitute a "reorganization" within the meaning of Code Section 368. 5.12 Stock Options. (a) All Target Options outstanding, whether or not exercisable, whether or not vested, and whether or not performance-based, at the Effective Time under the Target Stock Option Plan, shall by virtue of the Merger and without any further action on the part of Target or the holder thereof, be converted into an option to purchase Acquiror Common Stock pursuant to the terms of the Quintus Corporation 1999 Stock Plan ("Quintus 1999 Stock Plan") in such manner that Acquiror (i) is "assuming a stock option in a transaction to which Section 424(a) applied" within the meaning of Section 424 of the Code, or (ii) to the extent that Section 424 of the Code does not apply to any such Target Options, would be a transaction within Section 424 of the Code. Each Target Option converted by Acquiror shall be exercisable upon the same terms and conditions as under the Target Stock Option Plan and the applicable option agreement issued thereunder, except that (A) each such Target Option shall be exercisable for that whole number of shares of Acquiror Common Stock (rounded down to the nearest whole share) into which the number of shares of Target Common Stock subject to such Target Option immediately prior to the Effective Time would be converted under Section 1.6(a), and (B) the option price per share of Acquiror Common Stock shall be an amount equal to the option price per share of Target Common Stock subject to such Target Option in effect immediately prior to the Effective Time divided by the Exchange Ratio (the option price per share, as so determined, being rounded downward to the nearest full cent). Acquiror shall (i) on or prior to the Effective Time, reserve for issuance the number of shares of Acquiror Common Stock that will become subject to Target Options pursuant to this Section 5.12, (ii) from and after the Effective Time, upon exercise of the Target Options in accordance with the terms thereof, make available for issuance all shares of Acquiror Common Stock covered thereby and (iii) as promptly as practicable after the Effective Time, issue to each holder of an outstanding Target Option a document evidencing the foregoing conversion by Acquiror. (b) Acquiror shall comply with the terms of the Target Stock Option Plan and ensure, to the extent required by, and subject to the provisions of, such Target Stock Option Plan, that Target Stock Options which qualified as incentive stock options prior the Effective Time continue to quality as incentive stock options after the Effective Time. 40 47 (c) Without limiting the foregoing, Acquiror shall take all corporate action necessary to reserve and make available for issuance a sufficient number of shares of Acquiror Common Stock for delivery under Target Stock Options assumed in accordance with this Section 5.12. 5.13 Fairness Hearing. Acquiror will as promptly as practicable after execution hereof, file (i) a permit application under Section 25121 of California Law with the California Commissioner of Corporations (the "Commissioner") and (ii) a request for a hearing to be held by the Commissioner to consider the terms, conditions and fairness of the transactions contemplated by this Agreement and the Certificate of Merger pursuant to Section 25142 of California Law ("Fairness Hearing"). As soon as permitted by the Commissioner, Target shall cause the mailing of the hearing notice to all holders of securities entitled to receive such notice pursuant to the requirements of the rules of the Commissioner and California Law. Target shall furnish to Acquiror such data and information as is reasonably necessary for Acquiror' preparation and filing of the permit application, the request for the hearing and the hearing notice. 5.14 Escrow Agreement. Upon execution of this Agreement, each Affiliate agrees to execute and deliver to Acquiror the Escrow Agreement in the form attached hereto as Exhibit C ("Escrow Agreement") (it being understood by the parties hereto that each Former Target Stockholder shall have shares deposited into the Escrow Fund, not just the Affiliates). 5.15 Additional Agreements. Each of Target, Acquiror and Merger Sub agrees to use its reasonable commercial efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, subject to the appropriate vote of stockholders of Target described in Section 5.3, including cooperating fully with the other party, including by provision of information. In case at any time after the Effective Time reasonable further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either Target or Merger Sub of the proper officers and directors of each party to this Agreement shall take such necessary action. 5.16 Employee Benefits. Acquiror shall take such reasonable actions, to the extent permitted by Acquiror's benefits program, as are necessary to allow eligible employees of Target to participate in the benefit programs of Acquiror, or alternative benefits programs in the aggregate substantially comparable to those applicable to employees of Acquiror on similar terms, as soon as practicable after the Effective Time of the Merger. 5.17 Market Stand-Off Agreement. Each Affiliate hereby agrees that during a period not to exceed one hundred eighty (180) days following the effective date of the IPO (as defined in Section 8.6(b)) and during periods not to exceed ninety (90) days following the effective date of registration statements (other than a registration statement relating either to sale of securities to employees of the Company pursuant to its stock option, stock purchase or similar plan or a SEC Rule 145 transaction) of Acquiror filed under the Securities Act within two (2) years of the effective date of the IPO, such periods to be specified by Acquiror and an underwriter of Acquiror Common Stock or other securities of Acquiror (or such lesser period of 41 48 time as negotiated with the underwriter) it shall not, to the extent requested by Acquiror and such underwriter, (x) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Acquiror Common Stock or any securities convertible into or exercisable or exchangeable for Acquiror Common Stock (including, without limitation, shares of Acquiror Common Stock or securities convertible into or exercisable or exchangeable for Acquiror Common Stock which may be deemed to be beneficially owned by such Affiliate in accordance with the rules and regulations of the Securities and Exchange Commission) or (y) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Acquiror Common Stock (regardless of whether any of the transactions described in clause (x) or (y) is to be settled by the delivery of Acquiror Common Stock, or such other securities, in cash or otherwise); provided, however, that all officers and directors of Acquiror and holders of at least one percent (1%) of then-outstanding Acquiror Common Stock enter into similar agreements. In order to enforce the foregoing covenant, Acquiror may impose stop-transfer instructions with respect to such Affiliate's shares of Acquiror Capital Stock (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. Each Affiliate agrees that the managing underwriters of the IPO will be third party beneficiaries of this Section 5.17. 5.18 Delivery of Financial Information. Acquiror shall deliver to each Affiliate, as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of Acquiror, an income statement for such fiscal year, a balance sheet of Acquiror and a statement of stockholders' equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be audited and certified by independent public accountants of nationally recognized standing selected by Acquiror; provided, that the requirement that such financial statements be audited and certified may be waived by action of the Board of Directors of Acquiror if all members of the Board vote in favor of such waiver. The obligations of Acquiror under this Section 5.18 shall terminate and be of no further force or effect upon the earlier to occur of (i) the effectiveness of the IPO, (ii) when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the Exchange Act or (iii) the one-year anniversary of the date of this Agreement. 5.19 Koz Inc. Stock Distribution. Target agrees that if Target distributes or sells the shares of capital stock of Koz Inc. ("Koz") currently held by Target to certain of Target's stockholders (the "Koz Distribution"), such transaction will: (i) contain indemnification provisions (which such indemnity shall survive for at least three years following the closing of the Koz Distribution) in which each of the purchasers or distributees of the Koz stock agrees in writing to indemnify Target and Target's successors and assigns for any Damages (as defined in Section 8.2) arising out of or related to the Koz Distribution; (ii) close on or before September 30, 1999; (iii) comply with (a) all applicable laws, including without limitation the Delaware General Corporation Law, (b) the certificate or articles of incorporation of Koz, (c) the bylaws of Koz, (d) any Koz shareholder agreement or other agreement that affects the transferability of the shares, (e) Target's certificate of incorporation, (f) Target's bylaws and (g) any Target shareholder agreement or other agreement that affects the transferability of the shares; (iv) contain a minimum aggregate purchase price for the Koz stock of $535,000; and 42 49 (v) not cause, in the reasonable judgment of Acquiror or counsel to Acquiror, the Merger to fail to constitute a "reorganization" within the meaning of Code Section 368. ARTICLE VI. CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by agreement of all the parties hereto: (a) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. In the event an injunction or other order shall have been issued, each party agrees to use its reasonable diligent efforts to have such injunction or other order lifted. (b) Governmental Approval. Acquiror and Target and their respective subsidiaries shall have timely obtained from each Governmental Entity all approvals, waivers and consents, if any, necessary for consummation of or in connection with the Merger and the transactions contemplated hereby, including such approvals, waivers and consents as may be required under the Securities Act. (c) Tax Opinion. Each of Target and Acquiror shall have received a written opinion from its respective counsel to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code. In preparing the Target and the Acquiror tax opinions, counsel may rely on reasonable assumptions and may also rely on (and to the extent reasonably required, the parties shall make) reasonable representations related thereto. (d) Fairness Hearing. The Commissioner of Corporations for the State of California shall have approved the terms and conditions of the transactions contemplated by this Agreement and the Certificate of Merger and the fairness of such terms and conditions pursuant to Section 25142 of the California Statute following a fairness hearing and shall have issued a Permit under Section 25121 of the California securities laws for the issuance of (i) the Acquiror Common Stock and Acquiror Series G Preferred Stock to be issued in the Merger, (ii) the options to purchase Acquiror Common Stock issuable to former holders of Target Stock Options, (iii) the Acquiror Common Stock issuable on exercise of the Target Stock Options to be assumed by Acquiror, (iv) the warrants to purchase Acquiror Capital Stock issuable to former holders of Target Warrants and (v) the Acquiror Capital Stock issuable on exercise of the Target Warrants to be assumed by Acquiror. 43 50 6.2 Additional Conditions to Obligations of Target. The obligations of Target to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by Target: (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the holders of at least (i) seventy-five percent (75%) of the outstanding Target Preferred Stock, voting separately as class, and (ii) a majority of the outstanding shares of the Target Capital Stock outstanding as of the record date set for the Target Stockholders Meeting or solicitation of stockholder consents. (b) Legal Opinion. Target shall have received a legal opinion from Acquiror's legal counsel substantially in the form attached as Exhibit D hereto. (c) Injunctions or Restraints on Merger and Conduct of Business. No proceeding brought by any administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking to prevent the consummation of the Merger shall be pending. In addition, no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting Acquiror's conduct or operation of the business of Target and its subsidiaries, following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (d) Investors Rights Agreement. Acquiror and the holders of at least a majority of the Registrable Securities (as defined in Section 1.1(b) of Acquiror's Amended and Restated Investors Rights Agreement dated August 26, 1999) of Acquiror then outstanding shall have executed the Amended and Restated Investors Rights Agreement in the form attached hereto as Exhibit I. 6.3 Additional Conditions to the Obligations of Acquiror. The obligations of Acquiror to consummate and effect this Agreement and the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Effective Time of each of the following conditions, any of which may be waived, in writing, by Acquiror: (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the holders of at least ninety-five percent (95%) of the shares of Target Capital Stock outstanding as of the record date set for the Target Stockholders Meeting or solicitation of stockholder consents. (b) Third Party Consents. Acquiror shall have been furnished with evidence satisfactory to it of the consent or approval of those persons whose consent or approval shall be required in connection with the Merger under the contracts of Target set forth on Schedule 6.3(c) hereto. (c) Injunctions or Restraints on Merger and Conduct of Business. No proceeding brought by any administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking to prevent the consummation of the Merger shall 44 51 be pending. In addition, no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint provision limiting or restricting Acquiror's conduct or operation of the business of Target and its subsidiaries, following the Merger shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other Governmental Entity, domestic or foreign, seeking the foregoing be pending. (d) Legal Opinion. Acquiror shall have received a legal opinion from Target's legal counsel, in substantially the form attached hereto as Exhibit E. (e) FIRPTA Certificate. Target shall, prior to the Closing Date, provide Acquiror with a properly executed FIRPTA Notification Letter, substantially in the form of Exhibit F attached hereto, which states that shares of capital stock of Target do not constitute "United States real property interests" under Section 897(c) of the Code, for purposes of satisfying Acquiror's obligations under Treasury Regulation Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such Notification Letter, Target shall have provided to Acquiror, as agent for Target, a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2) and substantially in the form of Exhibit G attached hereto along with written authorization for Acquiror to deliver such notice form to the Internal Revenue Service on behalf of Target upon the Closing of the Merger. (f) Resignation of Directors. The directors of Target in office immediately prior to the Effective Time shall have resigned as directors of Target effective as of the Effective Time. (g) Proprietary Information and Inventions Agreements. All of the employees of Target on September __, 1999 shall have entered into Proprietary Information and Inventions Agreements in a form reasonably acceptable to Acquiror. (h) Compensation Agreement. Dain Rauscher Wessels, financial advisor to Target, shall have entered into a Compensation Agreement substantially in the form attached hereto as Exhibit B. (i) Amendment of Target Certificate of Incorporation. Target shall have filed an amendment to its Certificate of Incorporation so that the Merger does not constitute a "liquidation" under Section 3 of the Target's Certificate of Incorporation. (j) Escrow Agreement. The parties to the Escrow Agreement shall have entered into an Escrow Agreement in the form attached hereto as Exhibit C. (k) Equity Financing. Target shall have closed an equity financing with gross proceeds of at least $1,240,000. (l) Koz Distribution. The Koz Distribution, if any, shall have complied with each of the requirements set forth in Section 5.19 hereof. 45 52 ARTICLE VII. TERMINATION, EXPENSES, AMENDMENT AND WAIVER 7.1 Termination. (a) Termination. This Agreement may be terminated at any time prior to Closing: (i) By mutual written consent duly authorized by the Board of Directors of Acquiror and Target; (ii) By the Acquiror if there is the failure of a condition set forth in Section 6.3 hereof to be satisfied (and such condition is not waived in writing by the Acquiror) on or prior to November 10, 1999 or the occurrence of any event which results or would result in the failure of a condition set forth in Section 6.3 hereof; provided that the Acquiror may not terminate this Agreement prior to such date if (x) the Target has not had an adequate opportunity to cure such failure or (y) the Target has the right to terminate this Agreement under clause (iii) of this Section 7.1(a); (iii) By Target if there is the failure of a condition set forth in Section 6.2 hereof to be satisfied (and such condition is not waived in writing by the Company) on or prior to November 10, 1999, or the occurrence of any event which results or would result in the failure of a condition set forth in Section 6.2 hereof be satisfied on or prior to such date; provided that, Target may not terminate this Agreement prior to such date if (x) Acquiror has not had an adequate opportunity to cure such failure or (y) Acquiror has the right to terminate this Agreement under clause (ii) of this Section 7.1(a); or (iv) By Target if there is a failure of a condition set forth in Section 6.1 hereof (unless the ability to meet such condition was within the control of Target) or by Acquiror if there is a failure of a condition set forth in Section 6.1 hereof (unless the ability to meet such condition was within the control of Acquiror). 7.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Acquiror or Target or their respective officers, directors, stockholders or affiliates, except to the extent that such termination results from the breach by a party hereto of any of its representations, warranties or covenants set forth in this Agreement; provided that, the provisions of Section 5.5 (Confidentiality), Section 7.3 (Expenses) and this Section 7.2 shall remain in full force and effect and survive any termination of this Agreement. 7.3 Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, the fees and expenses of its advisers, accountants and legal counsel) shall be paid by the party incurring such expense; provided, however, that any out-of-pocket expenses incurred by Target in excess of $250,000 for fees and expenses of legal counsel and accountants shall remain an obligation of Target's stockholders. If Acquiror or Target receives any invoices for amounts in excess of said amounts, it may, with Acquiror's written 46 53 approval, pay such fees; provided, however, that such payment shall, if not promptly reimbursed by the Target stockholders at Acquiror's request, constitute "Damages" recoverable under the Escrow Agreement and such Damages shall not be subject to the Escrow Basket (as defined below). 7.4 Amendment. The boards of directors of Acquiror, Merger Sub and Target may cause this Agreement to be amended at any time only by the execution of an instrument in writing signed on behalf of each of such parties; provided that an amendment made subsequent to adoption of the Agreement by the stockholders of Target shall not (i) alter or change the amount or kind of consideration to be received on conversion of the Target Capital Stock, (ii) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, or (iii) alter or change any of the terms and conditions of the Agreement if such alteration or change would adversely affect the holders of Target Capital Stock. 7.5 Extension; Waiver. At any time prior to the Effective Time any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE VIII. ESCROW AND INDEMNIFICATION 8.1 Survival of Representations, Warranties and Covenants. Notwithstanding any investigation conducted before or after the Closing Date, and notwithstanding any actual or implied knowledge or notice of any facts or circumstances which Acquiror or Target may have as a result of such investigation or otherwise, Acquiror and Target will be entitled to rely upon the other party's representations, warranties and covenants set forth in this Agreement. The obligations of Target with respect to its representations, warranties, agreements and covenants will survive the Closing and continue in full force and effect until the date 12 months following the Closing Date (the "Target Termination Date"), at which time, subject to Section 8.5, the representations, warranties and covenants of Target set forth in this Agreement and any liability of the Former Target Stockholders with respect to those representations, warranties and covenants will terminate. The obligations of Acquiror with respect to its representations, warranties, agreements and covenants will survive the Closing and continue in full force and effect until the earlier of (i) the date 12 months following the Closing Date or (ii) the expiration or early termination of the lock-up restrictions applicable to the shares of Target Common Stock in connection with the Acquiror's IPO (the "Acquiror Termination Date"), at which time the representations, warranties and covenants of Acquiror set forth in this Agreement and any liability of the Acquiror Stockholders with respect to those representations, warranties and covenants will terminate. 47 54 8.2 Indemnity. From and after the Closing Date, and subject to the provisions of this Article VIII, Acquiror and the Surviving Corporation (on or after the Closing Date) shall be indemnified and held harmless by the Former Target Stockholders against, and reimbursed for, any actual liability, damage, loss, obligation, demand, judgment, fine, penalty, cost or expense, other than any such damages resulting from injunctive relief granted as to an intellectual property claim), but including reasonable attorneys' fees and expenses, and the costs of investigation incurred in defending against or settling such liability, damage, loss, cost or expense or claim therefor and any amounts paid in settlement thereof) imposed on or reasonably incurred and paid by Acquiror or the Surviving Corporation as a result of any breach of any representation, warranty, agreement or covenant on the part of Target under this Agreement (collectively the "Damages"). "Damages" as used herein is not limited to matters asserted by third parties, but includes Damages actually incurred or sustained by Acquiror in the absence of claims by a third party. 8.3 Escrow Fund. As security for the indemnity provided for in Section 8.2 hereof, shares of Acquiror Capital Stock to be issued to Target Stockholders pursuant to Section 1.6 ("Acquisition Shares") equal to ten percent (10%) of the Total Target Consideration (excluding the Target Option Reserve) shall be deposited by Acquiror in an escrow account with a third party financial or banking institution mutually reasonably acceptable to Acquiror and Target as Escrow Agent (the "Escrow Agent"), as of the Closing Date, such deposit to constitute an escrow fund (the "Escrow Fund") to be governed by the terms set forth in this Agreement and the provisions of an Escrow Agreement to be executed and delivered pursuant to Section 5.18. The Escrow Fund shall be allocated among the Former Target Stockholders receiving Acquiror Capital Stock on a pro-rata basis in accordance with the number of shares of Acquiror Capital Stock held by the Former Target Stockholders upon consummation of the Merger (excluding for purposes of this calculation any Dissenting Shares). Upon compliance with the terms hereof and subject to the provisions of this Article VIII, Acquiror and the Surviving Corporation shall be entitled to obtain indemnity from the Escrow Fund for Damages covered by the indemnity provided for in Section 8.2 of this Agreement. 8.4 Damage Threshold. Notwithstanding the foregoing, Acquiror may not receive any shares from the Escrow Fund unless and until an Officer's Certificate (as defined in Section 8.6 below) identifying Damages the aggregate amount of which exceeds $250,000 (the "Escrow Basket") has been delivered to the Escrow Agent as provided in Section 8.6 below and such amount is determined pursuant to this Article VIII to be payable, in which case Acquiror shall receive shares equal in value to the full amount of Damages. In determining the amount of any Damage attributable to a breach, any materiality standard contained in a representation, warranty or covenant of Acquiror shall be disregarded. 8.5 Escrow Period. The Escrow Period shall terminate at the expiration of twelve (12) months after the Effective Time; provided, however, that a portion of the Escrow Shares, which are necessary to satisfy any unsatisfied claims specified in any Officer's Certificate theretofore delivered to the Escrow Agent prior to termination of the Escrow Period with respect to facts and circumstances existing prior to expiration of the Escrow Period, shall remain in the Escrow Fund until such claims have been finally resolved. 48 55 8.6 Claims upon Escrow Fund. (a) Upon receipt by the Escrow Agent on or before the Termination Date of a certificate signed by the chief financial or chief executive officer of Acquiror (an "Officer's Certificate") for a claim against the Escrow Fund: (i) stating that Acquiror or the Surviving Corporation has incurred, paid or properly accrued (in accordance with GAAP) or knows of facts giving rise to a reasonable probability that it will have to incur, pay or accrue (in accordance with GAAP) Damages in an aggregate stated amount with respect to which Acquiror or the Surviving Corporation is entitled to payment from the Escrow Fund pursuant to this Agreement; and (ii) specifying in reasonable detail the individual items of Damages included in the amount so stated, the date each such item was incurred, paid or properly accrued (in accordance with GAAP), or the basis for such anticipated liability, the specific nature of the breach to which such item is related, the Escrow Agent shall, subject to the provisions of Sections 8.7 and 8.8 of this Agreement, deliver to Acquiror shares of Acquiror Capital Stock in an amount necessary to indemnify Acquiror for the Damages claimed. All shares of Acquiror Capital Stock subject to such claims shall remain in the Escrow Fund until Damages are actually incurred or paid or the Acquiror determines in its reasonably good faith judgment that no Damages will be required to be incurred or paid (in which event such shares shall be distributed to the Former Target Stockholders in accordance with Section 8.10 below). (b) For the purpose of compensating Acquiror for its Damages pursuant to this Agreement, the Acquiror Capital Stock in the Escrow Fund shall be valued at (i) prior to the closing of a bona fide registered public offering under the Securities Act (an "IPO"), the following prices per share: (1) the Acquiror Series G-1 Preferred Stock, G-2 Preferred Stock, G-3 Preferred Stock, G-4 Preferred Stock, G-5 Preferred Stock and G-6 Preferred Stock shall be valued at $8.25 per share; and (2) the Common Stock shall be valued at $7.50 per share; or (ii) after the IPO, the market value of the public stock, as measured by the average of the closing sales price for a share of Acquiror Common Stock as quoted on the Nasdaq National Market for the five (5) trading days immediately preceding and ending on the day of the release of the Acquiror Capital Stock from the Escrow Fund. 8.7 Objections to Claims. At the time of delivery of any Officer's Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate shall be delivered to the Stockholders' Agent (defined in Section 8.9 below) and for a period of thirty (30) days after such delivery to the Escrow Agent, the Escrow Agent shall make no delivery of Acquiror Common Stock or other property pursuant to Section 8.6 hereof unless the Escrow Agent shall have received written authorization from the Stockholders' Agent to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent shall make delivery of the Acquiror Common Stock or other property in the Escrow Fund in accordance with Section 8.6 hereof, provided that no such payment or delivery may be made if the Stockholders' Agent shall object in a written statement to the claim made in the Officer's Certificate (the "Objective Notice"), and 49 56 such statement shall have been delivered to the Escrow Agent and to Acquiror prior to the expiration of such thirty (30) day period. 8.8 Resolution of Conflicts; Arbitration. (a) In case the Stockholders' Agent shall so object in writing to any claim or claims by Acquiror made in any Officer's Certificate, the Stockholders' Agent and Acquiror shall attempt in good faith for sixty (60) days from the date of receipt of the Objection Notice to agree upon the rights of the respective parties with respect to each of such claims. If the Stockholders' Agent and Acquiror should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall distribute the Acquiror Common Stock or other property from the Escrow Fund in accordance with the terms thereof. (b) If no such agreement can be reached after good faith negotiation, either Acquiror or the Stockholders' Agent may, by written notice to the other, demand arbitration of the matter unless the amount of the Damage is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Within fifteen (15) days after such written notice is sent, Acquiror and the Stockholders' Agent shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator. The decision of the arbitrators as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in Section 8.6 hereof, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance therewith. (c) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in Santa Clara or San Mateo County, California under the commercial rules then in effect of the American Arbitration Association. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents related to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses, and (c) such other depositions as may be allowed by the arbitrator upon a showing of good cause. The arbitrator shall be required to provide in writing to the parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. Any order or award of the arbitrator in accordance with the foregoing shall be final, binding and conclusive as to the parties to this Article VIII. For purposes of this Section 8.8, in any arbitration hereunder in which any claim or the amount thereof stated in the Officer's Certificate is at issue, Acquiror shall be deemed to be the Non-Prevailing Party unless the arbitrators award Acquiror more than two-thirds (2/3) of the amount in dispute; otherwise, the Target Stockholders for whom shares of Acquiror Common Stock otherwise issuable to them have been deposited in the Escrow Fund shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative fee of the American Arbitration Association, and 50 57 the expenses, including without limitation, attorneys' fees and costs, reasonably incurred by the other party to the arbitration. 8.9 Stockholders' Agent. (a) Andrew Busey shall be constituted and appointed as agent ("Stockholders' Agent") for and on behalf of the Target stockholders to give and receive notices and communications, to authorize delivery to Acquiror of the Acquiror Common Stock or other property from the Escrow Fund in satisfaction of claims by Acquiror, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Stockholders' Agent for the accomplishment of the foregoing. Such agency may be changed by the holders of a majority in interest of the Escrow Fund from time to time upon not less than ten (10) days' prior written notice to Acquiror. The Stockholder's Agent may resign upon ten (10) days notice to the parties to this Agreement and the Former Target Stockholders. No bond shall be required of the Stockholders' Agent, and the Stockholders' Agent shall receive no compensation for his services. Notices or communications to or from the Stockholders' Agent shall constitute notice to or from each of the Target stockholders. (b) The Stockholders' Agent shall not be liable for any act done or omitted hereunder as Stockholders' Agent while acting in good faith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The Target stockholders shall severally indemnify the Stockholders' Agent and hold him harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Stockholders' Agent and arising out of or in connection with the acceptance or administration of his duties hereunder. (c) The Stockholders' Agent shall have reasonable access to information about Target and the reasonable assistance of Target's officers and employees for purposes of performing its duties and exercising its rights hereunder, provided that the Stockholders' Agent shall treat confidentially and not disclose any nonpublic information from or about Target to anyone (except on a need to know basis to individuals who agree to treat such information confidentially). (d) The Stockholders' Agent shall be entitled to a distribution from the Escrow Fund equal to any such indemnity claim which has not been satisfied; provided, however, that no such distribution shall be made until all claims of Acquiror set forth in any Officer's Certificate delivered to the Escrow Agent on or prior to the Termination Date have been resolved. 8.10 Distribution Upon Termination of Escrow Period. Within five (5) business days following the Termination Date, the Escrow Agent shall deliver to the Former Target Stockholders all of the shares in the Escrow Fund in excess of any amount of such shares reasonably necessary to satisfy any unsatisfied or disputed claims for Damages specified in any Officer's Certificate delivered to the Escrow Agent on or before the Termination Date and any unsatisfied or disputed claims by the Stockholder's Agent under Section 8.9. As soon as all such 51 58 claims have been resolved, the Escrow Agent shall deliver to the Former Target Stockholders all shares remaining in the Escrow Fund and not required to satisfy such claims. Deliveries of shares to the Former Target Stockholders pursuant to this section shall be made in proportion to the allocation set forth in Section 8.3. 8.11 Actions of the Stockholders' Agent. A decision, act, consent or instruction of the Stockholders' Agent shall constitute a decision of all Target stockholders for whom shares of Acquiror Common Stock otherwise issuable to them are deposited in the Escrow Fund and shall be final, binding and conclusive upon each such Target stockholder, and the Escrow Agent and Acquiror may rely upon any decision, act, consent or instruction of the Stockholders' Agent as being the decision, act, consent or instruction of each and every such Target stockholder. The Escrow Agent and Acquiror are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, act, consent or instruction of the Stockholders' Agent. 8.12 Third-Party Claims. In the event Acquiror becomes aware of a third-party claim which Acquiror believes may result in a demand against the Escrow Fund, Acquiror shall promptly notify the Stockholders' Agent of such claim. Acquiror shall have the right to settle any such claim only with the written consent of the Stockholders' Agent, which consent shall not be unreasonably withheld; provided, however, that the Stockholders' Agent may, at his option, direct the settlement negotiations or (ii) disputes or disagreements with customers of Acquiror or Target. In the event that the Stockholders' Agent has consented to any such settlement, neither the Former Target Stockholders nor the Stockholders' Agent shall have any power or authority to object under Section 8.7 or any other provision of this Agreement to the amount of any claim by Acquiror against the Escrow Fund for indemnity with respect to such settlement. If any proceeding is commenced, or if any claim, demand or assessment is asserted, in respect of which a claim for indemnification is or might be made against the Escrow Fund the Stockholders' Agent may, at his option, contest or defend any such action, proceeding, claim, demand or assessment, with counsel selected by the Stockholder Agent who is reasonably acceptable to Acquiror; provided, however, that if Acquiror shall reasonably object to such control, then the Stockholders' Agent and Acquiror shall cooperate in the defense of such matter; provided further, that the Stockholders' Agent shall not admit any liability with respect thereto or settle, compromise, pay or discharge the same without the prior written consent of Acquiror, which consent shall not be unreasonably withheld. With respect to any claim for indemnification based on matters relating to the intellectual property of Target, or customers of Target or Acquiror, Acquiror shall have the option to defend any such proceeding with counsel reasonably satisfactory to the Stockholders' Agent; provided, however, that Acquiror shall not admit any liability with respect thereto or settle, compromise, pay or discharge the same without the prior written consent of the Stockholders' Agent, which consent shall not be unreasonably withheld. The Stockholder Agent or Acquiror, whichever is not controlling the defense of any matter, shall be entitled to participate in such defense, at Acquiror's or the Former Target Stockholders' expense. 8.13 Maximum Liability and Remedies. The Escrow Fund shall be the sole and exclusive remedy of Acquiror and the Surviving Corporation after the Closing with respect to any representation, warranty, covenant or agreement made by Target under this Agreement and any claim for indemnification with respect thereto; provided, however, that nothing herein limits 52 59 any potential remedies and liabilities of Acquiror or the Surviving Corporation, arising under applicable state and federal laws with respect to any intentional or fraudulent misrepresentations, made in or pursuant to this Agreement. Nothing in this Agreement shall limit the liability of any Target stockholder in connection with any breach by such stockholder of the Stockholder Representation Agreement or the Voting and Proxy Agreement. ARTICLE IX. GENERAL PROVISIONS 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following address (or at such other address for a party as shall be specified by like notice): (a) if to Acquiror or Merger Sub, to: Quintus Corporation 47212 Mission Falls Court Fremont, CA 94539 Attention: Chief Financial Officer Facsimile No.: (510) 624-2895 Telephone No.: (510) 624-2895 with a copy to (which shall not constitute notice): Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 155 Constitution Drive Menlo Park, CA 94025 Attention: Scott C. Dettmer Facsimile No.: (650) 321-2800 Telephone No.: (650) 321-2400 (b) if to Target, to: Acuity Corp. 11100 Metric Blvd., Building 7 Austin, TX 78758 Attention: President Facsimile No.: (512) 719.8225 Telephone No.: (512) 425.2200 53 60 with a copy to (which shall not constitute notice): Gray Cary Ware & Freidendrich 100 Congress Avenue, Suite 1440 Austin, TX 78701-4042 Attention: Paul E. Hurdlow Facsimile No.: (512) 457-7070 Telephone No.: (512) 457-7000 (c) if to the Stockholders' Agent, to: Andrew Busey --------------------------------- --------------------------------- Facsimile No.: ----- Telephone No.: ----- 9.2 Interpretation. When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." In this Agreement, any reference to any event, change, condition or effect being "material" with respect to any entity or group of entities means any material event, change, condition or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations or results of operations of such entity or group of entities. In this Agreement, any reference to a "Material Adverse Effect" with respect to any entity or group of entities means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, operations or results of operations of such entity and its subsidiaries, taken as a whole. In this Agreement, any reference to a party's "knowledge" means such party's actual knowledge after due and diligent inquiry of officers and directors of such party and its subsidiaries reasonably believed to have knowledge of such matters. The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. The phrases "the date of this Agreement", "the date hereof", and terms of similar import, unless the context otherwise requires, shall be deemed to refer to the date first above written. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 9.4 Entire Agreement; No Third Party Beneficiaries. This Agreement, the other Transaction Documents and the documents and instruments and other agreements specifically referred to herein or delivered pursuant hereto, including the Exhibits, the Schedules, including the Target Disclosure Letter and the Acquiror Disclosure Letter (a) constitute the entire 54 61 agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, except for the Confidentiality Agreement, which shall continue in full force and effect, and shall survive any termination of this Agreement or the Closing, in accordance with its terms; (b) are not intended to confer upon any other person any rights or remedies hereunder, except for the rights of the Target Stockholders and optionholders described herein. 9.5 Severability. In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 9.6 Remedies Cumulative. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to applicable principles of conflicts of law. Each of the parties hereto irrevocably consents to the exclusive jurisdiction of any court located within the State of California, in connection with any matter based upon or arising out of this Agreement or the matters contemplated herein, agrees that process may be served upon them in any manner authorized by the laws of the State of California for such persons and waives and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 9.8 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns. 9.9 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation, preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 55 62 IN WITNESS WHEREOF, Target, Acquiror, Merger Sub and each Affiliate have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, and the Stockholders' Representative has executed this Agreement, all as of the date first written above. "TARGET" ACUITY CORP. By: /s/ MARK WHIPPLE SAUL ------------------------------------- Mark Whipple Saul, Chairman, Chief Executive Officer and President "ACQUIROR" QUINTUS CORPORATION By: /s/ ALAN K. ANDERSON ------------------------------------- Alan K. Anderson, Chief Executive Officer "MERGER SUB" RIBEYE ACQUISITION CORP. By: /s/ ALAN K. ANDERSON ------------------------------------- Alan K. Anderson, Chief Executive Officer "STOCKHOLDERS' REPRESENTATIVE" /s/ ANDREW BUSEY -------------------------------------- Andrew Busey [SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION] 63 INVESTORS: ONSET ENTERPRISE ASSOCIATES II, L.P. By: OEA II Management, L.P. its General Partner By: /s/ THOMAS E. WINTER ------------------------------------- Thomas E. Winter, its General Partner GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- GE CAPITAL EQUITY INVESTMENTS, INC. By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- VECTOR CAPITAL, L.P. By: Vector Capital Partners, L.L.C., a General Partner By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- [SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION] 64 SONY MUSIC ENTERTAINMENT INC. By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- CURLY H VENTURES, LTD. By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- KECALP, INC. By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- TEA CUSTODIANS (WESTONE) LIMITED By: /s/ ------------------------------------- (Signature) Name: ----------------------------------- Title: ----------------------------------- [SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION] 65 /s/ ANDREW BUSEY ----------------------------------------- Andrew Busey /s/ MARK WHIPPLE SAUL ----------------------------------------- Mark Whipple Saul /s/ JOHN HIME ----------------------------------------- John Hime /s/ ANDREW BUSEY ----------------------------------------- Andrew Busey /s/ STEVE SMITH ----------------------------------------- Steve Smith /s/ ALEX SLUSKY ----------------------------------------- Alex Slusky /s/ REG MCHONE ----------------------------------------- Reg McHone /s/ DAN FOWKES ----------------------------------------- Dan Fowkes /s/ DEAN CRUSE ----------------------------------------- Dean Cruse /s/ MICHAEL OSWALD ----------------------------------------- Michael Oswald /s/ KURT SOMERHOLTER ----------------------------------------- Kurt Somerholter [SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION] EX-3.1 3 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF QUINTUS CORPORATION, A Delaware Corporation Quintus Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY THAT: FIRST: The name of the corporation is Quintus Corporation and that the corporation was originally incorporated on June 11, 1990 under the name QTNEWCO, INC. pursuant to the General Corporation Law. SECOND: The Board of Directors of the corporation, at a meeting duly called and held, adopted resolutions amending and restating the Certificate of Incorporation to read in full as follows: "RESOLVED, that the Certificate of Incorporation of the corporation (the "Certificate") be and it hereby is amended and restated to read in its entirety as follows: ARTICLE I The name of this corporation is Quintus Corporation. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law. ARTICLE IV A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock," each with a par value of $0.001 per share. The total number of shares which this corporation is authorized to issue is Fifty-Nine Million Fifty-Five Thousand (59,055,000) shares. Forty Million (40,000,000) shares shall be Common Stock and Nineteen Million Fifty-Five Thousand (19,055,000) shares shall be Preferred Stock. 1 2 B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock (the "Series A Preferred Stock"), which series shall consist of Nine Million One Hundred Thousand (9,100,000) shares, the Series B Preferred Stock (the "Series B Preferred Stock"), which series shall consist of One Million (1,000,000) shares, the Series C Preferred Stock (the "Series C Preferred Stock"), which series shall consist of Three Million (3,000,000) shares, the Series D Preferred Stock (the "Series D Preferred Stock"), which series shall consist of One Million Four Hundred Fifty-Five Thousand (1,455,000) shares, the Series E Preferred Stock (the "Series E Preferred Stock"), which series shall consist of Three Million (3,000,000) shares and the Series F Preferred Stock (the "Series F Preferred Stock"), which series shall consist of One Million Five Hundred Thousand (1,500,000) shares, are as set forth below in this Article IV(B). The Board of Directors of this corporation is hereby authorized to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them. Subject to compliance with applicable protective voting rights which have been or may be granted to the Preferred Stock or series thereof ("Protective Provisions") and other applicable rights under the General Corporation Law, but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock or the Series F Preferred Stock) prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. (a) The holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other non-redeemable equity securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the per share rate of $0.20, $0.286, $0.382, $0.55, $0.83 and $1.65 per annum, respectively, (as adjusted for any stock dividends, combinations or splits with respect to such shares) or, if greater (as determined on a per annum basis), an amount equal to that paid on any other outstanding shares of this corporation, payable only when and if declared by the Board of Directors. If any dividends are declared or paid in any year on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock in an 2 3 amount less than $0.20, $0.286, $0.382, $0.55, $0.83 and $1.65 respectively, per share, all such Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock dividends during such year shall be declared or paid, as applicable, ratably among the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock in proportion to the full preferential dividend amounts for such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock set forth above. The right to such dividends on shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. (b) In the event this corporation shall declare any other dividend or distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidence of indebtedness, then, in each such case the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be entitled to a proportionate share of any such dividend or distribution as though the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock were the holders of the number of shares of Common Stock of this corporation into which their respective shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series F Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Common Stock by reason of their ownership thereof, an amount per share equal to $8.25 (the "Original Series F Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series F Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share (the "Series F Liquidation Preference"). After payment of the Series F Liquidation Preference, the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership thereof, (i) an amount per share equal to $1.00 (the "Original Series A Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series A Preferred 3 4 Stock held by each such holder plus any declared but unpaid dividends on such share, (ii) an amount per share equal to $1.43 (the "Original Series B Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series B Preferred Stock held by each such holder plus any declared but unpaid dividends on such share, (iii) an amount per share equal to $1.91 (the "Original Series C Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series C Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (iv) an amount per share equal to $2.75 (the "Original Series D Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series D Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, and (v) an amount per share equal to $4.15 (the "Original Series E Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series E Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share. If upon the occurrence of such event and after payment of the Series F Liquidation Preference, the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the assets and funds of this corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive under this subsection 2(a). (b) Upon the completion of the distributions required by subsection (a) of this Section 2, the remaining assets of this corporation available for distribution to stockholders shall be distributed among the holders of Series E Preferred Stock, Series F Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming full conversion of all such Series E Preferred Stock and Series F Preferred Stock) until, with respect to the holders of the Series E Preferred Stock and Series F Preferred Stock, such holders shall have received an aggregate of $10.375 per share and $12.375 per share, respectively (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to subsection (a) of this Section 2); thereafter, if assets remain in this corporation, the holders of the Common Stock of this corporation shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (c) A consolidation or merger of this corporation with or into any other corporation or corporations (other than a wholly-owned subsidiary or parent corporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by this corporation of a transaction or series of related transactions in which more than 50% of the voting power of this corporation is disposed of, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. (d) In the event a liquidation, dissolution or winding up of this corporation under this Section 2 is effected, whether in whole or in part, through a noncash 4 5 distribution, such noncash distribution shall be valued at the fair value thereof as determined in good faith by the Board of Directors of this corporation. 3. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall have conversion rights (the "Conversion Rights") as follows: (a) Right to Convert. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be convertible, at any time upon the election of the holders of at least a majority of the then-outstanding shares of Series A Preferred, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, voting together as a single class, into shares of Common Stock and a right to receive cash, (i) with each share of Series A Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price by the Conversion Price applicable to Series A Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $0.925 for each share of Series A Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series A Cash Amount"), (ii) with each share of Series B Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series B Issue Price by the Conversion Price applicable to Series B Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $1.325 for each share of Series B Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series B Cash Amount"), (iii) with each share of Series C Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series C Issue Price by the Conversion Price applicable to the Series C Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $1.765 for each share of Series C Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series C Cash Amount") and (iv) with each share of Series D Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series D Issue Price by the Conversion Price applicable to Series D Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $2.544 for each share of Series D Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series D Cash Amount"). Each share of Series E Preferred Stock and Series F Preferred Stock shall be convertible, at the option of the holder thereof at any time after the date of issuance of such share, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series E Issue Price or Original Series F Issue Price, as the case may be, by the Conversion Price (determined as hereinafter provided) per share in effect for such series of Preferred Stock at the time of conversion. The initial Conversion Price per share for shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be the Original Series A Issue Price, the Original Series B Issue Price, the Original Series C Issue Price, the Original Series D Issue Price, the Original Series E Issue Price and the Original Series F Issue Price, respectively; provided, however, that the Conversion Prices 5 6 for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be subject to adjustment as set forth in subsection 3(d). The Series A Cash Amount, the Series B Cash Amount, the Series C Cash Amount and the Series D Cash Amount are sometimes hereinafter referred to collectively as the "Cash Amounts." (b) Automatic Conversion. (i) Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall automatically be converted into shares of Common Stock and a right to receive cash, with each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock converting into: (i) fully paid and nonassessable shares of Common Stock at the respective Conversion Prices for each of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock at the time in effect for such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively; and (ii) a right to receive from this corporation a cash payment in an amount equal to the Series A Cash Amount for each share of Series A Preferred Stock held, the Series B Cash Amount for each share of Series B Preferred Stock held, the Series C Cash Amount for each share of Series C Preferred Stock held and the Series D Cash Amount for each share of Series D Preferred Stock held, except as provided below in subsection 3(c), immediately upon the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which is not less than $40,000,000 in the aggregate. (ii) Each share of Series E Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series E Preferred Stock immediately upon the earlier of (A) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which was not less than $40,000,000 in the aggregate, or (B) the date specified by written consent or agreement of the holders of at least sixty percent (60%) of the then outstanding shares of Series E Preferred Stock; provided, however, that to the extent that the Series E Preferred Stock would automatically convert into Common Stock pursuant to clause (A) of this subsection 3(b)(ii) and the public offering price is less than $8.30 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) (as so adjusted, the "Series E Price"), each share of Series E Preferred Stock shall automatically convert into such number of fully paid and nonassessable shares of Common Stock as is determined (X) by dividing the Series E Price by the price per share of the public offering or (Y) by dividing the Original Series E Issue Price by the Conversion Price applicable to the Series E Preferred Stock (as adjusted, if applicable, by Section 3(d)) in effect on the date of such conversion, whichever is greater. (iii) Each share of Series F Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price then in effect for such series of Preferred Stock immediately upon the earlier of (A) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of 6 7 which is not less than $40,000,000 in the aggregate, or (B) the date specified by written consent or agreement of the holders of at least a majority of the then outstanding shares of Series F Preferred Stock, respectively; provided, however, that to the extent that the Series F Preferred Stock would automatically convert into Common Stock pursuant to clause (A) of this subsection 3(b)(ii) and the public offering price is less than $11.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization), each share of Series F Preferred Stock shall automatically convert into such number of fully paid and nonassessable shares of Common Stock as is determined (X) by dividing $11.00 by the price per share of the public offering or (Y) by dividing the Original Series F Issue Price by the Conversion Price per share (as adjusted, if applicable, by Section 3(d)) in effect for such series of Preferred Stock at the time of such conversion, whichever is greater. (c) Mechanics of Conversion. Following such a conversion, each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for such holder, and shall indicate in writing the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall issue and deliver to each such holder, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled pursuant to Section 3(a) or Section 3(b) above, as applicable, and shall pay (i) to each holder of Series A Preferred Stock the applicable Series A Cash Amount for each share of Series A Preferred Stock held by such holder, (ii) to each holder of Series B Preferred Stock the applicable Series B Cash Amount for each share of Series B Preferred Stock held by such holder, (iii) to each holder of Series C Preferred Stock the applicable Series C Cash Amount for each share of Series C Preferred Stock held by such holder, and (iv) to each holder of Series D Preferred Stock the applicable Series D Cash Amount for each share of Series D Preferred Stock held by such holder, payable by check or wire transfer within ten calendar days following such conversion. In the case of conversion pursuant to Section 3(a), such conversion shall be deemed to have been made immediately prior to the close of business on the date of such election to convert the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock, as the case may be, and the holders entitled to receive the shares of Common Stock issuable and Cash Amounts payable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with a public offering of the Company's Common Stock, the conversion may, at the election of the holders requesting such conversion, be conditioned upon the closing of the sale of securities pursuant to such public offering, in which event the conversion of the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall not be deemed to have occurred until immediately subsequent to the closing of such sale of securities. If the funds of this corporation legally available for payment of the total Cash Amounts upon conversion of the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are insufficient at the time of such conversion to pay in full the total Cash Amounts required upon such conversion, those funds that are legally available at such time, if any, shall be applied ratably to the payment of the Cash Amounts, and, thereafter, when additional funds of this corporation become legally 7 8 available for payment of the remaining portion of such total Cash Amounts, such funds shall be applied ratably to the payment of such remaining Cash Amounts until it is paid in full. (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If the corporation shall issue, after the date upon which any shares of Series A Preferred Stock are first issued (the "Series A Purchase Date") or the shares of Series B Preferred Stock are first issued (the "Series B Purchase Date") or the shares of Series C Preferred Stock are first issued (the "Series C Purchase Date") or the shares of Series D Preferred Stock are first issued (the "Series D Purchase Date") or the shares of Series E Preferred Stock are first issued (the "Series E Purchase Date") or the shares of Series F Preferred Stock are first issued (the "Series F Purchase Date") (the "Purchase Date" with respect to such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including the number of shares of Common Stock issuable upon conversion of outstanding Preferred Stock) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock (including the number of share of Common Stock issuable upon conversion of outstanding Preferred Stock) outstanding immediately prior to such issuance plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, or the Series F Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to 3 years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of 3 years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 3(d)(i)(E)(3) and 3(d)(i)(E)(4), no adjustment of such Conversion Price pursuant to this subsection 3(d)(i)(B) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. 8 9 (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(i)(C) and 3(d)(i)(D)), if any, received by the corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (to the extent then convertible or exchangeable) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 3(d)(i)(C) and 3(d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Prices of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 9 10 (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Prices of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(i)(E)(1) and 3(d)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(i)(E)(3) or 3(d)(i)(E)(4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 3(d)(i)(E)) by this corporation after the applicable Purchase Date other than (A) securities issued pursuant to a transaction described in subsection 3(d)(iii) hereof; (B) shares of Common Stock issuable or issued to employees, consultants or directors of this corporation directly or pursuant to stock option plans or restricted stock plans approved by the Board of Directors of this corporation prior to the Series E Purchase Date and pursuant to stock option plans or restricted stock plans approved by the Board of Directors of this corporation after the Series F Purchase Date and approved by the holders of a majority of outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series F Preferred Stock, voting together as a single class; (C) securities issuable upon the conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock; (D) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by this corporation by merger, purchase of substantially all the assets or other reorganization whereby this corporation will own a majority of the voting power of such business entity or business segment of any such entity, in each such instance, approved by the Board of Directors; (E) securities issued to vendors or customers or to other persons in similar commercial situations with this corporation if such issuance is approved by the Board of Directors; 10 11 (F) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person if such issuance is approved by the Board of Directors; (G) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of Additional Stock pursuant to subsections (D) through (F) above; (H) warrants issued April 17, 1996 to purchase 5,000 shares of Common Stock and the Common Stock issuable upon exercise thereof; (I) warrants issued August 16, 1996 to purchase 192,262 shares of Series B Preferred Stock and the Preferred Stock issuable upon exercise thereof; (J) warrants to purchase 331,312 shares of Common Stock and the Common Stock issuable upon exercise thereof issued pursuant to that certain Note and Warrant Purchase Agreement dated November 10, 1997 by and among the corporation and the other parties thereto; (K) warrants to purchase 300,000 shares of Common Stock issued on or about August 19, 1999 and the Common Stock issuable upon exercise thereof. (iii) In the event the corporation should at any time or from time to time after the Series A Purchase Date, the Series B Purchase Date, the Series C Purchase Date, the Series D Purchase Date, the Series E Purchase Date, or the Series F Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock, respectively, shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (iv) If the number of shares of Common Stock outstanding at any time after the Series A Purchase Date, Series B Purchase Date, Series C Purchase Date, Series D Purchase Date, Series E Purchase Date or Series F Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Ratio shall be appropriately adjusted so that the 11 12 number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, respectively, shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 3(d)(iii), then, in each such case for the purpose of this subsection 3(e), the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, respectively, are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3), provision shall be made so that the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock, respectively, the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock against impairment. 12 13 (h) No Fractional Shares. No fractional shares shall be issued upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Such rounding shall be based on the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock such holder is converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (i) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 4. Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each applicable holder of Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 5. Voting Rights. (a) Subject to Section 5(b) below, the Common Stock and Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock will vote together as a single class on all matters submitted for stockholder consent or approval; provided, however, that if at any time the voting power of the then-outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock would otherwise be insufficient to elect all of this corporation's directors (any period during which such condition exists referred to as the "Voting Shift Period"), then, during the Voting Shift Period, (i) the number of authorized directors of this corporation shall be set at a number not less than five (5), (ii) the Series A Preferred Stock and Series B Preferred Stock then outstanding shall be entitled to elect, voting as a separate class, that number of directors equal to three-fourths (3/4ths) of the then-authorized directors (rounded to the nearest whole number), (iii) the Series C Preferred Stock shall be entitled, pursuant to subsection 5(b), to elect, voting separately as a series, one (1) director, and (iii) the holders of the Common Stock then outstanding shall be entitled to elect the remaining number of authorized directors. 13 14 (b) The holders of the Series C Preferred Stock, voting separately as a series, shall be entitled to elect one (1) member of the Board of Directors. (c) The holder of each share of Series A Preferred Stock shall have ten votes for each share of Common Stock into which such Series A Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series A Preferred Stock, each share of Series A Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of ten shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series B Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series B Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series B Preferred Stock, each share of Series B Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series C Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series C Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series C Preferred Stock, each share of Series C Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series D Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series D Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series D Preferred Stock, each share of Series D Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series E Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series E Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series E Preferred Stock, each share of Series E Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with 14 15 holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series F Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series F Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series F Preferred Stock, each share of Series F Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. 6. Protective Provisions. In addition to the vote provided for pursuant to Section 5 above, and subject to the rights of series of Preferred Stock which may from time to time come into existence: (a) so long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock are outstanding, this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy-five percent (75%) of the voting power of the then outstanding shares of such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock voting together as a single class: (i) increase or decrease the authorized number of shares of any series of Preferred Stock; (ii) create any new class or series of stock or any other securities convertible into equity securities of this corporation (by reclassification or otherwise) having a preference over or on parity with the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, or Series F Preferred Stock with respect to voting, dividends, conversion, redemption or upon liquidation; (iii) redeem or repurchase any other class or series of stock prior to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock; (iv) alter or change the rights, preferences, or privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock so as to adversely affect such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock; or (v) amend or alter the voting percentage required to approve an event or change listed in this Section 6(a); (b) So long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or 15 16 Series F Preferred Stock are outstanding, this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the voting power of the then outstanding shares of such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock, voting together as a single class, sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of. (c) This corporation shall not (i) alter or change the rights, preferences or privileges of any series of Preferred Stock so as to affect adversely the shares of such series in a manner different than the shares of any other series of Preferred Stock, or (ii) amend the provisions of this Section 6(c) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of shares of such adversely affected series that are entitled to vote with respect to the matter and that hold at least a majority of the then outstanding shares of such series. (d) This corporation shall not (i) amend or alter Section 2(b) of Article IV or Section 3(b)(ii) of Article IV or (ii) amend the provisions of this Section 6(d) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least sixty percent (60%) of the then outstanding shares of Series E Preferred Stock. (e) This corporation shall not (i) amend or alter Section 2(b) of Article IV or Section 3(b)(iii) of Article IV or (ii) amend the provisions of this Section 6(e) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least sixty percent (60%) of the then outstanding shares of Series F Preferred Stock. C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, only when and if declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section B(2) of this Article IV of this Certificate of Incorporation. 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. 16 17 ARTICLE V Except as otherwise provided in this Certificate, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the bylaws of this corporation. ARTICLE VI The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII Elections of directors need not be by written ballot unless the bylaws of this corporation shall so provide. ARTICLE VIII Meetings of stockholders may be held within or outside the State of Delaware, as the bylaws may provide. The books of this corporation may be kept, (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of this corporation. ARTICLE IX A director of this corporation shall not be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended. Any repeal or modification of the foregoing provisions of this Article IX by the stockholders of this corporation shall not adversely affect any right or protection of a director of this corporation existing at the time of such repeal or modification. ARTICLE X Except as provided for in Section 6 of Article IV, this corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation." * * * 17 18 THIRD: That thereafter, pursuant to resolution of the Board of Directors, the Amended and Restated Certificate of Incorporation was submitted to the stockholders for their approval, which approval was given by written consent of a majority of the stockholders pursuant to Section 228 of the General Corporation Law. FOURTH: That said Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed by the President and the Secretary of the Corporation this 24th day of August, 1999. QUINTUS CORPORATION /s/ Alan K. Anderson ----------------------------------------- Alan K. Anderson Chief Executive Officer 18 EX-3.2 4 FORM OF RESTATED CERT. OF INCORP. (ACQUISITION) 1 EXHIBIT 3.2 RESTATED CERTIFICATE OF INCORPORATION OF QUINTUS CORPORATION, A Delaware Corporation Quintus Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY THAT: FIRST: The name of the corporation is Quintus Corporation and that the corporation was originally incorporated on June 11, 1990 under the name QTNEWCO, INC. pursuant to the General Corporation Law. SECOND: The Board of Directors of the corporation, at a meeting duly called and held, adopted resolutions amending and restating the Certificate of Incorporation to read in full as follows: "RESOLVED, that the Certificate of Incorporation of the corporation (the "Certificate") be and it hereby is amended and restated to read in its entirety as follows: ARTICLE I The name of this corporation is Quintus Corporation. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law. ARTICLE IV A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock," each with a par value of $0.001 per share. The total number of shares which this corporation is authorized to issue is One Hundred Thirty-Three Million (133,000,000) shares. One Hundred Million (100,000,000) shares shall be Common Stock and Thirty-Three Million (33,000,000) shares shall be Preferred Stock. 1 2 B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges, and restrictions granted to and imposed on the Series A Preferred Stock (the "Series A Preferred Stock"), which series shall consist of Nine Million One Hundred Thousand (9,100,000) shares, the Series B Preferred Stock (the "Series B Preferred Stock"), which series shall consist of One Million (1,000,000) shares, the Series C Preferred Stock (the "Series C Preferred Stock"), which series shall consist of Three Million (3,000,000) shares, the Series D Preferred Stock (the "Series D Preferred Stock"), which series shall consist of One Million Four Hundred Fifty-Five Thousand (1,455,000) shares, the Series E Preferred Stock (the "Series E Preferred Stock"), which series shall consist of Three Million (3,000,000) shares, the Series F Preferred Stock (the "Series F Preferred Stock"), which series shall consist of One Million Five Hundred Thousand (1,500,000) shares, the Series G-1 Preferred Stock (the "Series G-1 Preferred Stock"), which series shall consist of __________ (_______) shares, the Series G-2 Preferred Stock (the "Series G-2 Preferred Stock"), which series shall consist of __________ (_______) shares, the Series G-3 Preferred Stock (the "Series G-3 Preferred Stock"), which series shall consist of __________ (_______) shares, the Series G-4 Preferred Stock (the "Series G-4 Preferred Stock"), which series shall consist of __________ (_______) shares, the Series G-5 Preferred Stock (the "Series G-5 Preferred Stock"), which series shall consist of __________ (_______) shares, and the Series G-6 Preferred Stock (the "Series G-6 Preferred Stock"), which series shall consist of __________ (_______) shares, are as set forth below in this Article IV(B). The Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, Series G-5 Preferred Stock and Series G-6 Preferred Stock are sometimes collectively referred to herein as the "Series G Preferred Stock." The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock are sometimes collectively referred to herein as the "Series Preferred Stock." The Board of Directors of this corporation is hereby authorized to fix or alter the rights, preferences, privileges, and restrictions granted to or imposed upon additional series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them. Subject to compliance with applicable protective voting rights which have been or may be granted to the Preferred Stock or series thereof ("Protective Provisions") and other applicable rights under the General Corporation Law, but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series Preferred Stock) prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 2 3 1. Dividend Provisions. (a) The holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, Series G-5 Preferred Stock and Series G-6 Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other non-redeemable equity securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Common Stock of this corporation, at the per share rate of $0.20, $0.286, $0.382, $0.55, $0.83, $1.65, [THIS NUMBER (THE "Series G-1 Dividend") SHALL BE THE PRODUCT OF (x) 0.20 AND (y) A FRACTION, THE NUMERATOR OF WHICH IS $1.00 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO" AS SET FORTH IN SECTION 1.6(a) (THE "EXCHANGE RATIO") OF THE AGREEMENT AND PLAN OF REORGANIZATION, DATED SEPTEMBER __, 1999, BY AND AMONG THE COMPANY, RIBEYE ACQUISITION CORP.AND ACUITY CORP. (THE "MERGER AGREEMENT")], [THIS NUMBER (THE "Series G-2 Dividend") SHALL BE THE PRODUCT OF (x) 0.20 AND (y) A FRACTION, THE NUMERATOR OF WHICH IS $1.50 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"], [THIS NUMBER (THE "Series G-3 Dividend") SHALL BE THE PRODUCT OF (x) 0.20 AND (y) A FRACTION, THE NUMERATOR OF WHICH IS $1.75 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"], [THIS NUMBER (THE "Series G-4 Dividend") SHALL BE THE PRODUCT OF (x) 0.20 AND (y) A FRACTION, THE NUMERATOR OF WHICH IS $3.00 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"], [THIS NUMBER (THE "Series G-5 Dividend") SHALL BE THE PRODUCT OF (x) 0.20 AND (y) A FRACTION, THE NUMERATOR OF WHICH IS $3.50 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] and [THIS NUMBER (THE "Series G-6 Dividend") SHALL BE THE PRODUCT OF (x) 0.20 AND (y) A FRACTION, THE NUMERATOR OF WHICH IS $2.59 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] per annum, respectively, (as adjusted for any stock dividends, combinations or splits with respect to such shares) or, if greater (as determined on a per annum basis), an amount equal to that paid on any other outstanding shares of this corporation, payable only when and if declared by the Board of Directors. If any dividends are declared or paid in any year on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, the Series G-5 Preferred Stock and the Series G-6 Preferred Stock in an amount less than $0.20, $0.286, $0.382, $0.55, $0.83, 3 4 $1.65, the Series G-1 Dividend, the Series G-2 Dividend, the Series G-3 Dividend, the Series G-4 Dividend, the Series G-5 Dividend and the Series G-6 Dividend, respectively, per share, all such Series Preferred Stock dividends during such year shall be declared or paid, as applicable, ratably among the Series Preferred Stock in proportion to the full preferential dividend amounts for such Series Preferred Stock set forth above. The right to such dividends on shares of Series Preferred Stock shall not be cumulative and no right shall accrue to holders of shares of Series Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year, nor shall any undeclared or unpaid dividend bear or accrue interest. (b) In the event this corporation shall declare any other dividend or distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidence of indebtedness, then, in each such case the holders of the Series Preferred Stock shall be entitled to a proportionate share of any such dividend or distribution as though the holders of the Series Preferred Stock were the holders of the number of shares of Common Stock of this corporation into which their respective shares of Series Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence, the holders of Series F Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series G Preferred Stock and Common Stock by reason of their ownership thereof, an amount per share equal to $8.25 (the "Original Series F Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series F Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share (the "Series F Liquidation Preference"). After payment of the Series F Liquidation Preference, the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series G Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership thereof, (i) an amount per share equal to $1.00 (the "Original Series A Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series A Preferred Stock held by each such holder plus any declared but unpaid dividends on such share, (ii) an amount per share equal to $1.43 (the "Original Series B Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series B Preferred Stock held by each such holder plus any declared but unpaid dividends on such share, (iii) an amount per share equal to $1.91 (the "Original Series C Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series C 4 5 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (iv) an amount per share equal to $2.75 (the "Original Series D Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series D Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (v) an amount per share equal to $4.15 (the "Original Series E Issue Price") for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series E Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (vi) an amount per share equal to [THIS NUMBER (THE "Original Series G-1 Issue Price") SHALL BE A FRACTION, THE NUMERATOR OF WHICH IS $1.00 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series G-1 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (vii) an amount per share equal to [THIS NUMBER (THE "Original Series G-2 Issue Price") SHALL BE A FRACTION, THE NUMERATOR OF WHICH IS $1.50 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series G-2 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (viii) an amount per share equal to [THIS NUMBER (THE "Original Series G-3 Issue Price") SHALL BE A FRACTION, THE NUMERATOR OF WHICH IS $1.75 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series G-3 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (ix) an amount per share equal to [THIS NUMBER (THE "Original Series G-4 Issue Price") SHALL BE A FRACTION, THE NUMERATOR OF WHICH IS $3.00 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series G-4 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, (x) an amount per share equal to [THIS NUMBER (THE "Original Series G-5 Issue Price") SHALL BE A FRACTION, THE NUMERATOR OF WHICH IS $3.50 AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series G-5 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share, and (xi) an amount per share equal to [THIS NUMBER (THE "Original Series G-6 Issue Price") SHALL BE A FRACTION, THE NUMERATOR OF WHICH IS $____ AND THE DENOMINATOR OF WHICH IS THE "EXCHANGE RATIO"] for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares) of Series G-6 Preferred Stock held by each such holder plus any undeclared but unpaid dividends on such share. 5 6 If upon the occurrence of such event and after payment of the Series F Liquidation Preference, the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series G Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock which may from time to time come into existence, the assets and funds of this corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series G Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive under this subsection 2(a). (b) Upon the completion of the distributions required by subsection (a) of this Section 2, the remaining assets of this corporation available for distribution to stockholders shall be distributed among the holders of Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (assuming full conversion of all such Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock) until, with respect to the holders of Series E Preferred Stock, Series F Preferred Stock, Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, Series G-5 Preferred Stock and Series G-6 Preferred Stock, such holders shall have received an aggregate of $10.375, $12.375, [THIS NUMBER SHALL BE THE PRODUCT OF (i) THE ORIGINAL SERIES G-1 ISSUE PRICE AND (ii) 2.0], [THIS NUMBER SHALL BE THE PRODUCT OF (i) THE ORIGINAL SERIES G-2 ISSUE PRICE AND (ii) 2.0], [THIS NUMBER SHALL BE THE PRODUCT OF (i) THE ORIGINAL SERIES G-3 ISSUE PRICE AND (ii) 2.0], [THIS NUMBER SHALL BE THE PRODUCT OF (i) THE ORIGINAL SERIES G-4 ISSUE PRICE AND (ii) 2.0], [THIS NUMBER SHALL BE THE PRODUCT OF (i) THE ORIGINAL SERIES G-5 ISSUE PRICE AND (ii) 2.0], [THIS NUMBER SHALL BE THE PRODUCT OF (i) THE ORIGINAL SERIES G-6 ISSUE PRICE AND (ii) 2.0], per share respectively (as adjusted for any stock splits, stock dividends, recapitalizations or the like) (including amounts paid pursuant to subsection (a) of this Section 2); thereafter, if assets remain in this corporation, the holders of the Common Stock of this corporation shall receive all of the remaining assets of this corporation pro rata based on the number of shares of Common Stock held by each. (c) A consolidation or merger of this corporation with or into any other corporation or corporations (other than a wholly-owned subsidiary or parent 6 7 corporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by this corporation of a transaction or series of related transactions in which more than 50% of the voting power of this corporation is disposed of, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. (d) In the event a liquidation, dissolution or winding up of this corporation under this Section 2 is effected, whether in whole or in part, through a noncash distribution, such noncash distribution shall be valued at the fair value thereof as determined in good faith by the Board of Directors of this corporation. 3. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock shall have conversion rights (the "Conversion Rights") as follows: (a) Right to Convert. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be convertible, at any time upon the election of the holders of at least a majority of the then-outstanding shares of Series A Preferred, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, voting together as a single class, into shares of Common Stock and a right to receive cash, (i) with each share of Series A Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price by the Conversion Price applicable to Series A Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $0.925 for each share of Series A Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series A Cash Amount"), (ii) with each share of Series B Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series B Issue Price by the Conversion Price applicable to Series B Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $1.325 for each share of Series B Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series B Cash Amount"), (iii) with each share of Series C Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series C Issue Price by the Conversion Price applicable to theSeries C Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $1.765 for each share of Series C Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series C Cash Amount") and (iv) with each share of Series D Preferred Stock converting upon such an election into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series D Issue Price by the Conversion Price applicable to Series D Preferred Stock, determined as hereafter provided, in effect on the date of such conversion and a right to receive from this corporation a cash payment in an amount equal to $2.544 for each share of Series D Preferred Stock held, plus all declared but unpaid dividends on such share (the "Series D Cash Amount"). Each share of Series E Preferred Stock, Series F Preferred Stock, Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, Series G-5 Preferred Stock and Series G-6 Preferred 7 8 Stock shall be convertible, at the option of the holder thereof at any time after the date of issuance of such share, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series E Issue Price, Original Series F Issue Price, the Original Series G-1 Issue Price, the Original Series G-2 Issue Price, the Original Series G-3 Issue Price, the Original Series G-4 Issue Price, the Original Series G-5 Issue Price or the Original Series G-6 Issue Price, as the case may be, by the Conversion Price (determined as hereinafter provided) per share in effect for such series of Preferred Stock at the time of conversion. The initial Conversion Price per share for shares of Series Preferred Stock shall be the Original Series A Issue Price, the Original Series B Issue Price, the Original Series C Issue Price, the Original Series D Issue Price, the Original Series E Issue Price, the Original Series F Issue Price, the Original Series G-1 Issue Price, the Original Series G-2 Issue Price, the Original Series G-3 Issue Price, the Original Series G-4 Issue Price, the Original Series G-5 Issue Price and the Original Series G-6 Issue Price, respectively; provided, however, that the Conversion Prices for the Series Preferred Stock shall be subject to adjustment as set forth in subsection 3(d). The Series A Cash Amount, the Series B Cash Amount, the Series C Cash Amount and the Series D Cash Amount are sometimes hereinafter referred to collectively as the "Cash Amounts." (b) Automatic Conversion. (i) Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall automatically be converted into shares of Common Stock and a right to receive cash, with each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock converting into: (i) fully paid and nonassessable shares of Common Stock at the respective Conversion Prices for each of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock at the time in effect for such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively; and (ii) a right to receive from this corporation a cash payment in an amount equal to the Series A Cash Amount for each share of Series A Preferred Stock held, the Series B Cash Amount for each share of Series B Preferred Stock held, the Series C Cash Amount for each share of Series C Preferred Stock held and the Series D Cash Amount for each share of Series D Preferred Stock held, except as provided below in subsection 3(c), immediately upon the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which is not less than $40,000,000 in the aggregate. (ii) Each share of Series E Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series E Preferred Stock immediately upon the earlier of (A) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which was not less than $40,000,000 in the aggregate, or (B) the date specified by written consent or agreement of the holders of at least sixty percent (60%) of the then outstanding shares of Series E Preferred Stock; provided, however, that to the extent that the Series E Preferred Stock would automatically convert into Common Stock pursuant to clause (A) of this subsection 3(b)(ii) and the public offering price is less than $8.30 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization) (as so adjusted, the "Series E 8 9 Price"), each share of Series E Preferred Stock shall automatically convert into such number of fully paid and nonassessable shares of Common Stock as is determined (X) by dividing the Series E Price by the price per share of the public offering or (Y) by dividing the Original Series E Issue Price by the Conversion Price applicable to the Series E Preferred Stock (as adjusted, if applicable, by Section 3(d)) in effect on the date of such conversion, whichever is greater. (iii) Each share of Series F Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price then in effect for such series of Preferred Stock immediately upon the earlier of (A) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which is not less than $40,000,000 in the aggregate, or (B) the date specified by written consent or agreement of the holders of at least a majority of the then outstanding shares of Series F Preferred Stock; provided, however, that to the extent that the Series F Preferred Stock would automatically convert into Common Stock pursuant to clause (A) of this subsection 3(b)(iii) and the public offering price is less than $11.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalization), each share of Series F Preferred Stock shall automatically convert into such number of fully paid and nonassessable shares of Common Stock as is determined (X) by dividing $11.00 by the price per share of the public offering or (Y) by dividing the Original Series F Issue Price by the Conversion Price per share (as adjusted, if applicable, by Section 3(d)) in effect for such series of Preferred Stock at the time of such conversion, whichever is greater. (iv) Each share of Series G Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price then in effect for such series of Preferred Stock immediately upon the earlier of (A) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which is not less than $40,000,000 in the aggregate, or (B) the date specified by written consent or agreement of the holders of at least a majority of the then outstanding shares of Series G Preferred Stock. (c) Mechanics of Conversion. Following such a conversion, each holder of Series Preferred Stock shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for such holder, and shall indicate in writing the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall issue and deliver to each such holder, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled pursuant to Section 3(a) or Section 3(b) above, as applicable, and shall pay (i) to each holder of Series A Preferred Stock the applicable Series A Cash Amount for each share of Series A Preferred Stock held by such holder, (ii) to each holder of Series B Preferred Stock the applicable Series B Cash Amount for each share of Series B Preferred Stock held by such holder, (iii) to each holder of Series C Preferred Stock the applicable Series C Cash Amount for each share of Series C Preferred Stock held by such holder, and (iv) to each holder of Series D Preferred Stock the applicable Series D Cash Amount for each share of Series D Preferred Stock held by such holder, payable by check or wire transfer within ten calendar days following such conversion. In the case of conversion pursuant to 9 10 Section 3(a), such conversion shall be deemed to have been made immediately prior to the close of business on the date of such election to convert the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, or Series G Preferred Stock, as the case may be, and the holders entitled to receive the shares of Common Stock issuable and Cash Amounts payable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with a public offering of the Company's Common Stock, the conversion may, at the election of the holders requesting such conversion, be conditioned upon the closing of the sale of securities pursuant to such public offering, in which event the conversion of the Series Preferred Stock shall not be deemed to have occurred until immediately subsequent to the closing of such sale of securities. If the funds of this corporation legally available for payment of the total Cash Amounts upon conversion of the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are insufficient at the time of such conversion to pay in full the total Cash Amounts required upon such conversion, those funds that are legally available at such time, if any, shall be applied ratably to the payment of the Cash Amounts, and, thereafter, when additional funds of this corporation become legally available for payment of the remaining portion of such total Cash Amounts, such funds shall be applied ratably to the payment of such remaining Cash Amounts until it is paid in full. (d) Conversion Price Adjustments of Preferred Stock for Certain Dilutive Issuances, Splits and Combinations. The Conversion Price of the Series Preferred Stock shall be subject to adjustment from time to time as follows: (i) (A) If the corporation shall issue, after the date upon which any shares of Series A Preferred Stock are first issued (the "Series A Purchase Date") or the shares of Series B Preferred Stock are first issued (the "Series B Purchase Date") or the shares of Series C Preferred Stock are first issued (the "Series C Purchase Date") or the shares of Series D Preferred Stock are first issued (the "Series D Purchase Date") or the shares of Series E Preferred Stock are first issued (the "Series E Purchase Date") or the shares of Series F Preferred Stock are first issued (the "Series F Purchase Date") or the shares of Series G Preferred Stock are first issued (the "Series G Purchase Date") (the "Purchase Date" with respect to such series), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including the number of shares of Common Stock issuable upon conversion of outstanding Preferred Stock) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock (including the number of share of Common Stock issuable upon conversion of outstanding Preferred Stock) outstanding immediately prior to such issuance plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series Preferred Stock shall be made in an amount less than one cent per share, provided that 10 11 any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to 3 years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of 3 years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 3(d)(i)(E)(3) and 3(d)(i)(E)(4), no adjustment of such Conversion Price pursuant to this subsection 3(d)(i)(B) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 3(d)(i) and subsection 3(d)(ii): (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (to the extent then exercisable) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 3(d)(i)(C) and 3(d)(i)(D)), if any, received by the corporation upon the issuance of such options or rights plus the minimum exercise price provided in such options or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (to the extent then convertible or exchangeable) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange 11 12 of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections 3(d)(i)(C) and 3(d)(i)(D)). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Prices of the Series Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Prices of the Series Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 3(d)(i)(E)(1) and 3(d)(i)(E)(2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 3(d)(i)(E)(3) or 3(d)(i)(E)(4). (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 3(d)(i)(E)) by this corporation after the applicable Purchase Date other than (A) securities issued pursuant to a transaction described in subsection 3(d)(iii) hereof; (B) shares of Common Stock issuable or issued to employees, consultants or directors of this corporation directly or pursuant to stock option plans or restricted stock plans approved by the Board of Directors of this corporation prior to the Series G Purchase Date and pursuant to stock option plans or restricted stock plans approved by the Board of Directors of this corporation after the Series G Purchase Date and approved by the holders of a majority of outstanding shares of Series Preferred Stock, voting together as a single class; (C) securities issuable upon the conversion of the Series Preferred Stock; (D) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by this corporation by merger, 12 13 purchase of substantially all the assets or other reorganization whereby this corporation will own a majority of the voting power of such business entity or business segment of any such entity, in each such instance, approved by the Board of Directors; (E) securities issued to vendors or customers or to other persons in similar commercial situations with this corporation if such issuance is approved by the Board of Directors; (F) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person if such issuance is approved by the Board of Directors; (G) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of Additional Stock pursuant to subsections (D) through (F) above; (H) warrants issued April 17, 1996 to purchase 5,000 shares of Common Stock and the Common Stock issuable upon exercise thereof; (I) warrants issued August 16, 1996 to purchase 192,262 shares of Series B Preferred Stock and the Preferred Stock issuable upon exercise thereof; (J) warrants issued to purchase 55,340 shares of Series C Preferred Stock and the Preferred Stock issuable upon exercise thereof; (K) warrants to purchase 385,530 shares of Common Stock and the Common Stock issuable upon exercise thereof issued pursuant to that certain Note and Warrant Purchase Agreement dated November 10, 1997 by and among the corporation and the other parties thereto; (L) warrants to purchase 300,000 shares of Common Stock issued on or about August 19, 1999 and the Common Stock issuable upon exercise thereof; and (M) securities issued in connection with the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended. (iii) In the event the corporation should at any time or from time to time after the Series A Purchase Date, the Series B Purchase Date, the Series C Purchase Date, the Series D Purchase Date, the Series E Purchase Date, the Series F Purchase Date or the Series G Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of 13 14 Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the Series F Preferred Stock, and Series G Preferred Stock, respectively, shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (iv) If the number of shares of Common Stock outstanding at any time after the Series A Purchase Date, Series B Purchase Date, Series C Purchase Date, Series D Purchase Date, Series E Purchase Date, Series F Purchase Date or Series G Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Ratio shall be appropriately adjusted so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, and Series G Preferred Stock, respectively, shall be decreased in proportion to such decrease in outstanding shares. (e) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 3(d)(iii), then, in each such case for the purpose of this subsection 3(e), the holders of the Series Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (f) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 3), provision shall be made so that the holders of the Series Preferred Stock shall thereafter be entitled to receive upon conversion of the Series Preferred Stock, the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 3 with respect to the rights of the holders of the Series Preferred Stock after the recapitalization to the end that the provisions of this Section 3 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (g) No Impairment. This corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed 14 15 or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions hereof and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Series Preferred Stock against impairment. (h) No Fractional Shares. No fractional shares shall be issued upon conversion of the Series Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Such rounding shall be based on the total number of shares of Series Preferred Stock such holder is converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (i) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 4. Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each applicable holder of Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 5. Voting Rights. (a) Subject to Section 5(b) below, the Common Stock and Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and Series G Preferred Stock will vote together as a single class on all matters submitted for stockholder consent or approval; provided, however, that if at any time the voting power of the then-outstanding Series Preferred Stock would otherwise be insufficient to elect all of this corporation's directors (any period during which such condition exists referred to as the "Voting Shift Period"), then, during the Voting Shift Period, (i) the number of authorized directors of this corporation shall be set at a number not less than five (5), (ii) the Series A Preferred Stock and Series B Preferred Stock then outstanding shall be entitled to elect, voting as a separate class, that number of directors equal to three-fourths (3/4ths) of the then-authorized directors (rounded to the nearest whole number), (iii) the Series C Preferred Stock shall be entitled, pursuant to subsection 5(b), to elect, voting 15 16 separately as a series, one (1) director, and (iii) the holders of the Common Stock then outstanding shall be entitled to elect the remaining number of authorized directors. (b) The holders of the Series C Preferred Stock, voting separately as a series, shall be entitled to elect one (1) member of the Board of Directors. (c) The holder of each share of Series A Preferred Stock shall have ten votes for each share of Common Stock into which such Series A Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series A Preferred Stock, each share of Series A Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of ten shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series B Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series B Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series B Preferred Stock, each share of Series B Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series C Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series C Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series C Preferred Stock, each share of Series C Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series D Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series D Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series D Preferred Stock, each share of Series D Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series E Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series E Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series E Preferred Stock, each share of Series E Preferred Stock shall have full voting rights and powers equal to 16 17 the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series F Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series F Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series F Preferred Stock, each share of Series F Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. The holder of each share of Series G Preferred Stock shall have fourteen votes for each share of Common Stock into which such Series G Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to such votes by the holders of Series G Preferred Stock, each share of Series G Preferred Stock shall have full voting rights and powers equal to the voting rights and powers of fourteen shares of Common Stock, and the holders thereof shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. 6. Protective Provisions. In addition to the vote provided for pursuant to Section 5 above, and subject to the rights of series of Preferred Stock which may from time to time come into existence: (a) so long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock are outstanding, this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy-five percent (75%) of the voting power of the then outstanding shares of such Series Preferred Stock voting together as a single class: (i) increase or decrease the authorized number of shares of any series of Preferred Stock; (ii) create any new class or series of stock or any other securities convertible into equity securities of this corporation (by reclassification or otherwise) having a preference over or on parity with the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock with respect to voting, dividends, conversion, redemption or upon liquidation; (iii) redeem or repurchase any other class or series of stock prior to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 17 18 Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock; (iv) alter or change the rights, preferences, or privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock or Series G Preferred Stock so as to adversely affect such shares of Series Preferred Stock; or (v) amend or alter the voting percentage required to approve an event or change listed in this Section 6(a). (b) So long as any shares of Series Preferred Stock are outstanding, this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the voting power of the then outstanding shares of such Series Preferred Stock, voting together as a single class, sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of. (c) This corporation shall not (i) alter or change the rights, preferences or privileges of any series of Preferred Stock so as to affect adversely the shares of such series in a manner different than the shares of any other series of Preferred Stock, or (ii) amend the provisions of this Section 6(c) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of shares of such adversely affected series that are entitled to vote with respect to the matter and that hold at least a majority of the then outstanding shares of such series. (d) This corporation shall not (i) amend or alter Section 2(b) of Article IV or Section 3(b)(ii) of Article IV or (ii) amend the provisions of this Section 6(d) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least sixty percent (60%) of the then outstanding shares of Series E Preferred Stock. (e) This corporation shall not (i) amend or alter Section 2(b) of Article IV or Section 3(b)(iii) of Article IV or (ii) amend the provisions of this Section 6(e) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least sixty percent (60%) of the then outstanding shares of Series F Preferred Stock. (f) This corporation shall not (i) amend or alter Section 2(b) of Article IV or Section 3(b)(iv) of Article IV or (ii) amend the provisions of this Section 6(f) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least fifty percent (50%) of the then outstanding shares of Series G Preferred Stock. 7. Status of Converted Stock. In the event any shares of Series Preferred Stock shall be converted pursuant to Section 3 hereof, the shares so converted shall be cancelled and shall not be issuable by this corporation. 18 19 C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, only when and if declared by the Board of Directors, out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of this corporation, the assets of this corporation shall be distributed as provided in Section B(2) of this Article IV of this Certificate of Incorporation. 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V Except as otherwise provided in this Certificate, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the bylaws of this corporation. ARTICLE VI The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII Elections of directors need not be by written ballot unless the bylaws of this corporation shall so provide. ARTICLE VIII Meetings of stockholders may be held within or outside the State of Delaware, as the bylaws may provide. The books of this corporation may be kept, (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of this corporation. ARTICLE IX A director of this corporation shall not be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing 19 20 violation of law, (iii) under Section 174 of the General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the General Corporation Law is amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors then the liability of a director of this corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended. Any repeal or modification of the foregoing provisions of this Article IX by the stockholders of this corporation shall not adversely affect any right or protection of a director of this corporation existing at the time of such repeal or modification. ARTICLE X Except as provided for in Section 6 of Article IV, this corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation." 20 21 * * * THIRD: That thereafter, pursuant to resolution of the Board of Directors, the Amended and Restated Certificate of Incorporation was submitted to the stockholders for their approval, which approval was given by written consent of a majority of the stockholders pursuant to Section 228 of the General Corporation Law. FOURTH: That said Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed by the Chief Executive Officer of the Corporation this _____ day of _________, 1999. QUINTUS CORPORATION By: ------------------------------------------ Alan K. Anderson, Chief Executive Officer EX-3.3 5 FORM OF RESTATED CERT. OF INCORP. (OFFERING) 1 EXHIBIT 3.3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF QUINTUS CORPORATION A DELAWARE CORPORATION The undersigned, Alan K. Anderson, hereby certifies that: ONE: He is the duly elected and acting Chief Executive Officer of the corporation. TWO: The name of the corporation is Quintus Corporation and that the corporation was originally incorporated on June 11, 1990 under the name QTNEWCO, INC. pursuant to the General Corporation Law of the State of Delaware. THREE: Pursuant to Section 242 and Section 245 of the General Corporation Law of the State of Delaware, Quintus Corporation has adopted this Amended and Restated Certificate of Incorporation, restating, integrating and further amending its Restated Certificate of Incorporation dated on or about August 24, 1999, which Amended and Restated Certificate of Incorporation has been duly proposed by the directors and adopted by the stockholders of this corporation (by written consent pursuant to Section 228 of said General Corporate Law) in accordance with the provisions of said Section 242 and Section 245. FOUR: The Amended and Restated Certificate of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this corporation is Quintus Corporation. ARTICLE II The address of the registered office of this corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that this corporation is authorized to issue is one hundred ten million (110,000,000) shares. One hundred 2 million (100,000,000) shares shall be Common Stock, par value $0.001 per share, and ten million (10,000,000) shares shall be Preferred Stock, par value $0.001 per share. The Preferred Stock may be issued from time to time in one or more series, without further stockholder approval. The Board of Directors is hereby authorized, in the resolution or resolutions adopted by the Board of Directors providing for the issuance of any wholly unissued series of Preferred Stock, within the limitations and restrictions stated in this Amended and Restated Certificate of Incorporation (the "Restated Certificate"), to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them, and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V Except as otherwise provided in this Restated Certificate, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of this corporation. ARTICLE VI The number of directors of this corporation shall be fixed from time to time by a bylaw or amendment thereof duly adopted by the Board of Directors or by the stockholders. ARTICLE VII Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide. ARTICLE VIII Except as otherwise provided in this Restated Certificate, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of the stockholders of the Corporation, and no action required to be taken or that may be taken at any annual or special meeting of the stockholders of the Corporation may be taken by written consent. ARTICLE IX A director of this corporation shall, to the full extent permitted by the Delaware General Corporation Law as it now exists or as it may hereafter be amended, not be liable to this 2 3 corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Neither any amendment nor repeal of this Article IX, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article IX, shall eliminate or reduce the effect of this Article IX in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article IX, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE X This corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE XI To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) agents of the Corporation (and any other persons to which General Corporation Law permits the Corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law, subject only to limits created by applicable General Corporation Law (statutory or non-statutory), with respect to actions for breach of duty to the Corporation, its stockholders, and others. Any amendment, repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection of a director, officer, agent, or other person existing at the time of, or increase the liability of any director of the Corporation with respect to, any acts or omissions of such director, officer or agent occurring prior to such amendment, repeal or modification. * * * FIVE: That thereafter said amendment and restatement was duly adopted in accordance with the provisions of Section 242 and Section 245 of the General Corporation Law by obtaining the vote of the holders of the majority of the outstanding stock of the corporation in favor of said amendment and restatement in the manner set forth in Section 228 of the General Corporation Law. 3 4 IN WITNESS WHEREOF, the undersigned have executed this certificate on _______________, 1999. ----------------------------------------- Alan K. Anderson, Chief Executive Officer EX-3.4 6 AMENDED AND RESTATED BYLAWS OF THE REGISTRANT 1 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF QUINTUS CORPORATION ARTICLE I OFFICES Section 1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held at the principal executive offices of the Company or at such other place as may be fixed from time to time by the Board of Directors, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1995, shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a 2 board of directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. 2 3 Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of fifty percent (50%) of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express 3 4 provision of the statutes or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. At all elections of directors of the corporation each stockholder having voting power shall be entitled to exercise the right of cumulative voting as provided in the certificate of incorporation. Section 11. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 4 5 ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole board shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and new created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do 5 6 all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the board may be called by the president on two (2) days' notice to each director by mail or forty-eight (48) hours notice to each director either personally or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director. 6 7 Section 8. At all meetings of the board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation of these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 11. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate 7 8 members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. 8 9 COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 14. Unless otherwise restricted by the certificate of incorporation or bylaw, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. 9 10 Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a president, treasurer and a secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more vice-presidents, assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a president, a treasurer, and a secretary and may choose vice presidents. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be 10 11 removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD Section 6. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. Section 7. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. THE PRESIDENT AND VICE-PRESIDENTS Section 8. The president shall be the chief executive officer of the corporation; and in the absence of the Chairman and Vice Chairman of the Board he shall preside at all meetings of the stockholders and the Board of Directors; he shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 9. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. 11 12 Section 10. In the absence of the president or in the event of his inability or refusal to act, the vice-president, if any, (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 11. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 12. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the 12 13 event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 13. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 14. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. Section 15. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 16. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, 13 14 then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI CERTIFICATE OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman or vice-chairman of the Board of Directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such 14 15 class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 15 16 TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. MARKET STAND-OFF Section 6. Each stockholder of the corporation who receives or purchases shares on or after the date these amended and restated bylaws are adopted by the Board of Directors shall not, during the 180-day period following the effective date of a registration statement of the corporation filed under the Act, to the extent requested by the corporation or an underwriter of 16 17 the common stock or other securities of the corporation, (x) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission) or (y) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (x) or (y) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise). The corporation may impose stop-transfer instructions with respect to registrable stock of each stockholder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. All certificates representing any shares of stock of the corporation shall have endorsed thereon the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF A 180-DAY MARKET STANDOFF REQUIREMENT CONTAINED IN THE CORPORATIONS BYLAWS. COPIES OF THE BYLAWS MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION. REGISTERED STOCKHOLDERS Section 7. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such 17 18 owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 18 19 FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFICATION Section 6. The corporation shall, to the fullest extent authorized under the laws of the State of Delaware, as those laws may be amended and supplemented from time to time, indemnify any director made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of being a director of the corporation or a predecessor corporation or, at the corporation's request, a director or officer of another corporation, provided, however, that the corporation shall indemnify any such agent in connection with a proceeding initiated by such agent only if such proceeding was authorized by the Board of Directors of the corporation. The indemnification provided for in this Section 6 shall: (i) not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement or vote of stockholders or disinterested directors or otherwise, both as to action in their official capacities and as to action in another capacity while holding such office, (ii) continue as to a person who has ceased to be a director, and (iii) inure to the benefit of the heirs, executors and administrators of such a person. The corporation's obligation to provide 19 20 indemnification under this Section 6 shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person. Expenses incurred by a director of the corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that he is or was a director of the corporation (or was serving at the corporation's request as a director or officer of another corporation) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized by relevant sections of the General Corporation Law of Delaware. Notwithstanding the foregoing, the corporation shall not be required to advance such expenses to an agent who is a party to an action, suit or proceeding brought by the corporation and approved by a majority of the Board of Directors of the corporation which alleges willful misappropriation of corporate assets by such agent, disclosure of confidential information in violation of such agent's fiduciary or contractual obligations to the corporation or any other willful and deliberate breach in bad faith of such agent's duty to the corporation or its shareholders. The foregoing provisions of this Section 6 shall be deemed to be a contract between the corporation and each director who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. 20 21 The Board of Directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an officer or employee of the corporation. To assure indemnification under this Section 6 of all directors, officers and employees who are determined by the corporation or otherwise to be or to have been "fiduciaries" of any employee benefit plan of the corporation which may exist from time to time, Section 145 of the General Corporation Law of Delaware shall, for the purposes of this Section 6, be interpreted as follows: an "other enterprise" shall be deemed to include such an employee benefit plan, including without limitation, any plan of the corporation which is governed by the Act of Congress entitled "Employee Retirement Income Security Act of 1974," as amended from time to time; the corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to such Act of Congress shall be deemed "fines." ARTICLE VIII RIGHT OF FIRST REFUSAL Section 1. No stockholder shall sell, assign, pledge, or in any manner transfer any of the shares of stock of the corporation or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this Bylaw: 21 22 (a) If the stockholder desires to sell or otherwise transfer any of his or her shares of stock, then the stockholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the proposed consideration and all other terms and conditions of the proposed transfer. (b) For thirty (30) days following receipt of such notice, the corporation shall have the option to purchase all, but not less than all, of the shares specified in the notice at the price and upon the terms set forth in such notice. In the event of a gift, property settlement or other transfer in which the proposed transferee is not paying the full price for the shares, the price shall be deemed to be the fair market value of the stock at such time as determined in good faith by the Board of Directors. In the event the corporation elects to purchase such shares, is shall give written notice to the transferring stockholder of its election and settlement for said shares shall be made as provided below in paragraph (d). (c) The corporation may assign its rights hereunder. (d) In the event the corporation and/or its assignee(s) elect to acquire the shares of the transferring stockholder as specified in said transferring stockholder's notice, the Secretary of the corporation shall so notify the transferring stockholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said transferring stockholder's notice; provided that if the terms of payment set forth in said transferring stockholder's notice be payable in property other than cash or evidences of indebtedness, the corporation shall have the right to pay the purchase price in the form of cash equal to the value of such property. 22 23 (e) In the event the corporation and/or its assignees(s) do not elect to acquire the shares specified in the transferring stockholder's notice, said transferring stockholder may, within the sixty-day period following the expiration of the option rights granted to the corporation and/or its assignees(s) herein, transfer the shares as specified in said transferring stockholder's notice. All shares so sold by said transferring stockholder shall continue to be subject to the provision of this Bylaw in the same manner as before said transfer. (f) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provision of this Bylaw: (1) A stockholder's transfer of any or all shares held either during such stockholder's lifetime or on death by will or intestacy to such stockholder's immediate family or to any custodian or trustee for the account of such stockholder or such stockholder's immediate family. "Immediate family" as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the stockholder making such transfer. (2) A stockholder's transfer of any or all of such stockholder's shares to a person who, at the time of such transfer, is a stockholder of the corporation. (3) A stockholder's transfer of any or all of such stockholder's shares to a person who, at the time of such transfer, is an officer or Director of the corporation. (4) A corporate stockholder's transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, 23 24 reclassification of shares or capital reorganization of the corporate stockholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate stockholder. (5) A transfer by a stockholder which is a limited or general partnership to any or all of its partners or former partners. (6) A corporate stockholder's transfer of any or all of its shares to its stockholders on a pro rata basis. In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this Bylaw, and there shall be no further transfer of such stock except in accord with this Bylaw. (g) The provisions of this Bylaw may be waived with respect to any transfer either by the corporation, upon duly authorized action of its Board of Directors, or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring stockholder). This Bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation. (h) Any sale or transfer, or purported sale or transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this Bylaw are strictly observed and followed. (i) The foregoing right of first refusal shall terminate on either of the following dates, whichever shall first occur: (1) On May 24, 2005; or 24 25 (2) Upon the date securities of the corporation are first offered to the public pursuant to a registration statement filed with, and declared effective by, the United States Securities and Exchange Commission under the Securities Act of 1933, as amended. (j) The certificates representing shares of stock of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION. ARTICLE IX AMENDMENTS Section 1. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the certificate or incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. 25 26 CERTIFICATE OF SECRETARY OF QUINTUS CORPORATION The undersigned, Susan Salvesen, hereby certifies that she is the duly elected and acting Secretary of Quintus Corporation, a Delaware corporation (the "Corporation"), and that the Bylaws attached hereto constitute the Bylaws of said Corporation as duly adopted by the Board of Directors on September 2, 1999. IN WITNESS WHEREOF, the undersigned has hereunto subscribed her name this 2nd day of September, 1999. /s/ SUSAN SALVESEN ---------------------------------- Susan Salvesen, Secretary EX-4.3 7 FORM OF AMENDED & RESTATED INVESTORS RIGHTS AGMT 1 EXHIBIT 4.3 QUINTUS CORPORATION AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT _____________ ___, 1999 2 TABLE OF CONTENTS
Page ---- 1. Registration Rights......................................................................2 1.1 Definitions.....................................................................2 1.2 Request for Registration........................................................3 1.3 Company Registration............................................................4 1.4 Obligations of the Company......................................................5 1.5 Furnish Information.............................................................6 1.6 Expenses of Demand Registration.................................................6 1.7 Expenses of Company Registration................................................6 1.8 Underwriting Requirements.......................................................7 1.9 Delay of Registration...........................................................7 1.10 Indemnification................................................................7 1.11 Reports Under Securities Exchange Act of 1934..................................9 1.12 Form S-3 Registration.........................................................10 1.13 Assignment of Registration Rights.............................................11 1.14 Limitations on Subsequent Registration Rights.................................11 1.15 "Market Stand-Off" Agreement..................................................11 1.16 Termination of Registration Rights............................................11 2. Covenants of the Company................................................................12 2.1 Delivery of Financial Statements...............................................12 2.2 Investor's Right of First Refusal..............................................13 2.3 Observer Rights................................................................14 2.4 Termination of Certain Covenants...............................................15 2.5 SBIC Inspection Rights.........................................................15 3. Miscellaneous...........................................................................15 3.1 Successors and Assigns.........................................................15 3.2 Governing Law..................................................................15 3.3 Counterparts...................................................................15 3.4 Titles and Subtitles...........................................................16 3.5 Notices........................................................................16 3.6 Expenses.......................................................................16 3.7 Amendments and Waivers.........................................................16 3.8 Severability...................................................................16 3.9 Aggregation of Stock...........................................................16 3.10 Entire Agreement; Amendment; Waiver...........................................16 3.11 Election of Director..........................................................16 Schedule A Schedule of Investors
3 AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT THIS AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT (the "Agreement") is made as of the ____th day of ____________, 1999, by and among Quintus Corporation, a Delaware corporation (the "Company"), and certain stockholders of the Company (the "Investors") listed on Schedule A hereto. RECITALS WHEREAS, certain of the Investors (the "Existing Investors") hold shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and/or shares of Common Stock issued upon conversion thereof and possess registration rights, information rights, rights of first refusal, and other rights pursuant to an Amended and Restated Investors' Rights Agreement dated as of August 26, 1999 among the Company and such Existing Investors (the "Prior Agreement"); WHEREAS, the Existing Investors are holders of a majority of the "Registrable Securities" of the Company (as defined in the Prior Agreement), and desire to terminate the Prior Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreement; WHEREAS, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Nabnasset Corporation ("Nabnasset") on August 15, 1997, as amended October 8, 1997, pursuant to which all outstanding shares of Nabnasset Series A Preferred Stock, all of which shares were owned by Hancock Venture Partners IV Direct Fund L.P. ("HVP"), Pioneer Ventures Limited Partnership ("Pioneer"), and Pioneer Ventures Limited Partnership II (collectively, "New Investors"), were automatically converted into shares of the Company's Series D Preferred Stock; WHEREAS, the Company entered into a Series D Preferred Stock Purchase Agreement (the "Series D Purchase Agreement") on November 10, 1997 whereby certain investors (the "Series D Investors") purchased shares of the Company's Series D Preferred Stock; WHEREAS, the Company entered into a Series E Preferred Stock Purchase Agreement (the "Series E Purchase Agreement") on May 21, 1998 whereby certain of the Existing Investors purchased shares of the Company's Series E Preferred Stock; and WHEREAS, the Company entered into a Series F Preferred Stock Purchase Agreement (the "Series F Purchase Agreement") on August 26, 1999 whereby MeriTech Capital Partners ("MeriTech") purchased shares of the Company's Series F Preferred Stock; and 4 WHEREAS, the Company entered into an Agreement and Plan of Reorganization ("Merger Agreement") with Acuity Corp. ("Acuity") on September ___, 1999 pursuant to which, among other things, (i) Ribeye Acquisition Corp., a wholly owned subsidiary of the Company, will merge with and into Acuity, with Acuity continuing as the surviving corporation (the "Merger"), and (ii) all outstanding shares of Acuity Series A Preferred Stock, Series B-1 Preferred Stock, Series B-2 Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series F Preferred Stock will automatically convert into shares of Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, Series G-5 Preferred Stock and Series G-6 Preferred Stock, respectively, of the Company; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Existing Investors hereby agree that the Prior Agreement shall be superseded and replaced in its entirety by this Agreement, and the parties hereto further agree as follows: 1. Registration Rights. The Company covenants and agrees as follows: 1.1 Definitions. For purposes of this Section 1: (a) The terms "register", "registered", and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and the declaration or ordering of effectiveness of such registration statement or document; (b) The term "Registrable Securities" means (1) (i) the Common Stock issuable upon conversion of the Series A Preferred Stock of the Company (the "Series A Preferred"), (ii) the Common Stock issuable upon conversion of the Series B Preferred Stock of the Company (the "Series B Preferred"), (iii) the Common Stock issuable upon conversion of the Series C Preferred Stock of the Company (the "Series C Preferred"), (iv) the Common Stock issuable upon conversion of the Series D Preferred Stock of the Company (the "Series D Preferred"), (v) the Common Stock issuable upon conversion of the Series E Preferred Stock of the Company (the "Series E Preferred"), (vi) the Common Stock issuable upon conversion of the Series F Preferred Stock of the Company (the "Series F Preferred"), (vii) the Common Stock issuable upon conversion of the Series G-1 Preferred Stock, Series G-2 Preferred Stock, Series G-3 Preferred Stock, Series G-4 Preferred Stock, Series G-5 Preferred Stock and Series G-6 Preferred Stock of the Company (together, "the Series G Preferred"), (viii) the Common Stock of the Company issued and sold pursuant to that certain Series B Preferred Stock Purchase Agreement by and between the Company and certain of the Existing Investors, and (ix) the Common Stock issued upon conversion of the warrants to purchase shares of Common Stock issued and sold pursuant to that certain Note and Warrant Purchase Agreement dated November 10, 1997 by and between the Company and certain of the Investors (collectively with the Common Stock referenced in clause (viii) of this Section 1.1(b), the "Registrable Common Stock") and (2) any Common Stock of the Company issued as (or issuable upon the exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the Series A Preferred, the Series B Preferred, 2 5 the Series C Preferred, the Series D Preferred, the Series E Preferred, the Series F Preferred, the Series G Preferred or the Registrable Common Stock; provided, however, that such term shall not include any such shares sold by a person in a transaction in which his rights under this Section 1 are not assigned; (c) The number of shares of "Registrable Securities then outstanding" shall be determined by the number of shares of Common Stock that are at that time issued, and issuable upon conversion of the Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D Preferred, the Series E Preferred, the Series F Preferred and the Series G Preferred that are Registrable Securities, plus the number of shares of Registrable Common Stock that are Registrable Securities; (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.13 hereof; and (e) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 1.2 Request for Registration. (a) If the Company shall receive at any time beginning six (6) months after the effective date of the first registration statement for a public offering of securities of the Company (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), a written request from the Holders of at least twenty-five percent (25%) of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of at least twenty-five percent (25%) of the Registrable Securities then outstanding and yielding aggregate proceeds, net of underwriting discounts and commissions, of at least Ten Million Dollars ($10,000,000), then the Company shall, subject to the limitations of subsection 1.2(b) hereof, within ten (10) days of the receipt of such request, give written notice of such request to all Holders in accordance with Section 3.5 hereof and shall effect as soon as practicable, and in any event shall use its commercially reasonable efforts to effect within one hundred twenty (120) days of the receipt of such request, the registration under the Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of the mailing of such notice by the Company. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise 3 6 mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder. (c) Notwithstanding the foregoing, the Company shall not be obligated under this Section 1.2 to effect any such registration: (i) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement. The Company shall have the right to defer taking action with respect to such filing for a period of not more than 120 days after receipt of the request of the Initiating Holders, which right shall not be utilized more than once in any 12 month period; (ii) after the Company has effected two (2) such registrations pursuant to this Section 1.2; or (iii) during the period starting with the date sixty (60) days prior to the Company's estimated date of filing of, and ending on the date one hundred eighty (180) days immediately following, the effective date of any registration statement pertaining to securities of the Company (other than (i) a registration of securities in a Rule 145 transaction; (ii) a registration with respect to an employee benefit plan; or (iii) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities which are also being registered), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that the Company's estimate of the date of filing such registration statement is made in good faith. 1.3 Company Registration. If the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its capital stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company shall, at such time, promptly give each Holder written notice of such registration in accordance with Section 3.5 hereof. Upon the 4 7 written request of each Holder given within twenty (20) days after mailing of such notice by the Company, the Company shall, subject to the provisions of subsection 1.8 hereof, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 Obligations of the Company. Whenever required under this Section 1 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective, and, upon the reasonable request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to forty-five (45) days; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Act. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or fails to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 5 8 (g) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. (i) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 1.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.6 Expenses of Demand Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.2 for each Holder, including without limitation all registration, filing, and qualification fees, fees and disbursements of Company counsel, printing and accounting fees relating or apportionable thereto, and fees of one (1) special counsel representing all selling stockholders in each such offering, but excluding underwriting discounts and commissions relating to Registrable Securities; provided, however that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 1.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 1.2; provided, further, that, if at the time of the withdrawal of a registration request as described in the foregoing sentence, the Holders have learned of a material adverse change in the condition, business or prospects of the Company from that known to the Holders at the time of their request, the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 1.2. 1.7 Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registrations, filings or qualifications of Registrable 6 9 Securities with respect to the registrations pursuant to Section 1.3 for each Holder including without limitation all registration, filing, and qualification fees, fees and disbursements of Company counsel, printing and accounting fees relating or apportionable thereto, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.8 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine, in their sole discretion, will not jeopardize the success of the offering by the Company. If: (a) the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds (b) the amount of securities to be sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders) but in no event shall the amount of securities of the selling Holders included in the offering be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the initial firm commitment underwritten offering of the Company's securities to the general public, in which case the selling stockholders may be excluded if the underwriters make the determination described above and no other stockholder's securities are included. For purposes of the preceding parenthetical concerning apportionment, for any selling stockholder that is a holder of Registrable Securities and that is a partnership or corporation, the partners, retired partners and stockholders of such holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder", and any pro rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling stockholder," as defined in this sentence. 1.9 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.10 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, each Holder's officers, directors and partners, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "1934 7 10 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission therein of a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law, any rule or regulation promulgated under the Act, the 1934 Act or any state securities law; and the Company will pay to each such Holder, officer, director, partner, underwriter or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.10(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.10(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.10 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.10, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the 8 11 indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.10, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.10. (d) The obligations of the Company and Holders under this Section 1.10 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.11 Reports Under Securities Exchange Act of 1934. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) use its best efforts to make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company in a firm commitment underwritten public offering on Form S-1 under the Securities Act of 1933, as amended (the "Initial Public Offering"); (b) take such action, including the voluntary registration of its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first registration statement filed by the Company for the offering of its securities to the general public is declared effective; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the 1934 Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably 9 12 requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.12 Form S-3 Registration. In case the Company shall receive from any Holder or Holders of the Registrable Securities a written request that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 1.12: (i) if Form S-3 is not then available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an anticipated aggregate price to the public (net of any underwriters' discounts or commissions) of less than $2,500,000; (iii) if the Company shall furnish to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 120 days after receipt of the request of the Holder or Holders under this Section 1.12; provided, however, that the Company shall not utilize this right more than once in any twelve-month period; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 1.12; (v) if the Company has consummated, less than twelve (12) months prior to a request pursuant to this Section 1.12, its Initial Public Offering; or (vi) after the Company has effected three (3) such registrations pursuant to this Section 1.12; (vii) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with a registration requested pursuant to Section 1.12, including (without limitation) all registration, filing, qualification, printing and special accounting fees (other than those regularly incurred by the Company) and the reasonable fees and disbursements of counsel for the selling Holder or Holders and counsel for the Company, shall be borne by the Company. 10 13 Registrations effected pursuant to this Section 1.12 shall not be counted as demands for registration or registrations effected pursuant to Section 1.2. 1.13 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities; provided, however, (i) that the Company is furnished in advance of such transfer with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned, (ii) such transferee or assignee receives all and not less than all of the Registrable Securities held by such Holder (except that Holders who are partnerships need not transfer all their Registrable Securities to assign the registration rights set forth herein provided that such transferee or assignee is a partner or retired partner of such partnership or to affiliates of any Holder), and (iii) that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 1.14 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to include such securities in any registration filed under Section 1.2 hereof or would allow such holder or prospective holder priority as to the inclusion of such securities over a Holder's Registrable Securities in any registration filed under Section 1.3 hereof. 1.15 "Market Stand-Off" Agreement. Each Investor hereby agrees that during a period not to exceed one hundred eighty (180) days following the effective date of the Company's Initial Public Offering and during periods not to exceed ninety (90) days following the effective date of registration statements of the Company filed under the Act within two (2) years of the effective date of the Company's Initial Public Offering, such periods to be specified by the Company and an underwriter of Common Stock or other securities of the Company (or such lesser period of time as negotiated with the underwriter) it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; provided, however, that all officers and directors of the Company and holders of at least one percent (1%) of the Company's then-outstanding Common Stock (calculated on a fully-diluted basis) enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.16 Termination of Registration Rights. No Holder shall be entitled to exercise any right provided for in this Section 1 after five (5) years following the consummation of the Company's Initial Public 11 14 Offering, or if such Holder can sell, after the Initial Public Offering, all of such Holder's Registrable Securities (and any other Company securities then held by such Holder) within a single three-month period under Rule 144 (without recourse to Rule 144(k)). 2. Covenants of the Company. 2.1 Delivery of Financial Statements. The Company shall deliver: (a) to each Holder of Registrable Securities, as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and a statement of stockholders' equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be audited and certified by independent public accountants of nationally recognized standing selected by the Company; provided, that the requirement that such financial statements be audited and certified may be waived by action of the Board of Directors of the Company if all members of the Board vote in favor of such waiver. (b) to each Holder of at least one million (1,000,000) shares of Registrable Securities (as presently constituted), to each Series D Investor for so long as such investor owns not less than 50% of the shares of Series D Preferred Stock received pursuant to the Merger Agreement and the Series D Purchase Agreement (or an equivalent amount of Common Stock issued upon conversion thereof), to the Series F Investors for so long as the Series F Investors own not less than 50% of the shares of Series F Preferred Stock purchased pursuant to the Series F Purchase Agreement (or an equivalent amount of Common Stock upon conversion thereof), and to each Holder of Series G Preferred for so long as such Holder owns not less than five hundred thousand (500,000) shares of Series G Preferred (or an equivalent amount of Common Stock upon conversion thereof), as soon as practicable, but in any event: (i) within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, an income statement, a statement of cash flows for such fiscal quarter, and a balance sheet as of the end of such fiscal quarter; (ii) within thirty (30) days of the end of each month, an unaudited income statement and statement of cash flows and balance sheet for and as of the end of such month, together with a narrative comparison to budget, in reasonable detail; (iii) as soon as practicable, but in any event within sixty (60) days prior to the end of each fiscal year, a copy of the Company's annual operating plan, including a financial forecast for the next fiscal year, prepared on a monthly basis, including balance sheets and statements of cash flows for such months and, as soon as prepared, any revised financial forecasts; and (iv) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as such Holder or any assignee of such Holder may from time to time request, provided, however, that the Company shall not be obligated under this subsection (b)(iv) or any other subsection of this Section 2.1 to provide 12 15 information which it deems in good faith to be a trade secret or similar confidential information or to provide information to a direct competitor of the Company. 2.2 Investor's Right of First Refusal. The Company hereby grants to the Holders of Registrable Securities (each such holder is referred to for purposes of this Section 2.2 as a "Stockholder") the right of first refusal to purchase a pro rata share of New Securities (as defined in this Section 2.2) that the Company may, from time to time, propose to sell and issue. A Stockholder's pro rata share, for purposes of this right of first refusal, is equal to such Stockholder's percentage interest in the then-outstanding Common Stock of the Company (assuming, for purposes of such percentage interest, complete conversion of all outstanding convertible securities and complete exercise of any and all outstanding options and warrants of the Company). This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any shares of capital stock of the Company, including Common Stock and Preferred Stock, whether now authorized or not, and any rights, options or warrants to purchase such shares, and securities of any type whatsoever that are, or may become, convertible into such shares; provided that "New Securities" does not include (i) Common Stock issuable upon conversion of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock or Series G Preferred Stock, (ii) securities issued pursuant to a bona fide, firmly underwritten public offering of shares of Common Stock registered under the Act, (iii) securities issued in connection with the leasing or financing of equipment, or with the indebtedness of the Company to banks, insurance companies, or other commercial lending institutions regularly engaged in the business of lending money, if such issuance is approved by the Board of Directors, (iv) securities issued pursuant to the acquisition of another corporation by the Company by (A) merger, (B) purchase of substantially all of the assets or (C) other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation in each instance where such transaction and such issuance are approved by the Board of Directors, (v) any of the Company's Common Stock (or related options exercisable for such Common Stock) issued to employees, officers and directors of, and consultants to, the Company, pursuant to any arrangement approved by the Board of Directors of the Company, (vi) stock issued upon conversion or exercise of any convertible securities, options or warrants, provided that the rights of first refusal established by this Section 2.2 first applied with respect to the initial sale or grant by the Company of such convertible securities, options or warrants, (vii) stock issued in connection with any stock split, stock dividend or recapitalization by the Company, (viii) shares of capital stock of the Company issued pursuant to the Series A Preferred Stock Purchase Agreements dated May 25, 1995 and July 22, 1995, Common Stock and Series B Preferred Stock Purchase Agreement dated March 7, 1996, the Series C Preferred Stock Purchase Agreements dated September 17, 1996 and December 18, 1996, the Series D Preferred Stock Purchase Agreement dated November 10, 1997, the Series E Preferred Stock Purchase Agreement dated May 21, 1998, and the Series F Preferred Stock Purchase Agreement dated August 26, 1999, (ix) shares of Series D Preferred Stock issued pursuant to the Agreement and Plan of Merger dated August 15, 1997, as amended October 8, 1997, (x) the April 17, 1996 issuance of warrants to purchase 5,000 shares of Common Stock, (xi) the August 16, 1996 issuance of warrants to purchase 192,262 shares of Series B Preferred Stock and the issuance of 13 16 the shares of Series B Preferred Stock upon exercise of such warrants, (xii) the issuance of warrants to purchase 55,340 shares of Series C Preferred Stock and the issuance of the shares of Series C Preferred Stock upon exercise of such warrants, (xiii) the issuance of warrants to purchase 385,530 shares of Common Stock under the Note and Warrant Purchase Agreement dated as November 10, 1997 and the issuance of the shares of Common Stock upon exercise of such warrants and (xiv) the issuance of warrants to purchase 300,000 shares of Common Stock and the issuance of the shares of Common Stock upon exercise of such warrants. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Stockholder written notice of its intention, describing the type of New Securities, and the price and terms upon which the Company proposes to issue the same. Each Stockholder shall have fifteen (15) days from the date of receipt of any such notice to agree to purchase up to the Stockholder's pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event a Stockholder fails to exercise the right of first refusal within such fifteen (15) day period, the Company shall have ninety (90) days thereafter to sell the New Securities respecting which the Stockholder's option was not exercised, at the price and upon terms no more favorable to the purchasers of such securities than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period, the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Stockholders in the manner provided above. 2.3 Observer Rights. As long as the "Series D Investors" collectively own not less than 727,500 shares of Series D Preferred Stock of the Company (or an equivalent amount of Common Stock issued upon conversion thereof), the Company shall invite a representative designated by the holders of a majority of the Registrable Securities held by such Series D Investors to attend all meetings of its Board of Directors in a nonvoting observer capacity (it being understood and the Company hereby agrees that such representative shall alternate between a representative of Hancock Venture Partners IV - Direct Fund L.P. and a representative of Pioneer Ventures Limited Partnership as such entities may from time to time determine). As long as MeriTech collectively owns not less than 333,334 shares of Series F Preferred Stock of the Company (or an equivalent amount of Common Stock issued upon conversion thereof), the Company shall invite a representative designated by MeriTech to attend all meetings of its Board of Directors in a nonvoting observer capacity. The Company shall provide to each representative copies of all notices, minutes, consents, and other materials that it provides to its directors; provided, however, that each representative shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided; and, provided further, that the Company reserves the right to withhold any information and to exclude a representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel or would result in disclosure of trade secrets to such representative if such Investor or its representative is a direct competitor of the Company. 14 17 2.4 Termination of Certain Covenants. The obligations of the Company under Sections 2.1, 2.2 and 2.3 hereof shall terminate and be of no further force or effect concurrent with the effectiveness of the Company's Initial Public Offering, or when the Company first becomes subject to the periodic reporting requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall first occur. 2.5 SBIC Information Rights. Promptly after written request made by any Investor that is a small business investment company (a "SBIC Investor") licensed under the Small Business Investment Act of 1958, as amended (the "SBIC Act"), the Company shall provide such information as such Investor may reasonably request to enable such Investor to comply with its recordkeeping, reporting, and other obligations under the SPIC Act and under the regulations of the Small Business Administration thereunder; provided, however, that the Company shall not be obligated pursuant to this Section 2.5 to provide access to any information that it reasonably considers to be a trade secret or similar confidential information; provided further that such Investor shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so provided. Notwithstanding anything to the contrary herein, the prior written consent of Pioneer Ventures Limited Partnership II (collectively, "Pioneer") shall be required, so long as Pioneer holds at least one (1) share of capital stock of the Company in order to effect any amendment or waiver of this Section 2.5. The Company shall complete, execute and deliver to each of the Investors who so request a Size Status Declaration on SBA Form 480, and a Non-Discrimination Certificate on SBA Form 652-D. If requested by an SBIC Investor, the Company shall permit representatives of the Small Business Administration access to the Company's records; provided, however, that the Company shall not be obligated pursuant to this Section 2.5 to provide access to any information that it reasonably considers to be a trade secret or similar confidential information. 3. Miscellaneous. 3.1 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 3.2 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 15 18 3.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or five (5) days following deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days advance written notice to the other parties. 3.6 Expenses. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 3.7 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of at least a majority of the Registrable Securities then outstanding. Notwithstanding the foregoing, the rights granted to the Series D Investors and the Series F Investors, respectively, under Sections 2.1 and 2.3 may be amended only with the written consent of the holders of at least a majority of the Series D Preferred Stock and the Series F Preferred Stock, respectively, (or the Common Stock issued upon conversion thereof) then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of the Registrable Securities, each future holder of the Registrable Securities, and the Company (whether or not such Holder is a party to or consents to such amendment or waiver). 3.8 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.9 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. 3.10 Entire Agreement; Amendment; Waiver. This Agreement and the Purchase Agreements constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. 3.11 Election of Director. (a) Upon the closing of the Merger and for so long as the Holders of Series G Preferred and/or their transferees continue to hold more than 50% of the shares of Series G Preferred issued in the Merger, in any election of directors of the Company, the Investors shall 16 19 each vote at any regular or special meeting of stockholders (or by written consent) such number of shares of voting capital stock then owned by them (or as to which they then have voting power) as may be necessary to elect one (1) member of the Board of Directors designated by the holders of a majority of the shares of Series G Preferred issued in the Merger, which designate shall initially be Andrew Busey. (b) Section 3.11(a) shall terminate and be of no further force or effect upon (a) the consummation of the Company's sale of its Common Stock or other securities pursuant to a registration statement under the Securities Act of 1933, as amended, (other than a registration statement relating either to sale of securities to employees of the Company pursuant to its stock option, stock purchase or similar plan or a SEC Rule 145 transaction), or (b) ___________, 2009. 17 20 IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors Rights Agreement as of the date first above written. COMPANY: QUINTUS CORPORATION By: ------------------------------ Alan K. Anderson Chief Executive Officer Address: 47212 Mission Falls Court Fremont, California 94539 INVESTORS: Name: ---------------------------- By: ------------------------------ (Signature) Address: -------------------------- -------------------------- SIGNATURE PAGE TO QUINTUS CORPORATION AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT 21 SCHEDULE A SCHEDULE OF INVESTORS DLJ Capital Corporation Sprout Capital VI, L.P. Sprout Capital VII, L.P. DLJ ESC II, L.P. The Sprout CEO Fund, L.P. William Herman Jeanne Wohlers Beverly Powell Paul H. Bartlett Oak Investment Partners VI, Limited Partnership Oak VI Affiliates Fund, Limited Partnership MeriTech Capital Partners, L.P. MeriTech Capital Affiliates L.P. Hancock Venture Partners IV - Direct Fund L.P. Ascent Venture Partners II, L.P. Ascent Venture Partners, L.P. Robert Shaw Robert Hammer Onset Enterprise Associates II, L.P. General Electric Capital Corporation S-1 22 GE Capital Equity Investments, Inc. Vector Capital, L.P. Sony Music Entertainment Inc. Curly H Ventures, Ltd. KECALP, Inc. TEA Custodians (Westone) Limited Rod MacDonald Jim Sullivan Ray Villeneuve Dain Rauscher Wessels EX-10.1 8 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS AGREEMENT (the "Agreement") is made and entered into as of ____, between Quintus Corporation, a Delaware corporation ("the Company"), and _________ ("Indemnitee"). WITNESSETH THAT: WHEREAS, Indemnitee performs a valuable service for the Company; and WHEREAS, the Board of Directors of the Company has adopted Bylaws (the "Bylaws") providing for the indemnification of the officers and directors of the Company to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended ("Law"); and WHEREAS, the Bylaws and the Law, by their nonexclusive nature, permit contracts between the Company and the officers or directors of the Company with respect to indemnification of such officers or directors; and WHEREAS, in accordance with the authorization as provided by the Law, the Company may purchase and maintain a policy or policies of directors' and officers' liability insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its officers or directors in the performance of their obligations to the Company; and WHEREAS, in recognition of past services and in order to induce Indemnitee to continue to serve as an officer or director of the Company, the Company has determined and agreed to enter into this contract with Indemnitee; NOW, THEREFORE, in consideration of Indemnitee's service as an officer or director after the date hereof, the parties hereto agree as follows: 1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Indemnitee to the full extent authorized or permitted by the provisions of the Law, as such may be amended from time to time, and Article VII, Section 6 of the Bylaws, as such may be amended. In furtherance of the foregoing indemnification, and without limiting the generality thereof: (a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(a) if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith 2 and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. (b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made. (c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 2. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company's obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful under Delaware law. 3. Contribution in the Event of Joint Liability. (a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding 2 3 in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. Company shall not enter into any settlement of any action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee. (b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), Company shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary, and the degree to which their conduct is active or passive. (c) Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company other than Indemnitee who may be jointly liable with Indemnitee. 4. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. 5. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's Corporate Status within ten (10) days 3 4 after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free. Notwithstanding the foregoing, the obligation of the Company to advance Expenses pursuant to this Section 5 shall be subject to the condition that, if, when and to the extent that the Company determines that Indemnitee would not be permitted to be indemnified under applicable law, the Company shall be entitled to be reimbursed, within thirty (30) days of such determination, by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Company that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). 6. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the law and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement: (a) To obtain indemnification (including, but not limited to, the advancement of Expenses and contribution by the Company) under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case by one of the following three methods, which shall be at the election of Indemnitee: (1) by a majority vote of the disinterested directors, even though less than a quorum, or (2) by independent legal counsel in a written opinion, or (3) by the stockholders. (c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by 4 5 Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors). Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed. (d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. (e) Indemnitee shall be deemed to have acted in good faith if Indemnitee's action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 5 6 (f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 30 day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating documentation and/or information relating thereto; and provided, further, that the foregoing provisions of this Section 6(g) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board of Directors or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat. (g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board of Directors, or stockholder of the Company shall act reasonably and in good faith in making a determination under the Agreement of the Indemnitee's entitlement to indemnification. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion, by clear and convincing evidence. 6 7 7. Remedies of Indemnitee. (a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 6(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee's right to seek any such adjudication. (b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination under Section 6(b). (c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent a prohibition of such indemnification under applicable law. (d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors' and officers' liability insurance policies maintained by the Company the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery. (e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. 7 8 8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation. (a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the certificate of incorporation of the Company, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the Law, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. 9. Exception to Right of Indemnification. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors of the Company or (b) such Proceeding is being brought by the Indemnitee to assert, interpret or enforce his rights under this Agreement. 10. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the 8 9 Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as an officer or director of the Company or any other Enterprise at the Company's request. 11. Security. To the extent requested by the Indemnitee and approved by the Board of Directors of the Company, the Company may at any time and from time to time provide security to the Indemnitee for the Company's obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee. 12. Enforcement. (a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company. (b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof. 13. Definitions. For purposes of this Agreement: (a) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the express written request of the Company. (b) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (c) "Enterprise" shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is 9 10 or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary. (d) "Expenses" shall include all reasonable attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. (e) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (f) "Proceeding" includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer or director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement; and excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement. 14. Severability. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, illegal or otherwise unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; and (b) to the fullest extent 10 11 possible, the provisions of this Agreement (including, without limitation, each portion of any section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company. 17. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to the address set forth below Indemnitee signature hereto. (b) If to the Company, to: Quintus Corporation 47212 Mission Falls Court Fremont, CA 94539 Attention: Chief Financial Officer or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. 18. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 11 12 19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. 20. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware without application of the conflict of laws principles thereof. 21. Gender. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. 12 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. QUINTUS CORPORATION By:_________________________________ Name:____________________________ Title:___________________________ INDEMNITEE ____________________________________ Name:_______________________________ Address: ____________________________________ ____________________________________ ____________________________________ ____________________________________ EX-10.2 9 1995 STOCK OPTION PLAN 1 EXHIBIT 10.2 QUINTUS CORPORATION 1995 STOCK OPTION PLAN ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1995 Stock Option Plan is intended to promote the interests of Quintus Corporation, a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option or shares issued thereunder. III. ELIGIBILITY A. The persons eligible to receive option grants under the Plan are as follows: (i) Employees, (ii) non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and (iii) consultants who provide services to the Corporation (or any Parent or Subsidiary) B. The Plan Administrator shall have full authority to determine which eligible persons are to receive option grants under the Plan, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at 2 which each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding. IV. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 1,038,034 shares. B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are canceled in accordance with the cancellation-regrant provisions of Article Two. All shares issued under the Plan, whether or not those shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation's preferred stock into shares of Common Stock. ARTICLE TWO OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. Exercise Price. 1) The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. (ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred 2 3 ten percent (110)% of the Fair Market Value per share of Common Stock on the option grant date. 2) The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Three and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions (a) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than Disability or death, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (ii) Should such Service terminate by reason of Disability, then the Optionee shall have a period of six (6) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. However, should such Disability be deemed to constitute Permanent Disability, then the period during which each outstanding option held by the Optionee is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be the twelve (12)-month period following the date of the Optionee's cessation of Service by reason of such Permanent Disability. 3 4 (iii) Should the Optionee die while holding one or more outstanding options, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution shall have a period of twelve (12) months following the date of the Optionee's death during which to exercise each such option. (iv) Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent it is not exercisable for vested shares on the date of such cessation of Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. UNVESTED SHARES. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock under the Plan. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, all or (at the discretion of the Corporation and with the consent of the Optionee) any of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon any option grant or any shares of Common Stock subject to the option which is more restrictive than twenty percent (20%) per year vesting, beginning one (1) year after the option grant date. However, this minimum vesting requirement shall not be applicable with respect to any option granted to a Highly-Compensated Person. All outstanding repurchase rights under the Plan shall terminate automatically in the event of any Corporate Transaction, except to the extent that the repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction. F. FIRST REFUSAL RIGHTS. Pursuant to Article VIII of the Corporation's bylaws, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall lapse upon the registration of the shares of Common Stock under Section 12(g) of the 1934 Act. G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or the laws of descent and distribution following the Optionee's death. However, a Non-Statutory Option may be assigned in accordance with the terms of a Qualified Domestic Relations Order. The assigned option may only be exercised by the person or persons 4 5 who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. H. WITHHOLDING. The Corporation's obligation to deliver shares of Common stock upon the exercise of any options granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the terms specified in this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION A. In the event of any Corporate Transaction, each outstanding option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with such Corporate Transaction. B. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 5 6 C. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same of different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. ARTICLE THREE MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee to pay the option exercise price by delivering a promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. Promissory notes may be authorized with or without security or collateral. In all events, the maximum credit available to each Optionee may not exceed the sum of (i) the aggregate option exercise price payable for the purchased shares (less the par value of such shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee in connection with the option exercise. II. ADDITIONAL AUTHORITY A. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding: (i) to extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate; provided, that is no event shall such option be exercisable after the specified expiration of the option term, and/or (ii) to permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service or death but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan became effective when adopted by the Board on April 16, 1996. The Plan was approved by the Corporation's stockholders on May 17, 1996. 6 7 B. The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Upon a clause (i) termination, all options and unvested stock issuances outstanding under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall, without the consent of the Optionees, adversely affect their rights and obligations under their outstanding options. In addition, the Board shall not, without the approval of the Corporation's stockholders, (i) increase the maximum number of shares issuable under the Plan, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) materially modify the eligibility requirements for Plan participation or (iii) materially increase the benefits accruing to Plan participants. B. Options may be granted under the Plan to purchase shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided any such options actually granted may not be exercised until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the excess grants are first made, then any options granted on the basis of such excess shares shall terminate and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VI. REGULATORY APPROVALS The implementation of the Plan, the granting of any option hereunder and the issuance of any shares of Common Stock upon the exercise of any option shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. VII. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee's Service at any time for any reason, with or without cause. VIII. FINANCIAL REPORTS 7 8 The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information. 8 9 APPENDIX The following definitions shall be in effect under the Plan: A. BOARD shall mean the Corporation's Board of Directors. B. CODE shall mean the Internal Revenue Code of 1986, as amended. C. COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Quintus Corporation, a Delaware corporation. G. DISABILITY shall mean the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. H. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. I. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. J. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: A-1 10 (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. L. HIGHLY-COMPENSATED PERSON shall mean an Optionee who is an officer, director or consultant to the Corporation, its parent or subsidiaries. M. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. O. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. P. OPTIONEE shall mean any person to whom an option is granted under the Plan. Q. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. R. PLAN shall mean the Corporation's 1995 Stock Option Plan, as set forth in this document. S. PLAN ADMINISTRATOR shall mean either the Board or the Committee, to the extent the Committee is at the time responsible for the administration of the Plan. T. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Plan A-2 11 Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. U. SERVICE shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant, except to the extent otherwise specifically provided in the documents evidencing the option grant. V. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. W. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. X. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing tern percent (10%) or more of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). A-3 12 QUINTUS CORPORATION STOCK OPTION AGREEMENT RECITALS A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary and consultants who provide services to the Corporation (or any Parent or Subsidiary). B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation's grant of an option to Optionee. C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5, 6 or 17. 3 LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Option's death and may be exercised, during Option's lifetime, only by Optionee. However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may also be assigned in accordance with the terms of a Qualified Domestic Relations Order. If so assigned, the assigned option shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such Qualified Domestic Relations Order. The terms applicable to the assigned option (or portion thereof) shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. 4, DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5, 6 or 17. 13 5. Cessation of Service. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable. (a) Should Optionee cease to remain in Service for any reason (other than death or Disability) while this option is outstanding, then Optionee shall have a period of three (3) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. (b) Should Optionee die while this option is outstanding, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be outstanding upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee's death or (ii) the Expiration Date. (c) Should Optionee cease Service by reason of Disability while this option is outstanding, then Optionee shall have a period of six (6) months (commencing with the date of such cessation of Service) during which to exercise this option. However, should such Disability be deemed to constitute Permanent Disability, then the period during which this option is to remain exercisable shall be extended by an additional six (6) months so that the exercise period shall be the twelve (12)-month period following the date of Optionee's cessation of Service by reason of such Permanent Disability. In no event shall this option be exercisable at any time after the Expiration Date. Note: Exercise of this option on a date later than three (3) months following cessation of Service due to Disability will result in loss of favorable Incentive Option treatment, unless such Disability constitutes Permanent Disability. In the event that Incentive Option treatment is not available, this option will be taxed as a Non-Statutory Option upon exercise. (d) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee's cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. To the extent Optionee is not vested in the Option Shares at the time of Optionee's cessation of Service, this option shall immediately terminate and cease to be outstanding with respect to those shares. 2 14 6. SPECIAL TERMINATION OF OPTION (a) in the event of a Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or parent thereof In connection with such Corporate Transaction. (b) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. (c) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 8. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares, 9. MANNER OF EXERCISING OPTION (a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions: (i) Execute and deliver to the Corporation A Purchase Agreement for the Option Shares for which the option is exercised. (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms: (A) cash or check made payable to the Corporation; or (B) a promissory note payable to the Corporation, but only to the extent approved by the Plan Administrator in accordance with Paragraph 14. 3 15 Should the Common Stock be registered under Section 12(g) of the 1934 Act at the time the option is exercised, then the Exercise Price may also be paid as follows: (C) in shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair Market Value on the Exercise Date; or (D) to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable written instructions (a) to a Corporation designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Purchase Agreement delivered to the Corporation in connection with the option exercise. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option. (iv) Execute and deliver to the Corporation such written representations as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and state securities laws. (v) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. (c) In no event may this option be exercised for any fractional shares 4 16 10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT. 11. COMPLIANCE WITH LAWS AND REGULATIONS. (a) The exercise of this option and the Issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 13. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 14. FINANCING. The Plan Administrator may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a promissory note. The terms of any such promissory note (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion.(1) 15. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under - --------------------- (1) Authorization of payment of the Exercise Price by a promissory note under such provisions may, under currently proposed Treasury Regulations, result in the loss of incentive stock option treatment under the Federal tax laws. 5 17 the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 16. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 17. STOCKHOLDER APPROVAL. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock usable under the Plan is obtained in accordance with the provisions of the Plan. 18. ADDITIONAL TERMS APPLICABLE TO AIM INCENTIVE OPTION. In the event this option is designated an incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant: (a) This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (ii) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability, (b) This option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock and any other securities for which one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion shall become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18(b) would not be contravened, but such deferral shall in all events end immediately prior to the effective date of a Corporate Transaction in which this option is not to be assumed, whereupon the option shall become immediately exercisable as a Non-Statutory Option for the deferred portion of the Option Shares. (c) Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. 6 18 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Option Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. Code she mean the Internal Revenue Code of 1986, as amended. D COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: - a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or - the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean Quintus Corporation, a Delaware corporation. G. DISABILITY shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. H. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or order (including approval of a property settlement agreement) which provides or otherwise conveys, pursuant to applicable State domestic relations laws (including community property laws), marital property rights to any spouse or former spouse of the Optionee. I. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. J. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement. K. EXERCISE PRICE shall mean the exercise price per share as specified in the Grant Notice. A-1 19 L. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice. M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: - If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. - If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. - If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be, determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. N. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice 0. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. P. INCENTIVE OPTION shall mean an option which satisfies the requirements of code Section 422. Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. R. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. S. OPTION SHARES shall mean the number of shares of Common Stock subject to the option. T. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. A-2 20 U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PLAN shall mean the Corporation's 1995 Stock Option Plan. W. PLAN ADMINISTRATOR shall mean either the Board or a committee of Board members, to the extent the committee is at the time responsible for the administration of the Plan. X. PURCHASE AGREEMENT shall mean the stock purchase agreement in substantially the form of Exhibit B to the Grant Notice. Y. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic Relations Order which substantially complies with the requirements of Code Section 414(p). The Plan Administrator shall have the sole discretion to determine whether a Domestic Relations Order is a Qualified Domestic Relations Order. Z. SERVICE shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant. AA. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. BB. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A-3 21 QUINTUS CORPORATION STOCK PURCHASE AGREEMENT AGREEMENT made as of this ___________ day of Corporation, a Delaware corporation (the "Corporation"), _______ , 19___, by and among Quintus an Optionee under the Corporation's 1995 Stock Option Plan (the "Plan"), and Optionee's spouse. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix. A. EXERCISE OF OPTION 1. EXERCISE. Optionee hereby purchases shares of Common Stock (the "Purchased Shares") pursuant to that certain option (the "Option") granted Optionee on _______ , 199_ (the "Grant Date") to purchase up to _______ shares of Common Stock under the Plan at the exercise price of $________ per share (the "Exercise Price"). 2. PAYMENT. Concurrently with the delivery of this Agreement to the Corporation, Optionee shall pay the Exercise Price for the Purchased Shares in accordance with the provisions of the Option Agreement and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 3. DELIVERY OF CERTIFICATES. The certificates representing any Purchased Shares which are subject to the Repurchase Right shall be held in escrow in accordance with the provisions of this Agreement. 4. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises the Repurchase Right, the First Refusal Right or the Special Purchase Right, Optionee (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Purchased Shares, including the Purchased Shares held in escrow hereunder, subject, however, to the transfer restrictions of Articles B and C. B. SECURITIES LAW COMPLIANCE 1. RESTRICTED SECURITIES. The Purchased Shares have not been registered under the 1933 Act and are being issued to Optionee in reliance upon the exemption from such registration provided by SEC Rule 701 for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that SEC Rule 144 issued under the 1933 Act which exempts certain resales of unrestricted securities 22 is not presently available to exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act. 2. RESTRICTIONS ON DISPOSITION OF PURCHASED SHARES. Optionee shall make no disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is compliance with all of the following requirements: (i) Optionee shall have provided the Corporation with a written summary of the terms and conditions of the proposed disposition. (ii) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares. (iii) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that (a) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (b) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or any exemption from registration available under the 1933 Act (including Rule 144) has been taken. (iv) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition shall not result in the contravention of any transfer restrictions applicable to the Purchased Shares pursuant to the provisions of state securities laws. The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Agreement or (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 3. RESTRICTIVE LEGENDS. The stock certificates for the Purchased Shares shall be endorsed with one or more restrictive legends, including the following: (i) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." (ii) "The shares represented by this certificate are subject to certain repurchase rights and rights of first refusal granted to the Corporation and accordingly may not be sold, assigned, transferred, encumbered or in any manner disposed of except in conformity with the terms of a written agreement dated 2 23 _______ 199__ between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation's principal corporate offices." C. TRANSFER RESTRICTIONS 1. RESTRICTION on TRANSFER. Except for any Permitted Transfer, Optionee shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase Right. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise disposed of in contravention of the First Refusal Right, the Market Stand-Off or the Special Purchase Right. 2. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) the Repurchase Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same extent such shares would be so subject if retained by Optionee. 3. MARKET STAND-OFF. (a) In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such restriction (the "Market Stand-Off") shall be in effect for such period of time from and after the effective date of the final prospectus for the offering as may be requested by the Corporation or such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days, and the Market Stand-Off shall in all events terminate two (2) years after the effective date of the Corporation's initial public offering. (b) Owner shall be subject to the Market Stand-Off provided and only if the officers and directors of the Corporation are also subject to similar restrictions. (C) Any new, substituted or additional securities which are by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such provisions. (d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. 3 24 D. REPURCHASE RIGHT 1. GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the 90 day period following the date Optionee ceases for any reason to remain in Service or (if later) during the 90 day period following the execution date of this Agreement, to repurchase at the Exercise Price all or (at the discretion of the Corporation and with the consent of Optionee) any portion of the Purchased Shares in which Optionee is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule (such shares to be hereinafter referred to as the "Unvested Shares"). 2. EXERCISE OF THE REPURCHASE RIGHT. The Right of Repurchase shall be exercisable only by written notice delivered to the Owner which sets forth the date on which the repurchase is to be effected. Such date of repurchase shall be prior to the applicable 90 day period specified in paragraph D.1 above. The Corporation shall, prior to the close of business on the date specified for the repurchase, pay to the Owner an amount equal to the Exercise Price previously paid for the Unvested Shares which are to be repurchased from Owner. Payment shall be made in cash or cash equivalents or by canceling indebtedness to the Corporation incurred by the Owner in the purchase of the Purchased Shares. The Owner shall deliver to the Corporation the certificate(s) representing the Purchased Shares to be repurchased, properly endorsed for transfer, promptly following receipt of the written notice specified above. 3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Optionee vests in accordance with the Vesting Schedule. All Purchased Shares as to which the Repurchase Right lapses shall, however, remain subject to (i) the First Refusal Right, (ii) the Market Stand-Off and (iii) the Special Purchase Right. 4. AGGREGATE VESTING LIMITATION. If the Option is exercised in more than one increment so that Optionee is a party to one or more other Stock Purchase Agreements (the "Prior Purchase Agreements") which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which Optionee shall be deemed to have a fully-vested interest under this Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which Optionee would otherwise at the time be vested, in accordance with the Vesting Schedule, had all the Purchased Shares (including those acquired under the Prior Purchase Agreements) been acquired exclusively under this Agreement. 5. RECAPITALIZATION. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of Purchased Shares subject to this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such Recapitalization upon 4 25 the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 6. CORPORATE TRANSACTION. (a) Immediately prior to the consummation of any Corporate Transaction, the Repurchase Right shall automatically lapse in its entirety, except to the extent the Repurchase Right is to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction. (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to the new capital stock or other property (including any cash payment) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. E. RIGHT OF FIRST REFUSAL Pursuant to Article VIII of the Corporation's bylaws, the Corporation shall have the right of first refusal (the "First Refusal Right"), exercisable in connection with any proposed transfer of the Purchased Shares in which Optionee has vested in accordance with the Vesting Schedule. The First Refusal Right shall lapse upon the registration of the Common Stock under Section 12(g) of the 1934 Act. F. MARITAL DISSOLUTION OR LEGAL SEPARATION 1. GRANT. In connection with the dissolution of Optionee's marriage or the legal separation of Optionee and Optionee's spouse, the Corporation shall have the right (the "Special Purchase Right") to purchase from Optionee's spouse, in accordance with the provisions of Paragraph F.3, all or any portion of the Purchased Shares which would otherwise be awarded to such spouse in settlement of any community property or other marital property rights such spouse may have in such shares. 2. NOTICE OF DECREE OR AGREEMENT. Optionee shall promptly provide the Corporation with written notice (the "Dissolution Notice") of (i) the entry of any judicial decree or order resolving the property rights of Optionee and Optionee's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree or order of dissolution or contract or agreement between Optionee and Optionee's spouse which provides for the award to the spouse of one or more Purchased Shares in settlement of any community property or other marital property rights such spouse may have in such shares. 3. EXERCISE OF THE SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of written notice (the "Purchase Notice") to Optionee and 5 26 Optionee's spouse within thirty (30) days after the Corporation's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice) and the Fair Market Value to be paid for such Purchased Shares. Optionee (or Optionee's spouse, to the extent such spouse has physical possession of the Purchased Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporation the certificates representing the shares to be purchased. The Corporation shall, concurrently with the receipt of the stock certificates, pay to Optionee's spouse (in cash or cash equivalents) an amount equal to the Fair Market Value specified for such shares in the Purchase Notice. If Optionee's spouse does not agree with the Fair Market Value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two (2) appraisers shall designate a third appraiser of recognized standing whose appraisal shall be determinative of such value. The cost of the appraisal shall be shared equally by the Corporation and Optionee's spouse. The closing shall then be held on the fifth (5th) business day following the completion of such appraisal; provided, however, that if the appraised value is more than twenty-five percent (25%) greater than the Fair Market Value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the expiration of such five (5) business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse. In the event the Corporation so revokes its election, the Corporation shall bear the entire cost of the appraisal. 4. LAPSE. The Special Purchase Right shall lapse upon the earlier to occur of (i) the lapse of the First Refusal Right or (ii) the expiration of the exercise period specified in Paragraph F.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph. G. ESCROW 1. DEPOSIT. Upon issuance, the certificates for the Purchased Shares which are subject to the Repurchase Right shall be deposited in escrow with the Corporation to be held in accordance with the provisions of this Article G. Each deposited certificate shall be accompanied by a duly-executed Assignment Separate from Certificate in the form of Exhibit I. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporation pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with Paragraph G.3. Upon delivery of the certificates (or other assets and securities) to the Corporation, Owner shall be issued a receipt acknowledging the number of Purchased Shares (or other assets and securities) delivered in escrow. 6 27 2. RECAPITALIZATION/REORGANIZATION. Any new, substituted or additional securities or other property which is by reason of any Recapitalization or Reorganization distributed with respect to the Purchased Shares shall be delivered to the Corporation to be held in escrow under this Article G, but only to the extent the Purchased Shares are at the time subject to the escrow requirements hereunder. However, all regular cash dividends on the Purchased Shares (or other securities at the time held in escrow) shall be paid directly to Owner and shall not be held in escrow. 3. RELEASE/SURRENDER. The Purchased Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation: (i) Should the Corporation elect to exercise the Repurchase Right with respect to any Unvested Shares, then the escrowed certificates for those Unvested Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Corporation concurrently with the payment to Owner of an amount equal to the aggregate Exercise Price for such Unvested Shares, and Owner shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities attributable thereto). (ii) Should the Corporation elect to exercise the First Refusal Right with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for those Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Corporation concurrently with the payment of the Paragraph E.3 purchase price for such Target Shares to Owner, and Owner shall cease to have any further rights or claims with respect to such Target Shares (or other assets or securities attributable thereto). (iii) Should the Corporation elect not to exercise the Repurchase Right with respect to any Unvested Shares or the First Refusal Right with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for those shares (together with any other assets or securities attributable thereto) shall be released to Owner. (iv) As the Purchased Shares (or any other assets or securities attributable thereto) vest in accordance with the Vesting Schedule, the certificates for those vested shares (as well as all other vested assets and securities) shall be released from escrow upon Owner's request, but not more frequently than once every six (6) months. (v) All Purchased Shares which vest (and any other vested assets and securities attributable thereto) shall be released within thirty (30) days after the earlier to occur of (a) Optionee's cessation of Service or (b) the lapse of the First Refusal Right. 7 28 (vi) All Purchased Shares (or other assets or securities) released from escrow shall nevertheless remain subject to (a) the First Refusal Right, to the extent such right has not otherwise lapsed, (b) the Market Stand-Off, until such restriction terminates, and (c) the Special Purchase Right, to the extent such right has not otherwise lapsed. H. SPECIAL TAX ELECTION The acquisition of the Purchased Shares may result in adverse tax consequences which may be avoided by FILING an election under Code Section 83(b). Such election must be filed within thirty (30) days after the date of this Agreement. A description of the tax consequences applicable to the acquisition of the Purchased Shares and the form for making the Code Section 83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS OPTION'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF. I. GENERAL PROVISIONS 1. ASSIGNMENT The Corporation may assign the Repurchase Right, the First Refusal Right and/or the Special Purchase Right to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation. 2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. 3. NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement. 4. NO WAIVER. The failure of the Corporation in any instance to exercise the Repurchase Right, the First Refusal Right or the Special Purchase Right shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and Optionee or Optionee's spouse. No waiver of any breach or condition of this Agreement shall be 8 29 deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 5. CANCELLATION OF SHARES. If the Corporation shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. J. MISCELLANEOUS PROVISIONS 1. OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Optionee or the Purchased Shares pursuant to the provisions of this Agreement. 2. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the terms of the Plan. 3. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State's conflict-of-laws rules. 4. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 5. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and upon Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms hereof. 6. POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee his or her true and lawful attorney in fact, for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Optionee's spouse further gives and grants unto Optionee as his or her attorney in fact full power and authority to do and perform every act necessary and 9 30 proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby ratifying and confirming all that Optionee shall lawfully do and cause to be done by virtue of this power of attorney. 10 31 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. QUINTUS CORPORATION By: --------------------------------------- Title: ------------------------------------- Address: ----------------------------------- ------------------------------------------- ------------------------------------------- OPTIONEE ----------------------------------- Address: ------------------------------------------- 11 EX-10.3 10 1999 STOCK INCENTIVE PLAN 1 EXHIBIT 10.3 QUINTUS CORPORATION 1999 STOCK INCENTIVE PLAN (AS ADOPTED SEPTEMBER 9, 1999) 2 TABLE OF CONTENTS
Page ---- ARTICLE I. INTRODUCTION................................................................ 1 ARTICLE II. ADMINISTRATION.............................................................. 1 2.1 Committee Composition....................................................... 1 2.2 Committee Responsibilities.................................................. 1 2.3 Committee for Non-Officer Grants............................................ 1 ARTICLE III. SHARES AVAILABLE FOR GRANTS................................................. 2 3.1 Basic Limitation............................................................ 2 3.2 Annual Increase in Shares................................................... 2 3.3 Additional Shares........................................................... 2 3.4 Dividend Equivalents........................................................ 2 ARTICLE IV. ELIGIBILITY................................................................. 2 4.1 Incentive Stock Options..................................................... 2 4.2 Other Grants................................................................ 3 ARTICLE V. OPTIONS..................................................................... 3 5.1 Stock Option Agreement...................................................... 3 5.2 Number of Shares............................................................ 3 5.3 Exercise Price.............................................................. 3 5.4 Exercisability and Term..................................................... 3 5.5 Modification or Assumption of Options....................................... 4 5.6 Buyout Provisions........................................................... 4 ARTICLE VI. PAYMENT FOR OPTION SHARES................................................... 4 6.1 General Rule................................................................ 4 6.2 Surrender of Stock.......................................................... 4 6.3 Exercise/Sale............................................................... 4 6.4 Exercise/Pledge............................................................. 5 6.5 Promissory Note............................................................. 5 6.6 Other Forms of Payment...................................................... 5 ARTICLE VII. STOCK APPRECIATION RIGHTS................................................... 5 7.1 SAR Agreement............................................................... 5 7.2 Number of Shares............................................................ 5 7.3 Exercise Price.............................................................. 5 7.4 Exercisability and Term..................................................... 5 7.5 Exercise of SARs............................................................ 6 7.6 Modification or Assumption of SARs.......................................... 6
i 3 ARTICLE VIII. RESTRICTED SHARES.......................................................... 6 8.1 Restricted Stock Agreement.................................................. 6 8.2 Payment for Awards.......................................................... 6 8.3 Vesting Conditions.......................................................... 6 8.4 Voting and Dividend Rights.................................................. 7 ARTICLE IX. STOCK UNITS................................................................. 7 9.1 Stock Unit Agreement........................................................ 7 9.2 Payment for Awards.......................................................... 7 9.3 Vesting Conditions.......................................................... 7 9.4 Voting and Dividend Rights.................................................. 7 9.5 Form and Time of Settlement of Stock Units.................................. 7 9.6 Death of Recipient.......................................................... 8 9.7 Creditors' Rights........................................................... 8 ARTICLE X. CHANGE IN CONTROL.......................................................... 8 10.1 Effect of Change in Control................................................ 8 10.2 Involuntary Termination.................................................... 8 ARTICLE XI. PROTECTION AGAINST DILUTION................................................ 9 11.1 Adjustments................................................................ 9 11.2 Dissolution or Liquidation................................................. 9 11.3 Reorganizations............................................................ 9 ARTICLE XII. DEFERRAL OF AWARDS......................................................... 9 ARTICLE XIII. AWARDS UNDER OTHER PLANS................................................... 10 ARTICLE XIV. PAYMENT OF FEES IN SECURITIES.............................................. 10 14.1 Effective Date............................................................. 10 14.2 Elections to Receive NSOs, Restricted Shares or Stock Units................ 10 14.3 Number and Terms of NSOs, Restricted Shares or Stock Units................. 11 ARTICLE XV. LIMITATION ON RIGHTS....................................................... 11 15.1 Retention Rights........................................................... 11 15.2 Stockholders' Rights....................................................... 11 15.3 Regulatory Requirements.................................................... 11 ARTICLE XVI. WITHHOLDING TAXES.......................................................... 12 16.1 General.................................................................... 12 16.2 Share Withholding.......................................................... 12 ARTICLE XVII. FUTURE OF THE PLAN......................................................... 12 17.1 Term of the Plan........................................................... 12 17.2 Amendment or Termination................................................... 12 ARTICLE XVIII. LIMITATION ON PAYMENTS.................................................... 12 18.1 Scope of Limitation........................................................ 12
ii 4 18.2 Application to Award....................................................... 13 18.3 Basic Rule................................................................. 13 18.4 Reduction of Payments...................................................... 13 18.5 Overpayments and Underpayments............................................. 13 18.6 Related Corporations....................................................... 14 ARTICLE XIX. DEFINITIONS................................................................ 14
iii 5 QUINTUS CORPORATION 1999 STOCK INCENTIVE PLAN ARTICLE I. INTRODUCTION. The Plan was adopted by the Board to be effective at the IPO. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications, and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE II. ADMINISTRATION. 2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy: (a) Such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (b) Such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under section 162(m)(4)(C) of the Code. 2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the Employees, Outside Directors and Consultants who are to receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. 2.3 COMMITTEE FOR NON-OFFICER GRANTS. The Board may also appoint a secondary committee of the Board, which shall be composed of one or more directors of the Company who need not satisfy the requirements of Section 2.1. Such secondary committee may administer the Plan with respect to Employees and Consultants who are not considered officers or directors of the Company under section 16 of the Exchange Act, may grant Awards under the 6 Plan to such Employees and Consultants and may determine all features and conditions of such Awards. Within the limitations of this Section 2.3, any reference in the Plan to the Committee shall include such secondary committee. ARTICLE III. SHARES AVAILABLE FOR GRANTS. 3.1 BASIC LIMITATION. Shares of Common Stock issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Options, SARs, Stock Units and Restricted Shares awarded under the Plan shall not exceed (a) 1,000,000 plus (b) the additional shares of Common Stock described in Sections 3.2 and 3.3 and (c) any shares remaining available for issuance under the Predecessor Plan. The limitations of this Section 3.1 and Section 3.2 shall be subject to adjustment pursuant to Article 11. 3.2 ANNUAL INCREASE IN SHARES. As of January 1 of each year, commencing with the year 2000, the aggregate number of Options, SARs, Stock Units and Restricted Shares that may be awarded under the Plan shall automatically increase by a number equal to the lesser of (a) 5% of the total number of shares of Common Stock then outstanding or (b) [2,000,000] shares. 3.3 ADDITIONAL SHARES. If Restricted Shares or shares of Common Stock issued upon the exercise of Options are forfeited (including any Options incorporated from the Predecessor Plan), then such shares of Common Stock shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any other reason before being exercised, then the corresponding shares of Common Stock shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of shares of Common Stock (if any) actually issued in settlement of such Stock Units shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. If SARs are exercised, then only the number of shares of Common Stock (if any) actually issued in settlement of such SARs shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. The foregoing notwithstanding, the aggregate number of shares of Common Stock that may be issued under the Plan upon the exercise of ISOs shall not be increased when Restricted Shares or other shares of Common Stock are forfeited. 3.4 DIVIDEND EQUIVALENTS. Any dividend equivalents paid or credited under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. ARTICLE IV. ELIGIBILITY. 4.1 INCENTIVE STOCK Options. Only Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(6) of the Code are satisfied. 2 7 4.2 OTHER GRANTS. Only Employees, Outside Directors and Consultants shall be eligible for the grant of Restricted Shares, Stock Units, NSOs or SARs. ARTICLE V. OPTIONS. 5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a reduction in the Optionee's other compensation. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she exercises a prior Option and pays the Exercise Price in the form described in Section 6.2. 5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the number of shares of Common Stock subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. Options granted to any Optionee in a single fiscal year of the Company shall not cover more than 1,000,000 shares of Common Stock, except that Options granted to a new Employee in the fiscal year of the Company in which his or her service as an Employee first commences shall not cover more than 2,000,000 shares of Common Stock. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 11. 5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price under an ISO shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price under an NSO shall in no event be less than 85% of the Fair Market Value of a Common Share on the date of grant. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding. 5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify the date or event when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. 5.5 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, 3 8 without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. 5.6 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish. ARTICLE VI.PAYMENT FOR OPTION SHARES. 6.1 GENERAL RULE. The entire Exercise Price of shares of Common Stock issued upon exercise of Options shall be payable in cash or cash equivalents at the time when such shares of Common Stock are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Article 6. (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6. 6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is applicable, all or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, shares of Common Stock that are already owned by the Optionee. Such shares of Common Stock shall be valued at their Fair Market Value on the date when the new shares of Common Stock are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, shares of Common Stock in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. 6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the shares of Common Stock being purchased under the Plan and to deliver all or part of the sales proceeds to the Company. 6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to pledge all or part of the shares of Common Stock being purchased under the Plan to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company. 6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) a full-recourse promissory note. However, the par value of the shares of Common Stock being purchased under the Plan, if newly issued, shall be paid in cash or cash equivalents. 4 9 6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is applicable, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules. ARTICLE VII. STOCK APPRECIATION RIGHTS. 7.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. 7.2 NUMBER OF SHARES. Each SAR Agreement shall specify the number of shares of Common Stock to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 11. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 1,000,000 shares of Common Stock, except that SARs granted to a new Employee in the fiscal year of the Company in which his or her service as an Employee first commences shall not pertain to more than 2,000,000 shares of Common Stock. The limitations set forth in the preceding sentence shall be subject to adjustment in accordance with Article 11. 7.3 EXERCISE PRICE. Each SAR Agreement shall specify the Exercise Price. An SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. 7.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may be awarded in combination with Options, and such an Award may provide that the SARs will not be exercisable unless the related Options are forfeited. An SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. 7.5 EXERCISE OF SARS. Upon exercise of an SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) shares of Common Stock, (b) cash or (c) a combination of shares of Common Stock and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of shares of Common Stock received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the shares of Common Stock subject to the SARs exceeds the Exercise Price. If, on the date when an SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. 5 10 7.6 MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. ARTICLE VIII. RESTRICTED SHARES. 8.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Stock Agreement between the recipient and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Stock Agreements entered into under the Plan need not be identical. 8.2 PAYMENT FOR AWARDS. Subject to the following sentence, Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an Award consists of newly issued Restricted Shares, the consideration shall consist exclusively of cash, cash equivalents or past services rendered to the Company (or a Parent or Subsidiary) or, for the amount in excess of the par value of such newly issued Restricted Shares, full-recourse promissory notes, as the Committee may determine. 8.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Stock Agreement. Restricted Stock Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. 8.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Restricted Stock Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. ARTICLE IX. STOCK UNITS. 9.1 STOCK UNIT AGREEMENT. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Agreement between the recipient and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Agreements entered into under the Plan need not be identical. Stock Units may be granted in consideration of a reduction in the recipient's other compensation. 6 11 9.2 PAYMENT FOR AWARDS. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients. 9.3 VESTING CONDITIONS. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Agreement. A Stock Unit Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. 9.4 VOTING AND DIVIDEND RIGHTS. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of shares of Common Stock, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach. 9.5 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested Stock Units may be made in the form of (a) cash, (b) shares of Common Stock or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of shares of Common Stock over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 11. 9.6 DEATH OF RECIPIENT. Any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. 9.7 CREDITORS' RIGHTS. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Agreement. 7 12 ARTICLE X. CHANGE IN CONTROL. 10.1 EFFECT OF CHANGE IN CONTROL. In the event of any Change in Control, each outstanding Award shall automatically accelerate so that each such Award shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such Award and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding Award shall NOT so accelerate if and to the extent such Award is, in connection with the Change in Control, either to be assumed by the successor corporation (or parent thereof) or to be replaced with a comparable Award for shares of the capital stock of the successor corporation (or parent thereof). The determination of Award comparability shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. ARTICLE XI. PROTECTION AGAINST DILUTION. 11.1 ADJUSTMENTS. In the event of a subdivision of the outstanding shares of Common Stock, a declaration of a dividend payable in shares of Common Stock, a declaration of a dividend payable in a form other than shares of Common Stock in an amount that has a material affect on the price of shares of Common Stock, a combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a lesser number of shares of Common Stock, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of: (a) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3; (b) The limitations set forth in Sections 5.2 and 7.2; (c) The number of shares of Common Stock covered by each outstanding Option and SAR; (d) The Exercise Price under each outstanding Option and SAR; or (e) The number of Stock Units included in any prior Award which has not yet been settled. Except as provided in this Article 11, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 8 13 11.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company. 11.3 REORGANIZATIONS. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Such agreement shall provide for (a) the continuation of the outstanding Awards by the Company, if the Company is a surviving corporation, (b) the assumption of the outstanding Awards by the surviving corporation or its parent or subsidiary, (c) the substitution by the surviving corporation or its parent or subsidiary of its own awards for the outstanding Awards, (d) full exercisability or vesting and accelerated expiration of the outstanding Awards or (e) settlement of the full value of the outstanding Awards in cash or cash equivalents followed by cancellation of such Awards. ARTICLE XII. DEFERRAL OF AWARDS. The Committee (in its sole discretion) may permit or require a Participant to: (a) Have cash that otherwise would be paid to such Participant as a result of the exercise of an SAR or the settlement of Stock Units credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company's books; (b) Have shares of Common Stock that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR converted into an equal number of Stock Units; or (c) Have shares of Common Stock that otherwise would be delivered to such Participant as a result of the exercise of an Option or SAR or the settlement of Stock Units converted into amounts credited to a deferred compensation account established for such Participant by the Committee as an entry on the Company's books. Such amounts shall be determined by reference to the Fair Market Value of such shares of Common Stock as of the date when they otherwise would have been delivered to such Participant. A deferred compensation account established under this Article 12 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Article 12. ARTICLE XIII. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of shares of Common Stock issued under this Plan. Such shares of 9 14 Common Stock shall be treated for all purposes under the Plan like shares of Common Stock issued in settlement of Stock Units and shall, when issued, reduce the number of shares of Common Stock available under Article 3. ARTICLE XIV. PAYMENT OF FEES IN SECURITIES. 14.1 EFFECTIVE DATE. No provision of this Article 14 shall be effective unless and until the Board has determined to implement such provision. 14.2 ELECTIONS TO RECEIVE NSOS, RESTRICTED SHARES OR STOCK UNITS. An Outside Director may elect to receive his or her annual retainer payments or meeting fees from the Company in the form of cash, NSOs, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Article 14 shall be filed with the Company on the prescribed form. 14.3 NUMBER AND TERMS OF NSOS, RESTRICTED SHARES OR STOCK UNITS. The number of NSOs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers or meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The Board shall also determine the terms of such NSOs, Restricted Shares or Stock Units. ARTICLE XV. LIMITATION ON RIGHTS. 15.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an Employee, Outside Director or Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the right to terminate the service of any Employee, Outside Director or Consultant at any time, with or without cause, subject to applicable laws, the Company's certificate of incorporation and by-laws and a written employment agreement (if any). 15.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any shares of Common Stock covered by his or her Award prior to the time when a stock certificate for such shares of Common Stock is issued or, if applicable, the time when he or she becomes entitled to receive such shares of Common Stock by filing any required notice of exercise and paying any required Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan. 15.3 REGULATORY REQUIREMENTS. Any other provision of the Plan notwithstanding, the obligation of the Company to issue shares of Common Stock under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of shares of Common Stock pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such shares of Common Stock, to their registration, qualification or listing or to an exemption from registration, qualification or listing. 10 15 ARTICLE XVI. WITHHOLDING TAXES. 16.1 GENERAL. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any shares of Common Stock or make any cash payment under the Plan until such obligations are satisfied. 16.2 SHARE WITHHOLDING. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any shares of Common Stock that otherwise would be issued to him or her or by surrendering all or a portion of any shares of Common Stock that he or she previously acquired. Such shares of Common Stock shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. ARTICLE XVII. FUTURE OF THE PLAN. 17.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become effective the date of effectiveness of the IPO. The Plan shall remain in effect until it is terminated under Section 17.2, except that no ISOs shall be granted on or after the 10th anniversary of the later of (a) the date when the Board adopted the Plan or (b) the date when the Board adopted the most recent increase in the number of shares of Common Stock available under Article 3 which was approved by the Company's stockholders. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants shall be made under the Predecessor Plan after the Plan effective date. All options outstanding under the Predecessor Plan as of such date shall, immediately upon effectiveness of the Plan, be incorporated into the Plan and treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock, except that the vesting acceleration provisions of Article 10 relating to Change in Control shall be extended to the options incorporated from the Predecessor Plan. 17.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. ARTICLE XVIII. LIMITATION ON PAYMENTS. 18.1 SCOPE OF LIMITATION. This Article 18 shall apply to an Award only if: (a) The independent auditors most recently selected by the Board (the "Auditors") determine that the after-tax value of such Award to the Participant, taking into account the effect of all federal, state and local income taxes, employment taxes and excise taxes applicable to the Participant (including the excise tax under section 4999 of the Code), will be 11 16 greater after the application of this Article 18 than it was before the application of this Article 18; or (b) The Committee, at the time of making an Award under the Plan or at any time thereafter, specifies in writing that such Award shall be subject to this Article 18 (regardless of the after-tax value of such Award to the Participant). 18.2 APPLICATION TO AWARD. If this Article 18 applies to an Award, it shall supersede any contrary provision of the Plan or of any Award granted under the Plan. 18.3 BASIC RULE. In the event that the Auditors determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount. For purposes of this Article 18, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 18.4 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall advise the Company in writing of his or her election within 10 days of receipt of notice. If no such election is made by the Participant within such 10-day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 18, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 18 shall be binding upon the Company and the Participant and shall be made within 60 days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 18.5 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which 12 17 he or she shall repay to the Company, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 18.6 RELATED CORPORATIONS. For purposes of this Article 18, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. ARTICLE XIX. DEFINITIONS. 19.1 "AFFILIATE" means any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity. 19.2 "AWARD" means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan. 19.3 "BOARD" means the Company's Board of Directors, as constituted from time to time. 19.4 "CHANGE IN CONTROL" shall mean: (a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; (b) The sale, transfer or other disposition of all or substantially all of the Company's assets; (c) A change in the composition of the Board, as a result of which fewer than 50% of the incumbent directors are directors who either (i) had been directors of the Company on the date 24 months prior to the date of the event that may constitute a Change in Control (the "original directors") or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved; or (d) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least 50% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Paragraph (d), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall 13 18 exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. 19.5 "CODE" means the Internal Revenue Code of 1986, as amended. 19.6 "COMMITTEE" means a committee of the Board, as described in Article 2. 19.7 "COMMON STOCK" means the common stock of the Company. 19.8 "COMPANY" means Quintus Corporation, a Delaware corporation. 19.9 "CONSULTANT" means a consultant or adviser who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a Consultant shall be considered employment for all purposes of the Plan, except as provided in Section 4.1. 19.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate. 19.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 19.12 "EXERCISE PRICE," in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price," in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR. 19.13 "FAIR MARKET VALUE" means the market price of one share of Common Stock, determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 19.14 "INVOLUNTARY TERMINATION" means the termination of the Service of any individual which occurs by reason of: (a) such individual's involuntary dismissal or discharge by the Company for reasons other than Misconduct, or (b) such individual's voluntary resignation following (a) a change in his or her position with the Company which materially reduces his or her level of responsibility, 14 19 (b) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in bonus or incentive programs) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Company without the individual's consent. 19.15 "ISO" means an incentive stock option described in section 422(b) of the Code. 19.16 "MISCONDUCT" means the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Company (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Company (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Company (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee or Participant or other person in the Service of the Company (or any Parent or Subsidiary). 19.17 "NSO" means a stock option not described in sections 422 or 423 of the Code. 19.18 "OPTION" means an ISO or NSO granted under the Plan and entitling the holder to purchase shares of Common Stock. 19.19 "OPTIONEE" means an individual or estate who holds an Option or SAR. 19.20 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an Employee. Service as an Outside Director shall be considered employment for all purposes of the Plan, except as provided in Section 4.1. 19.21 "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 19.22 "PARTICIPANT" means an individual or estate who holds an Award. 19.23 "PLAN" means this Quintus Corporation 1999 Stock Incentive Plan, as amended from time to time. 19.24 "PREDECESSOR PLAN" means the Company's existing 1995 Stock Option Plan. 19.25 "RESTRICTED SHARE" means a Common Share awarded under the Plan. 15 20 19.26 "RESTRICTED STOCK AGREEMENT" means the agreement between the Company and the recipient of a Restricted Share which contains the terms, conditions and restrictions pertaining to such Restricted Share. 19.27 "SAR" means a stock appreciation right granted under the Plan. 19.28 "SAR AGREEMENT" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. 19.29 "STOCK OPTION AGREEMENT" means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. 19.30 "STOCK UNIT" means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan. 19.31 "STOCK UNIT AGREEMENT" means the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit. 19.32 "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 16 EX-10.4 11 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.4 QUINTUS CORPORATION EMPLOYEE STOCK PURCHASE PLAN (AS ADOPTED SEPTEMBER 9, 1999) 2 TABLE OF CONTENTS
Page ---- SECTION 1. PURPOSE OF THE PLAN..........................................................1 SECTION 2. ADMINISTRATION OF THE PLAN...................................................1 (a) Committee Composition........................................................1 (b) Committee Responsibilities...................................................1 SECTION 3. ENROLLMENT AND PARTICIPATION.................................................1 (a) Offering Periods.............................................................1 (b) Accumulation Periods.........................................................1 (c) Enrollment...................................................................1 (d) Duration of Participation....................................................2 (e) Applicable Offering Period...................................................2 SECTION 4. EMPLOYEE CONTRIBUTIONS.......................................................2 (a) Frequency of Payroll Deductions..............................................2 (b) Amount of Payroll Deductions.................................................2 (c) Changing Withholding Rate....................................................3 (d) Discontinuing Payroll Deductions.............................................3 (e) Limit on Number of Elections.................................................3 SECTION 5. WITHDRAWAL FROM THE PLAN.....................................................3 (a) Withdrawal...................................................................3 (b) Re-Enrollment After Withdrawal...............................................3 SECTION 6. CHANGE IN EMPLOYMENT STATUS..................................................3 (a) Termination of Employment....................................................3 (b) Leave of Absence.............................................................4 (c) Death........................................................................4 SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.........................................4 (a) Plan Accounts................................................................4 (b) Purchase Price...............................................................4 (c) Number of Shares Purchased...................................................4 (d) Available Shares Insufficient................................................5 (e) Issuance of Stock............................................................5 (f) Unused Cash Balances.........................................................5 (g) Stockholder Approval.........................................................5 SECTION 8. LIMITATIONS ON STOCK OWNERSHIP...............................................5 (a) Five Percent Limit...........................................................5 (b) Dollar Limit.................................................................6
i 3 SECTION 9. RIGHTS NOT TRANSFERABLE......................................................6 SECTION 10. NO RIGHTS AS AN EMPLOYEE.....................................................7 SECTION 11. NO RIGHTS AS A STOCKHOLDER...................................................7 SECTION 12. SECURITIES LAW REQUIREMENTS..................................................7 SECTION 13. STOCK OFFERED UNDER THE PLAN.................................................7 (a) Authorized Shares............................................................7 (b) Anti-Dilution Adjustments....................................................7 (c) Reorganizations..............................................................8 SECTION 14. AMENDMENT OR DISCONTINUANCE..................................................8 SECTION 15. DEFINITIONS..................................................................8 (a) Accumulation Period..........................................................8 (b) Board........................................................................8 (c) Code.........................................................................8 (d) Committee....................................................................8 (e) Company......................................................................8 (f) Compensation.................................................................8 (g) Corporate Reorganization.....................................................9 (h) Eligible Employee............................................................9 (i) Exchange Act.................................................................9 (j) Fair Market Value............................................................9 (k) IPO..........................................................................9 (l) Offering Period.............................................................10 (m) Participant.................................................................10 (n) Participating Company.......................................................10 (o) Plan........................................................................10 (p) Plan Account................................................................10 (q) Purchase Price..............................................................10 (r) Stock.......................................................................10 (s) Subsidiary..................................................................10
ii 4 QUINTUS CORPORATION EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE OF THE PLAN. The Plan was adopted by the Board effective as of the date of the IPO. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code. SECTION 2. ADMINISTRATION OF THE PLAN. (a) COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board. (b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. SECTION 3. ENROLLMENT AND PARTICIPATION. (a) OFFERING PERIODS. While the Plan is in effect, two overlapping Offering Periods shall commence in each calendar year. The Offering Periods shall consist of the 24-month periods commencing on each May 1 and November 1, except that the first Offering Period shall commence on the date of the IPO and end on October 31, 2001. (b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation Periods shall commence in each calendar year. The Accumulation Periods shall consist of the six-month periods commencing on each May 1 and November 1, except that the first Accumulation Period shall commence on the date of the IPO and end on April 30, 2000. (c) ENROLLMENT. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location on or before the start date of such Offering Period. (d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant shall continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end of the Accumulation Period in which his or her employee contributions were discontinued under Section 4(d) or 8(b). A Participant who 5 discontinued employee contributions under Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 8(b) shall automatically resume participation at the beginning of the earliest Accumulation Period ending in the next calendar year, if he or she then is an Eligible Employee. (e) APPLICABLE OFFERING PERIOD. For purposes of calculating the Purchase Price under Section 7(b), the applicable Offering Period shall be determined as follows: (i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period shall continue to apply to him or her until the earliest of (A) the end of such Offering Period, (B) the end of his or her participation under Subsection (d) above or (C) re-enrollment for a subsequent Offering Period under Paragraph (ii) or (iii) below. (ii) In the event that the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period for which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent Offering Period, the Participant shall automatically be re-enrolled for such subsequent Offering Period. (iii) Any other provision of the Plan notwithstanding, the Company (at its sole discretion) may determine prior to the commencement of any new Offering Period that all Participants shall be re-enrolled for such new Offering Period. (iv) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant shall automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period. SECTION 4. EMPLOYEE CONTRIBUTIONS. (a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan. (b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 15%. (c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate shall be effective as soon as 2 6 reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employee's Compensation, but not less than 1% nor more than 15%. (d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 8(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company. (e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than 2 elections under Subsection (c) or (d) above during any Accumulation Period. SECTION 5. WITHDRAWAL FROM THE PLAN. (a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Accumulation Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participant's Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted. (b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 3(c). Re-enrollment may be effective only at the commencement of an Offering Period. SECTION 6. CHANGE IN EMPLOYMENT STATUS. (a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.) (b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work. (c) DEATH. In the event of the Participant's death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participant's death. 3 7 SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES. (a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount shall be credited to the Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Company's general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts. (b) PURCHASE PRICE. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period shall be the lower of: (i) 85% of the Fair Market Value of such share on the last trading day in such Accumulation Period; or (ii) 85% of the Fair Market Value of such share on the last trading day before the commencement of the applicable Offering Period (as determined under Section 3(e)) or, in the case of the first Offering Period under the Plan, the lower of: (A) 85% of the price at which one share of Stock is offered to the public in the IPO; or (B) 85% of the Fair Market Value of such share on the purchase date. (c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participant's Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 2000 shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Sections 8(b) and 13(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be (i) rounded down to the next lower whole share or (ii) credited as a fractional share. (d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section 13(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase. (e) ISSUANCE OF STOCK. Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares shall be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be 4 8 registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property. (f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participant's Plan Account to the next Accumulation Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the Participant in cash, without interest. (g) STOCKHOLDER APPROVAL. Any other provision of the Plan notwithstanding, no shares of Stock shall be purchased under the Plan unless and until the Company's stockholders have approved the adoption of the Plan. SECTION 8. LIMITATIONS ON STOCK OWNERSHIP. (a) FIVE PERCENT LIMIT. Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply: (i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code; (ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and (iii) Each Participant shall be deemed to have the right to purchase 2000 shares of Stock under this Plan with respect to each Accumulation Period. (b) DOLLAR LIMIT. Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value in excess of the following limit: (i) In the case of Stock purchased during an Offering Period that commenced in the current calendar year, the limit shall be equal to (A) $25,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company). (ii) In the case of Stock purchased during an Offering Period that commenced in the immediately preceding calendar year, the limit shall be equal to (A) $50,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase 5 9 plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the immediately preceding calendar year. (iii) In the case of Stock purchased during an Offering Period that commenced in the second preceding calendar year, the limit shall be equal to (A) $75,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the two preceding calendar years. For purposes of this Subsection (b), the Fair Market Value of Stock shall be determined in each case as of the beginning of the Offering Period in which such Stock is purchased. Employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Accumulation Period ending in the next calendar year (if he or she then is an Eligible Employee). SECTION 9. RIGHTS NOT TRANSFERABLE. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 5(a). SECTION 10. NO RIGHTS AS AN EMPLOYEE. Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause. SECTION 11. NO RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Accumulation Period. SECTION 12. SECURITIES LAW REQUIREMENTS. Shares of Stock shall not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including 6 10 (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company's securities may then be traded. SECTION 13. STOCK OFFERED UNDER THE PLAN. (a) AUTHORIZED SHARES. The number of shares of Stock available for purchase under the Plan shall be 1,000,000 (subject to adjustment pursuant to this Section 13). On May 1 of each year, commencing with May 1, 2000, the aggregate number of shares of Stock available for purchase during the life of the Plan shall automatically be increased by a number equal to the lesser of: (i) 2% of the then-outstanding number of Common Shares; or (ii) 1,000,000 shares (subject to adjustment pursuant to this Section 13). (b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock offered under the Plan, the 1,000,000-share limitation described in Section 7(c), the 1,000,000-share limitation described in Section 13(a), and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company's stockholders or a similar event. (c) REORGANIZATIONS. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period and Accumulation Period then in progress shall terminate and shares shall be purchased pursuant to Section 7, unless the Plan is continued or assumed by the surviving corporation or its parent corporation. The Plan shall in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization. SECTION 14. AMENDMENT OR DISCONTINUANCE. The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. The Company's Chief Executive Officer may also amend the Plan in certain respects. Except as provided in Section 13, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation. SECTION 15. DEFINITIONS. (a) "ACCUMULATION PERIOD" means a six-month period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(b). (b) "BOARD" means the Board of Directors of the Company, as constituted from time to time. 7 11 (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee of the Board, as described in Section 2. (e) "COMPANY" means Quintus Corporation, a Delaware corporation. (f) "COMPENSATION" means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under section 401(k) or 125 of the Code. "Compensation" shall exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee shall determine whether a particular item is included in Compensation. (g) "CORPORATE REORGANIZATION" means: (i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization; or (ii) The sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company. (h) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company who meets both of the following requirements: (i) His or her customary employment is for more than five months per calendar year and for more than 20 hours per week; and (ii) He or she has been an employee of a Participating Company for not less than five consecutive months. The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan. (i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (j) "FAIR MARKET VALUE" means the market price of Stock, determined by the Committee as follows: (i) If the Stock was traded on The Nasdaq National Market on the date in question, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by The Nasdaq National Market; 8 12 (ii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; or (iii) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal or as reported directly to the Company by Nasdaq or a stock exchange. Such determination shall be conclusive and binding on all persons. (k) "IPO" means the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission. (l) "OFFERING PERIOD" means a 24-month period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to Section 3(a). (m) "PARTICIPANT" means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(c). (n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company. (o) "PLAN" means this Quintus Corporation Employee Stock Purchase Plan, as it may be amended from time to time. (p) "PLAN ACCOUNT" means the account established for each Participant pursuant to Section 7(a). (q) "PURCHASE PRICE" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b). (r) "STOCK" means the Common Stock of the Company. (s) "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9 EX-10.5 12 1999 DIRECTOR OPTION PLAN 1 EXHIBIT 10.5 QUINTUS CORPORATION 1999 DIRECTOR OPTION PLAN (AS ADOPTED SEPTEMBER 9, 1999) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1. INTRODUCTION.....................................................................1 ARTICLE 2. ADMINISTRATION...................................................................1 2.1 Committee Composition...........................................................1 2.2 Committee Responsibilities......................................................1 ARTICLE 3. SHARES AVAILABLE FOR GRANTS......................................................1 3.1 Basic Limitation................................................................1 3.2 Additional Shares...............................................................1 ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS................................2 4.1 Eligibility.....................................................................2 4.2 Initial Grants..................................................................2 4.3 Annual Grants...................................................................2 4.4 Accelerated Exercisability......................................................2 4.5 Exercise Price..................................................................2 4.6 Term............................................................................2 4.7 Affiliates of Non-Employee Directors............................................2 4.8 Stock Option Agreement..........................................................2 ARTICLE 5. PAYMENT FOR OPTION SHARES........................................................3 5.1 Cash............................................................................3 5.2 Surrender of Stock..............................................................3 5.3 Exercise/Sale...................................................................3 5.4 Other Forms of Payment..........................................................3 ARTICLE 6. PROTECTION AGAINST DILUTION......................................................3 6.1 Adjustments.....................................................................3 6.2 Dissolution or Liquidation......................................................3 6.3 Reorganizations.................................................................3 ARTICLE 7. LIMITATION ON RIGHTS.............................................................4 7.1 Stockholders' Rights............................................................4 7.2 Regulatory Requirements.........................................................4 7.3 Withholding Taxes...............................................................4 ARTICLE 8. FUTURE OF THE PLAN...............................................................4 8.1 Term of the Plan................................................................4 8.2 Amendment or Termination........................................................4 ARTICLE 9. DEFINITIONS......................................................................4
i 3 QUINTUS CORPORATION 1999 DIRECTOR OPTION PLAN ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board on August __, 1999 to be effective at the effectiveness of the IPO. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Non-Employee Directors to focus on critical long-range objectives, (b) encouraging the attraction and retention of Non-Employee Directors with exceptional qualifications and (c) linking Non-Employee Directors directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for automatic and non-discretionary grants of Options to Non-Employee Directors. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE 2. ADMINISTRATION. 2.1. COMMITTEE COMPOSITION. The Plan shall be administered by the Committee. The Committee shall consist exclusively of two or more directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act. 2.2. COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan and make all decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares subject to Options granted under the Plan shall not exceed (a) 250,000 plus (b) the additional Common Shares described in Section 3.2. The limitations of this Section 3.1 shall be subject to adjustment pursuant to Article 6. 3.2. ADDITIONAL SHARES. If Options are forfeited or terminate for any other reason before being exercised, then the Common Shares subject to such Options shall again become available for the grant of Options under the Plan. 4 ARTICLE 4. AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. 4.1. ELIGIBILITY. Only Non-Employee Directors shall be eligible for the grant of Options under the Plan. 4.2. INITIAL GRANTS. Each Non-Employee Director who first becomes a member of the Board after the date of the IPO shall receive a one-time grant of an Option covering 30,000 Common Shares (subject to adjustment under Article 6). Such Option shall be granted on the date when such Non-Employee Director first joins the Board and shall become exercisable for the shares in 24 equal monthly installments from the date of grant. A Non-Employee Director who previously was an Employee shall not receive a grant under this Section 4.2. 4.3. ANNUAL GRANTS. Upon the conclusion of each regular annual meeting of the Company's stockholders held in the year 2000 or thereafter, each Non-Employee Director who will continue serving as a member of the Board thereafter shall receive an Option covering 10,000 Common Shares (subject to adjustment under Article 6), except that such Option shall not be granted in the calendar year in which the same Non-Employee Director received the Option described in Section 4.2. Options granted under this Section 4.3 shall become exercisable in full on the first anniversary of the date of grant. A Non-Employee Director who previously was an Employee shall be eligible to receive grants under this Section 4.3. 4.4. ACCELERATED EXERCISABILITY. All Options granted to a Non-Employee Director under this Article 4 shall also become exercisable in full in the event of: (a) The termination of such Non-Employee Director's service because of death or total and permanent disability; or (b) A Change in Control with respect to the Company. 4.5. EXERCISE PRICE. The Exercise Price under all Options granted to a Non-Employee Director under this Article 4 shall be equal to 100% of the Fair Market Value of a Common Share on the date of grant, payable in one of the forms described in Article 5. 4.6. TERM. All Options granted to a Non-Employee Director under this Article 4 shall terminate on the earliest of (a) the 10th anniversary of the date of grant, (b) the date 12 months after the termination of such Non-Employee Director's service for any reason. 4.7. AFFILIATES OF NON-EMPLOYEE DIRECTORS. The Committee may provide that the Options that otherwise would be granted to a Non-Employee Director under this Article 4 shall instead be granted to an affiliate of such Non-Employee Director. Such affiliate shall then be deemed to be a Non-Employee Director for purposes of the Plan, provided that the service-related vesting and termination provisions pertaining to the Options shall be applied with regard to the service of the Non-Employee Director. 4.8. STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option 2 5 shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. ARTICLE 5. PAYMENT FOR OPTION SHARES. 5.1. CASH. All or any part of the Exercise Price may be paid in cash or cash equivalents. 5.2. SURRENDER OF STOCK. All or any part of the Exercise Price may be paid by surrendering, or attesting to the ownership of, Common Shares that are already owned by the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. The Optionee shall not surrender, or attest to the ownership of, Common Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes. 5.3. EXERCISE/SALE. All or any part of the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed by the Company) an irrevocable direction to a securities broker approved by the Company to sell all or part of the Common Shares being purchased under the Plan and to deliver all or part of the sales proceeds to the Company. 5.4. OTHER FORMS OF PAYMENT. At the sole discretion of the Committee, all or any part of the Exercise Price and any withholding taxes may be paid in any other form that is consistent with applicable laws, regulations and rules. ARTICLE 6. PROTECTION AGAINST DILUTION. 6.1. ADJUSTMENTS. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Common Shares available for future grants under Article 3, (b) the number of Options to be granted to Non-Employee Directors under Article 4, (c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price under each outstanding Option. Except as provided in this Article 6, an Optionee shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 6.2. DISSOLUTION OR LIQUIDATION. To the extent not previously exercised, Options shall terminate immediately prior to the dissolution or liquidation of the Company. 6.3. REORGANIZATIONS. In the event that the Company is a party to a merger or other reorganization, outstanding Options shall be subject to the agreement of merger or 3 6 reorganization. Such agreement shall provide for (a) the continuation of the outstanding Options by the Company, if the Company is a surviving corporation, (b) the assumption of the outstanding Options by the surviving corporation or its parent or subsidiary, (c) the substitution by the surviving corporation or its parent or subsidiary of its own options for the outstanding Options, (d) full exercisability and accelerated expiration of the outstanding Options or (e) settlement of the full value of the outstanding Options in cash or cash equivalents followed by cancellation of such Options. ARTICLE 7. LIMITATION ON RIGHTS. 7.1. STOCKHOLDERS' RIGHTS. An Optionee shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Option prior to the time when he or she becomes entitled to receive such Common Shares by filing a notice of exercise and paying the Exercise Price. No adjustment shall be made for cash dividends or other rights for which the record date is prior to such time, except as expressly provided in the Plan. 7.2 REGULATORY REQUIREMENTS. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Option prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. 7.3. WITHHOLDING TAXES. To the extent required by applicable federal, state, local or foreign law, an Optionee or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. ARTICLE 8. FUTURE OF THE PLAN. 8.1. TERM OF THE PLAN. The Plan, as set forth herein, shall become effective on effectiveness of the IPO. The Plan shall remain in effect until it is terminated under Section 8.2. 8.2. AMENDMENT OR TERMINATION. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Options shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Option previously granted under the Plan. ARTICLE 9. DEFINITIONS. 9.1. "BOARD" means the Company's Board of Directors, as constituted from time to time. 4 7 9.2. "CHANGE IN CONTROL" means: (a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; (b) The sale, transfer or other disposition of all or substantially all of the Company's assets; (c) A change in the composition of the Board, as a result of which fewer than 50% of the incumbent directors are directors who either (i) had been directors of the Company on the date 24 months prior to the date of the event that may constitute a Change in Control (the "original directors") or (ii) were elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the aggregate of the original directors who were still in office at the time of the election or nomination and the directors whose election or nomination was previously so approved; or (d) Any transaction as a result of which any person is the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least 50% of the total voting power represented by the Company's then outstanding voting securities. For purposes of this Subsection (d), the term "person" shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a Parent or Subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company. A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company's incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company's securities immediately before such transaction. 9.3. "CODE" means the Internal Revenue Code of 1986, as amended. 9.4. "COMMITTEE" means a committee of the Board, as described in Article 2. 9.5. "COMMON SHARE" means one share of the common stock of the Company. 9.6. "COMPANY" means Quintus Corporation, a Delaware corporation. 9.7. "EMPLOYEE" means a common-law employee of the Company, a Parent or a Subsidiary. 5 8 9.8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 9.9. "EXERCISE PRICE" means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. 9.10. "FAIR MARKET VALUE" means the market price of Common Shares, determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 9.11. "IPO" means the initial offering of common stock of the Company to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission. 9.12. "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an Employee. 9.13. "OPTION" means an option granted under the Plan and entitling the holder to purchase Common Shares. Options do not qualify as incentive stock options described in section 422(b) of the Code. 9.14. "OPTIONEE" means an individual or estate who holds an Option. 9.15. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 9.16. "PLAN" means this Quintus Corporation 1999 Director Option Plan, as amended from time to time. 9.17. "STOCK OPTION AGREEMENT" means the agreement between the Company and an Optionee that contains the terms, conditions and restrictions pertaining to his or her Option. 9.18. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 6 EX-10.6 13 LIGHT INDUSTRIAL LEASE 1 EXHIBIT 10.6 LIGHT INDUSTRIAL LEASE between Teachers Insurance and Annuity Association of America ("Lessor") and Quintus, Inc. ("Lessee") 2 TABLE OF CONTENTS
Article Page - ------- ---- 1 BASIC LEASE TERMS 1 1.1 Commencement of Lease 1 1.2 Lease Term 1 1.3 Monthly Rent 1 1.4 Lessee's Pro Rata Share 1 1.5 Security Deposit 2 1.6 Use 2 2 PREMISES 2 2.1 Description 2 2.2 Possession 2 2.3 Early Entry 2 2.4 Condition of Premises 2 3 TERM 3 3.1 Term 3 3.2 Delay in Commencement 3 4 RENT 3 4.1 Monthly Rent 3 4.2 Mode of Payment 3 4.3 Late Charges 3 4.4 Security Deposit 4 5 TAXES 4 5.1 Real Property Taxes 4 5.2 Personal Property Taxes 5 6 INSURANCE 5 6.1 Property Rental Insurance - Premises 5 6.2 Property Insurance - Fixtures and Inventory 5 6.3 Lessor's Liability Insurance 5 6.4 Lessee's Liability Insurance 5 6.5 Waiver of Subrogation 5 6.6 Plate Glass Replacement 6 6.7 Workers' Compensation Insurance 6
(i) 3
Article Page - ------- ---- 7 MAINTENANCE 6 7.1 Maintenance - Premises 6 7.2 Maintenance - Building and Common Area 7 7.3 Common Area Expenses 7 7.4 Alterations, Changes and Additions by Lessee 9 7.5 Plumbing 10 7.6 Liens 10 8 UTILITIES 10 9 USE OF PREMISES 11 9.1 Use 11 9.2 Suitability 11 9.3 Uses Prohibited 11 10 DEFAULT PROVISIONS 12 10.1 Lessee's Default 12 10.2 Remedies 12 10.3 Default by Lessor 13 11 EXPIRATION OR TERMINATION 14 11.1 Surrender of Possession 14 11.2 Holding Over 14 11.3 Voluntary Surrender 14 12 CONDEMNATION OF PREMISES 14 12.1 Total Condemnation 14 12.2 Partial Condemnation 15 12.3 Award to Lessee 15 13 ENTRY BY LESSOR 15 14 INDEMNIFICATION 16 15 ASSIGNMENT AND SUBLETTING 16 16 DAMAGE OR DESTRUCTION 17 16.1 Right to Terminate on Destruction of Premises 17 16.2 Repairs by Lessor 18 16.3 Reduction of Rent During Repairs 18
(ii) 4
Article Page - ------- ---- 16.4 Arbitration 18 17 PARKING 18 18 COVENANTS, CONDITIONS AND RESTRICTIONS 18 19 HAZARDOUS MATERIALS 19 19.1 Definition 19 19.2 Use 19 19.3 Notice 19 19.4 Removal and Disposal 19 19.5 Indemnity 20 19.6 Right of Entry 20 19.7 Inspection 20 19.8 Surrender 20 19.9 Survival 21 19.10 Lessor's Covenant 21 20 BROKERS 21 20.1 Brokers 21 20.2 Commission 21 21 MISCELLANEOUS PROVISIONS 21 21.1 Waiver 21 21.2 Successors and Assigns 22 21.3 Notices 22 21.4 Partial Invalidity 22 21.5 Number and Gender 22 21.6 Descriptive Headings 22 21.7 Time is of the Essence 22 21.8 Entire Agreement 22 21.9 Memorandum of Lease 22 21.10 Applicable Law 22 21.11 Corporate Authority 23 21.12 Litigation Expense 23 21.13 Subordination of Leasehold 23 21.16 Lessee's Certificate 23 21.17 Attornment 24
(iii) 5 LIGHT INDUSTRIAL LEASE This Light Industrial Lease ("Lease") is made and entered into this 6th day of October, 1995, between Teachers Insurance and Annuity Association of America, a New York corporation ("Lessor") and Quintus, Inc., a California corporation ("Lessee"). ARTICLE I BASIC LEASE TERMS 1.1 Commencement of Lease. The Term of this Lease shall commence on October 15, 1995 (the "Commencement Date"). 1.2 Lease Term. The Term of this Lease shall expire five (5) years and two (2) months after the Commencement Date. 1.3 Monthly Rent. The base monthly rental shall be as follows:
Month of Term Base Monthly Rental ------------- ------------------- Oct 15, 1995 - Dec 14, 1995 $0.00/month Dec 15, 1995 - Dec 14, 1997 $21,228.00/month Dec 15, 1997 - Dec 14, 1998 $22,722.00/month Dec 15, 1998 - Dec 14, 2000 $24,216.00/month
Notwithstanding anything to the contrary set forth above if Lessor terminates this Lease because of Lessee's default, base monthly rental shall be deemed to have been due and payable at the rate of Twenty-One Thousand Two Hundred Twenty-Eight and no/100ths Dollars ($21,228.00) per month for the first two (2) months of the Term. Upon execution of this Lease by Lessor and Lessee, Lessee shall immediately deliver to Lessor the Security Deposit set forth in Paragraph 1.5 and Twenty-One Thousand Two Hundred Twenty-Eight and no/100ths Dollars ($21,228.00) as prepayment of base monthly rental for the third (3rd) month of the Term. As used in this paragraph, the first "rental month" shall mean the month beginning on the Commencement Date and ending on the same day of the next calendar month (the monthly "anniversary" of the Commencement Date), and each succeeding rental month shall begin on the monthly "anniversary" of the Commencement Date. If the Commencement Date does not fall on the first day of a calendar month, then the rent payments payable for each partial calendar month shall be prorated on a per diem basis, based on a 30 day month. 1.4 Lessee's Pro Rata Share. Lessee's pro rata share shall be sixty-nine and 87/100ths percent (69.87%), the square footage of the Premises divided by the square footage of the Building. -1- 6 Lessee's pro rata share shall be adjusted appropriately if the amount of space leased by Lessee in the Building increases. 1.5 Security Deposit. Seventy Thousand and no/100ths Dollars ($70,000.00). 1.6 Use. Software development, engineering, research & development, sales and general office. ARTICLE 2 PREMISES 2.1 Description. Lessor hereby leases to Lessee a portion of Building 105, consisting of approximately twenty-nine thousand eight hundred eighty-two (29,882) square feet ("Premises"), and commonly known as 47212 Mission Falls Court, Fremont, Alameda County, California, together with the right to use the common areas of the parcel on which the Premises are located. EXHIBIT A further describes the Premises being leased hereby, and the parcel of which the Premises is a part ("Property"). Building 105 (the "Building") consists of a total area of approximately forty-two thousand seven hundred sixty-eight (42,768) square feet. 2.2 Possession. Lessor shall deliver possession of the Premises to Lessee on the Commencement Date as hereinafter defined. 2.3 Early Entry. Lessee shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing telephone and data cabling, fixturing or any other purpose expressly permitted by Lessor. Such early entry shall be subject to all the terms and provisions hereof, except for the payment of base monthly rent which shall commence on the Commencement Date. If, however, Lessee commences occupancy of the Premises prior to October 15, 1995, the Commencement Date and the schedule of base monthly rent set forth in Paragraph 1.3 shall be revised to reflect such earlier date as the Commencement Date of this Lease. Lessee shall coordinate such early entry with Lessor so as minimize interference with any work that Lessor may be performing at the Premises. 2.4 Condition of Premises. By taking possession of the Premises, Lessee shall be deemed to have accepted the Premises and all improvements thereon in their current "as is" condition, subject to all applicable laws, codes and ordinances. Lessee acknowledges that neither Lessor nor its agents have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Lessee's business or for any other purpose, nor has Lessor agreed to undertake any alterations or improvements to the Premises. Any alterations or improvements to the Premises shall be constructed by Lessee, at Lessee's sole expense, in accordance with the terms and conditions set forth in Paragraph 7.4 below. -2- 7 ARTICLE 3 TERM 3.1 Term. The Lease shall commence on the date determined pursuant to Paragraph 1.1 (the "Commencement Date") and shall continue thereafter for the term specified in Paragraph 1.2 unless sooner terminated pursuant to this Lease. "Term" shall hereafter mean the term of this Lease. 3.2 Delay in Commencement. If for any reason Lessor cannot deliver possession of the Premises to Lessee on the Commencement Date, such failure shall not affect the validity of this Lease nor shall it extend the Term or render Lessor liable to Lessee for any loss or damage resulting therefrom. Notwithstanding any other provision of this Lease, if the Term of the Lease does not commence on the scheduled Commencement Date because Lessor cannot deliver possession of the Premises to Lessee, the Term of the Lease shall instead commence on the date on which Lessor tenders possession of the Premises to Lessee, and the Lease shall terminate sixty-two (62) months from the date on which the Term of the Lease commences. ARTICLE 4 RENT 4.1 Monthly Rent. Lessee shall pay to Lessor as base monthly rent for the Premises in advance on the first day of each calendar month of the Term without deduction, offset, prior notice or demand, in lawful money of the United States, the sum specified in Paragraph 1.3. If the Commencement Date is not the first day of a calendar month, the first monthly installment of base monthly rent shall be applied on a per diem basis against payment of the base monthly rent from the date base monthly rent is first payable until the first day of the first succeeding calendar month. Any unused portion of said amount shall be applied against payment of the base monthly rent for such first succeeding calendar month, and the balance of the base monthly rent for that month shall be due on the first day thereof. All additional amounts of rent or other charges required to be paid by Lessee under this Lease shall be deemed additional rent. 4.2 Mode of Payment. Lessee shall pay all rent due hereunder to Lessor c/o The Martin Group, 4637 Chabot Drive, Suite 218, Pleasanton, CA 94588, or any such other place as Lessor may designate from time to time in writing. 4.3 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on the Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designated agent within five (5) days after the date such rent or other sum is due, Lessee shall pay to Lessor a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a -3- 8 waiver of lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 4.4 Security Deposit. Concurrent with Lessee's execution of this Lease, Lessee shall deposit with Lessor a security deposit ("Deposit") in the amount specified in Paragraph 1.5. The Deposit shall be held for the faithful performance by Lessee of all the terms, covenants and conditions of this Lease to be kept and performed by Lessee. If Lessee defaults with respect to any provisions of this Lease, including but not limited to the provisions relating to the payment of rent and any of the monetary amounts due hereunder, Lessor may (but shall not be required to) use, apply or retain any part or all of the Deposit for the payment of any amount which Lessor may spend or become obligated to spend by reason of Lessee's default or to compensate Lessor for any loss or damage which Lessor may suffer by reason of Lessee's default. If any portion of the Deposit is so used or applied, Lessee shall, within ten (10) days after written demand therefor, deposit cash with Lessor in an amount sufficient to restore the Deposit to its original amount. Lessee's failure to do so shall be a material breach of this Lease. Lessor shall not be required to keep the Deposit separate from its general funds, and Lessee shall not be entitled to any interest on the Deposit. If Lessee fully and faithfully performs every provision of this Lease to be performed by it, the Deposit, or balance thereof, shall be returned to Lessee (or, at Lessor's option, to the last assignee of Lessee's interest hereunder) at the expiration of the Term and after Lessee has vacated the Premises. In the event of termination of Lessor's interest in this Lease, Lessor shall transfer the Deposit to Lessor's successor in interest, whereupon Lessee agrees to release Lessor from all liability for the return of such deposit or the accounting therefor. ARTICLE 5 TAXES 5.1 Real Property Taxes. Lessee shall pay all Real Property Taxes levied against the Premises during the Term as provided in Paragraph 7.3 below. If the Premises are not separately assessed, Lessee agrees to pay to Lessor its pro rata share of all Real Property Taxes levied against the Property. As used herein, "Real Property Taxes" shall include any form of assessment, license, fee, levy, penalty or tax imposed by any authority having the direct or indirect power to tax (excluding Lessor's income taxes), including any improvement district, as against any legal or equitable interests of Lessor in the Property or as against Lessor's business of renting the Property; provided, however, that any so-called "rent tax" shall only be paid by Lessee if such rent tax is levied in lieu of, and not in addition to, ad valorem real property taxes currently levied against the Property. Lessee's share of Real Property Taxes shall be equitably prorated to cover only the period of time within the fiscal tax year during which this Lease is in effect. With respect to any assessments which may be levied against or upon the Premises, and which may be paid in annual installments, only the amount of such annual installments (with appropriate proration for any partial year) and interest due thereon shall be included within the compilation of the annual Real Property Taxes. -4- 9 5.2 Personal Property Taxes. Lessee shall pay before delinquency all taxes levied or assessed on Lessee's fixtures, improvements, furnishings, merchandise, equipment and personal Property in and on the Premises, whether or not affixed to the real property. ARTICLE 6 INSURANCE 6.1 Property Rental Insurance - Premises. During the Term, Lessor shall keep the Property insured against loss or damage by fire and those risks normally covered by an "all risk" or " causes of loss - special form" policy of property insurance for the full replacement cost thereof. Any recovery received from said insurance policy shall be paid to Lessor. 6.2 Property Insurance - Fixtures and Inventory. During the Term, Lessee shall, at its sole expense, maintain insurance with "all risk" or "causes of loss - special form" coverage on any fixtures, leasehold improvements, furnishings, merchandise, equipment or personal property in or on the Premises, whether in place as of the date hereof or installed hereafter, for the full replacement value thereof, and Lessee shall also have sole responsibility and cost for maintaining any other types of insurance as Lessee elects to carry. Any deductibles shall be paid by Lessee. 6.3 Lessor's Liability Insurance. During the Term, Lessor shall maintain at its sole cost a policy or policies of commercial general liability insurance insuring Lessor (and such others as designated by Lessor) against liability for bodily injury, death and property damage on or about the Property, with combined single limit coverage of not less than Two Million Dollars ($2,000,000). 6.4 Lessee's Liability Insurance. During the Term, Lessee shall, at its sole expense, maintain for the mutual benefit of Lessor and Lessee, commercial general liability and property damage insurance against claims for bodily injury, death or property damage occurring in or about the Premises or arising out of the use or occupancy of the Premises, with combined single limit coverage of not less than Two Million Dollars ($2,000,000). The limits of such insurance shall not limit the liability of Lessee. Lessee shall furnish to Lessor prior to the Commencement Date, and at least thirty (30) days prior to the expiration date of any policy, certificates indicating that the liability insurance required of Lessee above is in full force and effect; that Lessor has been named as an additional insured; and that all such policies will not be canceled unless thirty (30) days' prior written notice of the proposed cancellation has been given to Lessor. The insurance shall be with insurers reasonably approved by Lessor and with policies in form reasonably satisfactory to Lessor. Said policies shall provide that Lessor, although an additional insured, may recover for any loss suffered by Lessor by reason of Lessee's negligence, and shall include a broad form liability endorsement. Lessee's insurance shall be primary and noncontributing with any other insurance available to Lessor. 6.5 Waiver of Subrogation. Lessor hereby releases Lessee, and Lessee hereby releases Lessor, and their respective officers, agents, employees and servants, from any and all claims or demands of damages, loss, expense or injury to the Premises, or to the furnishings and fixtures and equipment, or inventory or other property of either Lessor or Lessee in, about or upon the Premises, -5- 10 which is caused by or results from perils, events or happenings which are the subject of insurance carried by the respective parties and in force at the time of any such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. 6.6 Plate Glass Replacement. Lessee shall replace, at its sole expense, any and all plate glass and other glass in and about the Premises which is damaged or broken by vandalism. If any plate glass or other glass in and about the Premises is damaged or broken by causes other than vandalism, then Lessee shall pay Lessor an amount equal to Lessor's cost of replacement, provided that such amount shall not exceed the deductible then in effect on Lessor's insurance policy, if any, covering the damaged glass. Nothing herein shall be construed to require Lessor to carry plate glass insurance. 6.7 Workers' Compensation Insurance. Lessee shall, at its sole expense, maintain and keep in force during the Term a policy or policies of Workers' Compensation Insurance and any other employee benefit insurance sufficient to comply with all applicable laws, statutes, ordinances and governmental rules, regulations or requirements. ARTICLE 7 MAINTENANCE 7.1 Maintenance - Premises. Throughout the Term, Lessee agrees to keep and maintain the Premises and all improvements and appurtenances upon the Premises, including all sewer connections, plumbing, heating and cooling appliances, roof membrane, wiring and glass, in good order, condition and repair, including the replacement of such improvements and appurtenances when necessary, provided that Lessee shall not be responsible for insured damage to the foregoing or damages to the foregoing caused by Lessor or its agents or by other tenants. Lessee hereby expressly waives the provisions of any law permitting repairs by a tenant at the expense of a landlord, including, without limitation, all rights of Lessee under Section 1941 and 1942 of the California Civil Code. Lessee agrees to keep the Premises clean and in sanitary condition as required by the health, sanitary and police ordinances and regulation of any political subdivision having jurisdiction, and provide, at its own expense, trash removal and janitorial services. Lessee further agrees to keep the interior of the Premises, such as the windows, floors, walls, doors, showcases and fixtures clean and neat in appearance and to remove all trash and debris which may be found in or around the Premises. If any repairs and/or maintenance to be made by Lessee are necessary, Lessor shall have the right to cause such repairs and/or maintenance to be made if Lessee fails to cause such repairs, or commence to cause such repairs and diligently prosecute same to completion, within fifteen (15) days after written notice from Lessor to Lessee. Lessee agrees that upon demand, it shall pay to Lessor the cost of any such repairs, together with accrued interest from the date of payment at the highest rate allowable by law. Notwithstanding anything to the contrary above, Lessor may elect to enter into one or more maintenance contracts with third parties for the provision of all or a part of Lessee's maintenance obligations as set forth in this paragraph, excluding -6- 11 janitorial services. Upon such election, Lessee shall be relieved from its obligations to perform only those maintenance obligations covered by such maintenance contracts, and Lessee shall bear one hundred percent (100%) of the cost of any such maintenance contracts to the extent applicable to the Premises. All such costs shall be paid in advance on a monthly basis with Lessee's rent payments. If Lessor elects to enter into one or more maintenance contracts with third parties for the the provision of all or part of Lessee's maintenance obligations, Lessor shall obtain competitive bids for such services and the contracts entered into shall be at a fair market rate for the services provided. 7.2 Maintenance - Building and Common Area. Except for damage caused by any negligent or intentional act or omission of Lessee, Lessee's employees, suppliers, shippers, customers, or invitees (in which event Lessee shall repair the damage) Lessor, at Lessor's expense, shall keep in good condition and repair the foundations, exterior walls, the structural condition of interior bearing walls, and the roof structure of the Building. Lessor shall maintain the Common Areas of the Property in good working order and condition, except that damage occasioned by the act of Lessee and not covered by the insurance described in Article 6 shall be repaired by Lessor at Lessee's expense. Lessee shall notify Lessor in writing of any repairs or maintenance to the Common Areas which may be required and Lessor shall have a reasonable time to make such repairs which shall not exceed thirty (30) days from the date of Lessee's notice to Lessor unless such repairs and/or maintenance cannot reasonably be completed within such 30-day period, in which event Lessor shall have such additional time as may reasonably be required to complete such repairs and/or maintenance. The Common Areas of the Property shall be comprised of all non-leasable space including, but not limited to, sidewalks, parking areas, private roadways within the Property, water amenities, exterior lighting and landscaping. 7.3 Common Area Expenses. (a) Common Area Expenses Defined. The term "Common Area Expenses" shall mean all expenses, costs and disbursements of every kind and nature which Lessor shall pay or become obligated to pay because of or in connection with the ownership, management, maintenance, repair and operation of the Building and Common Area and such additional Building or Common Area facilities in subsequent years as may be determined by Lessor to be necessary, including but not limited to, the following: (i) wages and salaries of all employees engaged in the operation, maintenance and security of the Building and Common Area, including taxes, insurance and benefits relating thereto, and the rental cost of overhead of any office and storage space used to provide such services; (ii) cost of all supplies, materials and labor used in the operation, repair, replacement and maintenance of the Building and Common Area; (iii) cost of all utilities, including surcharges, for the Common Area, including the cost of water, sewer, gas, power, heating, lighting, air conditioning and ventilating; and the cost of all license, permit and inspections fees; -7- 12 (iv) cost of all insurance which Lessor or Lessor's lender deems necessary for the Building and Common Area such as the cost of "All-Risk" property insurance, including, at Lessor's option, earthquake and flood coverage, insurance against loss of rents on an "All-Risk" basis; and casualty and liability insurance applicable to the Building and Lessor's personal property used in connection therewith; (v) cost of repairs and general maintenance of the Building and Common Area (excluding repairs and general maintenance paid by proceeds of insurance or by Lessee pursuant to Article 7, or other third parties, and alterations attributable solely to lessees of the Building); (vi) a reasonable management fee for the manager of the Building consistent with management fees charged by owners of similar properties in the market area of the Property; (vii) the reasonable cost at market rates of any additional services not provided to the Building and Common Area at the Commencement Date, but thereafter provided by Lessor in its management of the same; (viii) the cost of any capital improvements made to the Building after the Commencement Date that reduce other operating expenses or are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed, such cost thereof to be amortized over such reasonable period as Lessor shall determine consistent with applicable governmental requirements; and (ix) Real Property Taxes. (b) Exclusions from Common Area Expenses. Common Area Expenses shall not include: (i) the cost of any additional or extraordinary services provided to other tenants of the Building; (ii) costs paid for directly by Lessee. (iii) principal and interest payment on loans secured by deeds of trust recorded against the Building; (iv) real estate sales or leasing brokerage commissions; (v) legal and accounting fees; (vi) executive salaries of off-site personnel employed by Lessor excepting the management fee referenced in Paragraph 7.3(a)(vi) above; (vii) the cost of any repairs to the foundations, exterior walls, the structural condition of interior bearing walls, or the roof structure of the Building; or (viii) Hazardous Materials clean-up costs except as otherwise provided in Article 19. Additionally, Common Area Expenses shall not include all utilities and janitorial services which shall be contracted for and paid for by Lessee, commencing on the Lease Commencement Date. (c) Adjustment. (i) Monthly Payments. Lessee shall pay to Lessor on the first day of each calendar month of the Term, an amount estimated by Lessor to be Lessee's pro rata share of the Common Area Expenses. The Common Area Expenses may be adjusted by Lessor at the end of any calendar quarter on the basis of Lessor's experience and reasonably anticipated costs. Any such -8- 13 adjustment shall be effective as of the calendar month next succeeding receipt by Lessee of written notice of such adjustment. (ii) Accounting. Within one hundred twenty (120) days following the end of each calendar year, Lessor shall furnish to Lessee a statement of Lessee's pro rata share of the actual Common Area Expenses (the "Actual Expenses") for the calendar year and the payments made by Lessee with respect to such period. If the Common Area Expenses paid by Lessee for such period are less than the amount of Actual Expenses, Lessee shall pay Lessor the deficiency within ten (10) days after receipt of such statement. Any overpayment made by Lessee shall be credited against the next monthly payment(s) of Common Area Expenses due from Lessee. (iii) Proration. Lessee's obligation to pay Common Area Expenses shall be prorated on the basis of a 365-day year to account for any fractional portion of a year included at the commencement or expiration of the Term of this Lease. (iv) Survival. Lessee's obligation to pay for any Common Area Expenses pursuant to this paragraph shall survive any termination of this Lease for a period of eighteen (18) months. 7.4 Alterations, Changes and Additions by Lessee. No changes, alterations, or additions shall be made by Lessee to the Premises without the prior written consent of Lessor which Lessor will not unreasonably withhold, except that Lessor's consent shall not be required for minor, nonstructural changes, alterations or additions to the Premises that do not affect the Building systems, provided that the cost of such changes, alterations or additions does not exceed $5,000.00 per work of improvement or $25,000.00 in the aggregate over the term of the Lease. Lessor shall have the right, however, to withhold its consent to structural or exterior changes at Lessor's sole and absolute discretion. As used herein, alterations include utility installations such as ducting, power panels, fluorescent fixtures, base heaters, conduit and wiring. As a condition to giving such consent, Lessor may require that Lessee agree to remove any such alterations, additions or improvements at the expiration of the term and to restore the Premises to their prior condition and that Lessee provide Lessor a payment and completion bond from a California surety company at Lessee's expense. All changes, alterations or additions to be made to the Premises shall be under the supervision of a competent architect and made in accordance with plans and specifications which have been furnished to and approved by Lessor prior to commencement of work. If the written consent of Lessor to any proposed alterations by Lessee shall have been obtained, Lessee agrees to advise Lessor in writing of the date upon which such alterations will commence in order to permit Lessor to post a notice of nonresponsibility. All such alterations, changes and additions shall be constructed in a good and workmanlike manner in accordance with all ordinances and laws relating thereto. With respect to any improvements which Lessee is entitled to make hereunder, Lessee shall use only duly qualified, reputable and licensed contractors and subcontractors for any work commenced after the Commencement Date. Lessee's selection of contractors and subcontractors shall be subject to Lessor's prior written approval, which shall not be unreasonably withheld. Lessee shall provide to Lessor copies of all plans, specifications and drawings of all changes, alterations and additions prior to the commencement of any work relating thereto. All leasehold improvements made by Lessee -9- 14 shall remain the property of Lessee during the Term and Lessee shall have the night to depreciate or amortize the cost of the same and claim and collect investment tax credits and all other tax benefits with respect to such improvements. At the end of the Term, Lessee shall, at Lessor's sole discretion, remove all leasehold improvements installed by it. 7.5 Plumbing. Lessee shall not use the plumbing facilities for any purpose other than that for which they were constructed. The expense of any breakage, stoppage or other damage relating to the plumbing and resulting from the introduction by Lessee, its agents, employees or invitees of foreign or harmful substances into the plumbing facilities shall be borne by Lessee. 7.6 Liens. Lessee shall keep the Premises and the Building free from any liens arising out of work performed, materials furnished or obligations incurred by Lessee and shall indemnify, hold harmless and defend Lessor from any liens and encumbrances arising out of any work performed or materials furnished by or at the direction of Lessee. In the event that Lessee shall not, within twenty (20) days following the imposition of any such lien and notice of the same to Lessee, cause such lien to be released of record by payment or posting of a proper bond, Lessor shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Lessor and all expenses incurred by it in connection therewith including reasonable attorneys' fees and costs shall be payable to Lessor by Lessee on demand with interest at the highest rate allowable by law. Lessor shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law, or which are proper, for the protection of Lessor and the Premises, and any other party having an interest herein, from mechanics, and materialmen's liens, and Lessee shall give to Lessor at least ten (10) business days' prior written notice of the expected date of commencement of any work relating to changes, alterations or additions to the Premises. ARTICLE 8 UTILITIES Lessee shall pay prior to delinquency throughout the Term the cost of water, gas, heating, cooling, sewer, telephone, electricity, garbage, air conditioning and ventilating, janitorial services, landscape maintenance (except Common Area landscape maintenance) and all other materials and utilities supplied to the Premises. If any such services are not separately metered to Lessee, Lessee shall pay Lessee's pro rata share of all charges which are jointly metered, unless Lessor reasonably determines that Lessee is utilizing more than Lessee's pro rata share of any such utilities, in which event Lessee shall pay for its actual usage of any such utilities as reasonably determined by Lessor, and in either event payment shall be made by Lessee within fifteen (15) days of receipt of the statement for such charges. -10- 15 ARTICLE 9 USE OF PREMISES 9.1 Use. The Premises shall be used and occupied by Lessee for only the purposes specified in Paragraph 1.6 and for no other purposes whatsoever without obtaining the prior written consent of Lessor, which shall not be unreasonably withheld. 9.2 Suitability. This Lease shall be subject to all applicable zoning ordinances and to any municipal, county and state laws and regulations governing and regulating the use of the Premises. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Lessee's business. 9.3 Uses Prohibited. (a) Rate of Insurance. Lessee shall not do or permit anything to be done in or about the Premises which will cause an increase in the existing rate of insurance upon the Premises (unless Lessee shall pay an increased premium as a result of such use or acts) or cause the cancellation of any insurance policy covering the Premises or the Building of which the Premises may be a part, nor shall Lessee sell or permit to be kept, used or sold in or about such Premises any articles which may be prohibited by a standard form policy of fire insurance. (b) Interference With Other Tenants. Lessee shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any unlawful purpose, nor shall Lessee cause, maintain or permit any nuisance in, or about the Premises. Lessee shall not commit or suffer to be committed any waste in or upon the Premises. (c) Applicable Laws. Lessee shall not conduct any auctions on the Premises or use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, zoning restriction, ordinance, governmental rule, regulation or requirements of duly constituted public authorities whether now in force or which may hereafter be enacted or promulgated. Lessee shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force (including the Americans With Disabilities Act as it applies to the Premises and to any portion of the Property affected by Lessee's use of the Premises) and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to Lessee's use or occupancy of the Premises. The judgment of any court of competent jurisdiction and exhaustion of any appeals periods, or the admission of Lessee in any action against Lessee whether Lessor be a party thereto or not, that Lessee has violated any law. statute, ordinance or government rule, regulation or requirement, shall be conclusive of that fact as between Lessor and Lessee. (d) Signs. Lessee shall not place any sign upon the Premises without Lessor's prior written consent, which consent shall not be unreasonably withheld. Lessee shall have the right to install, at Lessee's sole expense, one sign on the Building exterior, subject to Lessor's consent as to the exact location, size, style and color of the sign, the CC&Rs (defined in Article 18) and all -11- 16 applicable governmental regulations. Upon the expiration or sooner termination of this Lease, Lessee shall remove its signage from the Building and shall repair any damage to the Building caused by the installation and/or removal of Tenant's signage. ARTICLE 10 DEFAULT PROVISIONS 10.1 Lessee's Default. A default under this Lease by Lessee shall exist if any of the following occurs: (a) If Lessee fails to pay base monthly rent or any other sum required to be paid hereunder when due and Lessee fails to cure such breach within five (5) days after written notice from Lessor; provided, however, that such notice shall be in lieu of, and not in addition to, any notice required under Section 1161 of the California Code of Civil Procedure; (b) If Lessee fails to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Lessee fails to cure such breach within twenty (20) days after written notice from Lessor where such breach could reasonably be cured within such twenty (20) day period; provided, however, that where such failure could not reasonably be cured within the twenty (20) day period, that Lessee shall not be in default if it commences such performance within the twenty (20) day period and diligently thereafter prosecutes the same to completion; (c) If Lessee assigns its assets for the benefit of its creditors; (d) If the sequestration or attachment of or execution on any material part of Lessee's property essential to the conduct of Lessee's business occurs, and Lessee fails to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; (e) If Lessee abandons or vacates the Premises and ceases to pay rent; or (f) If a court makes or enters any decree or order other than under the bankruptcy laws of the United States adjudging Lessee to be insolvent; or approving as properly filed a petition seeking reorganization of Lessee; or directing the winding up or liquidation of Lessee and such decree or order shall have continued for a period of thirty (30) days. 10.2 Remedies. Upon a default, Lessor shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Lessor may resort cumulatively or in the alternative: (a) Lessor may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Lessor does not terminate this Lease, and Lessor shall have the right to collect base monthly rent and other charges due hereunder when due. -12- 17 (b) Lessor may terminate Lessee's night to possession of the Premises at any time by giving written notice to that effect, and relet the Premises or any part thereof. Lessee shall be liable immediately to Lessor for all costs Lessor incurs in reletting the Premises or any part thereof, including, without limitation, broker's commissions, expenses of cleaning and restoring the Premises required by the reletting, and like costs. Reletting may be for a period shorter or longer than the remaining term of this Lease. No act by Lessor other than giving written notice to Lessee shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Lessor's initiative to protect Lessor's interest under this Lease shall not constitute a termination of Lessee's right to possession. On termination, Landlord has the right to remove all Lessee's property and store same at Lessee's cost and to recover from Lessee as damages: (i) The worth at the time of award of unpaid rent and other sums due and payable which had been earned at the time of termination; plus (ii) The worth at the time of award of the amount by which the unpaid rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of such rent loss that Lessee proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of such Rent loss that Lessee proves could be reasonably avoided; plus (iv) Any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform Lessee's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom; plus (v) At Lessor's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. The "worth at the time of award" of the amounts referred to in Paragraphs 10.2(b)(i) and 10.2(b)(ii) is computed by allowing interest at the maximum rate permitted by law on the unpaid rent and other sums due and payable from the termination date through the date of award. The "worth at the time of award" of the amount referred to in Paragraph 10.2(b)(iii) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) Lessor may, with or without terminating this Lease, re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Lessee. No reentry or taking possession of the Premises by Lessor pursuant to this paragraph shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Lessee. 10.3 Default by Lessor. Lessor will be in default if Lessor fails to perform any obligation required of Lessor (other than a delay in delivery of possession as provided for in Paragraph 3.2) -13- 18 within thirty (30) days after written notice by Lessee, specifying wherein Lessor has failed to perform such obligation; provided that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance, then Lessor shall not be in default if Lessor promptly commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. ARTICLE II EXPIRATION OR TERMINATION 11.1 Surrender of Possession. Lessee agrees to deliver up and surrender to Lessor possession of the Premises and all improvements thereon, subject to the terms of Paragraph 7.4, in as good order and condition as when possession was taken by Lessee, excepting only ordinary wear and tear and elements of age and any insured casualty. Upon termination of this Lease, Lessor may re-enter the Premises and remove all persons and property therefrom. If Lessee shall fail to remove any effects which it is entitled to remove from the Premises upon the termination of this Lease, for any cause whatsoever, Lessor, at its option, may remove the same and store or dispose of them, and Lessee agrees to pay to Lessor on demand any and all expenses incurred in such removal and in making the Premises free from all dirt, litter, debris and obstruction, including all storage and insurance charges. If the Premises are not surrendered at the end of the Term, Lessee shall defend, indemnify and hold Lessor harmless from all loss or liability resulting from delay by Lessee in so surrendering the Premises, including, without limitation, any claims made by any succeeding lessee founded on such delay. 11.2 Holding Over. If Lessee remains in possession of the Premises after expiration of the term and if Lessor and Lessee have not executed an express written agreement as to such holding over, then such occupancy shall be a tenancy from month to month at a monthly rental equivalent of 125% of the monthly rental in effect immediately prior to such expiration, such payments to be made as herein provided. In the event of such holding over all of the terms of this Lease including the payment of all charges owing hereunder other than rent shall remain in force and effect on said month to month basis. 11.3 Voluntary Surrender. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work a merger, but shall, at the option of Lessor, terminate all or any existing subleases or subtenancies, or operate as an assignment to Lessor of any or all such subleases or subtenancies. ARTICLE 12 CONDEMNATION OF PREMISES 12.1 Total Condemnation. If the entire Premises, whether by exercise of governmental power or the sale or transfer by Lessor to any condemnor under threat of condemnation or while proceedings for condemnation are pending, at any time during the Term, or such portion of the entire Premises, shall be taken by condemnation such that there does not remain a portion suitable for -14- 19 occupation, this Lease shall then terminate as of the date transfer of possession required. Upon such condemnation, all rent shall be paid up to the date transfer of possession is required, and Lessee shall have no claim against Lessor for the value of the unexpired term of this Lease. 12.2 Partial Condemnation. If any portion of the Premises is taken by condemnation during the Term, whether by exercise of governmental power or the sale or transfer by Lessor to any condemnor under threat of condemnation or while proceedings for condemnation are pending, this Lease shall remain in full force and effect; except that in the event a partial taking leaves the Premises unfit for normal and proper conduct of the business of Lessee, then Lessee shall have the right to terminate this lease effective on the date transfer of possession is required. Lessee may elect to exercise its right to terminate this Lease pursuant to this paragraph by serving written notice to Lessor within thirty (30) days of Lessee's receipt of notice of condemnation. All rent shall be paid up to the date of termination; and Lessee shall have no claim against Lessor for the value of any unexpired term of this Lease. If this Lease shall not be canceled, the rent after such partial taking shall be that percentage of the adjusted base rent specified herein, equal to the percentage which the square footage of the untaken part of the Premises immediately after the taking bears to the square footage of the entire Premises immediately before the taking. If Lessee's continued use of the Premises requires alterations and repairs by reason of a partial taking, Lessor shall make and pay for such alterations and repairs, but only to the extent of proceeds received by Lessor for the condemning authority relating to the improvements to be altered and repaired, and Lessee shall pay the balance of such alterations and repairs. If Lessee is not willing to pay the balance of such alterations and repairs, Lessor shall have the right to terminate this Lease as of the date of taking. 12.3 Award to Lessee. In the event of any condemnation, whether total or partial, Lessee shall have the night to claim and recover from the condemning authority such compensation as may be separately awarded or recoverable by Lessee for all losses of Lessee, including loss of business, fixtures or equipment belonging to Lessee immediately prior to the condemnation. The balance of any condemnation award shall belong to Lessor, and Lessee shall have no further right to recover from Lessor or the condemning authority for any additional claims arising out of such taking. Notwithstanding the foregoing, any other award made as a result of a total or partial taking shall belong to and be paid to Lessor, except that Lessee shall receive from such award the following: (a) a sum attributable to improvements or alterations made to the Premises by Lessee which Lessee has the right to remove but elects not to remove and which increase the value of the Premises; and (b) any part of the award made directly to Lessee for the taking of personal property or trade fixtures belonging to Lessee, for the interruption of Lessee's business or for its moving costs, or for loss of Lessee's good will. ARTICLE 13 ENTRY BY LESSOR Provided that Lessor gives Lessee prior written notice, Lessee shall permit Lessor and its agents to enter the Premises at all reasonable times for any of the following purposes: to inspect the Premises; to maintain the Building; to make such repairs to the Premises as Lessor is obligated or may elect -15- 20 to make; to make repairs, alterations or additions to any other portion of the Building; to show the Premises and post "To Lease" signs for the purposes of reletting during the last ninety (90) days of the Term; to show the Premises as part of a prospective sale by Lessor or to post notices of nonresponsibility. Lessor shall have such right of entry without any rebate of rent to Lessee for any loss of occupancy or quiet enjoyment of the Premises thereby occasioned. In case of emergency, Lessor may enter the Premises without providing notice to Lessee. In making any entry into the Premises, Lessor shall not unreasonably interfere with Lessee's business. Lessor shall comply with Lessee's reasonable security regulations. ARTICLE 14 INDEMNIFICATION Lessee agrees not to hold Lessor liable for any injury or damage, either proximate or remote, occurring through or caused by any repairs or alterations to the Premises unless such injury or damage arises from the willful misconduct or negligence of Lessor or its agents. Lessee agrees that Lessor shall not be liable for any injury or damage occasioned by defective electric wiring, or the breaking, bursting, stoppage or leaking of any part of the plumbing, air conditioning, heating, fire control sprinkler systems or gas, sewer or steam pipes, unless such injury or damage arises from the willful misconduct or negligence of Lessor or its agents. Lessee will defend, indemnify, save and hold harmless Lessor from all claims, actions, liability, loss, expense (including reasonable attorneys' fees and costs), damage or injury to persons or property arising from or occurring by reason of Lessee's occupation or use of the Premises unless such losses or injuries are proximately caused by any willful misconduct or negligence of Lessor or its agents. Lessor shall not be liable for any damage to or loss of property of Lessee or other persons located on the Premises, and Lessee shall defend, indemnify, save and hold Lessor harmless from any claims and losses arising out of damage to the same, unless such loss or damage is proximately caused by the willful misconduct or negligence of Lessor or its agents. Lessor will defend, indemnify, save and hold harmless Lessee from all claims, actions, liability, loss, expense (including reasonable attorneys' fees and costs), damage or injury to persons or property arising from or occurring by reason of the willful misconduct or negligence of Lessor or its agents. ARTICLE 15 ASSIGNMENT AND SUBLETTING Lessee shall not assign this Lease in whole or in part, or sublet the Premises or any part thereof, or license the use of all or any portion of the Premises or business conducted thereon, or encumber or hypothecate this Lease, without first obtaining the written consent of Lessor, which consent will not be unreasonably withheld. Lessee shall submit in writing to Lessor: (a) the name and legal composition of the proposed sublessee; (b) the nature of the proposed sublessee's business to be carried on in the Premises; (c) the terms and provisions of the proposed sublease, and (d) such financial and other reasonable information as Lessor may request concerning the proposed sublessee. -16- 21 Lessor shall give its consent or give notice that it does not consent, specifying the reasons therefor, within seven (7) business days after receiving all the information set forth in the preceding sentence. Any assignment, subletting, licensing, encumbering, or hypothecating of this Lease without such prior written consent shall, at the option of Lessor, constitute grounds for termination of this Lease. Lessor's consent to any assignment or sublease shall not constitute a waiver of the necessity for such consent to any subsequent assignment or sublease. This prohibition against assignment and subletting shall be construed to include a prohibition against assignment or subletting by operation of law. Notwithstanding any assignment or subletting with Lessor's consent, Lessee shall remain fully liable on this Lease and shall not be released from its obligations hereunder. In the event Lessor shall consent to a sublease or assignment under this paragraph, Lessee shall pay Lessor's reasonable attorneys' fees incurred in connection with giving such consent. In addition, Lessee shall pay to Lessor with its regularly scheduled rent payments fifty percent (50%) of all rent or other charges in lieu of rent collected by Lessee from a sublessee or assignee which are in excess of the rent then owing pursuant to Article 4. Notwithstanding the foregoing, Lessee shall be free to assign or sublet without Lessor's consent (a) to a company that controls, is controlled by, or is under common control with Lessee, (b) to the surviving entity in connection with a merger, consolidation or other reorganization of Lessee, and (c) to the purchaser in connection with the sale of substantially all of the assets of the business being conducted at the Premises, provided that Lessee notifies Lessor of Lessee's intent to make such assignment or sublet prior to the date of actual assignment, or sublet and, in the event of any assignment of this Lease, the assignee executes an agreement whereby the assignee assumes the obligations of Lessee under this Lease. ARTICLE 16 DAMAGE OR DESTRUCTION 16.1 Right to Terminate on Destruction of Premises. (a) If the Premises are damaged by a peril not covered by insurance, Lessor may terminate the Lease if the cost to restore exceeds twenty percent (20%) of the replacement cost of the Premises and Lessee does not agree in writing to pay such excess within ten (10) days of receipt of Lessor's written election to terminate. (b) Either Lessor or Lessee shall have the option to terminate the Lease if the Premises are materially damaged during the Term and such option is exercised in writing no later than ten (10) calendar days after the occurrence of the damage. As used herein, materially damaged shall mean that the cost of repair is equal to or greater than thirty-three percent (33%) of the replacement cost of the Premises. If, however, the insurance proceeds available to Lessor, plus the funds, if any, which Lessee is willing to contribute to repair or rebuild the Premises, are sufficient to repair or rebuild the Premises, Lessee shall have the right to elect to continue this Lease and Lessor shall, as soon as possible, commence the repair of the Premises and diligently prosecute the construction of the Premises to completion. Lessee shall exercise such right on or before ten (10) calendar days after Lessor notifies Lessee of the approximate cost of repair and the amount of -17- 22 insurance proceeds available; and Lessee's failure to timely exercise such fight shall be deemed a waiver of such right. 16.2 Repairs by Lessor. If neither Lessor nor Lessee elects to terminate this Lease pursuant to Paragraph 16.1, Lessor shall, immediately upon receipt of insurance proceeds paid in connection with such casualty, proceed to repair or rebuild the Premises, on the same plan and design as existed immediately before such damage or destruction occurred, subject to such delays as may be reasonably attributable to governmental restrictions or failure to obtain materials or labor, or other causes beyond the control of Lessor. Lessee shall be liable for the repair and replacement of all fixtures, leasehold improvements, furnishings, merchandise, equipment and personal property not covered by the property insurance described in Paragraphs 6.1 and 6.2. 16.3 Reduction of Rent During Repairs. If Lessee is able to continue to conduct its business during the making of repairs, the rent then prevailing will be equitably reduced in the proportion that the unusable part of the Premises bears to the whole thereof for the period that repairs are being made. No rent shall be payable while the Premises are wholly unusable due to casualty damage. 16.4 Arbitration. Any controversy or claim arising out of or relating to this article shall be settled by arbitration in accordance with California Code of Civil Procedure, Sections 1280 et seq. The expenses of arbitration shall be borne by the parties as allocated by the arbitrators. The party desiring arbitration shall serve notice upon the other party, together with designation of the first party's arbitrator. ARTICLE 17 PARKING Lessee shall have the nonexclusive right to use one hundred nineteen (119) parking spaces in the parking area, provided that under no circumstances shall Lessor be required to police or monitor the parking rights of Lessee or any other tenant. ARTICLE 18 COVENANTS, CONDITIONS AND RESTRICTIONS This Lease is subject to the terms and conditions of (a) the Declaration of Covenants, Conditions and Restrictions of Mission Falls Business Park ("CC&Rs") imposing certain covenants, conditions and restrictions on the use and management of the Property, (b) the Bylaws ("Bylaws") of Mission Falls Business Park Owners Association ("Association"), a California nonprofit mutual benefit corporation charged with the responsibility of managing Mission Falls Business Park in accordance with the CC&Rs and the Articles of Incorporation of the Association ("Articles"), and (c) the rules ("Rules") adopted from time to time by the Association in accordance with the CC&Rs providing for restrictions on the use of Mission Falls Business Park. Collectively, the CC&Rs, Articles, Bylaws and Rules are referred to herein as the "Governing Documents." Lessor has delivered to -18- 23 Lessee copies of the CC&Rs recorded September 6, 1984 as Instrument No. 84-181476, and the First Amendment to the CC&Rs recorded April 19, 1985 as Instrument No. 85-076494, and the Articles and the Bylaws, respectively filed in connection therewith. Lessee agrees to comply with all provisions of the Governing Documents applicable to its occupancy, interest, use and utilization of the Premises subject to this Lease. Any failure to comply with the Governing Documents shall be a default under the terms of this Lease. ARTICLE 19 HAZARDOUS MATERIALS 19.1 Definition. "Hazardous Material" shall mean any substance or material which has been designated hazardous or toxic by any federal, state, county, municipal or other governmental agency or authority or determined by such agency or authority to be capable of endangering or posing a risk of injury to, or adverse effect on, the health or safety of persons, the environment or property. 19.2 Use. Lessee shall not store, use, generate, release or dispose of any Hazardous Materials in, on or adjacent to the Premises or the Property, or ship any Hazardous Materials therefrom, except in compliance with all laws, ordinances, regulations, rules, and policies, including any obligation to notify Lessor of same. Lessee shall submit to Lessor copies of all permits, licenses, filings, reports or other documentation submitted to any governmental agency or authority, at the same time such documents are submitted to the governmental agency or authority. 19.3 Notice. Lessee shall immediately notify Lessor as soon as possible of any inquiry, test, investigation, or enforcement proceeding by or against Lessee or the Premises or the Property concerning a Hazardous Material in, on, under or within 2,000 feet of the Premises and the Property. Lessee acknowledges that Lessor, as the owner of the Premises, shall have the right, at its election, in its own name or as Lessee's agent, to negotiate, defend, approve, and appeal, at Lessee's expense, any action taken or order issued by an applicable governmental authority with regard to Lessee's failure to comply with the provisions of this Article 19. Notwithstanding the foregoing, Lessee shall not be responsible for the cost of complying with any action taken or order issued by an applicable governmental authority with regard to any Hazardous Materials found in, on or under any real property within 2,000 feet of the Premises or the Property if their presence was not caused by Lessee, its agents, employees, contractors, invitees or subtenants. Lessee shall submit to Lessor copies of all such inquiries, tests, investigations and enforcement proceedings and copies of all reports and responses thereto prepared by Lessee. Lessee shall submit same to Lessor within five (5) days after receipt of same by Lessee, whether such receipt is from a governmental authority or nongovernmental entity. 19.4 Removal and Disposal. In addition, Lessee shall immediately remove all Hazardous Materials which Lessee, its agents, employees, contractors, invitees or subtenants have caused to be released or disposed of in, on, under or adjacent to, the Premises or the Property. Lessee shall dispose of all Hazardous Material removed from the Premises or the Property in lawful disposal sites -19- 24 and otherwise in compliance with all applicable laws, ordinances. regulations. rules and policies, and in all removals of Hazardous Materials, Lessee shall list itself as the shipper. 19.5 Indemnity. Lessee shall indemnify, defend and hold Lessor harmless from and against any claims, suits, causes of action, costs, fees, including attorneys' fees and costs, arising out of or in connection with any Hazardous Materials stored, used, generated, released or disposed of by Lessee or its agents, employees, contractors, invitees or subtenants in, on, under or adjacent to the Premises or the Property, or any Hazardous Materials shipped by Lessee therefrom, including any clean-up work, inquiry or enforcement proceeding resulting therefrom. 19.6 Right of Entry. Notwithstanding any other right of entry granted to Lessor under this Lease, Lessor shall have the right to enter the Premises or to have consultants enter the Premises throughout the term of this Lease for the purpose of determining: (i) whether the Premises are in conformity with federal, state and local laws, ordinances, regulations, rules and policies including those pertaining to the environmental condition of the Premises and the Property, (ii) whether Lessee has complied with this Article 19, and (iii) the corrective measures, if any, required of Lessee to ensure the safe storage, use, generation, release, shipment and disposal of Hazardous Materials, or to remove Hazardous Materials. Such entry shall comply with the provisions of Article 13. Lessee agrees to provide access and reasonable assistance for such inspections. Such inspections may include, but are not limited to, entering the Premises or the Property with drill rigs or other machinery for the purpose of obtaining soil, water or other samples. Lessor shall not be limited in the number of such inspections during the term of this Lease. 19.7 Ispection. If Lessee does store, use, generate, release, or dispose of any Hazardous Materials in, on, under or adjacent to the Premises or the Property, or ship any Hazardous Materials therefrom, Lessee shall pay for the reasonable cost of any inspection reasonably determined to be necessary by Lessor. If Lessee does not store, use, generate, release or dispose of any Hazardous Materials in, on, under or adjacent to the Premises or the Property, or ship any Hazardous Material therefrom, Lessor shall pay the cost of such inspection, however, if such inspection, together with any other evidence, shows that Lessee caused the presence of any Hazardous Materials, Lessee shall pay for the reasonable cost of such inspection and all subsequent inspections until the Hazardous Materials are eliminated. If such consultants determine that the Premises or the Property, or both, are contaminated with Hazardous Materials caused to be present by Lessee, Lessee shall, in a timely manner, at its expense, remove such Hazardous Materials or otherwise comply with the recommendations of such consultants to the reasonable satisfaction of Lessor and any applicable governmental agencies and reimburse Lessor for the cost of such inspections within ten (10) days of receipt of a written statement therefor. The right granted to Lessor herein to inspect the Premises or the Property shall not create a duty on Lessor's part to inspect the Premises or the Property, or any liability of Lessor for Lessee's use, storage, release or disposal of Hazardous Materials, it being understood that Lessee shall be solely responsible for all liability in connection therewith. 19.8 Surrender. Lessee shall surrender the Premises to Lessor upon the expiration or earlier termination of this Lease free of all Hazardous Materials which Lessee, its agents, employees, contractors, invitees or subtenants have caused to be released or disposed of in, on, under or adjacent to the Premises or the Property, and in a condition which complies with all governmental -20- 25 laws, ordinances, regulations, rules and policies, reasonable recommendations of consultants hired by Lessor, and such other reasonable requirements as may be imposed by Lessor. 19.9 Survival. Lessee's and Lessor's obligations under this Article 19 shall survive termination of this Lease. 19.10 Lessor's Covenant. Lessor represents and covenants that it has no knowledge of the existence of any Hazardous Materials located on or beneath the Premises prior to Lessee's occupancy of the Premises. ARTICLE 20 BROKERS 20.1 Brokers. Lessee warrants and represents that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, except for Bishop Hawk and R&D Commercial Properties and that it knows of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Lessee agrees to indemnify, defend and hold Lessor and its agents harmless from and against any and all liabilities or expenses, including attorneys' fees and costs, arising out of or in connection with claims made by any other broker or individual for commissions or fees resulting from Lessee's execution of this Lease. 20.2 Commission. Lessor shall pay the commission due to Bishop Hawk in connection with this Lease in four installments of Fifteen Thousand Eight Hundred Twenty-Four and 19/100ths Dollars ($15,824.19) each on the following terms and conditions. Lessor shall pay the first installment to Bishop Hawk on execution of this Lease by Lessor and Lessee. Lessor shall pay the second installment or before the first day of the thirteenth (13th) month of the Term, the third installment on or before the first day of the twenty-fifth (25th) month of the Term, and the fourth and final installment on or before the first day of the thirty-seventh (37th) month of Term; provided, however, that the second, third and fourth installments of the commission, as applicable, shall be paid to Bishop Hawk only if Lessee has not been in default of any material provision of this Lease during the previous twelve (12) month period. ARTICLE 21 MISCELLANEOUS PROVISIONS 21.1 Waiver. No waiver of any default of any of the covenants or conditions of this Lease shall be construed to be a waiver of any other default or to be a consent to any further or succeeding default of the same or other covenant or condition. The subsequent acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any preceding default by Lessee of any term, covenant or condition of this Lease, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding default at the time of acceptance of such rent. -21- 26 21. 2 Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall be binding upon and shall inure to the benefit of the heirs, personal representatives, successors and assigns of the parties. 21.3 Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing and either personally delivered or sent by certified mail, return receipt requested, postage prepaid, properly addressed to Lessor c/o The Martin Group, at 4637 Chabot Drive, Suite 218, Pleasanton, CA 94588, and to Lessee at the Premises, or at such other address as may from time to time be designated in like manner by one party to the other. Any such notice shall be deemed given when personally delivered or on the date indicated on the Postal Service's certified mail receipt. 21.4 Partial Invalidity. If for any reason any provision of this Lease shall be determined to be invalid or inoperative, the validity and effect of the other provisions hereof shall not be affected thereby. 21.5 Number and Gender. All terms in this Lease shall be construed to mean either the singular or the plural, masculine, feminine or neuter, as the situation may demand. 21.6 Descriptive Headings. The headings used herein and in any of the documents attached hereto as schedules, lists or exhibits are descriptive only and for the convenience of identifying provisions, and are not determinative of the meaning or effect of any such provisions. 21.7 Time is of the Essence. In all matters time is of the essence in the performance of all obligations under this Lease. 21.8 Entire Agreement. This Lease and the documents attached hereto as schedules, lists or exhibits, constitute the entire agreement and understanding between the parties with respect to the subject matters herein and therein, and supersede and replace any prior agreements and understandings, whether oral or written, between and among them with respect to the lease of the Premises, rental therefor, use thereof and all other such matters. The provisions of this Lease may be waived, altered, amended or repealed in whole or in part only upon the written consent of Lessor and Lessee. 21.9 Memorandum of Lease. Lessor and Lessee mutually agree that they will not file or record a copy of this Lease, but that in the event Lessor requests a recording, Lessor and Lessee shall execute and acknowledge a memorandum of this Lease in a form approved by the parties setting forth in said memorandum the description of the Premises, the date of the Lease, the Commencement Date and the date of termination. Said memorandum of Lease may be recorded in the Recorder's Office of the County in which the Premises are located. 21.10 Applicable Law. This Lease shall be construed and interpreted in accordance with the laws of the State of California, without giving effect to any doctrine of renvoi or other doctrine of conflicts of law. -22- 27 2.11 Corporate Authority. Each individual executing this Lease on behalf of a corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation in accordance with a duly adopted resolution of the Board of Directors of the corporation, and that this Lease is binding upon said corporation in accordance with its terms. 21.12 Litigation Expense. If any party shall bring an action against any other party hereto by reason of the breach of any covenant, warranty, representation or condition hereof, or otherwise arising out of this Lease or any schedule, list or exhibit hereto, whether for declaratory or other relief, the prevailing party in such suit shall be entitled to such party's costs of suit and reasonable attorneys' fees, which shall be payable whether or not such action is prosecuted to judgment. 21.13 Subordination of Leasehold. Lessee agrees that this Lease is and shall be, at all times, subject and subordinate to the lien of any mortgage or other encumbrances which Lessor may create against the Premises or the Property, or both, including all renewals, replacements and extensions thereof, provided, however, that regardless of any default under any such mortgage or encumbrance or any sale of the Premises under such mortgage, so long as Lessee performs all covenants and conditions of this Lease and continues to make all payments hereunder, this Lease and Lessee's possession and rights hereunder shall not be disturbed by the mortgagee or anyone claiming under or through such mortgagee. Lessee agrees to execute any and all instruments in writing which may be required by Lessor to subordinate Lessee's rights to the lien of such mortgage. Lessee's subordination is only effective in favor of a future lender so long as such lender, on behalf of itself and any purchaser at a foreclosure sale, agrees in writing to recognize all rights of Lessee under the Lease. 21.14 Lessee's Remedy. If, as a consequence of a default by Lessor under this Lease, Lessee recovers a money judgment against Lessor, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Lessor in the Building and out of rent or other income from such property received by Lessor, or out of consideration received by Lessor from the sale or other disposition of all or any part of Lessor's right, title or interest in the Building, and neither Lessor nor its agents shall be liable for any deficiency. 21.15 Unrelated Business Income. Lessor shall have the right at any time, and from time to time to unilaterally amend the provisions of this Lease if Lessor is advised by its counsel that all or any portion of the monies paid by Lessee to Lessor hereunder are, or may be deemed to be, unrelated business income within the meaning of the United States Internal Revenue Code or regulations issued thereunder, and Lessee agrees that it will execute all documents or instruments necessary to effect such amendment or amendments, provided that no such amendment shall result in Lessee having to pay in the aggregate more money on account of its occupancy of the Premises or materially increase Lessee's obligations under the terms of this Lease as so amended and provided further, that no such amendment or amendments shall result in Lessee receiving under the provisions of this Lease less services than it is entitled to receive, nor services of a lesser quality. 21.16 Lessee's Certificate. Within fifteen (15 )days following Lessor's request, Lessee shall complete, execute and deliver to Lessor a Lessee's Certificate setting forth the information requested -23- 28 therein relating to this Lease and Lessor's and Lessee's obligations thereunder. Failure of Lessee to deliver such certificate within said fifteen (15) days shall be deemed to be an acknowledgment that Lessor is not in default under the Lease, and that the terms of the Lease have not been modified or supplemented in any way. It is intended that such certificate may be relied upon by any prospective purchaser, lender, or assignee of any lender of the Premises. 21.17 Attornment. Lessee shall, in the event of any sale of the Premises or if proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage, installment land contract or deed of trust made by Lessor covering the Premises, attorn to the mortgagee or the purchaser upon any such foreclosure or sale and recognize such mortgagee or purchaser as Lessor under this Lease. LESSOR LESSEE Teachers Insurance and Annuity Quintus, Inc., a California corporation Association of America, a New York corporation By /s/ ALAN K. ANDERSON -------------------------------------- By /s/ [SIGNATURE ILLEGIBLE] its PRESIDENT, CEO -------------------------------- ------------------------------------- its ASST. SECRETARY ------------------------------- -24- 29 [MAP] EXHIBIT A EX-10.7 14 SUBLEASE AGREEMENT (PAVILION TECH / ACUITY CORP.) 1 EXHIBIT 10.7 SUBLEASE AGREEMENT THIS SUBLEASE AGREEMENT (the "SUBLEASE") is entered into effective as of December 19, 1996, by and between PAVILION TECHNOLOGIES, INC. ("SUBLESSOR"), a Texas corporation, and ICHAT, a Texas Corporation, ("SUBLESSEE") on the following terms and conditions: RECITALS: A. Security Capital Industrial Trust ("LANDLORD") and Sublessor entered into a certain Lease Agreement dated February 27, 1996 (hereinafter referred to as the "LEASE") for the lease of approximately 89,438 rentable square feet of the building known as Braker # 7 located at Braker Center, 11100 Metric Blvd., Austin, Texas 78758 (hereinafter referred to as the "PREMISES"). B. Sublessor desires to sublease a portion of the Premises to Sublessee on the terms and conditions set forth herein. C. In connection with the Sublease, Sublessor represents and warrants, to the best of its knowledge, as follows: (i) the Lease is in full force and effect; (ii) Sublessor has not received any notice of default from Landlord and is not aware of any condition which would, with the passage of time, be an event of default under the Lease; and (iii) Sublessor has not mortgaged or collaterally assigned its interest in the Lease of the Premises. NOW, THEREFORE, with reference to the foregoing recitals which are hereby incorporated in and made a part of this Sublease and in consideration of the agreements and covenants set forth herein, Sublessor and Sublessee agree as follows: 1. Sublease of Premises: Possession. Sublessor, in consideration of the rents reserved and covenants agreed to be kept and performed by Sublessee, hereby subleases to Sublessee, and Sublessee subleases from Sublessor approximately 17,002 rentable square feet of the Premises as shown in "Exhibit A" on the terms and conditions hereinafter set forth (hereinafter referred to as "SUBLEASED PREMISES"), together with a non-exclusive right for Sublessee, its customers, guests, invitees, employees, agents and licensees to us all easements rights and privileges appurtenant thereto, including the right to use the parking areas, driveways, roads, alleys and other portions of the "COMMON AREAS" (herein so called) as reflected on the Attached "Exhibit A". Sublessee hereby expressly agrees to perform any and all obligations and covenants required hereunder for the term hereof. 2. Subordinate to Lease. This Sublease is and shall be subject and subordinate to the Lease. Nothing contained in the Sublease shall be construed to create privity of estate or of contract between Sublessee and Landlord. 1 2 3. Premises Condition. Sublessee accepts the Subleased Premises in their present condition as of the Commencement Date (as hereinafter defined), subject to all applicable legal restrictions, the rules and regulations affecting the Premises promulgated by Landlord from time to time and the terms, conditions and provisions of this Sublease. Sublessor has made no warranty or representation as to the suitability of the Subleased Premises for the conduct of Sublessee's business. The taking of possession of the Subleased Premises by Sublessee shall evidence Sublessee's acceptance of the Subleased Premises and shall estop Sublessee from claiming that the Subleased Premises were not in good repair and condition at the time of the Commencement Date. Sublessee agrees to assume all costs imposed on Sublessor by Landlord or an authorized agent thereof to make all Alterations, as defined in Section 22 of this Sublease, in compliance with applicable federal, state or local laws and regulations, including but not limited to the American's with Disabilities Act (ADA), CERCLA, all applicable OSHA regulations and any other applicable laws, regulations or ordinances. Sublessee acknowledges and agrees that it has inspected the Premiss and agrees to accept same in its present condition, "AS IS" and "WITH ALL FAULTS." 4. Term. The term of this Sublease shall commence on February 1, 1997, but in no case later than Feb. 16, 1997 ("COMMENCEMENT DATE"), upon delivery of the Subleased Premises to Sublessee, free of all tenancies except for Sublessor's interest in the Lease and terminate at midnight (12:00 a.m.) on July 31, 1998. Notwithstanding the foregoing, Sublessee may terminate this Sublease after April 30, 1998 by providing six (6) months advance prior written notice to Sublessor of Sublessee's intent to cancel this Sublease and the effective date of early termination. In the event Sublessor does terminate this Sublease prior to July 31, 1998, pursuant to the terms of this paragraph, Sublessee will pay Sublessor the amount of Sublessor's costs (tenant improvements and leasing commissions) which are unamortized as of the early termination date. 5. Rental. (a) The rental during the Sublease for the Subleased Premises will be in the amount of $11,901.40 per month (calculated at $.70 per sq. ft.) ("FIXED RENT"). (b) Sublessee acknowledges that the Subleased Premises constitute a portion of the overall Premises leased by Sublessor pursuant to the terms and conditions of the Lease which provide that Sublessor shall be responsible for and pay on a monthly basis to Landlord its proportionate share of operating expenses for the building and project of which the Premises are a part in addition to all of the expenses incurred directly by Sublessor in connection with the use and operation of the Premises. Accordingly, Sublessee agrees to be responsible for and timely pay Sublessor for Sublessee's proportionate share of all expenses, including but not limited to, common area costs and expenses, real estate and personal property taxes, insurance premiums, utility costs and expenses, all other costs and expenses passed through or charged to Sublessor by Landlord under the Lease and other items as expressly discussed herein (such items are collectively referred to herein as "ADDITIONAL RENT"). Sublessee agrees in addition to Fixed Rent, to pay Sublessor in advance on the first day of every month hereunder commencing on the Commencement Date one-twelfth (1/12) of the estimated annual Additional Rent. 2 3 In January of each year, Sublessor shall provide Sublessee with a written compilation and computation of the expected operating expenses and other items constituting Additional Rent for the succeeding year. By March 1 of each year, Sublessor agrees to provide Sublessee with a written summary together with supporting information of the prior year's expenses. Any overage paid by Sublessee in the prior year shall be credited to the next owed payment of Additional rent. Alternatively, in the event of any underpayment, Sublessee agrees to pay such amount to Sublessor within fifteen (15) days of receipt of such written computation and request therefor. Sublessor agrees to use reasonable efforts to minimize all such expenses and to fairly and accurately estimate future years' Additional Rent (including operating expenses). At this time, annual operating expenses (on a rentable square footage basis) are estimated to be as follows: Common area maintenance $0.297 Taxes 1.089 Insurance 0.048 Other 0.283 ------ TOTAL: $1.717/sq. ft.
with Sublessee's proportionate share estimated to be $0.1431 per rentable square foot per month for a total Additional Rent of $2400.50 per month, (please note that this amount does not include Sublessee's proportionate share of utilities discussed in paragraph 10 below). (c) Sublessee shall pay all payments required hereunder promptly when due without notice or demand, without set-off, deduction or counterclaim of any nature or reason, except as set forth herein. Sublessee agrees to remit to Sublessor all other costs, charges and expenses required under the Lease which are deemed rent thereunder. Sublessee waives and disclaims any present or future right to apply any payment or part-payment of rent, or to set-off or counterclaim in any action for rent, against any obligation of Sublessor, however incurred, and agrees that it will not claim or assert such right, set-off or counterclaim. (d) Fixed Rent, Additional Rent and all additional monetary obligations (collectively referred to herein as "Rental") under the terms of this Sublease, shall be due and payable and begin to accrue on the Commencement Date and continue thereafter during the term hereof. (e) Commission: Sublesser agrees to pay to Magnum Real Estate (sole agent representing Sublessee) a commission of 4% for leasing, expansions, renewals and extensions, on net lease revenue. 6. Uses. The Subleased Premises shall be used only for the purposes of receiving, storing, shipping and selling (but limited to wholesale sales) products, materials and merchandise made and/or distributed by Sublessee, use as an engineering lab, for research and development of electronic and computer related products and for such other lawful purposes as may be incidental thereto; provided, however, with Sublessor's prior written consent which may not be 3 4 unreasonably withheld, conditioned or delayed, Sublessee may also use the Subleased Premises for light manufacturing. Sublessee shall not conduct or give notice of any auction, liquidation, or going out of business sale on the Subleased Premises. Sublessee shall not permit any objectionable odors, smoke, dust, noise, gas, vibration or any other nuisance. Outside storage of trucks and other vehicles is prohibited without the express written consent of Sublessor. Sublessee shall at its own expense use and occupy the Subleased Premises in compliance with all laws, including without limitation, the Americans with Disabilities Act (ADA), orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and restrictions now or hereafter applicable to the Subleased Premises. Sublessee will not use or permit the use of the Subleased Premises in a manner that would be inconsistent with the insurance of Sublessor or Landlord. Sublessee shall at all times operate and occupy the Subleased Premises in a safe and proper manner and will not commit waste or overload the floor or structure or perform or permit anyone to perform an act which would damage the Subleased Premises. 7. Services. If an interruption in services shall occur, Sublessee shall immediately provide simultaneous notice to Sublessor and Landlord. Sublessor shall in no event be liable to Sublessee for Landlord's or Sublessor's failure to provide any services, amenities and rights nor shall any such failure be construed as a breach hereof by Sublessor or an eviction of Sublessee or entitle Sublessee to an abatement of any of the Rentals under this Sublease, except and only to the extent that Sublessor receives an abatement under the Lease with respect thereto. 8. Disclaimer of Warranties. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SUBLESSEE ACKNOWLEDGES THAT SUBLESSOR HAS NOT MADE OR WILL MAKE ANY REPRESENTATIONS OR WARRANTIES TO SUBLESSEE WITH RESPECT TO THE QUALITY OF CONSTRUCTION OF ANY LEASEHOLD IMPROVEMENTS OR TENANT FINISH WITHIN THE SUBLEASED PREMISES OR AS TO THE CONDITION OF THE SUBLEASED PREMISES, EITHER EXPRESS OR IMPLIED, AND THAT SUBLESSOR EXPRESSLY DISCLAIMS ANY IMPLIED WARRANTY THAT THE SUBLEASED PREMISES ARE OR WILL BE SUITABLE FOR SUBLESSEE'S INTENDED COMMERCIAL PURPOSES. SUBLESSEE'S OBLIGATION TO PAY RENTALS UNDER THIS SUBLEASE IS NOT DEPENDENT UPON THE CONDITION OF THE SUBLEASED PREMISES (NOW OR IN THE FUTURE) OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS UNDER THE LEASE OR BY SUBLESSOR UNDER THIS SUBLEASE, AND SUBLESSEE SHALL CONTINUE TO PAY THE RENTALS HEREUNDER WITHOUT ABATEMENT, SET OFF OR DEDUCTION NOTWITHSTANDING ANY BREACH BY SUBLESSOR OF ITS DUTIES OR OBLIGATIONS UNDER THE SUBLEASE, WHETHER EXPRESS OR IMPLIED. 9. Repairs and Maintenance. Except for Landlord's obligation of repair under the Lease regarding structural soundness of the roof, foundation, or exterior walls of the building in which the Premises is located, Sublessee covenants and agrees that it shall maintain or cause to be maintained, the Subleased Premises in good order and repair. Landlord under the Lease has also agreed to maintain in good repair and condition the parking area and other common areas of the building. In the event of any repairs, or maintenance that Sublessee deems to be the responsibility of Landlord, Sublessee shall provide written notice to both Landlord and Sublessor setting out in detail the repairs and/or maintenance requested. Sublessor shall have no liability 4 5 to Sublessee resulting from any failure to repair or maintain by Landlord or resulting from any interruption of utility service to the Subleased Premises, unless such interruption is caused, in whole or in part, by the negligence or misconduct of Sublessor. 10. Utilities. Sublessee shall be responsible for all charges for electricity and gas used in the Subleased Premises as the Subleased Premises are monitored by a separate meter which does not monitor any other portion of the Premises. In addition, Sublessee shall be responsible for its pro-rata share of all other utilities, including but not limited to, sewer, sprinkler services and other utilities and services used on the Subleased Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges imposed by any governmental entity or utility provider. Sublessee acknowledges and agrees that it may share various utility meters servicing the Premises with other sub-tenants and Sublessor, other than the electricity and gas meter referenced above, and that each user of such meter and corresponding utility service shall be responsible for and pay for its proportionate share of such utility service. Sublessee agrees to independently contract for and be solely responsible for the following services and utilities: telephone, HVAC maintenance, refuse/trash collection and janitorial. Sublessee agrees to limit water and sewer use to normal restroom facilities. 11. Taxes on Personalty and Sublease Improvements. Sublessee shall pay all ad valorem and similar taxes or assessments levied upon or applicable to all equipment, fixtures, furniture, and other property placed in or on the Subleased Premises by Sublessee and all license and other fees or charges imposed on the business conducted by Sublessee on the Subleased Premises. Sublessee is solely responsible for any increase in ad valorem taxes or other charges which result from modifications made to the Subleased Premises by Sublessee or for any failure to modify the Subleased Premises which results in increased taxes, fines or other penalties. Sublessor shall have the right (but not the obligation) to pay any such additional costs and to recover them from Sublessee after presenting a written statement that such sum is due. 12. Sublessee Improvements. Sublessee Improvements. Sublessor and Sublessee agree that each will provide a dollar-for-dollar matching finish out allowance of up to a total of $25,000 each in order to accommodate any improvements to the Subleased Premises, including municipal permits, and architectural and engineering fees incurred by Sublessee. Sublessee shall install or retain, as part of the above referenced improvements, a coffee bar with a sink within the Subleased Premises. Sublessor will reimburse Sublessee to the extent provided above for approved sublease improvements and related costs and expenses within thirty (30) days of Sublessor's receipt of written request therefor accompanied by suitable supporting documentation. Sublessee will ensure that all improvements and alterations made to the Subleased Premises comply with all applicable codes and ordinances. Sublessor agrees to make available to Sublessee, at no cost to Sublessee, the carpet tiles currently stored by Sublessor. Sublessee may not make or cause to be made any improvements or alterations to the Subleased Premises without the prior approval of Sublessor and Landlord. Sublessee must provide Sublessor with as-built drawings of any improvements Sublessee makes to the Subleased Premises. 13. Parking. Sublessee shall be entitled to park in common areas with other tenants of the Premises in those areas designated for non-reserved parking. Sublessor shall have no 5 6 obligation or responsibility for enforcing Sublessee's parking rights, and Sublessee acknowledges that Landlord ultimately controls all parking areas. Sublessee shall have access to one (1) parking space for every three hundred and seventy (370) rentable square feet leased by it. Sublessee agrees to require its non-officer employees to park in the area located behind the building. Sublessee acknowledges that all deliveries to the Subleased Premises are to utilize the truck court and that no trucks, trailers, delivery vehicles or similar vehicles are allowed to be parked in the common areas for any period other than as necessary for delivery. 14. Signage. Sublessee shall not make any changes to the exterior of the Premises, or install any lights, decorations, signs, painting, advertising or any other item of a similar nature without the prior written consent of Sublessor and Landlord. For any approved signage or other item, Sublessee shall be solely responsible for all expenses of installation and securance of any and all required municipal permits. Subject to Sublessor's and Landlord's design approval, Sublessee shall be entitled to signage on the monument directory and at the entrance to the Subleased Premises. 15. Insurance, Taxes, Other Charges. (a) Sublessor, under the terms of the Lease has agreed to carry or cause to be carried on the Premises during the term hereof, commercial general liability insurance and all risk property insurance for the Premises and Sublessor's improvements located therein. During the term of this Sublease, Sublessee agrees to reimburse Sublessor for Sublessee's proportionate share of Sublessor's annual total cost for the premiums for Sublessor's insurance which shall be due and payable in advance as follows: (i) commencing on the Commencement Date, and continuing on the first day of each month thereafter, Sublessee shall pay monthly to Sublessor, Sublessee's proportionate share of the cost for the premiums of such insurance, and (ii) any additional amounts for Sublessee's proportionate share shall be paid within fifteen (15) days of written request therefore from Sublessor; (b) Sublessee, at its expense, shall maintain during the term of this Sublease the following: all risk property insurance covering the full replacement cost of all property and improvements installed or placed in the Subleased Premises by Sublessee; workers' compensation insurance with no less than the minimum limits required by law, if applicable; employer's liability insurance with such limits as are required by law and commercial liability insurance, with the minimum limit of $1,000,000 per occurrence and a minimum umbrella limit of $1,000,000, for a total minimum combined general liability and umbrella limit of $2,000,000 (together with such additional umbrella coverage as Landlord and/or Sublessor may reasonably require) for property damage, personal injuries, or deaths of persons occurring in or about the Subleased Premises. The commercial liability policies shall name Landlord and Sublessor as additional insureds, insure on an occurrence and not a claims-made basis, issued by insurance companies which are reasonably acceptable to Landlord and/or Sublessor, not be cancelable unless thirty (30) days prior written notice shall have been given to Landlord, contain a hostile fire endorsement and contractual liability endorsement and provide primary coverage to Landlord and Sublessor (any policy issued to Landlord and Sublessor providing duplicate or similar coverage shall be deemed excess over 6 7 Sublessee's policies). Such policies or certificates thereof shall be delivered to Sublessor by Tenant upon commencement of the sublease term and upon each renewal of said insurance. (c) The all risk property insurance obtained by Landlord, Sublessor and Sublessee shall each include a waiver of subrogation and recovery by the insurers and all rights based upon an assignment from its insured, against Landlord, Sublessor or Sublessee, their officers, directors, employees, managers, agents, invitees and contractors, in connection with any loss or damage thereby insured against. None of the parties nor their respective officers, directors, employees, managers, agents, representatives, invitees or contractors shall be liable to the others for loss or damage caused by any risk coverable by All Risk Property Insurance, and each party waives any claims against the other party, and its officers, directors, employees, managers, agents, representatives, invitees and contractors, for such loss or damage. Sublessor and its agents, employees and contractors shall not be liable for, and Sublessee hereby waives all claims against such parties for, business interruption and losses occasioned thereby sustained by Sublessee or any person claiming through Sublessee resulting from any accident or occurrence in or upon the Premises from any cause whatsoever, including without limitation, damage caused in whole or in part, directly or indirectly, by the negligence of Landlord, or Sublessor, or their respective agents, representatives, employees or contractors. (d) Sublessee and its invitees, employees, contractors and agents shall not be liable for, and Sublessor hereby waives all claims against Sublessee and its invitees, employees, contractors and agents for damage to property sustained by Sublessor or any person claiming through Sublessor resulting from any accident or occurrence in or upon the Subleased Premises, from any cause whatsoever, including, without limitation, damage in whole or in part, directly or indirectly, by the negligence of Sublessee or its invitees, employees, contractors or agents; provided, however, such waiver shall only apply to claims in excess of the commercially reasonable deductible under Sublessor's insurance policy. (e) Sublessor covenants and agrees to indemnify and save Sublessee, its employees and agents, harmless of and from any and all claims, costs, expenses and liabilities, including, without limitation, attorneys' fees, arising on account of or by reason of claims by third parties for injuries or death to persons or damages to property resulting from the negligence or willful misconduct of Sublessor or its agents, employees or contractors, to the extent not attributable to any negligence of Sublessee, or its employees, agents or contractors. If a claim under the foregoing indemnity is made against the indemnitee which the indemnitee believes to be covered by an indemnitor's indemnification obligation hereunder, the indemnitee shall promptly notify the indemnitor of the claim and, in such notice, shall offer to the indemnitor the opportunity to assume the defense of the claim within 10 business days after receipt of the notice (with counsel reasonably acceptable to the indemnitee). If the indemnitor timely elects to assume the defense of the claim, the indemnitor shall have the right to settle the claim on any terms it considers reasonable and without indemnitee's prior written consent, as long as the settlement shall not require the indemnitee to render any performance or pay any consideration, and the indemnitee shall not have the right to settle any such claim. If the indemnitor fails to timely elect to assume the defense of the claim or fails to defend the claim with diligence, then the indemnitee shall have the right to take over the defense of the claim and to settle the claim on any terms the indemnitee 7 8 considers reasonable. Any such settlement shall be valid as against the indemnitor. If the indemnitor assumes the defense of a claim, the indemnitee may employ its own counsel but such employment shall be at the sole expense of the indemnitee. If any such claim arises out of the negligence of both Sublessor and Sublessee, responsibility for such claim shall be allocated between Sublessor and Sublessee based on their respective degrees of negligence. This indemnity does not cover claims arising from the presence or release of Hazardous Materials. 16. Fire or Other Casualty. If the Subleased Premises are destroyed in whole or in part by fire or other casualty at any time during the Sublease and if after such damage or destruction, Sublessee, in its reasonable judgment, is not able to use Subleased Premises to substantially the same extent and for substantially the same purposes as Sublessee used the Subleased Premises before the fire or other casualty, Sublessee simultaneously shall give to Sublessor and Landlord written notice describing in reasonable detail the destruction. If the damage is not the result of negligence on the part of Sublessee, its agents, employees, or invitees and the Landlord terminates the Lease, this Sublease shall automatically terminate. If Landlord elects to restore or repair the damage so that the Subleased Premises are substantially the same as before the damage, the Sublease shall continue in effect in accordance with its terms, except that if Sublessor receives any abatement in rent, Sublessee shall receive an abatement in its Rental equal to the same percentage abatement received by Sublessor. If the damage is a result of the negligence of Sublessee or any of its agents, employees or invitees, then this Sublease shall continue in full effect in accordance with its terms with no abatement in the Rental. Sublessee shall furthermore be liable either to Sublessor or Landlord, at Sublessor's election, for all costs incurred in repairing or replacing the damage caused by the negligent action of Sublessee, its agents, employees, or invitees. SUBLESSEE ALSO AGREES TO INDEMNIFY SUBLESSOR FOR ANY AND ALL CLAIMS MADE AGAINST SUBLESSOR BY LANDLORD OR ANY OTHER PARTY, WHETHER SOUNDING IN CONTRACT, TORT, OR ANY OTHER LEGAL DOCTRINE, WHICH CLAIMS ARISE IN ANY MANNER FROM THE DAMAGE CAUSED BY THE SUBLESSEE'S, ITS AGENTS', EMPLOYEES', REPRESENTATIVES OR INVITEES' NEGLIGENCE. 17. Environmental Requirements. Except for Hazardous Materials (as hereinafter defined) contained in de minimis quantities for ordinary cleaning or office purposes, Sublessee shall not permit or cause any party to bring any Hazardous Material upon the Subleased Premises or to transport, store, use, generate, manufacture or release any Hazardous Material in or about the Subleased Premises without the prior written consent of Sublessor. Sublessee, at its sole cost and expense shall operate its business in strict compliance with all Environmental Requirements (as hereinafter defined) and shall remedy in a manner satisfactory to Sublessor any Hazardous Material released on or from the Subleased Premises by Sublessee, its agents, employees, representatives, or invitees. Sublessee shall complete and certify to disclosure statements as reasonably requested by Sublessor from time to time relating to Sublessee's transportation, storage, use, generation, manufacture or release of Hazardous Materials on the Subleased Premises. The term "ENVIRONMENTAL REQUIREMENTS" means all applicable present and future statutes, regulations, ordinances, codes, judgments, orders or other similar enactments of any governmental authority or agency regulating or relating to health, safety, environmental conditions on, under, or about the Premises, including the Subleased Premises, including, but not limited to, 8 9 the following: Comprehensive Environmental Response, Compensation and Liability Act; Resource Conservation and Recovery Act; and all state and local laws which are counterparts or related thereto and any regulations or policies promulgated thereunder. "HAZARDOUS MATERIALS" include, but are not limited to; substances, materials, waste, pollutant, or contaminant listed or defined as hazardous or toxic, under any Environmental Requirements, asbestos, petroleum, including crude oil or any fraction thereof, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel. As defined in Environmental Requirements, Sublessee is and shall be deemed to be the operator of the Sublessee's facility, and the owner of all Hazardous Material brought on the Subleased Premises by Sublessee, its agents, employees, or invitees and the waste, by-products, or residues generated, resulting or produced therefrom. Sublessee shall indemnify, defend and hold Sublessor harmless from and against any and all losses, claims, demands, actions, suits, damages, expenses including without limitation repair, remediation, removal, or clean-up expenses, and costs which are brought or recoverable against or suffered or incurred by Sublessor as a result of the release of Hazardous Materials for which Sublessee is obligated to remedy as provided above or other breach of the requirements under this Sublease by Sublessee, its agents, employees, or invitees, regardless of whether Sublessee had any knowledge of this noncompliance. THE OBLIGATIONS OF SUBLESSEE UNDER THIS PARAGRAPH SHALL SURVIVE THE TERMINATION OR EXPIRATION OF THIS SUBLEASE. Sublessor shall have access to, and a right to perform inspections and tests on the Subleased Premises to determine Sublessee's compliance with the Environmental Requirements and other obligations under this provision. Access shall be granted to Sublessor upon Sublessor's prior written notice to Sublessee and at such times as to minimize, so far as may be reasonable under the circumstances, any interference with Sublessee's business. Such inspections shall be conducted at Sublessor's expense unless the tests demonstrate that Sublessee has failed to comply with the provisions of this section, in which case Sublessee shall reimburse Sublessor for all costs incurred for the inspection and the tests. Sublessor's receipt of or satisfaction with any environmental assessment in no way waives any rights that Sublessor holds against Sublessee. 18. Default by Sublessee; Remedies of Sublessor. In case of any breach hereunder by Sublessee, in addition to all other rights of Sublessor hereunder or available to Sublessor at law or equity, Sublessor shall have all the rights against Sublessee as would be available to Landlord against Sublessor under the Lease if such breach were by Sublessor thereunder. If Sublessee defaults in the timely and satisfactory performance of any of the terms and provisions hereof and Sublessor places the enforcement of this Sublease in the hands of an attorney, Sublessee agrees to reimburse Sublessor for all reasonable costs and expenses incurred by Sublessor as a result thereof including, but not limited to, reasonable attorneys' fees and court costs. 19. Sublessor's Right to Perform Sublessee's Obligations. Upon default, in addition to any other rights that Sublessor has under this Sublease or at law or in equity, Sublessor shall have the right but not the obligation to perform all or any part of such obligations of Sublessee. Upon a receipt of the demand therefor from Sublessor, Sublessee shall reimburse Sublessor for the reasonable costs to Sublessor of performing such obligations plus the interest thereon at the 9 10 maximum rate of interest at which Sublessee may lawfully contract in Texas from the date such costs are paid by Sublessor until Sublessee reimburses Sublessor. 20. Indemnity by Sublessee. Sublessee shall indemnify and hold Sublessor, its officers, directors, shareholders, representatives, agents and employees, free and harmless of and from any and all demands, claims, causes of action, fines, penalties, losses, liabilities, judgments and expenses (including without limitation, attorney's fees and court costs) incurred, directly or indirectly, in connection with or arising from: (a) the use or occupancy of the Subleased Premises by Sublessee or any person claiming under Sublessee; (b) any activity, work or thing done, or permitted or suffered by Sublessee in or about the Subleased Premises; (c) any acts, omissions or negligence of Sublessee or any person claiming under Sublessee, or the contractors, agents, employees, invitees, or visitors of Sublessee or any such person; or (d) any breach, violation or nonperformance by Sublessee or any person claiming under Sublessee or the employees, agents, contractors, invitees, or visitors of Sublessee or any such person of any term, covenant or provision of this Sublease, or any law, ordinance or government requirement of any kind. If any action or proceeding is brought against Sublessor, its employees or agents by reason of any such claim, Sublessee, upon notice from Sublessor, shall defend the claim at Sublessee's expense with counsel reasonably satisfactory to Sublessor. The obligations of Sublessee under this paragraph shall survive the termination or expiration of this Sublease. 21. Indemnity by Sublessor. Sublessor shall indemnify and hold Sublessee, its officers, directors, shareholders, representatives, agents and employees, free and harmless of and from any and all demands, claims, causes of action, fines, penalties, damages, losses, liabilities, judgments and expenses (including without limitation, attorney's fees and court costs) incurred in connection with or arising from: (a) the prior use or occupancy of the Premises by Sublessor or any person claiming under Sublessor; (b) any activity, work or thing done, or permitted or suffered by Sublessor in or about the Premises; (c) any acts, omissions or negligence of Sublessor or any person claiming under Sublessor, or the contractor, agents, employees, invitees, or visitors of Sublessor or any such person; or (d) any breach, violation or nonperformance by Sublessor or any person claiming under Sublessor or the employees, agents, contractors, invitees, or visitors of Sublessor or any such person of and term, covenant or provision of this Sublease, or any law, ordinance or government requirement of any kind. If any action or proceeding is brought against Sublessee, its employees or agents by reason of any such claim, Sublessor, upon notice from Sublessee, shall defend the claim at Sublessor's expense with counsel reasonably satisfactory to Sublessee. 22. Alterations. (a) Any alterations, additions or improvements made by or on behalf of Sublessee to the Subleased Premises ("ALTERATIONS"), other than those specifically approved herein, shall be subject to Landlord's and Sublessor's prior written consent, which may be withheld in the sole discretion of Landlord or Sublessor, respectively. Sublessee shall cause, at its sole expense, all Alterations to comply with insurance and all legal requirements and shall be constructed at Sublessee's sole cost and expense. All approved Alterations shall be constructed in a good and workmanlike manner by contractors reasonably acceptable to Sublessor and only good grades of 10 11 material shall be used. Any and all plans and specifications for any alterations shall be submitted to Sublessor for its approval. Sublessor may monitor construction of the Alterations. Sublessor's right to review plans and specifications and to monitor construction shall be solely for its own benefit, and Sublessor shall have no duty to see that such plans and specifications or construction comply with applicable laws, codes, rules and regulations. Sublessee agrees to furnish security or make other arrangements reasonably satisfactory to Sublessor to assure payment for the completion of all work, free and clear of any and all liens and shall provide certificates of insurance in amounts and from an insurance company satisfactory to Sublessor protecting Sublessor and Landlord against liability from personal injury or property damage during construction. Upon surrender of these Subleased Premises, all alterations and any leasehold improvements constructed by Sublessor or Sublessee shall remain on the Subleased Premises as Sublessor's property, except to the extent Sublessor or Landlord requires removal at Sublessee's expense of any such items or to which Sublessor or Landlord have otherwise agreed in writing in connection with Sublessor's consent to any Alterations. Sublessee shall repair any and all damage caused by such removal. (b) Sublessee, at its own cost and expense and without need for Sublessor's prior written approval, may erect such shelves, bins, machinery and trade fixtures (collectively "TRADE FIXTURES") in the ordinary course of its business provided that such items do not alter the basic character of the Subleased Premises, do not overload or damage the Subleased Premises, and may be removed without injury to the Premises, and the construction, erection and installation thereof complies with all legal requirements and with Sublessor's requirements set forth above. Sublessee shall remove its Trade Fixtures and shall repair and all damage caused by such removal. (c) Sublessor and Sublessee acknowledge and agree that Sublessee will submit plans and specifications and related items prepared by RTG Partners, Inc. for the Subleased Premises prior to making any improvements to the Subleased Premises. Subject to the mutual agreement between Sublessor and Sublessee regarding such plans, both parties agree that these plans will be utilized for the construction of the subleased improvements. There shall be no modifications, alterations or changes to such plans by Sublessee without the prior written consent of Sublessor, which shall be made in Sublessor's sole discretion. 23. Waiver and Release. Sublessor and Sublessee hereby agree to waive and release all claims, liabilities and causes of action against each other and their respective officers, directors, shareholders, representatives, agents, and employees for loss or damage to or destruction of, the buildings and other improvements, fixtures, equipment, supplies, merchandise and other property, whether that of the party or of others in, upon or situated or about the Premises resulting from fire, explosion or other perils included in standard extended coverage insurance, whether caused by the negligence of any of said persons or otherwise. This waiver shall remain in full force so long as each party's insurer shall consent thereto. The foregoing mutual waivers are given in consideration of each other and the termination or suspension of one shall with like effect terminate or suspend the other. 11 12 24. Inspection. Upon 24 hours notice, except in cases of emergency, Sublessor and its agents, representatives and contractors may enter the Subleased Premises during business hours to inspect the Subleased Premises. 25. Consent of Landlord. This Sublease shall be void unless the consent of the Landlord to this Sublease is obtained in writing. Sublessee agrees that all rights and privileges granted hereunder are subject to the limitations in the Lease and that Sublessor is not granting any rights or privileges to Sublessee over and above those which Sublessor is entitled under the Lease. 26. Prohibition on Subletting. Sublessee is prohibited from subleasing or assigning the Sublease, its rights thereunder, any or all of the Subleased Premises, or in any other way encumbering or creating a lien on the Subleased Premises. 27. Surrender of Premises. Sublessee shall, upon the expiration of the term granted herein, or any earlier termination of the Sublease for any cause, surrender the Subleased Premises to Sublessor, including without limitation, all building apparatus and equipment then upon the Subleased Premises, and all alterations, improvements and other additions which may be made or installed by either party to, in, upon or about the Subleased Premises, other than Sublessee's property (which shall remain the property of Sublessee), broom clean, without any damage, injury or disturbance thereto (reasonable wear and year, loss due to condemnation, and damage due to casualty excepted), or payment therefor. 28. Holding Over. If Sublessee does not surrender possession of the Subleased Premises at the end of the term of the Sublease, Sublessee shall be a tenant-at-sufferance of the Sublessor and shall owe rent owe rent for the duration of the holdover equal to one hundred fifty percent (150%) of the Rentals, including Fixed Rent and Additional Rent. No holding over shall operate to extend this Sublease and in the event of any such holdover, Sublessee shall, in addition to all other obligations and liabilities of Sublessee hereunder, all of which shall remain in full force while Sublessee is a tenant-at-sufferance, indemnify, defend and hold harmless Sublessor from and against any and all clams for damages brought by Landlord or any other tenant or any other party. 29. Arbitration. Sublessee hereby agrees to submit all disputes arising out of this Sublease to arbitration in accordance with the rules and procedure of the American Arbitration Association. 30. Entire Agreement. No oral statements or prior written material not specifically incorporated herein shall be of any force or effect. Sublessee agrees that in entering into this Sublease, it has relied solely on the representations and agreements contained herein. This Sublease constitutes the entire agreement between Sublessor and Sublessee and shall in no way be modified or otherwise altered by Sublessee without the prior written consent of Sublessor and the Landlord. 31. Notices. All notices required or permitted to be given hereunder, or given in regard to this Sublease by one party to the other, shall be in writing and the same shall be given 12 13 and be deemed to have been served and given (a) if mailed, when placed in the United States mail, postage prepaid, by certified mail, return receipt requested, addressed to the party to whom notice is given at the address hereinafter specified, or (b) if hand delivered in any other manner, when actually received by the party to whom notice is given, or (c) if sent by facsimile, immediately upon facsimile transmittal with a copy of the notice and proof of transmission delivered by certified mail, return receipt requested, or (d) if sent by a nationally recognized overnight courier, one (1) day after being deposited with such courier. Any party hereto may, at any time by giving five (5) days' written notice to the other party hereto, designate any other address or addressee in substitution of its specified address or addressee to which such notices shall be given. If to Sublessor: Pavilion Technologies, Inc. 11100 Metric Blvd. Broker #7, Suite 700 Austin, Texas 787 Attention: Facilities Manager FAX (512) 438-1401 With a copy to: Jenkens & Gilchrist 2200 One American Center 600 Congress Avenue Austin, Texas 78701 Attention: J. Bradley Greenblum FAX: (512) 404-3520 If to Sublessee: ICHAT at Subleased Premises Attention: Chief Financial Officer FAX: (512) 349-0005 13 14 With a copy to: Brobeck, Phleger & Harrison LLP 301 Congress Ave., Suite 1200 Austin, TX 78701 Attention: Mike Dunn FAX: (512) 477-5813 If to Landlord: Security Capital Industrial Trust c/o SCI Client Services Incorporated 9101 Wall Street, Suite 1080 Austin, Texas 78754 With a copy to: Security Capital Industrial Trust 14100 East 35th Place Aurora, Colorado 80011 FAX: (303) 375-8581 32. Cure of Defaults. Sublessee shall be entitled to cure any default by Sublessor under the Lease, and shall be entitled to offset any amounts so spent against further sums due under the Sublease, in addition to any other remedy available at law. 33. Counterparts. This Sublease may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 34. Successor Landlord. When the term "Landlord" is used herein, such term shall also mean any party succeeding to Landlord's interest in the Lease. 35. Liens. Sublessee agrees to not allow and to discharge any and all liens, encumbrances or charges arising out of the work of any contractor, mechanic, labor or laborer or material contracted for by Sublessee. If any lien or notice of lien on account of an alleged debt of Sublessee or any notice of contract by a party engaged by Sublessee or Sublessee's contractor to work in the Subleased Premises shall be filed against the Premiss, Sublessee shall, within thirty (30) days after notice of the filing thereof, cause the same to be discharged of record by payment, deposit or bond. 36. Nonrecordation of Sublease. Sublessee shall not record the Sublease. Upon request by Sublessee, the parties shall join in the execution of a memorandum of this Sublease for the purpose of recordation. Any recording costs associated with the memorandum of this Sublease shall be borne by the party requesting recordation. 14 15 37. Attorney's Fees. In the event that at any time during the term of this Sublease, either party shall institute any action or proceeding against the other relating to the provisions of this Sublease, or any default hereunder, the unsuccessful party in such action or proceeding agrees to reimburse the successful party for the reasonable expenses of attorney's fees and other costs and expenses incurred therein by the successful party. 38. Remedies. All rights and remedies of the Sublessor and Sublessee herein created or otherwise existing at law are cumulative and the exercise of one or more rights or remedies may be exercised and enforced concurrently or consecutively and whenever and as often as deemed desirable. 39. Waiver. The failure of either Sublessor or Sublessee to insist upon strict performance by the other of any of the covenants, conditions and agreements of this Sublease shall not be deemed a waiver of any subsequent breach or default and any of the covenants, conditions and agreements of this Sublease. No surrender of the Subleased Premises by Sublessee shall be affected by Sublessor's acceptance of Rental or by any other means whatsoever nor shall acceptance of Rental be deemed a waiver of any other right or remedy by Sublessor, unless the same is evidenced by Sublessor's written acceptance of the surrender or other waiver. 40. Estoppel. At any time and from time to time either party, upon request of the other party, shall execute, acknowledge and deliver an instrument, stating, if the same be true, that this Sublease is a true and exact copy of the Sublease, that there are no amendments hereto (or, if not so, stating what amendments there may be), that this Sublease is then in full force and effect, and including such other customary language and information that is generally included in estoppel certificates. Such instrument will be executed by the other party and delivered to the requesting party within fifteen (15) days of receipt of such written request therefor. 41. Severability. Any provision of the Sublease which shall prove to be invalid, void or illegal, shall in no way affect, impair or invalidate any other provision hereof and such other provisions shall remain in full force and effect. 42. Laws and Ordinances. Except as specifically set forth herein, Sublessee agrees, at is sole cost and expense, to comply with all existing and future laws, ordinances, orders and regulations regarding the Subleased Premises and Sublessee's operations therein. 43. Rules and Regulations. Sublessee shall, at all times during the lease term, comply with all reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises. Sublessor shall not have any liability or obligation for the breach of any rules or regulations by other tenants in the buildings constituting a portion of the project in which the Premises is located or in the enforcement by Landlord of such rules and regulations. 44. Force Majeure. Sublessor shall not be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefore, governmental 15 16 restrictions, regulations or controls, delays in the issuances of permits, enemy or hostile action, civil commotion, fire or other casualty, or other causes beyond a reasonable control of Sublessor. 45. Limitation of Liability of Sublessor and Officers and Shareholders of Sublessor. Any obligation or liability whatsoever of Sublessor hereunder, which may arise at any time under the Sublease or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction or undertaken and contemplated hereby shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of, the directors, officers, shareholders, employees, representatives or agents of Sublessor, regardless of whether such obligation or liability is in the nature of contractor, or otherwise. 46. Late Charter and Interest on Overdue Rental. If any installment of Fixed Rent or Additional Rent is not received on the due date thereof, Sublessor will provide written notice to Sublessee regarding same. If the installment of Rent and/or Additional Rent is not paid within five (5) days after written notice is submitted to Sublessee, (without in any way implying Sublessor's consent to such late payment), Sublessee agrees to pay Sublessor a late charge equal to five percent (5%) of the installment of Rental due and unpaid, in addition to said installment, it being understood that the late charge shall constitute liquidated damages and shall be for the purpose of reimbursing Sublessor for the additional costs and expenses incurred by Sublessor. In addition to the late charge, Sublessor agrees to pay Sublessee interest, at the maximum rate allowed by law, on any Fixed rent or Additional Rent not paid within thirty (30) days after the due date thereof, which interest shall accrue from the due date to the date of payment. Notwithstanding the foregoing, the late charge shall not apply to any sum which may have been advanced by Sublessor to or for the benefit of Sublessee pursuant to any provision of this lease, it being understood that such sum shall bear interest, which Sublessee agrees to pay Sublessor at the highest maximum allowable interest rate. 47. Security Deposit. Sublessor agrees to deliver contemporaneously with its execution hereof, a security deposit in the amount of $14,500.00 which shall be held by Sublessor, without liability for interest, as security for the performance of Sublessee of Sublessee's covenants and obligations under this Sublease, it being expressly understood that the security deposit shall not be considered as advance payment of Rental or a measure of Sublessor's damages in the case of default by Sublessee. Upon occurrence of any event of default hereunder, Sublessor, from time to time and without prejudice to any other remedy, may use the security deposit to the extent necessary to make good any arrearages of Rental and any other damages, injury, expense or liability caused to Sublessor by such event of default. Following any such application of the security deposit, Sublessee shall pay Sublessor on demand the amount so applied in order to restore the security deposit to its original amount. If Sublessor has not been in default hereunder, any remaining balance of the security deposit shall be returned to Sublessee by Sublessor within a reasonable period of time after the termination of this Sublease. If Sublessor transfers its interest in the Premises during the term hereof, Sublessor may assign the security deposit to the transferee and thereafter, Sublessor shall have no further liability to Sublessee for the return of the security deposit. 16 17 IN WITNESS WHEREOF, the parties have executed this Sublease Agreement as of the day and year set forth above. SUBLESSOR: PAVILION TECHNOLOGIES, INC., a Texas corporation By: /s/ RONALD R. RIDESER ------------------------------------ Name: Ronald R. Rideser ---------------------------------- Title: President & CEO ---------------------------------- SUBLESSEE: ICHAT a Delaware corporation By: /s/ R.N. MACDONALD ------------------------------------ Name: R.N. MacDonald ---------------------------------- Title: CFO --------------------------------- 17 18 EXHIBIT "A" ICHAT LEASE SPACE [GRAPHIC] 19 CONSENT BY LANDLORD TO SUBLEASE The undersigned, as Landlord under that certain Lease dated February 27, 1996, with Pavilion Technologies, Inc., ("Sublandlord") for certain premises at 11100 Metric Blvd., Austin, Texas, (the "Prime Lease"), hereby consents to the entering into of the foregoing Sublease dated ________________________, 1996, ("Sublease") between Sublandlord, as Sublessor, and ichat as Subtenant ("Subtenant"), upon the express understandings and conditions that: a. Landlord neither approves nor disapproves the terms, conditions and agreements contained in the Sublease (all of which shall be subordinate and subject at all times to the terms, covenants and conditions of the Prime Lease) and assumes no liability or obligation of any kind whatsoever on account of anything contained in the Sublease; b. By executing this consent, Landlord shall not be deemed to have waived any rights under the Prime Lease nor shall Landlord be deemed to have waived Sublandlord's obligations to obtain any required consents under the Prime Lease (other than consent to the Sublease itself); c. Notwithstanding anything in the Sublease to the contrary, Sublandlord shall be and continue to remain liable for the payment of rent and the full and prompt performance of all of the obligations of Tenant under and set forth in the Prime Lease; d. Nothing contained in the Sublease shall be taken or construed to in any way modify, alter, waive or affect any of the terms, covenants or conditions contained in the Prime Lease, or be deemed to grant Subtenant any privity of contract with Landlord, or require Landlord to accept any payments form Subtenant on behalf of Sublandlord; e. The Sublease shall be deemed and agreed to be a sublease only and not an assignment and there shall be no further subletting or assignment or all or any portion of the premises demised under the Prime Lease (including the premises demised by the foregoing Sublease) except in accordance with the terms and conditions of the Prime Lease; and f. If Landlord terminates the Prime Lease as a result of a default by Sublandlord thereunder, the Sublease shall automatically terminate concurrently therewith unless Landlord elects in writing to keep the Sublease in full force and effect in which case the Sublease shall become and be deemed to be a direct indenture of lease between Landlord and Subtenant. LANDLORD SECURITY CAPITAL INDUSTRIAL TRUST By: /s/ STEVEN K. MEYER ----------------------------- Name: Steven K. Meyer ----------------------------- Title: Senior Vice President ----------------------------- Dated: December 12, 1996 20 SECOND AMENDMENT OF SUBLEASE AGREEMENT This SECOND AMENDMENT OF SUBLEASE AGREEMENT (the "Amendment No. 2") is made and entered into by and between PAVILION TECHNOLOGIES, INC., a Texas corporation ("Sublessor") and ACUITY CORP. (f/k/a ICHAT), a Delaware corporation ("SUBLESSEE"). WHEREAS, Sublessor and Sublessee entered into that certain Sublease Agreement (the "Sublease") dated December 19, 1996 pursuant to which Sublessor subleased to Sublessee, and Sublessee subleased from Sublessor, approximately 17,002 rentable square feet of that certain building known as Braker #7 located at Braker Center, 11100 Metric Blvd., Austin, Texas 78758 (the "Premises"). WHEREAS, Sublessor and Sublessee amended the Sublease by that certain Amendment of Sublease (the "Amendment No. 1") deemed by the Sublessor and Sublessee to be dated June 1, 1998, in order to increase the rentable square feet of the Premises to 22058, among other changes; WHEREAS, Sublessor and Sublessee desire to further amend the Sublease to change certain terms and provisions thereof; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessor and Sublessee agree as follows: 1. Extension of Term. The termination date of the Term is hereby extended to June 30, 2000, midnight (12:00 a.m.) local time. 2. Extension Option. Sublessee may elect to extend the termination date of the Term to June 30, 2001, with an increase to Fixed Rent and Additional Rent to be determined by Sublessor and Sublessee at that time, provided that (a) Sublessee furnishes Sublessor with no fewer than four (4) months' prior written notice of the extended termination date; and (b) Sublessor has not previously notified Sublessee in writing of Sublessor's election not to extend the termination date of the Term. 3. Increase in Rental. The Fixed Rent is hereby increased to $16,543.50 per month (calculated at $.75 per rsf), and the first payment reflecting such increase shall be due on July 1, 1999. 4. Additional Rent. Paragraph 5(b) of the Sublease is hereby amended as follows: The third sentence through the end of Paragraph 5(b) is deleted and replaced with the following: "Sublessee shall pay the Additional Rent (including any increases or adjustments thereto) for the Subleased Premises in accordance with any and all of the terms and provisions set forth in the Lease by and between Landlord and Sublessor which pertain to the items that collectively comprise Additional Rent. Sublessor will provide any and all credits or adjustments (if applicable), notices, 21 Information and documentation to Sublessee with regard to the Additional Rent for the Subleased Premises (including any increases thereto) as, and to the extent, that such credits or adjustments (if applicable), notices, information and documentation are made available to Sublessor by Landlord." This Amendment No. 2 may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. In the event of any conflict between the terms of the Sublease or Amendment No. 1 and the terms of this Amendment No. 2, the terms of this Amendment No. 2 will prevail. Except as specifically amended herein, all terms and conditions of the Sublease and Amendment No. 1 shall continue in full force and effect. Dated to be effective the ____ day of January, 1999. SUBLESSOR: PAVILION TECHNOLOGIES, INC., a Texas corporation By: /s/ KEVIN NAUGHTON ------------------------------- Name: Kevin Naughton ------------------------------- Title: CFO ------------------------------ SUBLESSEE: ACUITY CORP. (f/k/a ICHAT), a Delaware corporation By: /s/ [SIGNATURE ILLEGIBLE] ------------------------------- Name: [ILLEGIBLE] ------------------------------- Title: Controller, Asst. Sec. ------------------------------- 2 EX-10.11 15 EMPLOYMENT AGREEMENT WITH ALAN ANDERSON 1 EXHIBIT 10.11 QC ACQUISITION CORP. c/o Sprout Group 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 May 23, 1995 Mr. Alan Anderson 2185 Ridge Point Court Walnut Creek, CA 94596 Dear Alan: QC Acquisition Corp. ("QCAC") is pleased to extend this offer of employment to you to serve as President and Chief Executive Officer of Quintus Corporation (the "Company"). This offer and your employment with the Company, should you decide to accept our offer, would commence upon QCAC's purchase of all of the Company's outstanding capital stock (the "Purchase"). The other terms and conditions of your employment would be as follows: 1. Position. You will serve in a full-time capacity as President and Chief Executive Officer of the Company. In addition, you will be elected a Director of the Company immediately following the Purchase. As we also discussed, as President and a director of the Company, you will have input on the appointment of other directors of the Company. 2. Compensation. You will be paid a salary of $15,833.33 per month, payable in accordance with the Company's standard payroll practices for salaried employees. This salary will be subject to adjustment at the discretion of the Company's Board of Directors in each subsequent calendar year as part of the Board's annual review of employee compensation. 3. Bonus. You will be eligible for an annual bonus of up to 50 percent (50%) of your salary. Bonus payments, if any, will be determined pursuant to an annual management incentive plan presented by the Company's management for each prospective fiscal year and approved by and at the discretion of the Company's Board of Directors. 2 Mr. Alan Anderson May 23, 1995 Page 2 4. Stock Options. Following the Purchase, you will be granted an option to purchase 1,142,858 shares of Common Stock of QCAC,(1)/(QCAC anticipates that it will merge into the Company following the Purchase, with your options becoming options to purchase a comparable number of shares of Company Common Stock and representing a comparable percentage of Company's capitalization.) Your option is expected to be treated as an "incentive stock option," subject to its satisfying all the applicable requirements for an incentive stock option under the applicable tax laws, and will have a per share exercise price equal to $0.05 per share. Your option will have a term of ten years, subject to earlier termination upon termination of your service relationship with the Company or a sale or merger of QCAC.(2) Subject to the terms described herein, your option will be governed by a Stock Option Plan adopted by the Board of Directors of QCAC in its sole discretion and evidenced by agreements adopted under such plan.(3) This option will be subject to vesting, with fifty percent (50%) of the underlying shares vesting pursuant to a time-based formula and the other fifty percent (50%) vesting based on Company performance. Your time-based options will vest as follows: After twelve months of employment, twenty-five percent (25%) will vest; and the remainder will vest in equal monthly installments over the 36 months following the one year anniversary of your employment. Your performance-based options will vest over a ________________________ (1) As of the Purchase, QCAC will have issued 9,000,000 shares of Series A Preferred Stock at $1.00 per share, which Preferred Stock is convertible on a one-for-one basis into Common Stock, and options (including yours) covering 2,928,582 shares of Common Stock. Your percentage interest, of course, is subject to dilution if QCAC raises additional equity financing or grants additional stock options. (2) In the event the entity surviving such sale or merger does not assume your option, the vesting of your option will accelerate such that all of the underlying shares will be vested immediately prior to such sale or merger. Even if the entity surviving such sale or merger is willing to assume your option, the vesting of the shares underlying the performance-based portion of your option will accelerate if such sale or merger involves a value of the Company in excess of the thresholds set forth in Exhibit A hereto. (3) Among other terms, the Stock Option Plan will require that optionees not sell, make any short sale of, loan, pledge, grant any option for the purchase of, or otherwise dispose of or transfer for value any of the QCAC shares issued upon exercise of an option under the Stock Option Plan for up to one hundred eighty days following QCAC's initial public offering or another underwritten public offering of QCAC equity securities, pursuant to a registration statement declared effective under the Securities Act of 1933, as amended, within two years of QCAC's initial public offering. 3 Mr. Alan Anderson May 23, 1995 Page 3 significantly longer vesting schedule(4), but the vesting of such performance-based options will accelerate upon the achievement of specified performance milestones as set forth in Exhibit A hereto. 5. Severance. In the event that the Company terminates your employment "without cause" (as defined below), you will be entitled to receive your regular monthly compensation until the earlier of (a) six months following the effective date of such termination if such termination occurs within twelve months after the Purchase or nine months following the effective date of such termination if such termination occurs on or after the twelve month anniversary of the Purchase and (b) your commencing full-time employment with another employer. For purposes of this letter, termination "without cause" shall mean termination for reasons other than: (i) financial dishonesty, including without limitation, misappropriation of funds or property of the Company, (ii) a repeated refusal to comply with reasonable directives of the Board of Directors of the Company, or the gross negligence or willful misconduct in the performance of duties assigned to you by such Board, or (iii) the conviction of any crime involving moral turpitude, fraud, or any felony. 6. Fringe Benefits. The Company will provide you with those employee benefits that the Company after the Purchase maintains generally for its employees and for which you individually qualify. 7. Expense Reimbursement. During the period of your employment, you will be reimbursed for reasonable and necessary expenses incurred on behalf of the Company in accordance with the Company's expense reimbursement policy. 8. Vacation. You will accrue vacation pursuant to the Company's general vacation policies which are in effect after the Purchase. 9. Proprietary Information and Inventions Agreement. As with all Company employees involved in the development of or with access to Company trade secrets, you will be required, as a condition to your employment with the Company, to sign the Company's standard Proprietary Information and Inventions Agreement, a copy of which is enclosed as Exhibit B hereto. - ------------------- (4) The exact time periods for the time-based vesting of your performance-based options is pending input from the independent accounting firm selected to audit the Company's financial statements, but could involve the vesting of such shares in a single lump sum on the day before the tenth anniversary of your employment with the Company. 4 May 23, 1995 Page 4 Mr. Alan Anderson 10. Period of Employment. Your employment with the Company will be "at will," meaning that either you or the Company will be entitled to terminate your employment at any time for any reason with or without cause. Any contrary representations which may have been made or which may be made to you are superseded by this offer. 11. Outside Activities. During the period that you render services to the Company, you will not engage in any employment, business, or activity that is in any way competitive with the business or proposed business of the Company, and you will not assist any other person or other organization in competing with the Company or in preparing to engage in competition with the business or proposed business of the Company. 12. Entire Agreement. Other than the Company's standard Proprietary Information and Inventions Agreement referred to in paragraph 9 and the Company's standard stock option grant documents referred to in paragraph 4, this letter contains all of the terms of your employment with the Company and supersedes any other understandings, oral or written, between you and the Company. 5 Mr. Alan Anderson May 23, 1995 Page 5 13. Modifications. Any additions or modifications of these terms would have to be in writing and signed by yourself and a person authorized by the Board of Directors of the Company. We hope that you find the foregoing terms acceptable, and we look forward to your response to this letter by May 24, 1995. You may indicate your acceptance by signing and dating the enclosed duplicate original of this letter and returning it to me by the May 24, 1995 expiration date. We believe that you will be a key contributor to the Company's future success and profitability, and we look forward to the start of your new career with the Company. Very truly yours, QC ACQUISITION CORP. By: /s/ PAUL H. BARTLETT --------------------- Paul H. Bartlett Chairman of the Board AGREED TO AND ACCEPTED BY: ALAN ANDERSON /s/ ALAN ANDERSON - ------------------ Date: 5/24/95 ------------- 6 EXHIBIT A PERFORMANCE VESTING To the extent one or more of the following financial performance milestones are attained while the Optionee continues in Service to QCAC (as definitively defined in the Option Plan, "Service"), then the applicable percentage of the shares underlying the performance-based option (the "Performance Option Shares") indicated for each such attained milestone shall immediately vest and QCAC's repurchase right with respect to those Option Shares shall terminate. The performance milestones are based on the Operating Income of Quintus Corporation ("Quintus"), QCAC's wholly-owned subsidiary, determined in accordance with generally accepted accounting principles but excluding (a) amortization of goodwill or purchase-price related intangibles arising from QCAC's May 25, 1995 acquisition of all of the outstanding capital stock of Quintus, (b) closing costs directly related to such acquisition, and (c) the expenses incurred pursuant to the termination of certain Quintus employees as contemplated by Section 4.5 of the Stock Purchase Agreement effecting such acquisition. Such adjusted Quintus Operating Income shall be reasonably determined by the Board of Directors of QCAC and shall include, without limitation, the expense of any bonus payments to Quintus employees. Any such accelerated vesting of the Performance Option Shares and lapse of QCAC's repurchase right with respect to those Performance Option Shares shall be calculated proportionately (calculated on a straight-line basis, with any fractional share rounded to the nearest whole number of Option Shares) if Quintus Operating Income for a specified period falls between the Threshold Operating Income and the Maximum Vesting Operating Income. No accelerated vesting of the Option Shares will occur if Quintus Operating Income is at or below the Threshold Operating Income level; and even if Quintus Operating Income should exceed the Maximum Vesting Operating Income level specified for a particular time period below, the maximum acceleration for that time period shall be limited to 35% of the Performance Option Shares in the case of full-year periods or 17.5% of the Performance Option Shares in the case of partial-year periods.
% of Option % of Option Shares Vesting at Maximum Shares Vesting Threshold % of Option Target Target Vesting at Maximum Operating Shares Vesting Operating Operating Operating Vesting Time Period Income at Threshold Income Income Income Operating Income - ---------------------------------------------------------------------------------------------------------------- 05/25/95 to ($2,028,000) 0% ($1,352,000) 12.5% ($1,081,600) 17.5% 12/31/95 01/01/96 to $1,428,000 0% $2,856,000 25.0% $3,427,200 35.0% 12/31/96 01/01/97 to $2,960,000 0% $5,920,000 25.0% $7,104,000 35.0% 12/31/97 01/01/98 to $4,140,000 0% $8,280,000 25.0% $9,936,000 35.0% 12/31/98 01/01/99 to $2,900,000 0% $5,800,000 12.5% $6,960,000 17.5% 06/30/99
1 of 2 Pages 7 EXHIBIT A continued ACCELERATION OF VESTING Should a Corporate Transaction (as defined below) be effected during the time periods set forth below for an acquisition price (the "Per Share Acquisition Price") payable per share of QCAC Common Stock (determined on a fully-diluted basis as if all QCAC's outstanding securities exercisable or convertible into Common Stock were in fact exercised or converted immediately prior to such Corporate Transaction) in an amount not less than the minimum price per share indicated below for the respective time periods indicated below in which such Corporate Transaction occurs, then QCAC's repurchase right regarding Performance Option Shares will, immediately prior to the effective date of that Corporate Transaction, terminate in its entirety and all of an Optionee's Performance Option Shares shall immediately vest.
Time Period Minimum of Acquisition Price Acquisition Per Share ----------- ----------------- 05/25/95 to 12/31/96 $4.20 01/01/97 to 12/31/97 $5.25 01/01/98 to 12/31/98 $6.30 01/01/99 to 12/31/99 $7.35 01/01/00 to 12/31/00 $8.40 01/01/01 or later $9.45
Should a Corporate Transaction be effected during a time period set forth above for a Per Share Acquisition Price less than the applicable minimum price listed above for such time period, there will be no acceleration of vesting, and the vesting and repurchase rights related to such options will remain in effect. Upon the consummation of a Corporate Transaction, each such option will terminate, unless the acquirer expressly agrees to assume such option or substitute therefor a substitute option of the acquirer. "Corporate Transaction" shall mean either of the following shareholder-approved transactions: (1) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of QCAC's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (2) the sale, transfer or other disposition of all or substantially all of QCAC's assets in complete liquidation or dissolution of QCAC. (Note that the merger of QCAC into Quintus is not a "Corporate Transaction" and that following such merger, options will be governed as if initially granted by Quintus.) 2 of 2 Pages 8 EXHIBIT B PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT 9 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT ------------------------ The following confirms an agreement between me and Quintus Corporation, a Delaware corporation (the "Company"), which is a material part of the consideration for my employment by the Company: 1. In consideration of my employment by the Company and the compensation received by me from the Company from time to time, I hereby agree as follows: a. I understand that the Company possesses and will possess Proprietary Information which is important to the business. For purposes of this Agreement, "Proprietary Information" is information that was or will be developed, created, or discovered by or on behalf of the Company, or which became or will become known by, or was or is conveyed to the Company, which has commercial value in the Company's business. "Proprietary Information" includes, but is not limited to, information about circuits, layouts, algorithms, trade secrets, computer programs, designs, technology, ideas, know-how, processes, formulas, compositions, data, techniques, improvements, inventions (whether patentable or not), works of authorship, business and product development plans, salaries and terms of compensation of other employees, customers and other information concerning the Company's actual or anticipated business, research or development, or which is received in confidence by or for the Company from any other person. I understand that my employment creates a relationship of confidence and trust between me and the Company with respect to Proprietary Information. All Proprietary Information and all title, patents, patent rights, copyrights, mask work rights, trade secret rights, and other intellectual property and rights anywhere in the world (collectively "Rights") in connection therewith shall be the sole property of the Company. I hereby assign to the Company any Rights I may have or acquire in such Proprietary Information. At all times, both during my employment by the Company and after its termination, I will keep in confidence and trust and will not use or disclose any Proprietary Information or anything relating to it without the prior written consent of an officer of the Company except as may be necessary and appropriate in the ordinary course of performing my duties to the Company. Disclosure restrictions of this Agreement shall not apply to any information that I can document is generally known to the public through no fault of mine. Nothing contained herein will prohibit an employee from disclosing to anyone the amount of his or her wages. 10 b. I understand that the Company possesses or will possess "Company Materials" which are important to its business. For purposes of this Agreement, "Company Materials" are documents or other media or tangible items that contain or embody Proprietary Information or any other information concerning the business, operations or plans of the Company, whether such documents have been prepared by me or by others. "Company Materials" include, but are not limited to, blueprints, drawings, photographs, charts, graphs, notebooks, customer lists, computer disks, tapes or printouts, sound recordings and other printed, typewritten or handwritten documents, as well as samples, prototypes, models, products and the like. All Company Materials shall be the sole property of the Company. I agree that during my employment by the Company, I will not remove any Company Materials from the business premises of the Company or deliver any Company Materials to any person or entity outside the Company, except as I am required to do in connection with performing the duties of my employment. I further agree that, immediately upon the termination of my employment by me or by the Company for any reason, or during my employment if so requested by the Company, I will return all Company Materials, apparatus, equipment and other physical property, or any reproduction of such property, excepting only (i) my personal copies of records relating to my compensation; (ii) my personal copies of any materials previously distributed generally to stockholders of the Company; and (iii) my copy of this Agreement. c. I will promptly disclose in writing to my immediate supervisor, with a copy to the Chairman of the Board of Directors of the Company, or to any persons designated by the Company, all "Inventions", (which term includes improvements, inventions, works of authorship, trade secrets, technology, circuits, layouts, algorithms, computer programs, formulas, compositions, ideas, designs, processes, techniques, know-how and data, whether or not patentable) made or conceived or reduced to practice or developed by me, either alone or jointly with others, during the term of my employment. I will also disclose to the President of the Company Inventions conceived, reduced to practice, or developed by me within six (6) months of the termination of my employment with the Company; such disclosures shall be received by the Company in confidence (to the extent they are not assigned in (d) below) and do not extend the assignment made in Section (d) below. I will not disclose Inventions covered by Section 1.d to any person outside the Company unless I am requested to do so by management personnel of the Company. d. I agree that all Inventions which I make, conceive, reduce to practice or develop (in whole or in part, either alone or jointly with others) during my employment shall be the sole property of the Company to the maximum extent permitted by Section 2870 of the California Labor Code, a copy of which is attached hereto as Attachment B, and I hereby assign such Inventions and all Rights therein to the 2. 11 Company. No assignment in this Agreement shall extend to inventions, the assignment of which is prohibited by Labor Code section 2870. The Company shall be the sole owner of all Rights in connection therewith. e. I agree to perform, during and after my employment, all acts deemed necessary or desirable by the Company to permit and assist it, at the Company's expense, in evidencing, perfecting, obtaining, maintaining, defending and enforcing Rights and/or my assignment with respect to such Inventions in any and all countries. Such acts may include, but are not limited to, execution of documents and assistance or cooperation in legal proceedings I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents, as my agents and attorneys-in-fact to act for and in my behalf and instead of me, to execute and file any documents and to do all other lawfully permitted acts to further the above purposes with the same legal force and effect as if executed by me. f. I have attached hereto as Attachment A a complete list of all existing Inventions to which I claim ownership as of the date of this Agreement and that I desire to specifically clarify are not subject to this Agreement. g. During the term of my employment and for one (1) year thereafter, I will not encourage or solicit any employee or consultant of the Company to leave the Company for any reason. However, this obligation shall not affect any responsibility I may have as an employee of the Company with respect to the bona fide hiring and firing of Company personnel. h. I agree that during my employment with the Company I will not engage in any employment, business, or activity that is in any way competitive with the business of proposed business of the Company, and I will not assist any other person or organization in competing with the Company or in preparing to engage in competition with the business or proposed business of the Company. The provisions of this paragraph shall apply both during normal working hours and at all other times including, but not limited to, nights, weekends and vacation time, while I am employed by the Company. i. I represent that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any agreement either written or oral in conflict herewith or in conflict with my employment with the Company. 2. I agree that this Agreement is not an employment contract and that I have the right to resign and the Company has the right to terminate my employment at any time, for any reason, with or without cause. 3. 12 3. I agree that this Agreement does not purport to set forth all of the terms and conditions of my employment, and that as an employee of the Company I have obligations to the Company which are not set forth in this Agreement. 4. I agree that my obligations under paragraphs 1(a) through 1(e) and paragraph 1(g) of this Agreement shall continue in effect after termination of my employment, regardless of the reason or reasons for termination, and whether such termination is voluntary or involuntary on my part, and that the Company is entitled to communicate my obligations under this Agreement to any future employer or potential employer of mine. 5. I agree that any dispute in the meaning, effect or validity of this Agreement shall be resolved in accordance with the laws of the State of California without regard to the conflict of laws provisions thereof. I further agree that if one or more provisions of this Agreement are held to be illegal or unenforceable under applicable California law, such illegal or unenforceable portion(s) shall be limited or excluded from this Agreement to the minimum extent required so that this Agreement shall otherwise remain in full force and effect and enforceable in accordance with its terms. 6. This Agreement shall be effective as of the date I execute this Agreement and shall be binding upon me, my heirs, executors, assigns, and administrators and shall inure to the benefit of the Company, its subsidiaries, successors and assigns. 7. This Agreement can only be modified by a subsequent written agreement executed by the Chairman of the Board of Directors of the Company. 4. 13 I HAVE READ THIS AGREEMENT CAREFULLY AND I UNDERSTAND AND ACCEPT THE OBLIGATIONS WHICH IT IMPOSES UPON ME WITHOUT RESERVATION. NO PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO ME TO INDUCE ME TO SIGN THIS AGREEMENT. I SIGN THIS AGREEMENT VOLUNTARILY AND FREELY, IN DUPLICATE, WITH THE UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY THE COMPANY AND THE OTHER COUNTERPART WILL BE RETAINED BY ME. Dated: 5/24/1999 /s/ ALAN K. ANDERSON ---------------------------------------- Employee Signature Alan K. Anderson ---------------------------------------- Employee Name ACCEPTED AND AGREED TO: QUINTUS CORPORATION By: /s/ PAUL H. BARTLETT - ------------------------------------- 5. 14 ATTACHMENT A ------------ Quintus Corporation 301 East Evelyn Avenue Mountain View, CA 94041-1530 Ladies and Gentlemen: 1. The following is a list of Inventions relevant to the subject matter of my employment by Quintus Corporation (the "Company") that have been made or conceived or first reduced to practice by me alone or jointly with others prior to my employment by the Company that I desire to clarify are not subject to the Company's Proprietary Information and Inventions Agreement. X No Inventions - ------- See below: - ------- Additional sheets attached - ------- 2. I propose to bring to my employment the following materials and documents of a former employer: X No materials or documents - ------- See below: - ------- /s/ Alan K. Anderson --------------------------------------------- Employee Signature Alan K. Anderson --------------------------------------------- Employee Name 15 ATTACHMENT B Section 2870. Application of provision providing that employee shall assign or offer to assign rights in invention to employer. (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for his employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. EX-10.12 16 EMPLOYMENT AGREEMENT WITH JOHN BURKE 1 EXHIBIT 10.12 [Q U I N T U S Letterhead] June 11, 1999 John Burke 3956 Paradise Canyon Court Naperville, IL 60564 Dear John: Quintus Corporation is pleased to extend this offer of employment to serve as President. As we've discussed you will report directly to me. The areas you will be responsible for include: Worldwide Sales, Partners/Channel Sales, Marketing and Customer Support Services. This offer and your employment with Quintus, should you decide to accept our offer, would commence on July 6, 1999. The other terms and conditions of your employment would be as follows. 1) Compensation. You will be paid a salary of $16,500.00 per month (annualized to $198,000.00), payable in accordance with our standard payroll practices for salaried employees. This salary will be subject to adjustment at the discretion of the Company's Board of Directors in each subsequent calendar year as part of the Board's annual review of employee compensation. If you are terminated within one year of your hire date for reasons other than cause, you will receive a severance package of 3 months of base salary. 2) Stock Options. You will be granted two options to purchase 685,000 shares of the Company's Common Stock pursuant to approval by and at the discretion of the Company's Board of Directors. The first grant will be for 411,000 which are time-based options of which 205,000 will vest on your 1-year anniversary date and the remaining 206,000 will vest 1/36 over the remaining 3 years. The second grant will be for 274,000 performance based options which will vest at your 5-year anniversary. However, these options are subject to acceleration based on meeting the objectives described below. If you achieve all of the objectives you will be 100% vested in your performance based options in 3 years. Each objective will be based on meeting FY Revenue book targets, Ending backlog targets and Total revenue targets. You may meet or exceed each target within the total objective to receive acceleration. Each target if met will accelerate 30,000 options. With the exception of backlog, which if met will vest 31,333. Following are your FY'00 targets: 2 Total Fiscal Year Targets 2000: License Revenue Booked $40,681,000 License Backlog $14,250,000 Total Revenues $43,494,000
The remaining two fiscal year targets will be provided to you within 2 weeks of final fiscal year budgets. The effective date of any acceleration will be April 1st of the next fiscal year. If any target is not met the 30,000 or in the case of the backlog, the 31,333 options associated with the target will vest on your 5-year anniversary. 3) Option Acceleration. If (i) a Corporate Transaction occurs before Optionee's Service terminates, (ii) the Corporation's Repurchase Right is assigned to the successor corporation (or its parent) in connection with such Corporate Transaction, (iii) Optionee is subject to an Involuntary Termination within six (6) months after such Corporate Transaction and (iv) Optionee at the time of such Involuntary Termination has a vested interest in less than fifty percent (50%) of the Option Shares, then Optionee's vested interest shall be increased to fifty percent (50%) of the Option Shares. For this purpose, "Involuntary Termination" shall mean the termination of Optionee's Service by reason of: (a) The involuntary discharge of Optionee by the Corporation (or the Parent or Subsidiary employing him) for reasons other than Cause; or (b) The voluntary resignation of Optionee following (i) a change in his position with the Corporation (or the Parent or Subsidiary employing him) that materially reduces his level of authority or responsibility, (ii) a reduction in his compensation (including base salary, fringe benefits and participation in bonus or incentive programs based on corporate performance) by more than ten percent (10%) or (iii) a relocation of the Corporation's principal executive office by more than thirty-five (35) miles. For this purpose, "Cause" shall mean (i) the authorized use or disclosure of the confidential information or trade secrets of the Corporation, which use or disclosure causes material harm to the Corporation, (ii) conviction of, or pleas of "guilty" or "no contest" to, a felony under the laws of the United States or any state thereof, (iii) gross negligence or (iv) continued failure to perform assigned duties after receiving written notification from the Corporation's Board. The foregoing, however, shall not be deemed an exclusive list of all acts or omissions that the Corporation (or a Parent or Subsidiary) may consider as grounds for the discharge of Optionee. In no event shall any additional Option Shares vest after Optionee's cessation of Service. 3 4) Bonus. You will be eligible to receive an annual bonus of $180,000. The bonus will be based on meeting specific objectives in which you and I agree upon. The Board of Directors and/or myself reserves the right to change the bonus plan. 5) Fringe Benefits. You are entitled to take part in those employee benefits that Quintus maintains generally for its employees and for which you individually qualify. The benefits are effective with your date of hire. 6) Proprietary Information and Inventions Agreement. You will be required, as a condition to your employment with Quintus, to sign the company's standard Proprietary Information and Inventions Agreement, a copy of it is attached. 7) Location of Employment. Your employment location will be in our Chicago office for the first twelve months. We agree that you and I will revisit the location at that time. Your position will require frequent travel to corporate headquarters in Fremont during the first year. 8) Period of Employment. Your employment with Quintus will be "at will", meaning that either you or Quintus will be entitled to terminate your employment at any time for any reason, with or without cause. Any contract representations which may have been made or which may be made to you are superseded by this offer. 9) Outside Activities. During the period that you render services to the company, you will not engage in any employment, business, or activity that is in any way competitive with the business or proposed business of the Company, and you will not assist any other person or organization in competing with the Company or in preparing to engage in competition with the business or proposed business of the Company. 10) Entire Agreement and Modifications. This letter and all of the exhibits attached contain all of the terms of your employment with Quintus and supersede any other understanding, oral or written, between you and Quintus. Any additions or modifications of these terms would have to be in writing and signed by you and the company's President. You may indicate your agreement with these terms by signing and dating the enclosed letter and returning it to Joyce Phillips by Friday, August 26, 1999. I look forward to working with you in making Quintus a successful company. 4 I truly believe we are developing one of the best management teams in our industry and I think your expertise will be invaluable as the company develops into a market leader. Sincerely, Alan K. Anderson, CEO /s/ ALAN K. ANDERSON Agreed to and accepted by Name: /s/ JOHN BURKE ---------------------------- Date: 6/30/99 ---------------------------- EX-10.13 17 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.13 This LOAN AND SECURITY AGREEMENT is entered into as of September 18, 1998, by and between SILICON VALLEY BANK ("BANK") and QUINTUS CORPORATION ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software an other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit issuance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a loan advance under the Committed Revolving Line. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, such Persons, managers and members. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiations, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal or review, or those incurred in any Insolvency Proceeding), whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including without limitation: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to (i) eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means the property described on Exhibit A attached hereto. 1 2 "Committed Revolving Line" means Seven Million Five Hundred Thousand Dollars ($7,500,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith, provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Copyrights" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "Credit Extension" means each Advance, Letter of Credit, Term Loan, Exchange Contract or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Assets" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrower and its Subsidiaries as at such date. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Debt Service Coverage" means, as measured quarterly as of the last day of each fiscal quarter of Borrower, on a consolidated basis determined in accordance with GAAP, the ratio of (a) an amount equal to the sum of (i) net income, plus (ii) depreciation and amortization of intangible assets and other non-cash charges to income plus (iii) quarterly interest expense to (b) an amount equal to the sum of (x) all scheduled repayments and mandatory prepayments of principal on account of long-term Debt for such quarter plus (y) quarterly interest expense. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank in writing, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date, except with respect to Accounts owing from Lucent Technologies, which will be excluded to the extent such Accounts have not paid within one hundred twenty (120) days of invoice date; 2 3 (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date, except with respect to Accounts owing from Lucent Technologies, which shall be excluded if fifty percent (50%) of such Accounts have not been paid within one hundred twenty (120) days of invoice date; (c) Accounts with respect to an account debtor, including Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, except with respect to Lucent Technologies, as to which the percentage shall be thirty-five percent (35%), to the extent such obligations exceed the aforementioned percentages, except as approved in writing by Bank; (d) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (e) Accounts with respect to which the account debtor is a federal, state or local governmental entity or any department, agency or instrumentality thereof; (f) Accounts with respect to which Borrower is liable to the account debtor, but only to the extent of any amounts owing to the account debtor (sometimes referred to as "contra" accounts, e.g. accounts payable, customer deposits, credit accounts, etc.); (g) Accounts generated by demonstration or promotional equipment, or with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (h) Accounts with respect to which the account debtor is an Affiliate, officer, employee, or agent of Borrower; (i) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that are: (1) covered by credit insurance in form and amount, and by an insurer satisfactory to Bank less the amount of any deductible(s) which may be or become owing thereon; or (2) supported by one or more letters of credit either advised or negotiated through Bank or in favor of Bank as beneficiary in an amount and of a tenor, and issued by a financial institution, acceptable to Bank; or (3) that Bank approves on a case-by-case basis. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. 3 4 "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Intellectual Property Collateral" means all of Borrower's right, title and interest in and to the following: (a) Copyrights, Trademarks, and Patents; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents, or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks, or Patents; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other present or future agreement entered into between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated from time to time. 4 5 "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Maturity Date" means September 17, 2001. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Patents" means all patents, patent applications and like protections, including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "Payment Date" means the seventeenth (17th) calendar day of each month, commencing on the first such date after the Closing Date and ending on the Maturity Date. "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the closing Date and disclosed in the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and as to which adequate reserves are 5 6 maintained on Borrower's Books in accordance with GAAP, provided the same have no priority over any Bank's security interests; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) Leases or subleases and licenses or sublicenses granted to others in the ordinary course of Borrower's business not interfering in any material respect with the business of Borrower and its Subsidiaries taken as a whole, and any interest or title of a lessor, licensor or under any lease or license, provided that such leases, subleases, licenses and sublicenses do not prohibit the grant of the security interest granted hereunder, and (e) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "Prime Rate: means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means as of any applicable date, the unrestricted cash; unrestricted cash-equivalents; and net, billed accounts receivable of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" means the date immediately preceding the first anniversary of the Closing Date. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means with respect to any Person, corporation, partnership, company association, joint venture, or any other business entity of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. "Tangible Net Worth" means, as of any applicable date, the consolidated total assets of Borrower and its Subsidiaries minus without duplication, (i) the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, and (c) all reserves not already deducted from assets, and (ii) Total Liabilities. "Term Loan" means a credit extension of One Million One Hundred Thousand Dollars ($1,000,000). 6 7 "Total Liabilities" means, as of any applicable date, all obligations that should, in accordance with GAAP, be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. "Trademarks" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Assignor connected with and symbolized by such trademarks. 1.2. Accounting and Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations and determinations made hereunder shall be made in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. The terms "including"/"includes" shall always be read as meaning "including (or includes) without limitation," when used herein or in any other Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1. Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 2.1.1 Advances. (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is less. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1.1 to Borrower's deposit account. (c) The Committed Revolving Line shall terminate on the Revolving Maturity Date, at which time all Advances under this Section 2.1.1 shall be immediately due and payable. 2.1.2 Term Loan. (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make a Term Loan available to Borrower. Amounts borrowed pursuant to this Section 2.1.2 may not be reborrowed once repaid. (b) Interest shall accrue on the Term Loan at the rate specified in Section 2.3(a), and shall be payable monthly during the term thereof. The Term Loan will be payable in thirty-six (36) equal monthly installments of principal, plus all accrued interest, beginning on the Payment Date of the month following the Closing Date, and ending on the Maturity Date, at which time all amounts owing under this Agreement shall be due and payable. 7 8 2.2 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1.1 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rate. (i) Except as set forth in Section 2.3(b), any Advances shall bear interest on the average daily balance thereof, at a per annum rate equal to the Prime Rate. (ii) Except as set forth in Section 2.3(b), the Term Loan shall bear interest on the average daily balance thereof, at a per annum rate equal to the Prime Rate plus 0.5%. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number _______ for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Document shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4. Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment, whether directed to Borrower's deposit account with Bank or to the Obligations or otherwise, shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment in respect of the Obligations unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A Facility Fee equal to Two Thousand Dollars ($2,000) which fee shall be due on the Closing Date and shall be fully earned and non-refundable; (b) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; 8 9 (c) Bank Expenses. Upon demand from Bank, including, without limitation, upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6. Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7. Term. Except as otherwise set forth herein, this Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination of this Agreement, Bank's lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS 3.1. Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) an intellectual property security agreement; (d) financing statements (Forms UCC-1); (e) insurance certificate; (f) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; and 9 10 (g) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2. Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST 4.1. Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Borrower acknowledges that Bank may place a "hold" on any Deposit Account pledged as Collateral to secure the Obligations. Notwithstanding termination of this Agreement, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 4.2. Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3. Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1. Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5.2. Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles/Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 10 11 5.3. No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4. Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The service or property giving rise to such Eligible Accounts has been performed or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. 5.5. Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.6. Intellectual Property. Borrower is the sole owner of the Intellectual Property Collateral, except for non-exclusive licenses granted by Borrower to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party. Except for and upon filing with the United States Patent and Trademark Office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights necessary to perfect the security interests created hereunder, and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any United States governmental authority or United States regulatory body is required either (i) for the grant by Borrower of the security interest granted hereby or for the execution, delivery or performance of Loan Documents by Borrower in the United States or (ii) for the perfection in the United States or the exercise by Bank of its rights and remedies hereunder. 5.7. Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business and will not, without at least thirty (30) days prior written notice to Bank, do business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.8. Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. 5.9. No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank on or about the Closing Date. 5.10. Solvency. The fair saleable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.11. Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards 11 12 Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.12. Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the release or other disposition of hazardous waste or hazardous substances into the environment. 5.13. Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed on a timely basis, and has paid, or has made adequate provision for the payment of, all taxes reflected therein, except those being contested in good faith by proper proceedings with adequate reserves under GAAP. 5.14. Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15. Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.16. Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1. Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2. Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3. Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within thirty (30) days after the end of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by an Officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but in any event within 12 13 one hundred twenty (120) days after the end of Borrower's fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; (e) prompt notice of any material change in the composition of the Intellectual Property Collateral, including, but not limited to, any subsequent ownership right of Borrower in or to any Copyright, Patent or Trademark not specified in any intellectual property security agreement between Borrower and Bank or knowledge of an event that materially adversely affects the value of the Intellectual Property Collateral; and (f) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within ten (10) days after the fifteenth (15th) calendar day and the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable. Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is (i) contested in good faith by appropriate proceedings, (ii) is reserved against (to the extent required by GAAP) by Borrower and (iii) no lien other than a Permitted Lien results. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a 13 14 lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. At Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7. Principal Depository. Borrower shall maintain its principal depository and operating accounts with Bank. 6.8. Quick Ratio. Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities, less deferred maintenance revenue, of at least 1.0 to 1.0. 6.9. Profitability. Borrower may incur losses not to exceed: (i) $1,500,000 for the fiscal quarter ending September 30, 1998; (ii) $1,000,000 for the fiscal quarter ending December 31, 1998; (iii) $1,000,000 for the fiscal quarter ending March 31, 1999; or (iv) $500,000 for the fiscal quarter ending June 30, 1999. Borrower shall have a net profit of at least $1 for each fiscal quarter thereafter. 6.10. Liquidity, Debt Service Coverage. Subject to the remainder of this section, Borrower shall maintain (i) as of the last day of each calendar month, a Liquidity Ratio of at least 1.5 to 1.0 and (ii) as of the last day of each fiscal quarter, a Liquidity Ratio of at least 2.0 to 1.0. Notwithstanding the foregoing, if Borrower attains two consecutive quarters of Debt Service Coverage of not less than 1.5 to 1.0, then Liquidity Ratio will no longer be tested and instead Borrower shall maintain, as of the last day of each of Borrower's fiscal quarters, a Debt Service Coverage of at least 1.5 to 1.0. For purposes of this Section, "Liquidity Ratio" means as of any date for which it is tested, the ratio of (a) an amount equal to (i) cash and cash equivalents plus (ii) the amount available to be drawn but not drawn under Section 2.1.1 to (b) the aggregate outstanding amount of the Term Loan. 6.11. Registration of Intellectual Property Rights. (a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement within thirty (30) days of the date of this Agreement. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property Collateral. (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents, Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents, and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any Trademarks, Patents, or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, unless Bank determines that reasonable business practices suggest that abandonment is appropriate. (d) Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.11 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.11. 14 15 6.12. Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any Credit Extension hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, Borrower will not do any of the following: 7.1. Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of inventory in the ordinary course of business, (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business, or (iii) of worn-out or obsolete Equipment. 7.2. Changes in Business, Ownership, Management or Business Locations. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change in Borrower's ownership or management. Borrower will not, without at least thirty (30) days prior written notification to Bank, relocate its chief executive office or add any new offices or business locations. 7.3. Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merger or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 7.4. Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5. Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6. Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 7.7. Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8. Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 7.9. Intellectual Property Agreements. Borrower shall not permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in Borrower's rights and interests in any property included within the definition of the Intellectual Property Collateral acquired under such contracts, except to the extent that such provisions are necessary in Borrower's exercise of its reasonable business judgment. 7.10. Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 15 16 7.11. Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of any warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.12. Compliance. Become an "investment company" or a company controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1. Payment Default. If Borrower fails to pay, when due, any of the Obligations; 8.2. Covenant Default. (a) If Borrower fails to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11 or 6.12, or violates any of the covenants contained in Article 7 of this Agreement, or (b) If Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3. Material Adverse Change. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4. Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of 16 17 Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5. Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6. Other Agreements. If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 8.7. Subordinated Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8. Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9. Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate or writing delivered to Bank by Borrower or any Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Liquidate any Exchange Contracts not yet settled and demand that Borrower immediately deposit cash with Bank in an amount sufficient to cover any losses incurred by Bank due to liquidation of the Exchange Contracts at the then prevailing market price; (e) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to 17 18 assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possessions of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's premises, Borrower hereby grants Bank a license to enter such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (h) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (i) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply the proceeds thereof to the Obligations in whatever manner or order Bank deems appropriate; (j) Bank may credit bid and purchase at any public sale, or at any private sale as permitted by law; and (k) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. (l) Bank shall have a non-exclusive, royalty-free license to use the Intellectual Property Collateral to the extent reasonably necessary to permit Bank to exercise its rights and remedies upon the occurrence of an Event of Default. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verification of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (f) to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending Exhibit A, Exhibit B, Exhibit C and Exhibit D, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents, or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents, or Trademarks in which Borrower no longer has or claims any right, title or interest; (g) to file in its sole discretion, one ore more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (h) to transfer the Intellectual Property Collateral into the name of Bank or third party to the extent permitted under the California Uniform Commercial Code, provided Bank may exercise such power of attorney to sign the name of Borrower on 18 19 any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3. Accounts Collection. At any time from the date of this Agreement, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and, if requested or required by Bank, immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsement for deposit. 9.4. Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Committed Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5. Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6. Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not expressly set forth herein as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7. Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, by certified mail, portage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, as its addresses set forth below: If to Borrower: Quintus Corporation 47212 Mission Falls Court Fremont, CA 94539 Attn: Susan Salvesen FAX: (510) 770-1377 19 20 If to Bank: Silicon Valley Bank 1731 Embarcadero Road, Suite 220 Palo Alto, CA 94303 Attn: Scott Wiebe FAX: (650) 812-0640 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE The Loan Documents shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR, ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS. 12.1. Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2. Indemnification. Borrower shall indemnify, defend, protect and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under the Loan Documents, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3. Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4. Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5. Amendments in Writing, Integration. This Agreement cannot be amended or terminated except by a writing signed by Borrower and Bank. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 20 21 12.6. Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7. Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run, provided that so long as the obligations referred to in the first sentence of this Section 12.7 have been satisfied, and Bank has no commitment to make any Credit Extensions or to make any other loans to Borrower, Bank shall release all security interest granted hereunder and redeliver all Collateral held by it in accordance with applicable law. 12.8. Confidentiality. In handling any confidential information, Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement, except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may deem appropriate in connection with the exercise of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. QUINTUS CORPORATION By: /s/ Susan Salvesin ------------------------- Title: CFO ---------------------- SILICON VALLEY BANK By: /s/ [Signature Illegible] ------------------------- Title: Vice President ---------------------- 21 22 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; (e) All documents, cash deposit accounts, securities, securities entitlements, securities accounts, investment property, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; (g) All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. A-1 23 LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of October 15, 1998, by and between Quintus Corporation ("Borrower") and Silicon Valley Bank ("Bank"). 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated September 18, 1998, as may be amended from time to time, (the "Loan Agreement"). The Loan Agreement provided for, among other things, a Committed Revolving Line in the original principal amount of Seven Million Five Hundred Thousand Dollars ($7,500,000) and a Term Loan in the original principal amount of One Million One Hundred Thousand Dollars ($1,100,000). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTEES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement and an Intellectual Property Security Agreement dated September 18, 1998. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the indebtedness shall be referred to as the "Existing Loan Documents." 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement 1. Section 1.1 entitled "Definitions" is hereby amended to incorporate the following defined terms: "Exchange Contract" has the meaning set forth in Section 2.1.4. "Letter of Credit" means a letter of credit or similar undertaking issued by Bank pursuant to Section 2.1.3. "Letter of Credit Reserve" has the meaning set forth in Section 2.1.3. 2. The following Sections are hereby incorporated into the Loan Agreement to read as follows: 2.1.3 Letters of Credit Bank agrees to issue or cause to be issued Letters of Credit for the account of Borrower not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the then outstanding principal balance of the Advances minus the Foreign Exchange Reserve, however the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not in any case exceed One Million Five Hundred Dollars ($1,500,000). Each Letter of Credit shall have an expiry date no later than one hundred eighty (180) days after the Revolving Maturity Date provided that Borrower's Letter of Credit reimbursement obligation shall be secured by cash 24 on terms acceptable to bank at any time the Revolving Maturity Date if the term of this agreement is not extended by Bank. 2.1.4 Foreign Exchange Contract, Foreign exchange Settlements. Borrower may enter foreign exchange contracts (the "Exchange Contracts") not exceeding an aggregate amount of $500,000 (the "Contract Limit"), under which Bank will sell to or purchase from Borrower foreign currency on a spot or a future basis. Borrower may not request any Exchange Contracts if it is out of compliance with any provision of this Agreement. Exchange Contracts must provide for delivery of settlement on or before the Revolving Maturity Date. The amount available under the Committed Revolving Line is reduced by the following (the "Exchange Reserve") on any given day (the "Determination Date"): (i) on all outstanding Exchange contracts on which delivery is to be effected or settlement allowed more than two business days after the Determination Date, 10% of the gross amount of Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two business days after the Determination Date, 100% of the gross amount of the Exchange Contracts. Banks may terminate the Exchange Contracts if (a) an Event of Default occurs or (b) there is not sufficient availability under the Committed Revolving Line and Borrower does not have available funds in its deposit account for the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, Borrower will reimburse Bank for all fees, costs and expenses in connection with the Exchange Contracts. Borrower may not permit the total of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two business day period to be more than $500,000 (the "Settlement Limit") nor may Borrower permit the total of all Exchange Contracts outstanding at any one time, to exceed the Contract Limit. However, the amount which may be settled in any 2 business day period may be increased above the Settlement Limit if: (i) there is sufficient availability under the Committed Revolving Line in the amount of the Foreign Exchange Reserve for each Determination Date, provided that Bank in advance shall reserve the full amount of the Foreign Exchange Reserve against the Committed Revolving Line; or (ii) there is sufficient availability under the Committed Revolving Line for settlements within any 2 business day period, but Bank: (A) verifies good funds overseas before crediting Borrower's deposit account (in the case of Borrower's sale of foreign currency); or (B) debits Borrower's deposit account before delivering foreign currency overseas (in the case of Borrower's purchase of foreign currency. If Borrower purchases foreign currency, Borrower must in advance instruct Bank either to treat the settlement as an advance under the Committed Revolving Line, or to debit Borrower's account for the amount settled. Borrower will execute all bank's standard applications and agreements in connection with the Exchange Contracts and pay all Bank's standard fees and charges. 2 25 Borrower will indemnify Bank and hold it harmless from all claims, liabilities, demands, obligations, actions, costs and expenses (including reasonable attorneys' fees) which it incurs arising out of or in any way relating to any of the Exchange Contracts or any contemplated transactions. 3. Sub-section (a) of Section 2.1.1 entitled "Advances" is hereby amended in its entirety to read as follows: Subject to and upon the terms and conditions of this Agreement Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) and minus (iii) the Foreign Exchange Reserve. subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date. Section 2.2 entitled "Overadvances" is hereby amended in its entirety to read as follows: If Borrower's Obligations under Section 2.1.1, 2.1.3 and 2.1.4 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay in cash to Bank the excess. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that, as of the date hereof, it has no defenses against the obligations to pay any amounts under the Indebtedness. 6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. 3 26 This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: QUINTUS CORPORATION SILICON VALLEY BANK By: /s/ MARK P. THOMPSON By: /s/ SCOTT M. WIENE --------------------------------- --------------------------------- Name: Mark P. Thompson Name: Scott M. Wiene ------------------------------- ------------------------------- Title: VP, Corporate Controller Title: Assistant Vice President ------------------------------ ------------------------------ 4 27 LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of March 30, 1999, by and between Quintus Corporation ("Borrower") and Silicon Valley Bank ("Bank"). 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated September 18, 1998, as may be amended from time to time (the "Loan Agreement"). The Loan Agreement provided for, among other things, a Committed Revolving Line in the original principal amount of Seven Million Five Hundred Thousand Dollars ($7,500,000) and a Term Loan in the original principal amount of One Million One Hundred Thousand Dollars ($1,100,000). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement and an Intellectual Property Security Agreement dated September 18, 1998. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement 1. Section 1.1 entitled "Definitions" is hereby amended to incorporate the following defined terms: "Borrowing Base" means an amount equal to (i) eighty percent (80%) of Eligible Accounts plus the applicable Overadvance Amount (as set forth below under "Overadvance Schedule") "Purchase Agreement" means that certain Accounts Receivable Purchase Agreement, between Borrower and Silicon Valley Financial Services, of even date herewith. "Purchase Sublimit" has the meaning set forth in Section 2.1.5. "Overadvance Amount" means an amount not to exceed the amounts set forth for each applicable period set forth in the Overadvance Schedule, the Overadvance shall be cured by Borrower by paying down the indebtedness from the Collections under the Purchase Agreement, as more particularly described therein. "Overadvance Schedule" means: $1,100,000 for the period of March 16, 1999 through March 18, 1999; $700,000 for the period of March 19, 1999 through March 24, 1999; $350,000 for the period of March 26, 1999 through March 30, 1999; $0 thereafter. 28 2. Sub-section (a) of Section 2.1.1 entitled "Advances" is hereby amended in its entirety to read as follows: Subject to and upon the terms and conditions of this Agreement Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit); minus (iii) the Foreign Exchange Reserve and minus (iv) the Purchasing Sublimit. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date. Notwithstanding the foregoing, until such time as Borrower has fully repaid the Overadvance Amount in full in accordance with the Overadvance Schedule and is in full compliance with the Loan Agreement, Borrower shall no longer be entitled to further Advances. 3. The following Sections are hereby incorporated into the Loan Agreement to read as follows: 2.1.5 Purchasing Sublimit. Borrower may use up to $7,500,000 (gross $9,375,000) for selling receivables to Silicon Valley Financial Services under the terms and conditions of the Purchase Agreement. The amount available under the Committed Revolving Line shall be reduced by the aggregate amount of the Purchased Receivables as such term is defined in the Purchase Agreement. 4. Section 2.2 entitled "Overadvances" is hereby amended in its entirety to read as follows: If Borrower's Obligations under Section 2.1.1, 2.1.3, 2.14 and 2.1.5 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay in cash to Bank the excess. 5. Section 6.3 entitled "Financial Statements, Reports, Certificates" is hereby amended in part to provide that within three (3) days after the end of each week, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer, together with aged listings of accounts receivable and accounts payable, as well as weekly cash flow projections. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that, as of the date hereof, it has no defenses against the obligations to pay any amounts under the Indebtedness. 6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the 2 29 Indebtedness. Noting in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK; QUINTUS CORPORATION SILICON VALLEY BANK By: /s/ SUSAN SALVESEN By: --------------------------------- --------------------------------- Name: Susan Salvesen Name: ------------------------------- ------------------------------- Title: CFO Title: ------------------------------ ------------------------------ EX-16.1 18 LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT 1 EXHIBIT 16.1 September 9, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Gentlemen: We have read "Change in Accountants" on page 81 of the Registration Statement (Form S-1) of Quintus Corporation, and are in agreement with the statements contained therein. We have no basis to agree or disagree with other statements of the registrant contained therein. /s/ ERNST & YOUNG LLP EX-21.1 19 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT -------------------------- Quintus Corporation wholly owns Nabnasset Corporation, a Delaware corporation, Quintus CallCenter Solutions Co., a Canadian corporation, Quintus CallCenter Solutions BV (Netherlands), a company incorporated in the Netherlands, and Ribeye Acquisition Corp., a Delaware corporation. Quintus Corporation also owns approximately 20% of the outstanding capital stock of Logic Programming Associates, LTD, a company incorporated under the laws of England. EX-23.1 20 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Quintus Corporation on Form S-1 of our report dated June 18, 1999 (September 10, 1999 as to Note 15), appearing in the Prospectus, which is part of this Registration Statement, and of our report dated June 18, 1999 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the reference to us under the headings "Selected Consolidated Financial Data" and "Experts" in such Prospectus. /s/ Deloitte & Touche LLP San Jose, California September 10, 1999 EX-23.2 21 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the references to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our reports dated April 30, 1998, except for Note 12, as to which the date is September 18, 1998, in the Registration Statement (Form S-1) and related Prospectus of Quintus Corporation. Ernst & Young LLP Palo Alto, California September 9, 1999 EX-23.3 22 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated February 8, 1999, except as to Note 11, for which the date is March 31, 1999, relating to the financial statements of Acuity Corp., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. PricewaterhouseCoopers LLP Austin, Texas September 9, 1999 EX-27.1 23 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS MAR-31-1999 MAR-31-2000 APR-01-1998 APR-01-1999 MAR-31-1999 JUN-30-1999 1,785 467 0 0 9,400 11,526 729 761 0 0 11,029 12,527 8,518 8,610 5,356 5,471 19,594 20,274 19,673 21,436 2,201 1,649 17,811 17,811 13,707 13,707 3,468 4,323 (37,266) (38,652) 19,594 20,274 17,577 6,126 30,307 10,293 554 218 9,177 2,639 113 (1) 235 100 804 195 (10,586) (690) 0 0 (10,586) (690) 880 0 0 0 0 0 (11,466) (690) (4.04) (.20) (4.04) (.20)
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