Callidus Software, Inc., S-1 (I.P.O.)

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(1)	Includes shares that the underwriters have the right to purchase to cover over-allotments. Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

We are selling shares of our common stock. We have granted the underwriters an option to purchase up to additional shares of common stock to cover over-allotments.

This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $ and $ per share. We have applied to have the common stock included for quotation on the Nasdaq National Market under the symbol “CALD.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 5.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Enterprise Incentive Management Solutions

Aligning Employee, Sales and Channel Incentives with Corporate Strategy and Shareholder Value.

Solutions for the Strategic Enterprise™

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

Until , 2004 (25 days after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Callidus Software®, the Callidus Software logo and TrueComp® are registered trademarks of Callidus Software and TruePerformance^TM, TrueComp Grid^TM, TrueComp Manager^TM, TrueInformation^TM, TrueIntegration^TM, TrueResolution^TM and TrueReferral^TM are unregistered trademarks of Callidus Software. All trademarks, service marks and trade names of other companies that appear in this prospectus are the property of their respective holders.

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully before making an investment decision, including the “Risk Factors” section and the consolidated financial statements and the notes to those statements. Unless otherwise indicated, references in this prospectus to “Callidus,” the “Company,” “we,” “our” or “us” refer to Callidus Software Inc. and its subsidiaries.

We are a leading provider of Enterprise Incentive Management (EIM) software systems to global companies across multiple industries. Large enterprises use EIM systems to model, administer, analyze and report on pay-for-performance plans, which are designed to align employee, sales and channel tactics with targeted business objectives, and thereby increase productivity, improve profitability and achieve competitive advantage. Our product suite is based on our proprietary technology and extensive domain expertise and provides the flexibility and scalability required to meet the dynamic EIM requirements of large, complex businesses across multiple industries. Our installed base of over 75 active customers includes industry leaders in the insurance, retail banking, telecommunications, distribution, and manufacturing and technology industries, such as Allstate, JP Morgan Chase, AT&T Wireless, Airborne Express and Apple Computer. Our revenues were $26.6 million for the year ended December 31, 2002 and $29.8 million for the six months ended June 30, 2003.

In today’s competitive environment, pay-for-performance programs are increasingly recognized as important tools for companies to increase sales and productivity, gain market share and improve profitability. In 2001, AMR, a leading industry analysis firm, estimated that more than $1.5 trillion of pay-for-performance compensation is paid out annually by U.S. and European based companies. However, the management of pay-for-performance programs presents complex challenges due to the large numbers of potential payees, compensation transactions, incentive programs and corporate policies involved. Currently, the majority of large businesses administer these programs using manual methods or internally developed solutions that do not adequately address these challenges. Failure to effectively meet these challenges erodes the effectiveness of incentive compensation, impairs management’s ability to adapt pay-for-performance programs to changing corporate objectives and results in costly errors. We believe that large enterprises are increasingly seeking dedicated EIM solutions to manage their pay-for-performance programs and, as a result, that the EIM market represents a substantial and growing new market opportunity.

We develop, market, install and support a suite of rules-based EIM products to address the complex challenges of pay-for-performance programs for large enterprises. We provide a transparent and reliable data resource for enterprises to plan and manage pay-for-performance programs and accurately allocate credit among a wide range of payees. Our product suite allows management to accurately calculate and coordinate the payment of incentive compensation based on a highly flexible and scalable software architecture. In addition, our reporting product enables management to accurately and systematically report incentive compensation results to payees on a timely basis. Our solution is designed to enable large enterprises to achieve competitive advantages by ensuring that employees, agents and business partners are focused on targeted business objectives, thereby increasing productivity and driving bottom line results. We believe we provide the most advanced EIM solution available for three principal reasons:

We Solve Complex Pay-for-Performance Problems. By focusing exclusively on solving the challenges and complexities inherent in pay-for-performance programs, we have developed a suite of EIM solutions designed to enable timely and accurate planning, calculation and management of variable, salary and

We Address Key Vertical Market Requirements. We believe domain expertise is critical to designing a successful EIM system. We apply our domain expertise to build specific functionality into our products to address the key requirements of the insurance, retail banking, telecommunications, distribution, and manufacturing and technology industries.

We Have Superior Technology. Our products are based on our proprietary rules-based software and grid computing architecture. We believe this technology differentiates our products and offers superior performance, scalability and flexibility in an easy-to-use and reliable system, resulting in a lower total cost of ownership than manual methods and internally developed solutions.

Our objective is to extend our leadership position in the EIM market for large businesses. To achieve this goal we are pursuing the following strategies:

Capitalize on Our Technological Leadership. We intend to leverage our early-mover advantage and our technological leadership in the EIM market by continuing to invest in research and development to expand our product line and increase our products’ functionality, and thereby to capitalize on the EIM market opportunity.

Continue Our Focus on Vertical Markets and Develop Additional Referenceable Accounts. Our domain expertise enables our products to offer industry-specific advantages in functionality, implementation and deployment and allows us to achieve greater efficiency and effectiveness in our sales, marketing and product development efforts. We intend to add marquee customers in each of our vertical markets and to leverage these referenceable accounts to increase penetration of our target markets.

Increase the Industry-Specific Modeling and Analytic Capabilities of Our Products. We are developing new products and product enhancements to provide customers with more extensive industry-specific modeling and analytic capabilities required in increasingly competitive marketplaces.

Continue to Build Loyalty Through Superior Customer Care. As we grow our installed base, we intend to increase our investment in customer care to further strengthen customer loyalty and referenceability.

Our principal executive offices are located at 160 West Santa Clara Street, Suite 1500, San Jose, California 95113 and our telephone number is (408) 808-6400. Our website address is http://www.callidussoftware.com. Our website and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.

The number of shares to be outstanding after the offering is based on 17,420,414 shares outstanding on June 30, 2003 and excludes:


	•	4,201,026 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.43 per share as of June 30, 2003;

	•	843,197 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.63 per share as of June 30, 2003; and

	•	4,858,274 shares of common stock available for future issuance under our various stock plans, plus the annual increases in the number of shares authorized under each of our stock plans beginning July 1, 2004.


	•	gives effect to a 3-for-5 reverse split of our common stock expected to take effect prior to the effectiveness of the registration statement of which this prospectus is a part and the conversion of all of our outstanding preferred stock into common stock effective upon the consummation of this offering; and

	•	assumes no exercise by the underwriters of their option to purchase additional shares of our common stock in this offering.

The following table sets forth a summary of our consolidated financial data for the periods presented. This summary consolidated financial data should be read together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes contained elsewhere in this prospectus. The consolidated balance sheet data is set forth as of June 30, 2003 both on an actual basis and on an as adjusted basis to reflect our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ per share. See “Use of Proceeds” and “Capitalization.”

An investment in our common stock involves a high degree of risk. You should consider the risks described below carefully and all of the information contained in this prospectus before deciding whether to purchase our common stock. If any of the adverse events described in the following risk factors actually occurs, our business, financial condition and results of operations may suffer significantly. As a result, the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock.

We have a history of losses, and we cannot assure you that we will achieve or sustain our profitability. If we fail to do so, our stock price may decline.

We incurred net losses of $25.4 million for 2000, $20.8 million for 2001 and $19.1 million for 2002. Taking account of the $2.0 million of stock-based compensation we recorded in the first half of 2003, we recorded a net loss of $255,000 in the six months ended June 30, 2003. After this offering, we expect to significantly increase our expenses in the near term in order to expand our business. In addition, based on stock options granted through June 30, 2003, we expect to amortize an aggregate of $678,000, $665,000 and $1.8 million of deferred stock-based compensation in the three months ending September 30, 2003, the three months ending December 31, 2003 and in 2004, respectively. These increased operating expenses and amortization charges will adversely affect our operating results and may result in or contribute to net losses in future periods and we cannot assure you that we will be able to achieve or sustain profitability on a quarterly or annual basis. Our results of operations will be harmed if our revenues do not increase at a rate equal to or greater than increases in our expenses or if our revenues are insufficient for us to achieve or sustain profitability. If we are not able to achieve or sustain profitability, our stock price may decline and we may require additional financing, which may not be available.

Our quarterly revenues and operating results can be difficult to predict and can fluctuate substantially, which may harm our results of operations.

Our revenues, particularly our license revenues, are difficult to forecast and are likely to fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside of our control. These factors include:


	•	Competitive conditions in our industry, including new products, product announcements and special pricing offered by our competitors;

	•	varying size, timing and contractual terms of orders for our products, which may delay the recognition of revenues;

	•	the discretionary nature of our customers’ purchase and budget cycles and changes in their budgets for software and related purchases;

	•	strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

	•	our ability to timely complete our service obligations related to product sales;

	•	general weakening of the economy resulting in a decrease in the overall demand for computer software and services;

	•	the utilization rate of our professional services personnel and the degree to which we use third-party consulting services;

	•	changes in our pricing policies;

	•	timing of product development and new product initiatives;

	•	our ability to hire, train and retain sufficient sales and professional services staff; and


	•	changes in the mix of revenues attributable to higher-margin product license revenues as opposed to substantially lower-margin service revenues.

Because our quarterly revenues are dependent upon a relatively small number of transactions, even minor variations in the rate and timing of conversion of our sales prospects into revenues could cause us to plan or budget inaccurately, and those variations could adversely affect our financial results. In particular, based upon the terms of our customer contracts, we recognize the bulk of our license revenues for a given sale either at the time we enter into the agreement and deliver the product, or over the period in which we perform any services that are essential to the functionality of the product. Unexpected changes in contractual terms late in the negotiation process or changes in the mix of contracts we enter into could therefore materially and adversely affect our license revenues in a quarter. Delays, reductions in amount or cancellations of customers’ purchases would adversely affect our revenues, results of operations and financial condition.

In addition, we make assumptions and estimates as to the timing and amount of future revenues in budgeting our future operating costs and capital expenditures. Specifically, our sales personnel monitor the status of all proposals, including the estimated closing date and potential dollar amount of such transactions. We aggregate these estimates periodically to generate our sales forecasts and then evaluate the forecasts to identify trends in our business. Because our costs are relatively fixed in the short term and a substantial portion of our license revenue contracts are completed in the latter part of a quarter, we may be unable to reduce our expenses to avoid or minimize the negative impact on our quarterly results of operations if our estimates prove inaccurate and our anticipated revenues are not realized. As a result, our quarterly results of operations could be worse than anticipated, which could adversely affect our stock price.

Our products have long sales cycles, which make it difficult to plan our expenses and forecast our results.

The sales cycles for our products are generally between six and nine months for the majority of our sales, and in some cases can be a year or longer. It is therefore difficult to predict the quarter in which a particular sale will occur and to plan our expenditures accordingly. The period between our initial contact with a potential customer and its purchase of our products and services is relatively long due to several factors, including:


	•	The complex nature of our products;

	•	the need to educate potential customers about the uses and benefits of our products;

	•	the requirement that a potential customer invest significant resources in connection with the purchase and implementation of our products;

	•	budget cycles of our potential customers that affect the timing of purchases;

	•	customer requirements for competitive evaluation and internal approval before purchasing our products;

	•	potential delays of purchases due to announcements or planned introductions of new products by us or our competitors; and

	•	the lengthy approval processes of our potential customers, many of which are large organizations.

The delay or failure to complete sales in a particular quarter would reduce our revenues in that quarter, as well as any subsequent quarters over which revenues for the sale would likely be recognized. If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenues. If we were to experience a delay on a large order, it could harm our ability to meet our forecasts for a given quarter.

Managing large-scale deployments of our products requires substantial technical implementation and support by us or third-party service providers. Failure to meet these requirements could cause a decline or delay in recognition of our revenues and an increase in our expenses.

Our customers may require large, enterprise-wide deployments of our products, which require a substantial degree of technical implementation and support. It may be difficult for us to manage the timeliness of these deployments and the allocation of personnel and resources by us or our customers. Failure to successfully manage this process could harm our reputation and cause us to lose existing customers, face potential customer disputes or limit the number of new customers that purchase our products, which could adversely affect our revenues and increase our technical support and litigation costs.

Our software license customers have the option to receive implementation, maintenance, training and consulting services from our internal professional services organization or from outside consulting organizations. If we are unable to expand our internal professional services organization to keep pace with sales, we will be required to increase our use of third-party service providers to help meet our implementation and service obligations. If we require a greater number of third-party service providers than we currently have available, we will be required to negotiate additional arrangements, which may result in lower gross margins for maintenance or service revenues.

If a customer selects a third-party implementation service provider and such implementation services are not provided successfully and in a timely manner, our customers may experience increased costs and errors, which may result in customer dissatisfaction and costly remediation and litigation, any of which could adversely impact our operating results and financial condition.

Our success depends upon our ability to develop new products and enhance our existing products.


	•	Rapid technological advances in hardware and software development;

	•	evolving standards in computer hardware, software technology and communications infrastructure;

	•	changing customer needs; and

	•	frequent new product introductions and enhancements.

To keep pace with technological developments, satisfy increasingly sophisticated customer requirements and achieve market acceptance, we must enhance and improve existing products and we must also continue to introduce new products and services. If we are unable to successfully develop new products or enhance and improve our existing products or if we fail to position and/or price our products to meet market demand, our business and operating results will be adversely affected. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results. Further, any new products we develop may not be introduced in a timely manner and may not achieve the broad market acceptance necessary to generate significant revenues.

A substantial majority of our revenues are derived from TrueComp and related products and services and a decline in sales of these products and services could adversely affect our operating results and financial condition.

We derive a substantial majority of our revenues from TrueComp and related products and services, and revenues from these products and services are expected to continue to account for a substantial portion of our revenues for the foreseeable future. Because we generally sell licenses to our products on a perpetual basis and deliver new versions and enhancements to customers who purchase maintenance contracts, our future license revenues are substantially dependent on sales to new customers. In addition, substantially all of our TrueInformation product sales have historically been made in connection with TrueComp sales. As a result of these factors, we are particularly vulnerable to fluctuations in demand for TrueComp. Accordingly, if demand for TrueComp and related products and services declines significantly, our business and operating results would be adversely affected.

Errors in our products could result in significant costs to us and could impair our ability to sell our products.

Our products are complex and, accordingly, they may contain errors, or “bugs,” that could be detected at any point in their product life cycle. Errors in our products could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future. Customers relying on our products to calculate and pay incentive compensation may have a greater sensitivity to product errors and security vulnerabilities than customers for software products in general. The costs incurred in correcting any product errors may be substantial and would adversely affect our operating margins. While we plan to continually test our products for errors and work with customers through our customer support services organization to identify and correct bugs, errors in our products may be found in the future.

Because our customers depend on our software for their critical business functions, any interruptions could result in:


	•	Lost or delayed market acceptance and sales of our products;

	•	product liability suits against us;

	•	lost sales revenues;

	•	diversion of development resources;

	•	injury to our reputation; and

	•	increased service and warranty costs.

While our software license agreements typically contain limitations and disclaimers that purport to limit our liability for damages for errors in our software, such limitations and disclaimers may not be enforced by a court or other tribunal or otherwise effectively protect us from such claims.

If we do not compete effectively with companies selling EIM software, our revenues may not grow and could decline.

We have experienced, and expect to continue to experience, intense competition from a number of software companies. We compete principally with vendors of EIM software, such as Centive, Motiva and Synygy, vendors of enterprise resource planning software, such as Oracle, PeopleSoft and SAP, and vendors of customer relationship management software, such as Siebel Systems. Our competitors may announce new products, services or enhancements that better meet the needs of customers or changing industry standards. Increased competition may cause price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition.

Many of our competitors and potential competitors have significantly greater financial, technical, marketing, service and other resources than we have. Many of these companies also have a larger installed base of users, have longer operating histories or have greater name recognition than we have. Some of our competitors’ products may be more effective than our products at performing particular EIM system functions or may be more customized for particular customer needs in a given vertical market. Even if our competitors provide products with more limited EIM system functionality than our products, these products may incorporate other capabilities, such as recording and accounting for transactions, customer orders or inventory management data. A product that performs these functions, as well as some of the functions of our software solutions, may be appealing to some customers because it would reduce the number of different types of software used to run their business. Further, our competitors may be able to respond more quickly than we can to changes in customer requirements.

Our products must be integrated with software provided by a number of our existing or potential competitors. These competitors could alter their products in ways that inhibit integration with our

If we are required to change our pricing models to compete successfully, our margins and operating results will be adversely affected.

The intensely competitive market in which we do business may require us to reduce our prices. If our competitors offer deep discounts on certain products or services in an effort to recapture or gain market share or to sell other software or hardware products, we may be required to lower prices or offer other favorable terms to compete successfully. Any such changes would be likely to reduce our margins and could adversely affect our operating results. Some of our competitors may bundle software products that compete with ours for promotional purposes or as a long-term pricing strategy or provide guarantees of prices and product implementations. These practices could, over time, limit the prices that we can charge for our products. If we cannot offset price reductions with a corresponding increase in the number of sales or with lower spending, then the reduced software license revenues resulting from lower prices would adversely affect our margins and operating results.

Potential customers that outsource their technology projects offshore may come to expect lower rates for professional services than we are able to provide profitably, which could impair our ability to win customers and achieve profitability.

Many of our potential customers have begun to outsource technology projects offshore to take advantage of lower labor costs, and we believe that this trend will continue. Due to the lower labor costs in some countries, these customers may demand lower hourly rates for the professional services we provide, which may erode our margins for our maintenance and services revenues or result in lost business.

Our maintenance and service revenues produce substantially lower gross margins than our license revenues, and an increase in service revenues relative to license revenues would harm our overall gross margins.

Our maintenance and service revenues, which include fees for consulting, implementation, maintenance and training, were 44% of our revenues for the six months ended June 30, 2003 and 63% of our revenues for 2002. Our maintenance and service revenues have substantially lower gross margins than our license revenues. An increase in the percentage of total revenues represented by maintenance and service revenues would adversely affect our overall gross margins.

Maintenance and service revenues as a percentage of total revenues have varied significantly from quarter to quarter due to fluctuations in licensing revenues, economic changes, change in the average selling prices for our products and services, our customers’ acceptance of our products and our sales force execution. In addition, the volume and profitability of services can depend in large part upon:


	•	Competitive pricing pressure on the rates that we can charge for our professional services;

	•	the complexity of the customers’ information technology environment;

	•	the resources directed by customers to their implementation projects; and

	•	the extent to which outside consulting organizations provide services directly to customers.

Any erosion of our margins for our maintenance and service revenues, or any adverse changes in the mix of our license versus maintenance and service revenues would adversely affect our operating results.

We will not be able to maintain our sales growth if we do not attract, train or retain qualified sales personnel.

We depend on our direct sales force for most of our sales and have made significant expenditures in recent years to expand our sales force. Our future success will depend in part upon the continued expansion and increased productivity of our sales force. To the extent we experience attrition in our direct sales force, we will need to hire replacements. We face intense competition for sales personnel in the

Our business may be harmed if we do not successfully develop and maintain strategic relationships to implement and sell our products.

We have relationships with third-party consulting firms, systems integrators and software vendors. These third parties may provide us with customer referrals, cooperate with us in marketing our products and provide our customers with systems implementation services or overall program management. However, we do not have formal agreements governing our ongoing relationship with certain of these third-party providers and the agreements we do have generally do not include obligations with respect to generating sales opportunities or cooperating on future business. Should any of these third parties go out of business or choose not to work with us, we may be forced to increase the development of those capabilities internally, incurring significant expense and adversely affecting our operating margins. Any of our third-party providers may offer products of other companies, including products that compete with our products. We could lose sales opportunities if we fail to work effectively with these parties or they choose not to work with us.

Acquisitions and investments present many risks, and we may not realize the anticipated financial and strategic goals for any such transactions.

We may in the future acquire or make investments in complementary companies, products, services and technologies. Such acquisitions and investments involve a number of risks, including:


	•	We may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or that economic conditions change, all of which may generate a future impairment charge;

	•	we may have difficulty integrating the operations and personnel of the acquired business, and may have difficulty retaining the key personnel of the acquired business;

	•	we may have difficulty incorporating the acquired technologies or products with our existing product lines;

	•	there may be customer confusion where our products overlap with those of the acquired company;

	•	we may have product liability associated with the sale of the acquired company’s products;

	•	our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically and culturally diverse locations;

	•	we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;

	•	the acquisition may result in litigation from terminated employees or third-parties; and

	•	we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.

These factors could have a material adverse effect on our business, results of operations and financial condition or cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

The consideration paid in connection with an investment or acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included

cash, we could be required to use a substantial portion of our available cash, including proceeds of this offering, to consummate any acquisition. To the extent we issue shares of stock or other rights to purchase stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs (such as of acquired in-process research and development costs) and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

For our business to succeed, we need to attract, train and retain qualified employees and manage our employee base effectively.

Our success depends on our ability to hire, train and retain qualified employees and to manage our employee base effectively. Competition for qualified personnel is intense, particularly in the San Francisco Bay area where our headquarters are located, and the high cost of living increases our recruiting and compensation costs. We cannot assure you that we will be successful in hiring, training or retaining qualified personnel. If we are unable to do so, our business and operating results will be adversely affected.

We have recently experienced changes in our senior management team and the loss of key personnel and any failure to successfully integrate replacement personnel could adversely affect our business.

In September 2002, we hired Ronald J. Fior as our Chief Financial Officer and in June 2003, we hired Bertram W. Rankin as our Senior Vice President of Worldwide Marketing. In addition, we continue to recruit additional senior management personnel to support our growing operations. Our success will depend to a significant extent on our ability to assimilate these changes in our leadership team and to retain the services of our executive officers, including Reed D. Taussig, our President and Chief Executive Officer, and our other key employees. If we lose the services of one or more of our executives or key employees, or if one or more of our executives or key employees decides to join a competitor or otherwise compete directly or indirectly with us, this could harm our business and could affect our ability to successfully implement our business plan.

If we fail to adequately protect our proprietary rights and intellectual property, we may lose valuable assets, experience reduced revenues and incur costly litigation to protect our rights.

We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed programs may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent that we engage in international activities, our exposure to unauthorized copying and use of our products and proprietary information will increase.

We enter into confidentiality or license agreements with our employees and consultants and with the customers and corporations with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources, either of which could seriously harm our business.

Our results of operations may be adversely affected if we are subject to a protracted infringement claim or one that results in a significant damage award.

From time to time, we receive claims that our products or business infringe or misappropriate the intellectual property of third parties. Our competitors or other third parties may challenge the validity or scope of our intellectual property rights. We believe that software developers will be increasingly subject to claims of infringement as the functionality of products in our market overlaps. A claim may also be made relating to technology that we acquire or license from third parties. If we were subject to a claim of infringement, regardless of the merit of the claim or our defenses, the claim could:


	•	Require costly litigation to resolve;

	•	absorb significant management time;

	•	cause us to enter into unfavorable royalty or license agreements;

	•	require us to discontinue the sale of our products;

	•	require us to indemnify our customers or third-party systems integrators; or

	•	require us to expend additional development resources to redesign our products.

We may also be required to indemnify our customers and third-party systems integrators for third-party products that are incorporated into our products and that infringe the intellectual property rights of others. Although many of these third parties are obligated to indemnify us if their products infringe the rights of others, this indemnification may not be adequate.

In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Any of this litigation could be costly for us to defend, have a negative effect on our results of operations and financial condition or require us to devote additional research and development resources to change our products.

We depend on technology of third parties licensed to us for our TruePerformance product, our rules engine and the analytics and web viewer functionality for our products and the loss or inability to maintain these licenses or errors in such software could result in increased costs or delayed sales of our products.

We distribute our TruePerformance product under license from the independent contractor that developed the product. In addition, we license technology from several software providers for our rules engine, analytics and web viewer. We anticipate that we will continue to license technology from third parties in the future. This software may not continue to be available on commercially reasonable terms, if at all. Some of the products we license from third parties could be difficult to replace, and implementing new software with our products could require six months or more of design and engineering work. The loss of any of these technology licenses could result in delays in the license of our products until equivalent technology, if available, is developed or identified, licensed and integrated. In addition, our products depend upon the successful operation of third-party products in conjunction with our products, and therefore any undetected errors in these products could prevent the implementation or impair the functionality of our products, delay new product introductions and/or injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which could result in higher royalty payments and a loss of product differentiation.

Our revenues might be harmed by resistance to adoption of our software by information technology departments.

Some potential customers may have already made a substantial investment in other third-party or internally developed software designed to model, administer, analyze and report on pay-for-performance

programs. These companies may be reluctant to abandon these investments in favor of our software. In addition, information technology departments of potential customers may resist purchasing our software solutions for a variety of other reasons, particularly the potential displacement of their historical role in creating and running software and concerns that packaged software products are not sufficiently customizable for their enterprises. If the market for our products does not grow for any of these reasons, our revenues may be harmed.

Our inability to manage growth could affect our business adversely and harm our ability to sustain profitability.

To support our growth plans, we need to expand our existing management, operational, financial, human resources, customer service and management information systems and controls. This expansion will require significant capital expenditures and may divert our financial resources from other projects such as the development of new products or product upgrades. We may be unable to expand these systems and to manage our growth successfully, and this inability would adversely affect our business.

Mergers of or other strategic transactions by our competitors could weaken our competitive position or reduce our revenues.

If one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative relationships with our current or future systems integrators, third-party compensation consulting firms or other parties with whom we have relationships, thereby limiting our ability to promote our products and limiting the number of consultants available to implement our software. Disruptions in our business caused by these events could reduce our revenues.

If we are required or elect to account for employee stock option and employee stock purchase plans using the fair value method, it could significantly increase our net loss and net loss per share.

There has been ongoing public debate about whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such compensation. If we elect or are required to record an expense for our stock-based compensation plans using the fair value method, we could have significant additional compensation expense. For example, if we had historically accounted for stock-based compensation plans using the fair value method prescribed in Financial Accounting Standards Board Statement 123 as amended by Statement 148, in 2002 we would have recorded approximately $547,000 in additional expenses, and our basic and diluted loss per share would have been increased by $0.40 per share. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair value at the grant date or for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as an expense using the fair value method. See Notes 1 and 5 of our consolidated financial statements and our discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies and Use of Estimates” for a more detailed presentation of our accounting for stock-based compensation.

We may expand our international sales efforts but do not have substantial experience in international markets.

We may expand our international operations, and any such expansion would require substantial financial resources and a significant amount of attention from our management. International operations involve a variety of risks, particularly:


	•	Unexpected changes in regulatory requirements, taxes, trade laws and tariffs;

	•	differing ability to protect our intellectual property rights;


	•	differing labor regulations;

	•	greater difficulty in supporting and localizing our products;

	•	changes in a specific country’s or region’s political or economic conditions;

	•	greater difficulty in establishing, staffing and managing foreign operations; and

	•	fluctuating exchange rates.

We have limited experience in marketing, selling and supporting our products and services abroad. If we invest substantial time and resources in order to grow our international operations and are unable to do so successfully and in a timely manner, our business and operating results could be seriously harmed.

Our business communications, infrastructure and facilities are vulnerable to damage from human error, physical or electronic security breaches, power loss and other utility failures, fire, earthquake, flood, sabotage, vandalism and similar events. Although the source code for our software products is held by escrow agents outside of the San Francisco Bay area, our internal-use software and back-up are both located in the San Francisco Bay area. If a natural or man-made disaster were to hit this area, we may lose all of our internal-use software data. Despite precautions, a natural disaster or other incident could result in interruptions in our service or significant damage to our infrastructure. In addition, failure of any of our telecommunications providers could result in interruptions in our services and disruption of our business operations. Any of the foregoing could impact our provision of services and fulfillment of product orders, and our ability to process product orders and invoices and otherwise timely conduct our business operations.

Because some existing stockholders will together own % of our outstanding stock after this offering, the voting power of other stockholders, including purchasers in this offering, may be effectively limited.

After this offering, it is anticipated that, based on share ownership as of June 30, 2003, our officers, directors, major stockholders and their affiliates will beneficially own or control, directly or indirectly, 18,431,498 shares of common stock, which in the aggregate will represent approximately % of the outstanding shares of common stock (or % if the underwriters’ over-allotment option is exercised in full). As a result, if some of these persons or entities act together, they will have the ability to control all matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. This may delay or prevent an acquisition or cause the market price of our stock to decline. Some of these persons or entities may have interests different than yours. For example, because many of these stockholders purchased their shares at prices substantially below the price at which shares are being sold in this offering and have held their shares for a relatively longer period, they may be more interested in selling the Company to an acquiror than other investors or may want us to pursue strategies that are different from the wishes of other investors.

A substantial number of shares will be eligible for sale in the near future, which could cause our common stock price to decline significantly.

Additional sales of our common stock in the public market after this offering, or the perception that such sales could occur, could cause the market price of our common stock to decline. Upon completion of this offering, we will have shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants. See “Summary — The Offering” for a detailed discussion of shares included and excluded from this number. The shares to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933. We expect that substantially all of our existing stockholders will be

In addition, Citigroup, on behalf of the underwriters, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to the lock-up agreements, which would result in more shares being available for sale in the public market at earlier dates. Sales of common stock by existing stockholders in the public market, the availability of these shares for sale, our issuance of securities or the perception that any of these events might occur could materially and adversely affect the market price of our common stock.

There is no prior public market for our common stock. Our stock price is likely to be volatile and could decline following this offering, resulting in a substantial loss on your investment.

Prior to this offering, there has not been a public market for our common stock. An active trading market for our common stock may never develop or be sustained, which could affect your ability to sell your shares and could depress the market price of your shares. In addition, the initial public offering price has been determined through negotiations between us and the representatives of the underwriters and may bear no relationship to the price at which the common stock will trade upon completion of this offering. The stock market in general, and the market for technology-related stocks in particular, has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their stock, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this prospectus and others such as:


	•	Our operating performance and the performance of other similar companies;

	•	developments with respect to intellectual property rights;

	•	publication of research reports about us or our industry by securities analysts;

	•	speculation in the press or investment community;

	•	terrorist acts; and

	•	announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments.

As a new investor, you will incur substantial dilution as a result of this offering.

The initial public offering price will be substantially higher than the pro forma, net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $ per share, assuming an initial public offering price of $ per share. This dilution is due in large part to earlier investors having generally paid substantially less than the initial public offering price when they purchased their shares. In addition, the exercise of outstanding options and warrants will, and future equity issuances may, result in further dilution to investors. See the section entitled “Dilution” elsewhere in this prospectus.

Because we do not intend to pay dividends, you will not receive funds without selling shares and depending on when you sell your shares, you may lose the entire amount of your investment.

We have never declared or paid any cash dividends on our capital stock and do not intend to pay cash dividends in the foreseeable future. We intend to invest our future earnings, if any, to fund our growth. Therefore, you will not receive any proceeds in respect of your stock prior to selling it. We also cannot

Our management has broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.

Our management could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return. We plan to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies. Until we use the proceeds of this offering, we plan to invest the net proceeds in interest-bearing, investment-grade securities, which may not yield a favorable rate of return. If we do not invest or apply the proceeds of this offering in ways that enhance stockholder value, we may require additional financing, which may not be available.

We expect that the net proceeds from this offering, together with our other capital resources, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If we need additional capital and cannot raise it on acceptable terms, we may not be able to:


	•	Develop enhancements and additional features for our products;

	•	develop new products and services;

	•	hire, train and retain employees;

	•	enhance our infrastructure;

	•	respond to competitive pressures or unanticipated requirements;

	•	pursue international expansion; or

	•	pursue acquisition opportunities.

Provisions in our charter documents and Delaware law may delay or prevent an acquisition of our company.

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. For example, if a potential acquiror were to make a hostile bid for us, the acquiror would not be able to call a special meeting of stockholders to remove our board of directors or act by written consent without a meeting. In addition, our board of directors has staggered terms, which means that replacing a majority of our directors would require at least two annual meetings. The acquiror would also be required to provide advance notice of its proposal to replace directors at any annual meeting, and will not be able to cumulate votes at a meeting, which will require the acquiror to hold more shares to gain representation on the board of directors than if cumulative voting were permitted.

Our board of directors also has the ability to issue preferred stock that could significantly dilute the ownership of a hostile acquiror. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by some stockholders.

Our board of directors could choose not to negotiate with an acquiror that it did not believe was in our strategic interests. If an acquiror is discouraged from offering to acquire us or prevented from

We have made statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We undertake no obligation to update any of these forward-looking statements after the date of this prospectus to conform our prior statements to actual results or revised expectations.

We estimate that the net proceeds from the sale of shares of common stock by us in this offering will be approximately $ million ($ million if the underwriters’ over-allotment option is exercised in full) based on an assumed initial public offering price of $ per share and after deducting underwriting discounts and estimated offering expenses payable by us.

The principal purposes of this offering are to obtain additional working capital, establish a public market for our common stock and facilitate our future access to public capital markets. We currently expect to use the net proceeds from this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies. We have no present commitments or agreements with respect to any acquisition or investment. Pending these uses, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities. Our management will retain broad discretion in the allocation of the net proceeds of this offering. The amounts we actually spend will depend on a number of factors, including the amount of our future revenues and other factors described elsewhere in this prospectus.

We have never declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

The following table sets forth our cash and cash equivalents, bank line of credit and capitalization as of June 30, 2003 on an actual basis and as adjusted to reflect our receipt of the estimated net proceeds from the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and estimated offering expenses. This table gives effect to a planned increase in the number of authorized shares of common stock, which will be effected in an amendment to our certificate of incorporation that will be effective upon the consummation of this offering and, in the case of the as adjusted data, the conversion of all of our outstanding shares of preferred stock into common stock effective upon the consummation of this offering. You should read this table along with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.


	•	4,201,026 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $1.43 per share as of June 30, 2003;

	•	843,197 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $3.63 per share as of June 30, 2003; and

	•	4,858,274 shares of common stock available for future issuance under our various stock plans, plus the annual increases in the number of shares authorized under each of our stock plans beginning July 1, 2004.

Options to purchase shares of our common stock at a weighted average exercise price per share of $ will be fully vested and exercisable at the time the registration statement we have filed in connection with this offering is declared effective by the Securities and Exchange Commission.

Our pro forma net tangible book value as of June 30, 2003 was approximately $ million, or approximately $ per share. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of common stock outstanding, after giving effect to the automatic conversion of our preferred stock into common stock upon consummation of this offering. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the sale of the shares of common stock offered by us at an assumed initial public offering price of $ per share, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2003 would have been approximately $ million, or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of our common stock at the initial public offering price. The following table illustrates this dilution on a per share basis:

Dilution is determined by subtracting pro forma net tangible book value per share after the offering from the initial public offering price per share.

The following table sets forth, on a pro forma basis, as of June 30, 2003, the number of shares of common stock purchased from us, the total consideration paid, or to be paid, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and offering expenses payable by us:

If the underwriters exercise their over-allotment option in full, the percentage of shares held by existing stockholders will decrease to % of the total shares outstanding, and the number of shares held by new investors will increase to , or % of the total shares outstanding.

The foregoing discussion and tables are based upon the number of shares issued and outstanding on June 30, 2003 and assume no exercise of options outstanding as of June 30, 2003. As of that date, there were shares of our common stock issuable upon exercise of options outstanding at a weighted average exercise price of $ per share. Assuming the exercise in full of all the outstanding options, as adjusted net tangible book value as of June 30, 2003 would be $ per share, representing an immediate increase in the net tangible book value of $ per share to our existing stockholders and an immediate decrease in the net tangible book value of $ per share to purchasers of our common shares in this offering. For additional information concerning these options, see the section entitled “Management — Incentive Plans.”

The selected consolidated financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. We have derived the consolidated statement of operations data for the years ended December 31, 2000, 2001 and 2002 and the consolidated balance sheet data as of December 31, 2001 and 2002 from the audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1998, 1999 and 2000 were derived from the audited consolidated financial statements that are not included in this prospectus. The consolidated statement of operations data for the six months ended June 30, 2002 and June 30, 2003 and the consolidated balance sheet data as of June 30, 2003 were derived from the unaudited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of results to be expected for future periods and interim results are not necessarily indicative of results for the entire year.

The following information should be read together with our consolidated financial statements, including the notes thereto, and other information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties.

We were incorporated in 1996, and began selling our first product, TrueComp, in mid-1999. In 2000, the first full year of TrueComp sales, our license revenues grew to approximately $8.9 million, while total revenues grew to approximately $22.2 million. At the same time, we grew our organization to a total of 180 personnel, largely in anticipation of future revenue growth. In 2001, license revenue growth was adversely affected by the general reduction in IT spending resulting from the economic downturn in the United States and the September 11 terrorist attacks, and we experienced a year-over-year decline in license revenues of 23% to approximately $6.9 million. This decline was offset in 2001 by growth in our maintenance and service revenues, such that overall revenues grew by 3% and our net loss decreased by 18% in 2001 compared to 2000. In 2002, license revenues grew by 43% to $9.8 million and total revenues grew by 16% to $26.6 million. Since the second quarter of 2002, our quarterly license revenues have grown by comparison to the prior year period for five consecutive quarters. For the six months ended June 30, 2003, we had total revenues of $29.8 million and a net loss of $255,000. From inception through June 30, 2003, we generated aggregate net operating losses of approximately $94.8 million.

License Revenues. We generate license revenues from the sale of perpetual licenses to use our products, which we generally price on a per payee basis. In circumstances where third-party systems integrators provide integration and configuration services for deployment of our products, or the integration and configuration services we are to provide are not deemed essential to the functionality of the related software, we generally recognize all of the license revenues at the time the product has been delivered. In circumstances where we provide integration and configuration services and these services are deemed essential to the functionality of the related software, we recognize the revenues from these licenses on a percent-of-completion basis, with license fees recorded as deferred revenue pending recognition. Because our license revenue recognition differs based on contract terms and customer requirements, our license revenues may vary from period to period depending upon the mix of these arrangements we enter into in such periods. Please refer to “— Application of Critical Accounting Policies and Use of Estimates — Revenue Recognition,” for further information regarding license revenue recognition.

Maintenance and Service Revenues. Maintenance and service revenues consist of sales of maintenance and upgrade rights associated with the sale of software licenses, integration and configuration services and training. We generally sell maintenance on an annual basis and provide customers with the right to receive product enhancements and new versions of the products purchased, as well as technical support. Maintenance revenues are recorded as deferred revenue at the time the associated license is sold or a maintenance renewal is purchased, and are recognized ratably over the term of the maintenance

agreement. We derive service revenues when we provide integration, configuration or training services to customers. We price these services on a time-and-materials basis and we generally recognize these revenues when the services are performed. Integration and configuration services often are not started until one to two months after the software license is sold and generally take five to six months to complete; however, some integration and configuration projects can take twelve months or longer depending on the complexity of the project.

A substantial majority of our revenues have been, and are likely to continue to be, from licenses, maintenance and services related to our TrueComp product. In addition, while no single customer accounted for 10% or more of our revenues in 2000 or 2001, and only two customers accounted for more than 10% of our revenues for 2002, our quarterly revenues generally depend on relatively large sales of licenses or services to a relatively small number of customers. Any decline in sales of our TrueComp product or any delay or deferral of any large purchases by any of our customers could materially and adversely affect our revenues or operating results for a given quarter.

Our cost of license revenues consists primarily of third-party royalties. Our cost of maintenance and service revenues consists primarily of salaries, benefits, travel and related overhead for technical support, training and consulting personnel, the cost of subcontractors for professional services and the cost of materials delivered with product enhancements and new releases. Because the cost of maintenance and service revenues is substantially higher, as a percentage of related revenues, than the cost of license revenues, our overall gross margins vary from period to period as a function of the mix of maintenance and service versus license revenues in such periods.

Sales and marketing expenses consist primarily of salaries, benefits and commissions, advertising, referral fees on direct sales, promotional campaigns and materials, travel and other related overhead. To date, all of our research and development expenses have been expensed as incurred, and consist primarily of salaries and benefits, as well as facilities and other related overhead. General and administrative expenses consist primarily of salaries and benefits, as well as finance, accounting, legal and administrative costs and related overhead. Prior to 2002, general and administrative expenses also included amortization of goodwill recorded in connection with our acquisition of The Rob Hand Consulting Group in 1999.

We record deferred stock-based compensation when we grant stock options to employees with an exercise price lower than the deemed fair value of our common stock for financial accounting purposes on the date of grant. Deferred stock-based compensation is then amortized using the accelerated method. At June 30, 2003, we had total deferred stock-based compensation of approximately $4.2 million, which will be amortized over four years from the date of grant. For the quarters ending September 30, 2003 and December 31, 2003 and for 2004, we expect to amortize approximately $678,000, $665,000 and $1.8 million, respectively, of deferred stock-based compensation, based on options issued prior to June 30, 2003.

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The application of GAAP requires our management to make estimates that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee. Please refer to Note 1 to the consolidated financial statements for a further description of our accounting policies.

We generate revenues primarily by licensing software and providing maintenance and professional services to our customers. Our software arrangements typically include: (i) an end-user license fee paid in exchange for the use of our products in perpetuity, generally based on a specified number of payees; and (ii) a maintenance arrangement that provides for technical support and product updates, generally over a period of twelve months. If we are selected to provide integration and configuration services, then the software arrangement will also include professional services, generally priced on a time-and-materials basis. Depending upon the elements in the arrangement and the terms of the related agreement, we recognize license revenues under either the residual or the contract accounting method.

Residual Method. License fees are recognized upon delivery when licenses are either sold separately from integration and configuration services, or together with integration and configuration services, provided that (i) the criteria described below have been met, (ii) payment of the license fees is not dependent upon performance of the integration and configuration services, and (iii) the services are not otherwise essential to the functionality of the software. We recognize these license revenues using the residual method pursuant to the requirements of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions. Under the residual method, revenues are recognized when vendor-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement (i.e., professional services and maintenance), but does not exist for one or more of the delivered elements in the arrangement (i.e., the software product). Each license arrangement requires careful analysis to ensure that all of the individual elements in the license transaction have been identified, along with the fair value of each undelivered element.

We allocate revenue to each undelivered element based on its respective fair value, with the fair value determined by the price charged when that element is sold separately. For a certain class of transactions, the fair value of the maintenance portion of our arrangements is based on stated renewal rates. The fair value of the professional services portion of the arrangement is based on the hourly rates that we charge for these services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the items for which evidence of fair value cannot be established are delivered. If the only undelivered element is maintenance, then the entire amount of revenue is recognized over the maintenance delivery period.

Contract Accounting Method. For arrangements where services are considered essential to the functionality of the software, such as where the payment of the license fees is dependent upon performance of the services, both the license and services revenues are recognized in accordance with the provisions of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. We generally use the percentage-of-completion method because we are able to make reasonably dependable estimates relative to contract costs and the extent of progress toward completion. However, if

For all of our software arrangements, we will not recognize revenue until persuasive evidence of an arrangement exists and delivery has occurred, the fee is fixed or determinable and collection is deemed probable. We evaluate each of these criteria as follows:

Evidence of an Arrangement. We consider a non-cancelable agreement signed by us and the customer to be evidence of an arrangement.

Delivery. We consider delivery to have occurred when media containing the licensed programs is provided to a common carrier or, in the case of electronic delivery, the customer is given access to the licensed programs. Our typical end-user license agreement does not include customer acceptance provisions.

Fixed or Determinable Fee. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within our standard payment terms. If the fee is not fixed or determinable, we recognize the revenue as amounts become due and payable.

Collection is Deemed Probable. We conduct a credit review for all significant transactions at the time of the arrangement to determine the creditworthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, we defer the revenue and recognize the revenue upon cash collection.

A customer typically prepays maintenance for the first twelve months, and the related revenues are deferred and recognized over the term of the initial maintenance contract. Maintenance is renewable by the customer on an annual basis thereafter. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.

Professional services revenues primarily consist of integration and configuration services related to the installation of our products and training revenues. Our implementation services do not involve customization to, or development of, the underlying software code. Substantially all of our professional services arrangements are on a time-and-materials basis. To the extent we enter into a fixed-fee services contract, a loss will be recognized any time the total estimated project cost exceeds project revenues.

Certain arrangements result in the payment of customer referral fees to third parties that resell our software products. In these arrangements, license revenues are recorded, net of such referral fees, at the time the software license has been delivered to a third-party reseller and an end-user customer has been identified. To the extent a referral fee is paid to a third party when we sell directly to the end-user, the referral fee is recorded as a selling expense.

In arrangements where we purchase a third party’s products or services and sell products or services to the same party within a relatively short time period, we account for such concurrent arrangements in accordance with APB Opinion No. 29, Accounting for Nonmonetary Transactions, Emerging Issues Task Force 86-29, Nonmonetary Transactions: Magnitude of Boot and the Exception to the Use of Fair Value and the American Institute of Certified Public Accountants Technical Practice Aids 5100.46 and 5100.47, Nonmonetary Exchanges of Software. Accordingly, we record revenue on these transactions if the fair value of the products or services purchased or sold can be determined and the technology received in the transaction is expected, at the time of the exchange, to be deployed. If we are unable to determine the fair value of the products purchased or sold, or if the deployment of the purchased product is uncertain, we record the transaction at the historical cost basis of the products or services sold. During 2000, we entered into four sets of such concurrent transactions in which we and third parties purchased each other’s software products and services for internal use. In these transactions, we received net cash consideration of $604,000. Excluding net cash consideration, revenues recognized from these transactions were $1.2 million, or 6% of total revenues, in 2000 and $402,000, or 2% of total revenues, in 2001. The fair value of the products purchased were recorded as property and equipment in the amount of $1.1 million, and are being

We must make estimates of the uncollectibility of accounts receivable. The allowance for doubtful accounts, which is netted against our accounts receivable on our balance sheets, totaled $47,000 at December 31, 2001, $129,000 at December 31, 2002 and $103,000 at June 30, 2003. We record an increase in the allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. Management specifically analyzes accounts receivable and historical bad debts experience, customer creditworthiness, current economic trends, international situations (such as currency devaluation) and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. Should any of these factors change, the estimates made by management will also change, which could affect the level of our future provision for doubtful accounts. Specifically, if the financial condition of our customers were to deteriorate, affecting their ability to make payments, an additional provision for doubtful accounts may be required and such provision may be material.

We generally guarantee that our services will be performed in accordance with the criteria agreed upon in the statement of work. Should these services not be performed in accordance with the agreed upon criteria, we would provide remediation services until such time as the criteria are met. In accordance with Statement of Financial Accounting Standards (SFAS) 48, Revenue Recognition When Right of Return Exists, management must use judgments and make estimates of sales return reserves related to potential future requirements to provide remediation services in connection with current period service revenues. When providing for sales return reserves, we analyze historical experience of actual remediation service claims as well as current information on remediation service requests as they are the primary indicators for estimating future service claims. Material differences may result in the amount and timing of our revenues if for any period actual returns differ from management’s judgments or estimates. The sales return reserve balances, which are netted against our accounts receivable on our balance sheets, were $0 at December 31, 2001, $152,000 at December 31, 2002 and $232,000 at June 30, 2003.

We have adopted SFAS 123, Accounting for Stock-Based Compensation, but in accordance with SFAS 123, we have elected not to apply fair value-based accounting for our employee stock option plans. Instead, we measure compensation expense for our employee stock option plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, and related interpretations. We record deferred stock-based compensation to the extent the deemed fair value of our common stock for financial accounting purposes exceeds the exercise price of stock options granted to employees on the date of grant, and amortize these amounts to expense using the accelerated method over the vesting schedule of the options, generally four years. The deemed fair value of our common stock is determined by our board of directors. Because there has been no public market for our stock, the board of directors determined the deemed fair value of our common stock by considering a number of factors, including, but not limited to, our operating performance, significant events in our history, issuances of our convertible preferred stock, trends in the broad market for technology stocks and the expected valuation we would obtain in an initial public offering. We recorded deferred stock-based compensation of $1.7 million, $0, $0 and $4.5 million and amortization of such deferred compensation of $4.3 million, $1.9 million, $424,000 and $440,000 in the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2003, respectively. Based on deferred stock-based compensation recorded as of June 30, 2003, we expect to amortize $678,000, $665,000 and $1.8 million in the three months ending September 30, 2003, the three months ending December 31, 2003 and in 2004, respectively. Had different assumptions or criteria been used to determine the deemed fair value of the stock options, materially different amounts of stock compensation expenses could have been reported.

As required by SFAS 123, as modified by SFAS 148, Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123, we provide pro forma disclosure of the effect of using the fair value-based method of measuring stock-based compensation expense. For purposes of the pro forma disclosure, we estimate the fair value of stock options issued to employees using the Black-Scholes option valuation model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected life of options and our expected stock price volatility. Therefore, the estimated fair value of our employee stock options could vary significantly as a result of changes in the assumptions used. See Note 1 to our consolidated financial statements included elsewhere in this prospectus.

We are subject to income taxes in both the United States and foreign jurisdictions and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Our deferred tax assets consist primarily of net operating loss carryforwards. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is recognized if it is more likely than not that some portion of the deferred tax assets will not be recognized. We provided a full valuation allowance against our net deferred tax assets at December 31, 2001 and 2002 and June 30, 2003. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax assets would increase income in the period such determination was made. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business.

The following table sets forth certain consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated. Period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication of future performance.

License Revenues. License revenues grew by 218% from $5.2 million, or 43% of total revenues, in the six months ended June 30, 2002, to $16.6 million, or 56% of total revenues, in the six months ended June 30, 2003. The increase in license revenues was primarily the result of the growth in size and productivity of our sales force, an increase in average transaction value and the addition of new customers.

Maintenance and Service Revenues. Maintenance and service revenues grew by 90% from $6.9 million in the six months ended June 30, 2002 to $13.2 million in the six months ended June 30, 2003. As a percentage of total revenues, maintenance and service revenues decreased from 57% in the 2002 period to 44% in the 2003 period. The absolute dollar increase in maintenance and service revenues was primarily attributable to an increase in integration and configuration services for new customers and, to a lesser extent, increased maintenance fees associated with sales of new licenses of our products.

Cost of License Revenues. Cost of license revenues increased by 176% from $366,000 in the six months ended June 30, 2002 to $1.0 million in the six months ended June 30, 2003. The increase was primarily attributable to third-party royalty costs on increased license sales. As a percentage of license revenues, cost of license revenues decreased from 7% in the 2002 period to 6% in the 2003 period. The slightly lower cost of license revenues as a percentage of license revenues was due to product enhancements that eliminated certain third-party royalty costs.

Cost of Maintenance and Service Revenues. Cost of maintenance and service revenues increased by 62% from $6.3 million in the six months ended June 30, 2002 to $10.3 million in the six months ended June 30, 2003. The increase was primarily attributable to the increases in the number of integration and configuration, training and technical support personnel. As a percentage of maintenance and service revenues, cost of maintenance and service revenues decreased from 91% in the 2002 period to 78% in the 2003 period. Increased maintenance and service revenues attributable to the growth in our customer base resulted in higher utilization rates and a decline in the cost of maintenance and service revenues as a percentage of related revenues.

Gross Margin. Our gross profit as a percentage of total revenues, or gross margin, increased from 45% for the six months ended June 30, 2002 to 62% for the six months ended June 30, 2003. The increase

Sales and Marketing. Sales and marketing expenses increased by 45% from $6.1 million in the six months ended June 30, 2002 to $8.8 million in the six months ended June 30, 2003. The increase in absolute dollars was primarily associated with increased personnel expense of $1.2 million related to an increase in our sales and marketing headcount and an increase of $1.1 million in commission expenses and referral fees. To a lesser extent, the absolute dollar increase was attributable to a $522,000 increase in marketing program fees and ancillary sales and marketing costs. As a percentage of total revenues, sales and marketing expenses decreased from 50% in the 2002 period to 29% in the 2003 period. The decrease as a percentage of total revenues resulted primarily from increased productivity of our direct sales force in addition to an increase in the number of customer referrals from our strategic partners. We expect that sales and marketing expenses will continue to increase in absolute dollars as we expand our sales force and increase marketing activities.

Research and Development. Research and development expenses increased by 1% from $5.2 million in the six months ended June 30, 2002 to $5.3 million in the six months ended June 30, 2003. As a percentage of total revenues, research and development expenses decreased from 43% in the 2002 period to 18% in the 2003 period. The decrease as a percentage of total revenues was the result of revenues increasing 145% while the research and development expenses remained essentially constant. We expect research and development expenses to increase in absolute dollars in the future as we increase our spending to enhance the functionality of existing products and introduce new products.

General and Administrative. General and administrative expenses increased by 16% from $2.2 million in the six months ended June 30, 2002 to $2.5 million in the six months ended June 30, 2003. The increase in absolute dollars was primarily attributable to a $300,000 increase in personnel expense associated with increased headcount. As a percentage of total revenues, general and administrative expenses decreased from 18% in the 2002 period to 8% in the 2003 period. The decrease as a percentage of total revenues was the result of the revenues increasing 145% while the general and administrative costs increased only 16%. We expect general and administrative expenses to continue to increase in absolute dollars in the future as we invest in infrastructure to support continued growth and incur additional expenses related to being a public company.

Stock-based Compensation. Stock-based compensation increased to $2.0 million in the six months ended June 30, 2003 primarily as a result of $1.6 million of stock-based compensation recorded in connection with the issuance of 453,000 shares of our Series G preferred stock to certain of our executive officers and key employees at a discount to the deemed fair value of such stock for financial accounting purposes. To a lesser extent, the increase also reflects increased amortization of deferred stock-based compensation recorded in 2003.

Interest expense decreased 17% from $263,000 for the six months ended June 30, 2002 to $217,000 for the six months ended June 30, 2003. Interest expense consists of interest paid on our line of credit and loans, as well as amortization of loan discounts associated with the fair value of warrants. Other income, net decreased 56% from $106,000 for the six months ended June 30, 2002 to $47,000 for the six months ended June 30, 2003. Other income, net consists primarily of interest income on bank balances.

License Revenues. License revenues grew by 43% from $6.9 million, or 30% of total revenues, in 2001 to $9.8 million, or 37% of total revenues, in 2002. The increase in license revenues in 2002 resulted in part from strong license sales in the fourth quarter of 2002 of $3.0 million compared to approximately $345,000 of license revenues in the same period of 2001. We believe our license revenues in 2001 were negatively affected by the general reduction in IT spending in the aftermath of the September 11 terrorist attacks and the overall economic downturn in the United States during 2001.

Maintenance and Service Revenues. Maintenance and service revenues grew by 5% from $16.0 million in 2001 to $16.8 million in 2002. As a percentage of total revenues, maintenance and service revenues decreased from 70% in 2001 to 63% in 2002. The absolute dollar increase in 2002 was primarily the result of an increase in integration and configuration projects associated with our increased license revenues.

Cost of License Revenues. Cost of license revenues increased by 25% from $650,000 in 2001 to $814,000 in 2002. The increase in absolute dollars in 2002 was primarily attributable to third-party royalty costs on higher license revenues. As a percentage of license revenues, cost of license revenues decreased from 9% in 2001 to 8% in 2002. The lower cost of license revenues as a percentage of revenues for 2002 was due to increased average license values which did not increase unit based royalty costs.

Cost of Maintenance and Service Revenues. Cost of maintenance and service revenues increased by 8% from $13.1 million, or 82% of maintenance and service revenues, in 2001 to $14.2 million, or 85% of maintenance and service revenues, in 2002. The increase in absolute dollars and as a percentage of related revenues in 2002 was primarily due to increased personnel costs of $1.2 million associated with the increase in the number of integration and configuration, training and technical support personnel. Travel and entertainment cost also increased by $460,000. These increases were partially offset by a decrease in contractor fees of $798,000.

Gross Margin. Our gross margin increased from 40% in 2001 to 43% in 2002. The increase was primarily attributable to a 43% increase in license revenues, which generate higher margins compared to the 5% increase in maintenance and service revenues which generate lower margins.

Sales and Marketing. Sales and marketing expenses increased by 13% from $12.0 million in 2001 to $13.5 million in 2002. As a percentage of revenues, sales and marketing expenses were relatively consistent at 52% in 2001 compared to 51% in 2002. The absolute dollar increase in 2002 was primarily associated with increased commission costs of $1.8 million resulting from increased license sales and increased travel and entertainment costs of $342,000. These increases were partially offset by a decrease in marketing program fees of $442,000 due to cost control measures and a decrease in personnel costs of $227,000 due to a decrease in the marketing headcount and a reduction in average salary expense.

Research and Development. Research and development expenses increased by 4% from $10.7 million in 2001 to $11.1 million in 2002. The absolute dollar increase was primarily associated with the increase in contractor fees related to third-party development services of $215,000 and an increase in personnel costs of $162,000 as a result of higher average salaries. As a percentage of total revenues, research and development expenses decreased from 47% in 2001 to 42% in 2002. The decrease as a percentage of total revenues in 2002 was the result of revenues increasing at a greater rate than research and development costs.

General and Administrative. General and administrative expenses increased by 4% from $4.9 million in 2001 to $5.1 million in 2002. As a percentage of total revenues, general and administrative expenses decreased from 21% in 2001 to 19% in 2002. The increase in absolute dollars in 2002 was primarily attributable to an increase in outside legal fees of $826,000 associated with litigation expenses which were partially offset by a $332,000 decrease in personnel costs resulting from a decrease in average headcount, a $211,000 decrease in goodwill amortization due to our adoption of SFAS 142, Goodwill and Other Intangible Assets, on January 1, 2002, and a $98,000 decrease in depreciation and overhead expenses.

Stock-based Compensation. Stock-based compensation expenses decreased by 77% from $1.9 million in 2001 to $424,000 in 2002. The decrease was primarily due to the accelerated amortization of previously recorded deferred stock-based compensation from options granted with exercise prices below the deemed fair value of our common stock on the date of grant.

Interest expense decreased 36% from $916,000 in 2001 to $582,000 in 2002. Interest expense consists of interest paid on our line of credit and loans, as well as amortization of loan discounts associated with the fair value of warrants. Other income, net decreased 59% from $331,000 in 2001 to $137,000 in 2002. Other income, net consists primarily of interest income on bank balances.

We recorded a transitional impairment loss of approximately $123,000 in January 2002 upon the adoption of SFAS 142, Goodwill and Other Intangible Assets. The transitional impairment loss was based on an assessment of the implied fair value of goodwill at the time of adoption. The impairment loss reduced the carrying value of goodwill we recorded in connection with our acquisition of The Rob Hand Consulting Group in 1999 to zero as of January 1, 2002.

License Revenues. License revenues decreased by 23% from $8.9 million, or 40% of total revenues, in 2000 to $6.9 million, or 30% of total revenues, in 2001. License revenues for 2001 were adversely affected by the general reduction in IT spending, particularly in third and fourth quarter, subsequent to the September 11 terrorist attacks and the overall economic downturn in the United States during 2001. License revenues for the quarter ended December 31, 2001 was $345,000 as compared to $2.4 million for the quarter ended December 31, 2000.

Maintenance and Service Revenues. Maintenance and service revenues increased by 21% from $13.3 million, or 60% of total revenues, in 2000 to $16.0 million, or 70% of total revenues, in 2001. The increase in 2001 was primarily attributable to increased service revenues associated with integration and configuration services for new customers and maintenance fees associated with sales of new licenses. The increase as a percentage of total revenues is primarily associated with the decrease in license revenues referenced above.

Cost of License Revenues. Cost of license revenues decreased by 23% from $840,000 in 2000 to $650,000 in 2001. Cost of license revenues as a percentage of related revenues was unchanged at 9% in 2001 and 2000. The decrease in cost of license revenues in absolute dollars in 2001 was due primarily to the decrease in third-party royalty costs associated with the decrease in license revenues.

Cost of Maintenance and Service Revenues. Cost of maintenance and service revenues increased by 17% from $11.2 million in 2000 to $13.1 million in 2001. As a percentage of related revenues, cost of maintenance and service revenues decreased from 84% in 2000 to 82% in 2001. The increase in absolute dollars in 2001 was primarily due to increased personnel costs of $1.1 million associated with the increase

Gross Margin. Our gross margin decreased from 46% in 2000 to 40% in 2001. The decrease in our gross margin was primarily attributable to the 23% decrease in license revenues, which generate higher margins. Maintenance and service revenues increased by 21% and accounted for 70% of the total revenues.

Sales and Marketing. Sales and marketing expenses decreased by 26% from $16.1 million, or 73% of total revenues, in 2000 to $12.0 million, or 52% of total revenues, in 2001. The decrease in 2001 was attributable to cost cutting measures that resulted in a $2.1 million decrease in personnel costs from a decrease in headcount and lower average salaries. Travel and entertainment costs decreased by $310,000 due to the reduced headcount and cost control measures. Additionally, marketing program fees were reduced by $1.0 million and professional fees were decreased by $757,000 primarily as a result of the elimination of our contracting arrangement for the management of our European operations. As a result of the decrease in absolute costs, sales and marketing expenses decreased as a percentage of total revenues.

Research and Development. Research and development expenses increased by 10% from $9.7 million, or 44% of total revenues, in 2000 to $10.7 million, or 47% of total revenues, in 2001. The absolute dollar increase in 2001 was primarily associated with costs of increased headcount, resulting in additional expenses of $1.8 million, partially offset by a decrease in contractor fees of $1.6 million resulting from the conversion of many contract developers to employees. The increase in headcount contributed to an increase in facilities and overhead costs of $872,000.

General and Administrative. General and administrative expenses decreased by 4% from $5.0 million, or 23% of total revenues, in 2000 to $4.9 million, or 21% of total revenues, in 2001. The decrease in 2001 was primarily attributable to a reduction in professional fees of $436,000 due to cost control measures. This decrease was partially offset by an increase in personnel expenses of $242,000.

Stock-based Compensation. Stock-based compensation expense decreased by 56% from $4.3 million in 2000 to $1.9 million in 2001. The decrease was primarily due to the accelerated amortization of previously recorded deferred stock-based compensation from options granted with exercise prices below the deemed fair value of our common stock on the date of grant.

Interest expense increased 16% from $793,000 in 2000 to $916,000 in 2001. Interest expense consists of interest paid on our line of credit and loans, as well as amortization of loan discounts associated with the fair value of warrants. Other income, net decreased 14% from $383,000 in 2000 to $331,000 in 2001. Other income, net consists primarily of interest income on bank balances.

The tables below show our unaudited consolidated quarterly statements of operations data for each of the ten most recent quarters, as well as the percentage of revenues for each line item shown. This information has been derived from our unaudited consolidated financial statements, which, in our opinion, have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. The results of operations for any quarter are not necessarily indicative of the results of operations in any future period.

Our revenues in general, and our license revenues in particular, are difficult to forecast and are likely to fluctuate substantially from quarter to quarter due to a number of factors, many of which are outside of our control. For example, our license revenues in the quarter ended December 31, 2001 were adversely affected by the general reduction in IT spending in the aftermath of the September 11 terrorist attacks, and again in the quarter ended September 30, 2002 by the delay in closing a large contract due to competitive pressures. In addition, we budget our operating expenses based on our estimates of future revenues and a high percentage of our expenses are fixed in the short term. We also may be subject to unanticipated expenses. For example, general and administrative expenses in the quarter ended December 31, 2001 were increased by the costs of settling certain litigation. We recorded higher research and development expenses in the quarter ended September 30, 2002 due to an outsourced development project and we recorded higher sales and marketing costs in the quarter ended December 31, 2002 due to commissions that were earned upon invoicing a customer even though revenues had not yet been recognized. In addition, in the quarter ended March 31, 2002, our cost of maintenance and service revenues as a percentage of related revenues was higher than usual as a result of increased hiring in anticipation of new engagements that did not produce expected levels of revenues until later periods. If even a small number of large license transactions, or recognition of license revenue from such transactions,

is delayed until after a quarter ends or we experience unusual operating expenses, our operating results could vary substantially from quarter to quarter and our net income could fall significantly short of expectations. If our operating results in future quarters fall below the expectations of market analysts and investors, the trading price of our common stock may fall. For a discussion of these and other factors that may cause our operating results to fluctuate from quarter to quarter, see “Risk Factors — Our quarterly revenues and operating results can be difficult to predict and can fluctuate substantially, which may harm our results of operations.”

Since our inception in September 1996, we have funded our operations primarily through the issuance of convertible preferred stock that provided us with aggregate net proceeds of approximately $84.2 million. As of December 31, 2002 and June 30, 2003, we had cash and cash equivalents of $12.8 million and $13.3 million, respectively.

Net Cash Used in Operating Activities. We used $2.3 million net cash in operating activities in the six months ended June 30, 2003. Cash used in operating activities increased from $18.1 million in 2000, to $18.5 million in 2001 and decreased to $8.8 million in 2002. Net cash used in operating activities of $2.3 million for the six months ended June 30, 2003 was due primarily to a $7.3 million increase in accounts receivable partially offset by an increase in deferred revenues of $2.7 million. Net cash used in operating activities in 2000, 2001, and 2002 was primarily the result of our net operating losses during those periods offset by non-cash expenses including depreciation, amortization, and stock-based compensation. Also affecting net cash used in operating activities were changes in operating assets and liabilities which provided cash of $1.3 million in 2000, used cash of $2.5 million in 2001 and provided cash of $7.4 million in 2002. The $7.4 million change in 2002 was the result of a $4.9 million increase in deferred revenues plus other increases in liabilities offset by a $1.9 million increase in accounts receivable.

Net Cash Used in Investing Activities. We used $285,000 in investing activities in the six months ended June 30, 2003. Cash used in investing activities decreased from $4.2 million in 2000 to $456,000 in 2001 and increased to $668,000 in 2002. Net cash used in investing activities is primarily the result of capital expenditures including the purchases of equipment, software, furniture, and leasehold improvements to support the growth of our business. In 2000, capital expenditures of $3.6 million consisted primarily of equipment and software to support internal administration and growth in personnel. In 2001 and 2002, capital expenditures were approximately $646,000 and $657,000, respectively. Capital expenditures for the six months ended June 30, 2003 were approximately $389,000. We expect capital expenditures to increase in future periods consistent with our anticipated growth in personnel and infrastructure, including facilities and systems.

Net Cash Provided by Financing Activities. We generated $3.0 million in cash through our financing activities in the six months ended June 30, 2003. Cash provided by financing activities increased from $10.7 million in 2000 to $27.7 million in 2001 and decreased to $10.3 million in 2002. Net cash provided by financing activities in 2000 was due in large part to the issuance of $8.0 million of subordinated convertible notes payable which were converted into preferred stock in 2001. In 2001 and 2002, we received proceeds of $29.4 million and $8.9 million, respectively, from the issuance of preferred stock. In the six months ended June 30, 2003, we received $2.6 million in net proceeds from increases in short-term debt.

In March 2003, we amended a financing agreement with Silicon Valley Bank that includes a revolving line of credit that permits borrowings from time to time of the lesser of $7.0 million or 80% of eligible accounts receivable as determined by the lender. The agreement also provides for a $1.5 million term loan (Term Loan #1) payable in 36 monthly installments ending in September 2005 and a $1.0 million term loan (Term Loan #2) for equipment purchases payable in 36 monthly installments ending in June 2006. Amounts drawn under both term loans cannot be reborrowed once repaid. In addition to the financing agreement with Silicon Valley Bank, we have an existing equipment loan with Transamerica Business

The financial covenants in the Silicon Valley Bank loan agreement require us to maintain minimum levels of monthly cash collections, quarterly revenues, and quarterly bookings. We were not in compliance with the revenue covenant as of December 31, 2002, but we received a waiver from the lender. As of June 30, 2003, we were in compliance with all covenants. We have no off-balance sheet arrangements, with the exception of operating lease commitments, that have not been recorded in our consolidated financial statements.

In September 2003, we amended the operating lease on our corporate headquarters in San Jose, California to increase the square footage to 44,500 and extend the term for seven years through 2010. The total rent obligation over the term of the lease is $10.3 million. We do not expect the amendment of the lease to result in significant capital expenditures or leasehold improvements.

The following table describes our commitments to settle contractual obligations in cash as of June 30, 2003. The contractual obligation for operating leases has been adjusted to reflect the September 2003 amendment to the operating lease for our corporate headquarters.

We believe our existing cash balance, credit facilities, the net proceeds from this offering and cash from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancement to existing products, and the continuing market acceptance of our products. To the extent that the net proceeds of this offering, together with existing cash and cash equivalents and any cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, we may enter into these types of arrangements in the future, which could also require us to seek 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.

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in

Interest Rate Risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. We do not believe that a 10% change in interest rates will have a significant impact on our interest income. As of June 30, 2003, all of our investments were in money market accounts, certificates of deposit, high quality corporate debt obligations or United States government securities.

Our exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on our outstanding debt instruments, primarily borrowings under an amended financing agreement we entered into with Silicon Valley Bank in March 2003 (See Note 3 of the notes to our consolidated financial statements). As of June 30, 2003, our revolving line of credit provides for borrowings up to $7.0 million, of which approximately $1.5 million is available for future borrowings. At June 30, 2003, approximately $5.5 million was outstanding under this revolving line of credit. In addition to the revolving line of credit, we have outstanding term loans with variable interest rates totaling $1.4 million as of June 30, 2003. The revolving line of credit and term loans bear a variable interest rate based on the lender’s prime rate plus 2.0% to 3.5%, with a floor ranging from 6.25% to 7.75%, depending on the type of loan. The risk associated with fluctuating interest expense is limited to these debt instruments and we do not believe that a 10% change in the prime rate would have a significant impact on our interest expense.

Foreign Currency Exchange Risk. Our revenues and our expenses, except those related to our United Kingdom, German and Australian operations, are denominated in United States dollars. As a result, we have relatively little exposure to currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we believe our foreign currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk.

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. As used in SFAS 143, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We adopted SFAS 143 as of January 1, 2003. The adoption of SFAS 143 did not have a material impact on our consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other provisions, SFAS 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains or losses from extinguishment of debt are not reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB 30. SFAS 145 is effective for fiscal years beginning after May 15, 2002. We adopted SFAS 145 as of January 1, 2003. The adoption of SFAS 145 did not have a material impact on our consolidated financial position or results of operations.

In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force (EITF) 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring), required an exit cost liability be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. We adopted SFAS 146 as of January 1, 2003. The adoption of SFAS 146 did not have a material impact on our consolidated financial position or results of operations.

In November 2002, the FASB issued Statement of Financial Interpretations (FIN) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The adoption of FIN 45 did not have a material impact on our consolidated financial position or results of operations.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. This interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. It explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. This interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. As of June 30, 2003, we did not have any investments in variable interest entities.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 will not have a significant impact on our consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS 150 did not have a significant impact on our consolidated financial position or results of operations.

We are a leading provider of Enterprise Incentive Management (EIM) software systems to global companies across multiple industries. Large enterprises use EIM systems to model, administer, analyze and report on pay-for-performance plans, which are designed to align employee, sales and channel tactics with targeted business objectives, and thereby increase productivity, improve profitability and achieve competitive advantage. We develop, market, install and support rules-based enterprise application software to solve the complex problems of large scale enterprise incentive compensation systems. Our product suite is based on our proprietary technology and extensive domain expertise and provides the flexibility and scalability required to meet the dynamic EIM requirements of large, complex businesses across multiple industries. Our installed base of over 75 active customers includes industry leaders in the insurance, retail banking, telecommunications, distribution, and manufacturing and technology industries, such as Allstate, JP Morgan Chase, AT&T Wireless, Airborne Express and Apple Computer. Our revenues were $26.6 million for the year ended December 31, 2002 and $29.8 million for the six months ended June 30, 2003.

In today’s competitive environment, pay-for-performance programs are increasingly recognized as important tools for companies to increase sales and productivity, gain market share and improve profitability. By rewarding employees and business partners for the achievement of quantitative and qualitative objectives, pay-for-performance programs provide incentives to achieve desired operating results, align behavior with corporate strategy and shareholder value and drive performance and competitive advantage in the marketplace. In 2001, AMR, a leading industry analysis firm, estimated that more than $1.5 trillion of pay-for-performance compensation is paid out annually by U.S. and European based companies.

The process of designing, maintaining and managing pay-for-performance programs to effectively meet corporate objectives is complex, expensive and time consuming. Large businesses such as banks, insurance companies, telecommunications providers and manufacturers need to calculate, report and pay sales commissions and incentives as often as weekly based on a large number of different compensation plans for thousands of internal and external payees. For large and complex pay-for-performance programs, these payments can represent millions of separate calculations per pay period, with total payouts ranging from approximately $100 million to over $1 billion annually. Employee turnover, changes to internal and external reporting systems, the need for very high levels of user security, regulatory restrictions and the dispersed nature of sales organizations themselves add further complexity to managing incentive compensation programs. The complexity of pay-for-performance programs is magnified by the use of management-by-objectives (MBOs), which compensate employees for the attainment of qualitative business objectives, such as customer satisfaction, quality of service and product development milestones.

While nearly all industries rely on pay-for-performance programs as a management tool, different industry verticals have distinct requirements and objectives for managing their pay-for-performance programs. For example, a manufacturer selling through the wholesale distribution channel concerned with gross product margin and customer discounts may want its pay-for-performance program to reward sales people for selling higher margin products and controlling discounts. A multi-line insurance company may also be concerned with customer discounts and gross margin by product line; however, because insurance companies must compensate both in-house and independent insurance agents under the separate regulations of 50 states, they must also contend with a variety of constraints including state-by-state license regulations and multi-year commission payouts tied to specific policy types.

Large companies increasingly require effective EIM systems to ensure that employees, agents and business partners are focused on achieving targeted business objectives to gain competitive advantage, increase productivity and improve bottom line results. Effective EIM systems must:


	•	*Create Trust and Confidence in the Pay-for-Performance Programs.* EIM systems must give finance personnel confidence in the integrity of the sales data and MBO attainment reports and at the same time generate trust among employees, agents and business partners that they will receive due credit and accurate compensation for achieving targeted business objectives.

	•	*Report Incentive Compensation in a Timely Manner.* Pay-for-performance program participants must receive goal attainment and reward notification on a regular basis, thereby reinforcing desired behavior and improving business performance.

	•	*Facilitate Plan Modifications.* EIM systems must enable management to adapt incentive compensation programs to align behavior with corporate objectives in response to competitive pressures.

	•	*Provide Functionality and Scalability.* EIM systems must enable large enterprises to address the complex industry-specific challenges they face and provide scalability to meet the performance requirements of processing millions of incentive compensation transactions.

To successfully implement and manage pay-for-performance programs, an EIM system must address each of the following requirements:

Data Acquisition. EIM systems require the acquisition of sales and operational data on which pay-for-performance compensation will be based. The pay-for-performance programs of large businesses may have anywhere from three data feeds, typically originating from order entry, accounts receivable and human resources, to as many as 30 data feeds. These additional data feeds may include information such as data from internal enterprise resource planning (ERP) or supply chain management systems to track individual products for a manufacturer or retailer, independent retail outlet data for a cellular telephone provider or transactional sales information provided by independent business partners such as retail banks to insurance companies. Assuring and maintaining the quality and validity of this data are essential to properly calculate and pay sales commissions. However, data originating from outside the enterprise, and in many cases inside the enterprise, is often incomplete or inaccurate and is subject to frequent change. For example, a key business partner might upgrade its in-house ERP system thus corrupting a data element that is essential to the commission calculation process.

Credit Allocation. Determining who gets credit for an individual transaction or performance objective is both technically difficult and subject to constant change. For example, in a sales incentive program, a large company may pay eight to fifteen payees for every transaction. These payees might include a telemarketing representative who created the sales lead, sales and support representatives who participated in the customer sale, branch, regional and area sales managers, the corporate vice president of sales and individuals in the marketing department responsible for sales of a product or service. Due to the large number of credits generated, the credit allocation process places a tremendous processing load on any EIM system. Credit allocation is further complicated by employee turnover and organizational change. As a result, the eight to fifteen people who receive credit for a transaction or performance milestone in one period may not be the same people in a subsequent period.

Measurement and Calculation. Determining the relevant compensation metrics and payment amounts presents additional challenges due to the number of compensation plans that may be used by large enterprises. In the example regarding sales force compensation discussed above, the eight to fifteen payees to be compensated for a given transaction may be compensated using as many different compensation plans. Specifically, sales representatives may be rewarded on the revenues and profitability of a given transaction, supervisors may be rewarded on the net contribution margin of the sales team and senior management may be rewarded on the contribution margin of the division.

Timing of Payments. Determining when a payee will be paid incentive compensation varies from company to company and industry to industry and is subject to frequent change depending on the goals and objectives management is trying to influence. For example, to manage accounts receivable, companies may reward sales people only upon collection. In other cases, sales commissions in excess of a certain value are paid out over a period of months or quarters in order to ensure employee retention and customer satisfaction. In still other industries, such as life insurance, calculation and pay-out of a commission may occur over a period as long as 20 years and the rights to receive these payments may be transferrable from one party to another.

Reporting Results. EIM systems must report results to payees with a high degree of accuracy. A successful reporting application must be capable of handling the large number of individual reports and report pages generated, the frequent rate of organizational change, the requirement for high levels of user security and the dispersed nature of sales organizations. Large businesses may generate more than a million report pages per week directed to thousands of payees who expect to see their individual commission reports accurately reflected in their native language and currency.

Historically, large businesses have sought to overcome the challenges inherent in pay-for-performance programs through labor-intensive, manual methods, that may involve numerous spreadsheets or desktop databases, or through the use of internally developed software solutions that are expensive to develop, inflexible and may not employ best practices or advanced technology. These manual methods or internally developed solutions may result in:


	•	*Costly Errors.* Industry studies estimate that on average, companies using manual methods to calculate pay-for-performance compensation for their sales forces overpay commissions by between 2% and 5% of the total payout. For example, an organization paying out $400 million per year in pay-for-performance compensation, may incur excess compensation expenses of $8 million to $20 million annually.

	•	*Lost Productivity.* Without a transparent and reliable resource to verify complex pay-for-performance calculations, payees may expend considerable time to confirm that they were not underpaid and to resolve any discrepancies, resulting in lost sales and operational productivity.

	•	*Limited Flexibility.* Manual methods and internally developed solutions are generally not equipped, or require substantial time and IT resources, to handle frequent changes to pay-for-performance programs resulting from payee turnover, new product introductions and evolving management priorities.

Recently, established ERP and customer relationship management (CRM) system providers have sought to provide solutions for managing pay-for-performance programs. However, EIM functionality generally is not core to these companies’ product offerings, and we believe these companies have not developed the domain expertise required to meet the dynamic requirements of today’s complex pay-for-performance programs.

Manual methods, internally developed solutions and solutions from ERP and CRM providers have historically been unable to provide large companies with an adequate means to accurately administer and report pay-for-performance compensation. These alternatives fail to meet EIM requirements due to the complexity and frequent rate of change of required internal and external data, the number of payees to whom credit must be allocated for each sales transaction, the number and unique nature of compensation plans, the variety of payment timing rules for compensation plans and the complexity of delivering timely and accurate reports.

data resource for enterprises to plan and manage pay-for-performance programs and accurately allocate credit among a wide range of payees. Our product suite allows management to accurately calculate and coordinate the payment of incentive compensation based on a highly flexible and scalable software architecture. In addition, our reporting product enables management to accurately and systematically report incentive compensation results to payees on a timely basis. Our solution is designed to enable large enterprises to achieve competitive advantage by ensuring that employees, agents and business partners are focused on targeted business objectives, thereby increasing productivity and driving bottom line results.

We believe we provide the most advanced EIM solutions available for three principal reasons:

We Solve Complex Pay-for-Performance Problems. Our TrueComp product enables enterprises to accurately reflect all sales data and to apply it to multiple pay-for-performance programs. TruePerformance enables our customers to plan and manage salary and MBO compensation. TrueResolution provides our customers the ability to efficiently manage sales commission dispute resolution with their independent distribution channels. TrueReferral offers our financial services customers the ability to effectively promote customer referrals by customer facing employees. Finally, TrueInformation provides reporting and analytics capabilities for our TrueComp, TrueResolution and TrueReferral products.

We Address Key Vertical Market Requirements. We believe domain expertise is critical to designing a successful EIM system. We apply our domain expertise to build specific functionality into our products to address the key requirements of the insurance, retail banking, telecommunications, distribution, and manufacturing and technology industries. For example, our TrueComp product includes functionality designed to address the complex pay-for-performance constraints affecting the insurance industry, including varied state-by-state regulatory requirements and transferability of incentive compensation payment rights.

We Have Superior Technology. Our products are based on our proprietary rules-based software and scalable grid computing architecture. We believe this technology differentiates our products and offers the following advantages:


	•	*Performance and Scalability.* Our products provide the capacity for vertical-specific functionality and the ability to rapidly and accurately process large transaction volumes.

	•	*Flexibility, Reliability and Predictability.* Our products facilitate changes to the rules governing a compensation plan to fine-tune incentives or adapt to changes in the competitive landscape without compromising the consistency and accuracy of results.

	•	*Ease-of-Use.* Our products enable non-technical personnel to configure and administer EIM systems and allow employees, agents and business partners to readily access up-to-date compensation information through an intuitive web-based interface.

	•	*Lower Total Cost of Ownership.* Our products are based on a standardized set of code designed to reduce the time and expense required to integrate and configure our products, upgrades and new releases and to enhance overall return on investment in our products.

Our customers use our EIM products to effectively manage complex and dynamic pay-for-performance programs, streamline resolution of incentive compensation disputes, reduce costly errors and improve profitability. The industry-specific functionality of our products enables our customers to address the important challenges for their pay-for-performance programs, including managing widely distributed agency channels in the heavily regulated insurance industry, managing large pay-outs to the independent dealer channel in the telecommunications and distribution industries, promoting referrals and cross-selling in the retail banking industry and promoting higher-margin products while controlling discounts in the manufacturing and technology industries.

Our objective is to extend our leadership position in EIM systems for large businesses. To achieve this goal we are pursuing the following strategies:

Capitalize on Our Technological Leadership. We believe that most major enterprises utilize pay-for-performance programs, and that the majority of these enterprises are currently using manual methods or internally developed solutions that do not adequately address the key requirements of EIM systems. We intend to leverage our early-mover advantage and our technological leadership in the EIM market by continuing to invest in research and development to expand our product line and increase our products’ functionality, and thereby to capitalize on the EIM market opportunity.

Continue Our Focus on Vertical Markets and Develop Additional Referenceable Accounts. Each of our five principal industry markets, insurance, retail banking, telecommunications, distribution, and manufacturing and technology, is a very large pay-for-performance market with distinct industry needs. Our domain expertise enables our products to offer industry-specific advantages in functionality, implementation and deployment and allows us to achieve greater efficiency and effectiveness in our sales, marketing and product development efforts. We intend to add marquee customers in each of our vertical markets and to leverage these referenceable accounts to increase penetration of our target markets. We also intend to invest in new vertical markets, such as pharmaceuticals and retail, that we believe present significant market opportunities.

Increase the Industry-Specific Modeling and Analytic Capabilities of Our Products. We are developing new products and product enhancements to provide customers with more extensive industry-specific modeling and analytic capabilities required in increasingly competitive marketplaces. These products will be designed to provide detailed information about the financial performance of sales channels, customers and products in various scenarios, enabling customers to proactively align compensation incentives to targeted business objectives and to more fully understand the effects of these changes on their pay-for-performance programs.

Continue to Build Loyalty Through Superior Customer Care. We believe our commitment to customer support is one of our principal competitive advantages. A member of our executive staff is responsible for maintaining our relationship with each major customer, and our customer advocacy group maintains quarterly contact with every account to ensure that our products and services are responsive to evolving customer needs. As we grow our installed base, we intend to increase investment in customer care to further strengthen customer loyalty and referenceability.

Our EIM product suite models, administers, analyzes and reports on every aspect of the incentive compensation process. Our core products combine a flexible rules-based architecture with grid-based computing, providing customers with reliable, flexible and highly scalable solutions for EIM systems. The majority of our products are Java-based, enabling efficient implementation on any operating system, and all of our products are designed to be operated by business users and compensation professionals rather than IT administrators. Our product suite features user-defined security combined with a complete audit trail, allowing for reduced errors in incentive compensation, enhanced trust and confidence between operational and finance personnel and reduced cost of incentive compensation programs.

Our TrueComp product allows our customers to administer and analyze pay-for-performance programs for the sales force and distribution channels. TrueInformation, which generally is purchased with TrueComp, provides reporting and analytics capabilities for distributing pay-for-performance compensation information throughout the enterprise. TruePerformance enables customers to plan, implement and measure salary and MBO compensation. TrueResolution offers the ability to manage sales channel commission disputes. TrueReferral, which integrates with TrueComp, offers our financial services customers the ability to effectively promote customer referrals.

TrueComp automates the modeling, design, administration, reporting and analysis of pay-for-performance programs for enterprise level sales and distribution organizations. Our customers use TrueComp to design, test and implement sales compensation plans that reward on the profitability of the sale, discourage excessive sales discounts, encourage team selling and promote new product introduction or other sales activities the company wishes to encourage. TrueComp enables our customers to accurately acquire and reflect all relevant sales data, apply it precisely to each payee’s pay-for-performance program and automate the day-to-day activities associated with administering transaction-driven, variable incentive compensation. TrueComp provides a flexible, user-maintainable system that can be modified easily to align direct or indirect sales compensation with corporate goals and shareholder value.

TrueComp consists of four principal modules: TrueIntegration collects and integrates the different data feeds used to compile the applicable sales data; TrueComp Repository serves as the database; TrueComp Manager serves as our rules-based engine; and the TrueComp Grid is our proprietary computing architecture. TrueComp’s modular, structured approach to defining compensation plans avoids the reliability and maintenance issues associated with internally developed solutions and enables systematic administration over a high volume of transactions and varied compensation plans that is not attainable using manual methods. TrueComp guides users through the process of paying variable compensation by a graphical and intuitive rule editor, which is usable by compensation analysts without coding or scripting skills. TrueComp was initially shipped in the second quarter of 1999 and to date has accounted for a substantial majority of our revenues.

TrueInformation is a self-service, web-based reporting and analytics portal that provides visibility into incentive compensation systems throughout the organization. TrueInformation provides reporting and analytics capabilities, enabling management to access a comprehensive model of pay-for-performance programs. By providing timely and accurate compensation information throughout the enterprise, TrueInformation engenders trust and confidence among operational and finance personnel, thereby improving morale and operational results while reducing errors that increase the costs of incentive compensation. TrueInformation includes user-defined security parameters that allow for appropriate controls on dissemination of sensitive compensation data and is accessed through an intuitive web-based interface that offers ease of use throughout the organization. TrueInformation was initially shipped in the fourth quarter of 2002.

TruePerformance provides tools and analytics to accurately plan, implement, manage and measure non-commission-based compensation programs. The primary features of TruePerformance include a compensation planner and a web-based team planner. The compensation planner provides forecasting, simulation and management capabilities for compensation policies, labor costs and personnel budgets. The team planner provides compensation professionals with a full view of employee and organizational data and provides compensation policy planning and MBO criteria development and assignment functionality. These features allow our customers to simulate the effects of changes in compensation strategy on their workforces, conduct market pay analysis, compare multiple incentive pay plan scenarios and plan for changes in compensation, promotions, job changes, new hires and reductions in force. By enabling our customers to effectively and efficiently create compensation plans and motivate employees, we believe TruePerformance allows our customers to build trust and confidence in their workforces, translate pay increases to bottom-line results, improve organizational consistency and achieve a greater return on investment. TruePerformance was initially shipped in the first quarter of 2003. TruePerformance was developed by an independent software company, and we have worldwide distribution rights to the product and the option to acquire all rights to the product. TruePerformance is currently available for NT SQL and NT Oracle platforms and we have contracted for the development of versions to support additional platforms.

TrueResolution is a rules-based engine that streamlines and automates the resolution of sales commission disputes, thereby reducing the associated cost and diversion of management and sales resources. Optimized for the largest sales channel organizations, TrueResolution eliminates manual, error-prone sales operation processes and allows dispute resolution to be initiated from the field where the majority of disputes originate. TrueResolution automates functions such as changes, transfers and splits to territory assignments, quota adjustments, organizational changes and payee information updates. TrueResolution enables sales professionals and business partners to submit and track their claims through a completely web-based self-service workflow process, which automates the evaluation, routing, resolution and approval of day-to-day requests and consistently communicates payment and resolution status to sales people. TrueResolution keeps management informed of changes that may affect compensation, produces an audit trail for all requests and resolutions, reduces errors and the risk of fraud and promotes enforcement of enterprise policies. TrueResolution was initially shipped in the second quarter of 2002 and to date has not accounted for a material portion of our revenues.

TrueReferral is a web-based sales referral tracking application that enables financial services customers to more effectively incentivize and manage up-sales and cross-sales between departments. TrueReferral automates the entire customer referral process, including prospecting and referral submission, validation and routing. TrueReferral generates completed sales referrals that are fed into TrueComp for referral reward processing. TrueReferral became commercially available in the third quarter of 2003.

Our products are based on our proprietary TrueComp Manager rules engine, which is implemented on our scalable TrueComp Grid computing architecture. This technology offers our customers high degrees of functionality and flexibility coupled with scalability and reliability that are designed to maximize the return on investment in their EIM systems.

TrueComp Manager employs rules-based enterprise application software technology designed to offer significant advantages over traditional enterprise application software, which generally requires a substantial investment in installation and customization for deployment and upgrades. TrueComp Manager’s rules-based design minimizes installation and configuration requirements, requires no customization, provides maximum flexibility to modify plan parameters and calculation and payment rules and facilitates deployment of product enhancements and new releases. Flexibility of configuration is particularly important for EIM systems, where pay-for-performance compensation is used to drive business performance and where it may be necessary to make frequent and substantial changes in compensation to respond to business conditions related to markets, competition and regulatory influences. With rules-based software, non-programmers, such as compensation analysts, can make changes or implement new compensation plans without a programming background. In addition, as there is no custom code or database customization with our software, we can write automated upgrade kits that significantly reduce the cost of deploying product enhancements and new releases. As a result, we can distribute major new releases with significant additional functionality regularly and customers can take advantage of the new capabilities without the substantial expenses associated with upgrading traditional enterprise software.

TrueComp Manager is designed to capture two aspects of the business practices surrounding compensation: a data model and a process model. Our data model defines how our users categorize different transactions and other events associated with their EIM systems. Our process model defines how rules may be applied to describe a compensation plan. We leverage our extensive domain expertise in each vertical market we target by ensuring our data and process models are designed to utilize the information and decision making criteria our customers use to model and manage their businesses.

Our data model enables TrueComp to categorize data brought in from other systems such as ERP, CRM, human resources and supply chain management systems to create a framework for how the customer views that data. For example, customers may organize transactional data according to geographic regions, sales channels or product lines. Categorization allows our products to model the business the way our customers manage their businesses.

Our process model provides a series of logical decision points where rules can be used to determine the outcomes for a given transaction under a particular compensation plan. Our process model addresses critical requirements of the EIM system, including credit allocation, measuring and calculating incentive compensation and determining the time of payment. The combination of these critical decision points, together with a powerful yet user-friendly rule language, makes it possible for TrueComp to pay on virtually any kind of business compensation model.

We have achieved high transaction performance levels for our rules-based engine by employing a proprietary grid computing architecture. Computation grids allow the sharing and aggregation of distributed computing resources so that they may be presented as a single, unified resource for solving large-scale data intensive computing applications. Using TrueComp Grid, customers can harness virtually unlimited numbers of processors to provide the degree of performance needed at their transaction levels. These processors can be in the form of mainframe-class single chassis systems, symmetric multiprocessors or racks of inexpensive NT blade servers. Our proprietary technology is designed to ensure optimal performance with the available computing resources and automatically balances the computation load across the grid array.

While our products can serve the pay-for-performance program needs of all companies, we have focused principally on five vertical markets, each of which has its own unique characteristics. The following table provides a list of our representative customers and illustrates typical characteristics of our vertical markets:

We currently have over 75 active customers across our vertical markets. In addition, we are continuing to invest in the relevant domain expertise to target the pharmaceutical and retail industries.

We provide a full range of services to our customers, including professional services, maintenance and technical support and educational services.

Professional Services. We provide integration and configuration services to our customers and partners. These services include the installation of our software, identification and sourcing of legacy data, configuration of TrueComp rules necessary to create compensation plans, creation of custom reports, integration of our other products including TruePerformance, TrueResolution, TrueInformation and TrueReferral and other general testing and tuning services for our software. We generally act as either the prime contractor or as a subcontractor depending on the customer’s specific requirements and preferences. As the prime contractor, we integrate and configure the software to the customer’s specifications, generally on a time-and-materials basis. We also provide services to our systems integration partners on a subcontracting basis when our specific domain expertise is required by these partners.

Maintenance and Technical Support. We have maintenance and technical support centers in the United States, the United Kingdom and Australia. We currently offer three levels of support, including standard, premium and premium plus, which are generally contracted for a period of one year. Under each of these levels of support, our customers are provided with on-line access to our customer support database, telephone support and all product enhancements and new releases. In the case of premium support, our customers are provided with access to a Callidus support engineer 24 hours a day, 7 days a week. Premium plus support includes an onsite support engineer in addition to all of the services included in our premium support plan.

Education Services. We offer our customers a full range of education services including computer and web based training, classroom training and on-site customer training. We provide classes for all of our products to our customers and provide educational services to our partners on a scheduled and as-requested basis.

We sell and market our software through a direct sales force and in conjunction with our partners. In the United States, we have sales offices in Atlanta, Austin, Chicago, New York and San Jose. Outside the United States, we have sales offices in London, Munich and Sydney.

Sales. Our direct sales force, consisting of experienced account executives, subject matter experts, technical pre-sales engineers and field management, is responsible for the sale of our products to global enterprises across multiple industries and is organized into geographic and industry territories. Our telesales department is responsible for sales lead generation and first line customer contact, while our non-quota carrying customer advocacy group is responsible for post-sales customer support. These services include informing our customers of new Callidus products, managing user groups and maintaining proactive contact with our customers.

Marketing. Our marketing activities include traditional product marketing functions such as production of both hardcopy and on-line product and company promotional material, gathering of customer and partner input for new product features and creation of sales product demonstrations. We generate awareness of our company and sales leads for our products through print and web-based advertising, seminars, direct mail and customer and partner events. Additionally, we maintain an extensive web site that is used to educate our customers and prospects about our products and services.

We actively promote and maintain strategic relationships with systems integration partners. These relationships provide customer referrals and co-marketing opportunities that expand our contacts with potential customers. In addition, these relationships allow us to leverage our business model by subcontracting or outsourcing integration and configuration services required to allow us to expand license sales.

In August 2003, we became an IBM Strategic Alliance Partner for Enterprise Incentive Management. Under our agreement with IBM, we co-market our products globally to banking, insurance and telecommunications customers, and we optimize our products to operate on IBM product platforms including Websphere, DB/2 and AIX. Neither we nor IBM is required to pay the other party royalty or other fees resulting from this relationship and both parties will generally contract directly with the third-

We also have an ongoing relationship with Accenture, which provides systems integration and configuration services to our customers. While we do not have any agreements with Accenture governing our long-term relationship, we expect to continue to rely on Accenture as a key collaborator in selling and integrating our products on a customer-by-customer basis. We also maintain active partnerships with the Alexander Group International (AGI), a compensation consulting and professional services firm that integrates and configures our products, and Iconixx Corporation, a professional services firm that specializes in the implementation of EIM systems.

Our research and development organization consists of experienced software engineers, software quality engineers and technical writers. We organize the development staff along product lines, with an engineering services group providing centralized support for technical documentation and advanced support. We employ advanced software development tools including automated testing, performance monitoring, source code control and defect tracking systems.

Our principal competition comes from established ERP vendors including Oracle, PeopleSoft and SAP, CRM vendors including Siebel Systems, pure-play EIM vendors including Centive, Motiva and Synygy and internally developed software solutions. We believe that the principal competitive factors affecting our market are:


	•	Industry-specific domain expertise;

	•	scalability and flexibility of solutions;

	•	superior customer service; and

	•	functionality of solutions.

We believe that we compete effectively with the established ERP and CRM companies due to our established market lead, domain expertise, rules-based application software and highly scalable software architecture. EIM systems are generally not part of these vendors’ core product offerings, whereas we believe we have more fully developed the domain expertise required to meet the dynamic requirements of today’s complex pay-for-performance programs.

We believe that we compete effectively with the pure-play EIM system vendors due to our established market leadership, robust, scalable architecture and commitment to customer service. While each of the pure-play EIM system vendors has domain knowledge of the EIM market, we believe that we have developed superior scalability demanded by the telecommunications, retail banking or insurance markets. Additionally, we have created substantial product differentiation by adding features into our products that are specific to each a given vertical market.

We also believe that our products offer a more cost-effective and complete alternative to internally developed solutions. These solutions are generally expensive, inflexible and difficult to maintain for large companies with complex pay-for-performance programs, thereby increasing total cost of ownership and limiting the ability to implement pay-for-performance programs that effectively address targeted business objectives.

Our success and ability to compete is dependent in part on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing upon the proprietary rights of others. We rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information. Due to the rapidly changing nature of applicable technologies, we believe that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how and development of new products are generally more advantageous than patent protection. We have an ongoing trademark registration program pursuant to which we register some of our product names, slogans and logos in the United States and in some foreign countries.

We also use contractual provisions to protect our intellectual property rights. We license our software directly to customers. These license agreements, which address our technology, documentation and other proprietary information, include restrictions intended to protect and defend our intellectual property. These licenses are generally non-transferable and are perpetual. We also require all of our employees, contractors and many of those with whom we have business relationships to sign non-disclosure and confidentiality agreements.

Certain of our products also include third-party software that we obtain the rights to use through license agreements and our TruePerformance product was developed by an independent contractor, from whom we have a license to distribute the product worldwide and an option to acquire all rights to the product.

As of June 30, 2003, we had approximately 250 employees. None of our employees is represented by unions. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

We lease our headquarters in San Jose, California which consists of approximately 44,500 square feet. The lease on our San Jose headquarters expires in 2010. We also lease facilities in Austin, Chicago, New York, Sydney, London and Munich. We believe that our properties are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.

On or about March 29, 2002, we received a copy of a complaint filed by Gordon Food Service in the United States District Court for the Western District of Michigan alleging breach of contract and misrepresentation in connection with software purchased by Gordon Food. On December 9, 2002, the court granted our motion to transfer venue and ordered that the case be transferred to the San Jose division of the United States District Court for the Northern District of California. Gordon Food has moved the court to file an amended complaint asserting, among other things, breach of contract and misrepresentation. We have reviewed the claims alleged in the complaint and believe that such claims are without merit and intend to contest the claims vigorously if an amended complaint is filed.

In addition, we are from time to time a party to various litigation matters incidental to the conduct of our business. There is no pending or threatened legal proceeding to which we are a party that, in our opinion, is likely to have a material adverse effect on our future financial results.

The following table sets forth information regarding the executive officers and directors of Callidus.

Reed D. Taussig has served as our President, Chief Executive Officer and director since November 1997. In August 2003, Mr. Taussig was elected as the Chairman of our Board of Directors. From April 1995 to October 1997, Mr. Taussig co-founded and served as President and Chief Executive Officer of inquiry.com, a web-based exchange and research facility for information technology professionals. From August 1991 to August 1994, Mr. Taussig served as Senior Vice President of North American Operations for Gupta Corporation (now Centura Software Corporation), an application development tools and database provider. From November 1987 to August 1991, Mr. Taussig served as Senior Vice President of Worldwide Operations for Unify Corporation, an e-commerce application software company. Mr. Taussig holds a B.A. in Economics from the University of Arizona.

Christopher W. Cabrera has served as our Vice President, Worldwide Sales and Business Development since January 2003. Prior to assuming his current position, Mr. Cabrera served as our Vice President of North American Sales from September 2000 to January 2003 and Managing Director of Western Area Sales from June 1999 to September 2000. Mr. Cabrera holds a B.A. in Business Administration from the University of Southern California and a M.B.A. from Santa Clara University.

Ronald J. Fior has served as our Vice President, Finance and Chief Financial Officer since September 2002. From December 2001 to July 2002, Mr. Fior served as Vice President of Finance and Chief Financial Officer for Ingenuity Systems, a bioinformatics software development company. From July 1998 until October 2001, Mr. Fior served as Chief Financial Officer and Vice President of Finance and Operations of Remedy Corporation, a software development company. Prior to this, Mr. Fior served for 13 years as Chief Financial Officer of numerous divisions and companies within the publishing operations of The Thomson Corporation, including the ITP Education Group and the International Thomson Publishing Group. Mr. Fior holds a Bachelor Commerce degree from the University of Saskatchewan and is a Chartered Accountant.

Bertram W. Rankin has served as our Senior Vice President, Worldwide Marketing since June 2003. Prior to joining Callidus, Mr. Rankin served as Vice President of Marketing at NetManage, a supplier of host access and integration solutions to Fortune 1000 organizations, from October 2000 to May 2003. From July 1998 to October 2000, Mr. Rankin served as General Manager and Vice President, Marketing for Ricoh Silicon Valley, a software company and subsidiary of Ricoh Company. Mr. Rankin holds a

Robert W. Warfield has served as our Chief Technology Officer and Senior Vice President, Research and Development since December 2001. From 1998 to 2001, Mr. Warfield served as Executive Vice President of Products and Services and Chief Technology Officer at iMiner, a private information mining company. From 1997 to 1998, Mr. Warfield served as Vice President of Research and Development at Rational Software, a provider of software development applications. From 1996 to 1997, Mr. Warfield served as Vice President of Research and Development and Chief Technology Officer at Integrity QA Software, a provider of software development applications. Mr. Warfield holds a B.A. in Computer Science from Rice University.

Daniel P. Welch has served as our Vice President, Worldwide Client Services since September 1998. From May 1993 to July 1998, Mr. Welch served as Vice President of Eastern Area Sales, then Vice President of Worldwide Sales for Brightware, a provider of interactive electronic commerce software. From January 1985 to May 1993, Mr. Welch served as Director of Accell Development, and then as Director of Professional Services for Unify Corporation, a software solutions company. From February 1983 to January 1985, Mr. Welch served as Vice President of Engineering for Pharmacy Accounting Management, a software company. Mr. Welch holds a B.A. in Marketing from Michigan State University.

Michael A. Braun has served as a director of Callidus since February 2000. Mr. Braun has served as the Chief Executive Officer and Managing Member of the Interim CEO Network, an executive recruiting company, since November 2000. Mr. Braun retired from IBM Corporation, an information technology company, in July 2000. From October 1999 to July 2000, Mr. Braun served as General Manager of the Global Small Business Unit at IBM, prior to which time he served as the General Manager of the Consumer Division from August 1998 to October 1999. Mr. Braun was President, Chief Executive Officer and a Director of Blaze Software, a rules-based application software company, from June 1996 to July 1998, and Chairman of the Board of Directors of Blaze Software from July 1998 until December 1999. From 1993 to 1996, he was President and Chief Executive Officer of Kaleida Labs, a multimedia software joint venture between IBM and Apple Computer. Prior to this, Mr. Braun held numerous executive positions at IBM. Mr. Braun received a B.A. in Psychology from the University of Rochester and a M.B.A. from the Simon School at the University of Rochester.

George James has served as a director of Callidus since May 1999. Mr. James currently serves as director of The Sharper Image, a consumer products company, and Pacific States Industries, a private lumber distribution company. From 1985 to 1998, Mr. James served as Senior Vice President and Chief Financial Officer of Levi Strauss & Company, an apparel manufacturer. Prior to joining Levi Strauss & Company, Mr. James was Executive Vice President and Chief Financial Officer, and later Group President, with Crown Zellerbach Corporation, a paper mill company, from 1982 to 1985. His previous experience also includes ten years with Arcata Corporation, a forest product and printing company, as Senior Vice President and Chief Financial Officer, and three years with PepsiCo Leasing Corporation, an equipment leasing company, as Vice President of Finance. Mr. James holds a B.A. in Economics from Harvard College and a M.B.A. from the Stanford Graduate School of Business.

Terry L. Opdendyk has served as a director of Callidus since September 2002 and previously served as a director of Callidus from February to November 1997. Mr. Opdendyk currently serves as chairman of ONSET Venture Services Corporation and is a general partner or managing director of a number of entities that are general partners of various venture capital funds known collectively as ONSET Ventures. Mr. Opdendyk has been with ONSET Ventures since he founded it in 1984. Mr. Opdendyk also serves as a Director of Arcot Systems, an e-business security technology company, Nextance, an enterprise software company, Automated Power Exchange, an energy market services company, and Visus Technology, a software company. Prior to 1984, Mr. Opdendyk served as president of VisiCorp, as an executive with Intel Corporation and as a technical manager with Hewlett Packard Corporation. Mr. Opdendyk holds a B.S. in computer science from Michigan State University and a M.S. in computer science from Stanford University.

R. David Spreng has served as a director of Callidus since February 2003. Mr. Spreng has served as the managing general partner of Crescendo Venture Management since September 1998. Mr. Spreng served as president of IAI Ventures, a venture capital firm, from March 1996 to September 1998. Mr. Spreng is also a Director of CoSine Communications, a global telecommunications equipment supplier. Mr. Spreng holds a B.S. in accounting from the University of Minnesota.

Executive officers are elected by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. Other than the family relationship between Christopher W. Cabrera and Brian E. Cabrera, our Vice President and General Counsel, who are brothers, there are no family relationships among any of our directors, executive officers or key employees.

Our board of directors currently consists of five members. The exact number of directors may change from time to time, solely as determined by resolution adopted by a majority of the entire board of directors. No director may be removed from office by the stockholders of the Company except for cause with the affirmative vote of the holders of not less than a majority of the outstanding shares of common stock. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal. Effective upon the closing of this offering, we will divide the terms of office of the directors into three classes:


	•	Class I, whose term will expire at the annual meeting of stockholders to be held in 2004;

	•	Class II, whose term will expire at the annual meeting of stockholders to be held in 2005; and

	•	Class III, whose term will expire at the annual meeting of stockholders to be held in 2006.

Upon the closing of this offering, Class I shall consist of George James and Reed D. Taussig; Class II shall consist of R. David Spreng and Terry L. Opdendyk; and Class III shall consist of Michael A. Braun. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, to the extent possible, each class will consist of one third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

Our board of directors has elected a nominating and corporate governance committee, an audit committee and a compensation committee. Upon the completion of this offering each of our committees will have the composition and responsibilities described below:

Our nominating and corporate governance committee is comprised of Messrs. Opdendyk and James, both of whom are non-management members of our board of directors. The nominating and corporate governance committee is responsible for, among other things:


	•	Recommending to our board of directors nominees to the board of directors to be proposed for election by the stockholders and individuals to be considered by the board to fill any vacancies on the board of directors that may occur;

	•	developing, evaluating and recommending to our board of directors a set of corporate governance guidelines applicable to our company;

	•	establishing criteria for board and board committee membership, including as to director independence;

	•	overseeing the process for evaluating the performance of our board of directors;


	•	evaluating the current composition, organization and governance of our board of directors and its committees, determining future requirements and making recommendations to our board of directors for approval;

	•	reviewing and recommending director compensation; and

	•	reviewing and evaluating annually our nominating and corporate governance committee’s performance, including the compliance with its charter.

Our audit committee is comprised of Messrs. James, Braun and Spreng, each of whom is a non-management member of our board of directors. Messrs. James, Braun and Spreng are independent directors within the meaning of the independent director and audit committee requirements for quotation on the Nasdaq National Market. Mr. James is a “financial expert” within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002. The audit committee is responsible for, among other things:


	•	The integrity of our financial statements;

	•	the qualifications, independence and performance of our company’s independent auditors;

	•	the performance of our internal audit function; and

	•	our compliance with legal and regulatory requirements;


	•	preparing the audit committee report to be filed with the SEC;

	•	appointing, compensating, retaining, overseeing and terminating (if necessary) our independent accountants;

	•	reviewing with our chief executive officer and chief financial officer internal controls and procedures, including any significant deficiencies in the design or operation of our internal controls, and any allegations of fraud that involve our management or other employees who have a significant role in our internal controls; and

	•	reviewing and assessing annually our audit committee’s performance and the adequacy of its charter.

The members of the audit committee will also act as our Qualified Legal Compliance Committee (QLCC), which is responsible for reviewing any reports made to our QLCC by attorneys representing us or our subsidiaries of a material violation or breach arising under United States federal or state laws.

Our compensation committee is comprised of Messrs. Braun and Spreng, both of whom are non-management members of our board of directors. In accordance with our compensation committee charter, both members of the compensation committee are outside directors as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, and both members are nonemployee directors within the meaning of Rule 16b-3 of the rules promulgated under the Securities Exchange Act of 1934. The compensation committee is responsible for, among other things:


	•	Overseeing our compensation and benefits policies generally;

	•	evaluating the performance of our executives;

	•	overseeing and setting executive compensation;

	•	producing an annual report on executive compensation for inclusion in our annual proxy statement;


	•	approving and reviewing any employment, severance and change of control agreements with our senior executives, as well as any other compensation arrangements; and

	•	reviewing and assessing annually our compensation committee’s performance and the adequacy of its charter.

Each of our directors who is not an officer or employee of Callidus will be paid a quarterly retainer of $5,000 and a fee of $1,000 plus expenses for each meeting of the board of directors attended and an additional fee of $750 plus expenses for each committee meeting attended. We have also established the 2003 Stock Incentive Plan, which provides for an initial policy of automatic option grants to nonemployee directors. Each nonemployee director will receive options to purchase 30,000 shares of our common stock on first becoming a director, which will vest over four years, and will receive an annual grant of an option to purchase 10,000 shares, vested immediately. In addition, the chair of the audit committee will receive an annual option grant to purchase 10,000 shares of our common stock, and the chairs of the compensation and nominating and corporate governance committees will each receive an annual option grant to purchase 5,000 shares of our common stock, which will be vested immediately upon grant.

Prior to this offering, Messrs. Braun, James, Opdendyk and Spreng received stock option grants under our 1997 Stock Option Plan as compensation for their service as board members. See “1997 Stock Option Plan.” Messrs. Braun, James, Opdendyk and Spreng were granted the following options to purchase shares of our common stock on the dates, at the exercise prices, and with the vesting schedules set forth below:


(1)	Twenty-five percent of the shares subject to the option vest twelve months after the vesting commencement date specified in the option agreement and one-forty-eighth of the shares vest each month thereafter.

(2)	One-forty-eighth of the shares subject to the option vest each month after the vesting commencement date specified in the option agreement.

As described in further detail under the heading “— Employment Contracts, Change of Control Arrangements and Severance Agreements,” upon a change of control of Callidus, any options to purchase common stock then held by Messrs. Braun, James, Opdendyk and Spreng will immediately become 100% vested and exercisable.

None of our executive officers or members of our board of directors serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. In 2002, Messrs. Taussig and Swett, our founder and a former member of our board of directors, participated in deliberations of our board of directors concerning executive officer compensation. Messrs. Tidd, our former chief financial officer and current Vice President, Client Services, C. Cabrera, Welch, Warfield and Fior were also present for some of the deliberations of our board of directors concerning executive compensation.

The following table sets forth all compensation awarded, earned or paid for services rendered in all capacities to us during 2002, to our Chief Executive Officer and the five most highly compensated executive officers in 2002 other than the Chief Executive Officer. We refer to these individuals collectively as the “named executive officers.”


(1)	Mr. Fior joined our company and began serving as our Vice President, Finance and Chief Financial Officer on September 16, 2002. The salary and bonus figures shown in the table above are therefore only for the four months of 2002 during which Mr. Fior was employed by us.


(2)	Mr. Tidd served as our Chief Financial Officer until September 15, 2002 and presently serves as our Vice President, Client Services.

The following table sets forth information concerning grants of stock options made to our named executive officers during 2002. We did not grant stock appreciation rights to any of our named executive officers during 2002.

All options granted to our named executive officers in 2002 vest as to one-forty-eighth of the shares subject to the option each month starting on the vesting commencement date specified in the option, with the exception of the option to purchase 150,000 shares of our common stock granted to Mr. Taussig in April 2002, which provides that 100% of the shares subject to the option will become fully vested and exercisable on the seventh anniversary of the date of grant of the option, provided that in the event we complete an initial public offering of our common stock at a minimum valuation of $6.67 per share, 25% of the shares subject to the option will immediately vest and become exercisable upon the occurrence of such event and the remaining shares will vest each month thereafter as to an additional one- thirty-sixth of the shares subject to the option. The percentage of total options granted was based on aggregate grants of options to purchase 1,431,575 shares of our common stock to all of our employees and named executive officers in 2002. In the event of a change of control of Callidus, the officers listed above will be entitled to additional vesting as described in “— Employment Contracts, Change of Control Arrangements and Severance Agreements — Change of Control Arrangements.”

The options were granted to our named executive officers at an exercise price equal to the per share fair value of our common stock on the grant date, as determined by our board of directors. Because there was no public market for our stock prior to this offering, the board determined the fair value of our common stock by considering a number of factors, including, but not limited to, our current financial performance and prospects for future growth and profitability, the status of product releases and product integration and the absence of a resale market for our common stock.

The table above sets forth the hypothetical gains or option spreads that would exist for the options at the end of their respective 10-year terms based on assumed annualized rates of compound stock price appreciation of 5% and 10% from the dates the options were granted until the expiration of the 10-year option term. The disclosure of 5% and 10% assumed rates is required by the rules of the Securities and Exchange Commission and does not represent our estimate or projection of future common stock prices or stock price growth.

None of our named executive officers exercised any stock options in 2002. The following table sets forth certain information regarding the number of shares of common stock subject to exercisable and

Because the value of unexercised in-the-money options is based on a fair value of $0.83 per share and exercise prices of $0.83 per share, or greater, none of unexercised options held by the named executive officers at December 31, 2002 were in-the-money.

Employment Contracts, Change of Control Arrangements and Severance Agreements

From October 1998 through June 2003, we entered into change of control agreements with Messrs. Taussig, C. Cabrera, Welch, Rankin, Warfield, Fior, Tidd, Braun and James and other key employees, providing that in the event that such individual is involuntarily terminated for reasons other than cause at any time during the period commencing 90 days prior to a change of control of Callidus and ending on the first anniversary of the change of control, he shall receive accelerated vesting of 50% of the then unvested shares subject to any stock option agreements he has at such time. Under the terms of the agreement, a change of control is generally defined to include (i) the acquisition by any person of beneficial ownership, directly or indirectly, of our securities representing 50% or more of the total voting power represented by our then outstanding voting securities; (ii) a change in the composition of our board of directors within a rolling two-year period, as a result of which fewer than a majority of the directors are deemed to be incumbent directors, as defined in the agreements; (iii) a merger or consolidation involving Callidus other than a merger or consolidation which would result in our voting securities outstanding immediately prior to such merger or consolidation representing at least 50% of the total voting power of the surviving entity immediately after such merger or consolidation; and (iv) a sale or disposition by us of all or substantially all of our assets.

In September 2003, we entered into or amended change of control agreements with Messrs. Taussig, C. Cabrera, Fior, Rankin, Warfield, Welch, Braun, James, Opdendyk and Spreng. These agreements provide that in the event of a change of control of Callidus (as defined above), any options to purchase common stock then held by such individuals will immediately become 100% vested and exercisable.

In April 2002, we entered into an agreement with Mr. Taussig, in which he was granted an option to purchase 150,000 shares of our common stock at an exercise price of $0.83 per share. The agreement provides that the shares shall become 100% vested on the seventh anniversary of the date of grant, provided that, in the event we complete an initial public offering of our common stock at a minimum valuation of $6.67 per share, 25% of the shares subject to the option will immediately vest and become exercisable upon the occurrence of such event and one-thirty-sixth of the shares subject to the option will vest each month thereafter.

In August 2002, we entered into a severance agreement with Mr. Fior pursuant to which we agreed to pay him six months of his base salary plus benefits in the event he is terminated for reasons other than cause.

In November 2001, we entered into a severance agreement with Mr. Warfield pursuant to which we agreed to pay him six months of his base salary plus benefits in the event he is terminated for reasons other than cause.

In May 2003, we entered into an agreement with Mr. Warfield pursuant to which we granted him an option to purchase 132,000 shares of our common stock at an exercise price of $1.00 per share. The agreement provides that one-forty-eighth of the shares subject to the option vest each month from the date of grant, provided, that in the event we complete an initial public offering of our common stock for a price equal to or greater than $6.67 per share, an additional 25% of the shares subject to the option will immediately vest and become exercisable upon the initial public offering.

We have adopted provisions in our certificate of incorporation that limit the liability of our directors and executive officers for monetary damages for breach of their fiduciary duties to the maximum extent permitted by Delaware law. Under Delaware law, a certificate of incorporation may provide that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors except liability for:


	•	Any breach of their duty of loyalty to our company or our stockholders;

	•	acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;

	•	unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

	•	any transaction from which the director derived an improper personal benefit.

Our certificate of incorporation provides that we must indemnify our directors and officers and may indemnify our other employees and agents to the fullest extent permitted by law. We believe that the indemnification provisions of our certificate of incorporation are necessary to attract and retain qualified persons as directors, officers and key employees. Our certificate of incorporation also permits us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity, regardless of whether Delaware law or our bylaws would otherwise permit indemnification. We maintain directors’ and officers’ liability insurance on behalf of such persons.

We have entered into and expect to continue to enter into, agreements to indemnify our directors, executive officers and other employees as determined by the board of directors. These agreements provide for indemnification for related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these provisions and agreements are necessary to attract and retain qualified persons as our employees, directors and executive officers.

At present we are not aware of any pending litigation or proceeding involving any director, officer, employee or agent of our company in such person’s capacity with our company where indemnification will be required or permitted. We are also not aware of any threatened litigation or proceeding that might result in a claim for indemnification.

Our 1997 Stock Option Plan provides for the award of stock options and stock purchase rights. The plan was initially adopted by our board of directors in January 1997 and initially approved by our stockholders in January 1997. The plan is administered by the board of directors, but the board may delegate the administration of the plan to a committee at any time.

The plan provides for the grant of incentive stock options (ISOs) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, only to our employees and employees of our parent or subsidiary. Nonstatutory stock options (NSOs), and stock purchase rights may be granted to employees, directors and consultants.

Generally, each option granted under the plan is required to expire on or before the tenth anniversary of the date of grant. The exercise price of each ISO is required to be not less than 100% of the fair value of the underlying stock subject to the option on the date of grant and the exercise price of each NSO is required to be not less than 85% of the fair value of the underlying stock subject to the option on the date of grant. These minimum price provisions are increased and other conditions and restrictions apply, with respect to awards granted to persons who own or are deemed to own more than 10% of the total combined voting power of all classes of our stock.

Options granted under the plan generally vest as to twenty-five percent of the shares one year after the date of grant and as to one-forty-eighth of the shares each month thereafter. If an optionee’s service relationship with us ceases for any reason other than disability or death, the optionee may exercise any vested options up to three months from cessation of service (unless the terms of the stock option agreement provide for earlier or later termination). If an optionee’s service relationship with us ceases due to disability or death, the optionee (or his or her beneficiary) may exercise any vested options up to twelve months from cessation of service (unless the terms of the stock option agreement provide for earlier or later termination).

Generally, if we merge with or into another corporation, or sell substantially all of our assets, all outstanding options under the plan shall be assumed or substituted for by any surviving entity or a parent or subsidiary of the surviving entity. If the surviving entity determines not to assume or substitute for such awards, then, the vesting provisions of such stock awards will be accelerated and any unexercised stock awards will be exercisable for a period of fifteen days from the date that our plan administrator gives the optionees notice that such options will not be assumed by the surviving entity or its subsidiary or parent.

The plan terminates ten years after its initial adoption, unless earlier terminated by the board. The board of directors may amend or terminate the plan at any time, subject to stockholder approval where required by applicable law. Any amendment or termination may not impair the rights of holders of outstanding awards without their consent.

We have reserved 6,700,082 shares for issuance under the plan. Following our initial public offering, we will no longer grant options from our 1997 Stock Option Plan and all shares that remain available for future grant under this plan will become available for issuance under our 2003 Stock Incentive Plan, as described below.

Subject to stockholder approval, our 2003 Stock Incentive Plan will become effective on the date of this prospectus. The plan will be administered by the board of directors or by a committee appointed by the board.

Under the plan, the board of directors may grant stock options or other types of stock-based awards, such as restricted stock, restricted stock units, stock bonus awards or stock appreciation rights. Incentive stock options may be granted to our employees. Nonstatutory stock options and other stock-based awards may be granted to employees, consultants or outside directors.

We expect that options granted under the plan to optionees other than outside directors will generally vest as to twenty-five percent of the shares one year after the date of grant and as to one-forty-eighth of the shares each month thereafter. If an optionee’s service relationship with us ceases for any reason other than disability or death, the optionee may exercise any vested options up to 90 days after cessation of service (unless the terms of the stock option agreement provide for earlier or later termination). If an optionee’s service relationship with us ceases due to disability or death, the optionee (or his or her beneficiary) may exercise any vested options up to twelve months from cessation of service (unless the terms of the stock option agreement provide for earlier or later termination).

The plan provides for nondiscretionary, automatic grants to outside directors of nonstatutory stock options. An outside director will be granted automatically an initial nonstatutory option to purchase 30,000 shares upon first becoming a member of our board of directors. The initial option vests and becomes exercisable over four years, with the first 25% of the shares subject to the initial option vesting on the first anniversary of the date of grant date and the remainder vesting monthly thereafter. Immediately after each of our regularly scheduled annual meeting of stockholders, each outside director will be automatically granted a nonstatutory option to purchase 10,000 shares of our common stock, the chair of the audit committee will be automatically granted a nonstatutory option to purchase 10,000 shares of our common stock and the chairs of the compensation and nominating and corporate governance committees will each be automatically granted nonstatutory options to purchase 5,000 shares of our common stock. Each annual option will be fully vested and exercisable as of the date of grant. The options granted to outside directors will have a per share exercise price equal to 100% of the fair market value of the underlying shares on the date of grant.

We have reserved 2,000,000 shares of common stock for issuance under the plan. On July 1 of each year beginning July 1, 2004 the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to the lesser of (i) 5% of our outstanding shares, (ii) 2,800,000 shares or (iii) a lesser number of shares approved by the board. In addition, all shares available for issuance under the 1997 Stock Option Plan that available for future grant upon our initial public offering will cease to become issuable under our 1997 Stock Option Plan and will instead be available for issuance under our 2003 Stock Incentive Plan. We anticipate that approximately 158,274 shares previously authorized for issuance under our 1997 Stock Option Plan will become available for issuance under our 2003 Stock Incentive Plan, based on the number of shares available for future grant on June 30, 2003.

Subject to stockholder approval, our 2003 Employee Stock Purchase Plan will become effective on the date of this prospectus. The purchase plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986. The purchase plan is designed to enable eligible employees to purchase shares of our common stock at a discount on a periodic basis through payroll deductions.

We have initially reserved 1,200,000 shares of our common stock for issuance under our purchase plan. The number of shares reserved for issuance under the plan will increase automatically on July 1 of

Our employees generally will be eligible to participate in this plan if they are employed by us or by a designated subsidiary. Our employees are not eligible to participate in the purchase plan if they hold more than 5% of our stock or would become holders of more than 5% of our stock as a result of their participation in the plan. Under the purchase plan, eligible employees may acquire shares of our common stock through payroll deductions. Our eligible employees may select a rate of payroll deduction between one and fifteen percent of their cash compensation. An employee’s participation in this plan will end automatically upon termination of employment for any reason.

Except for the first offering period, each offering period will be for twelve months and will consist of consecutive six-month purchase periods. The first offering period is expected to begin on the date of this prospectus and end on or about February 15, 2005. We expect that the first purchase period will be more than six months long. After that, the offering periods will begin on each February 16 and August 16 and last for twelve months with six-month purchase periods. The purchase price for shares of our common stock purchased under the purchase plan at the end of each purchase period will be 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of the applicable purchase period. Our board will have the authority to change the starting date of any offering period, the purchase date of a purchase period and the duration of any offering period or purchase period.

In 1999, we established a 401(k) tax deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation to their 401(k) plan (presently from 1% up to the maximum allowed under IRS rules). While we may make matching contributions to our employees accounts under the plan, to date we have not made any such matching contributions.

From September 2000 through December 2000, we issued and sold approximately $8.0 million aggregate principal amount of subordinated convertible notes bearing simple interest at the prevailing prime rate plus 1.00% to four of our significant stockholders. All of the notes were converted into shares of our Series F Preferred Stock on March 13, 2001, as described below. In connection with the sale of the notes, we also issued to the stockholders who purchased the notes, warrants to purchase 340,187 shares of our common stock at an exercise price of $0.83 per share at the time the notes were converted into Series F Preferred Stock. The following table sets forth the names of the stockholders that purchased the notes, the corresponding aggregate principal amount of the notes that each such stockholder acquired, the number of shares of common stock to be issued immediately following completion of this offering upon the automatic net exercise of the warrants issued to such stockholder in connection with the private placement, assuming an initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus, and the value of such shares of common stock at such assumed initial public offering price.


(1)	Crosspoint Venture Partners LS 2000 was the record holder of $2,094,400 aggregate principal amount of the notes, and is the record holder of warrants to purchase 88,527 shares of our common stock.

(2)	The Goldman Sachs Group, Inc. was the record holder of $1,463,400 aggregate principal amount of the notes, and is the record holder of warrants to purchase 61,831 shares of our common stock; Stone Street Fund 1999, L.P. was the record holder of $243,901 aggregate principal amount of the notes, and is the record holder of warrants to purchase 10,305 shares of our common stock, Stone Street Fund 1998, L.P. was the record holder of $187,357 aggregate principal amount of the notes, and is the record holder of warrants to purchase 7,916 shares of our common stock; and Bridge Street Fund 1998, L.P. was the record holder of $56,544 aggregate principal amount of the notes, and is the record holder of warrants to purchase 2,389 shares of our common stock.

(3)	Crescendo World Fund, LLC was the record holder of $419,891 aggregate principal amount of the notes, and is the record holder of warrants to purchase 17,967 shares of our common stock; Eagle Ventures WF, LLC was the record holder of $20,109 aggregate principal amount of the notes, and is the record holder of warrants to purchase 859 shares of our common stock; and Wessel German American Venture Partners Gbr was the record holder of $40,000 aggregate principal amount of the notes, and is the record holder of warrants to purchase 1,711 shares of our common stock.

(4)	ONSET Enterprise Associates II, L.P. was the record holder of $1,737,200 aggregate principal amount of the notes, and is the record holder of warrants to purchase 74,338 shares of our common stock; and ONSET Enterprise Associates III, L.P. was the record holder of $1,737,200 aggregate principal amount of the notes, and is the record holder of warrants to purchase 74,339 shares of our common stock.

Between March 2001 and January 2002, we issued and sold 10,213,815 shares of our Series F Preferred Stock, which are convertible into 6,128,280 shares of our common stock, at a purchase price of $3.92 per

share of Series F Preferred Stock, to five of our significant stockholders and issued warrants to acquire 510,203 shares of our Series F Preferred Stock, which are convertible into 306,121 shares of our common stock, at an exercise price of $3.92 per share of Series F Preferred Stock, to one of our significant stockholders. The following table sets forth the names of the stockholders that invested in the financing, the corresponding number of shares of common stock to be issued upon conversion of the Series F Preferred Stock and number of shares of common stock issuable upon exercise of the warrants to acquire shares of our Series F Preferred Stock sold to such stockholders, assuming the conversion of our Series F Preferred Stock upon the completion of this offering, and the aggregate value of such shares at an estimated initial public offering price of $ per share, the midpoint of the range on the cover of this prospectus:


(1)	Crosspoint Venture Partners LS 2000 will be the record holder of 3,061,224 shares of our common stock issuable upon conversion of our Series F Preferred Stock.

(2)	The Goldman Sachs Group, Inc. will be the record holder of 232,664 shares of our common stock issuable upon conversion of our Series F Preferred Stock; Stone Street Fund 1999, L.P. will be the record holder of 38,777 shares of our common stock issuable upon conversion of our Series F Preferred Stock; Stone Street Fund 1998, L.P. will be the record holder of 29,787 shares of our common stock issuable upon conversion of our Series F Preferred Stock; and Bridge Street Fund 1998, L.P. will be the record holder of 8,989 shares of our common stock issuable upon conversion of our Series F Preferred Stock.

(3)	Crescendo World Fund, LLC will be the record holder of 650,117 shares of our common stock issuable upon conversion of our Series F Preferred Stock; Eagle Ventures WF, LLC will be the record holder of 16,839 shares of our common stock issuable upon conversion of our Series F Preferred Stock; and Wessel German American Venture Partners Gbr will be the record holder of 6,365 shares of our common stock issuable upon conversion of our Series F Preferred Stock.

(4)	ONSET Enterprise Associates II, L.P. will be the record holder of 276,454 shares of our common stock issuable upon conversion of our Series F Preferred Stock; and ONSET Enterprise Associates III, L.P. will be the record holder of 276,453 shares of our common stock issuable upon conversion of our Series F Preferred Stock.

(5)	Chancellor V, L.P. will be the record holder of 600,306 shares of our common stock issuable upon conversion of our Series F Preferred Stock and warrants to purchase an additional 120,061 shares of our common stock issuable upon conversion of our Series F Preferred Stock; Chancellor V-A, L.P will be the record holder of 281,326 shares of our common stock issuable upon conversion of our Series F Preferred Stock and warrants to purchase an additional 56,265 shares of our Series F Preferred Stock; Euromedia Venture Fund will be the record holder of 555,153 shares of our common stock issuable upon conversion of our Series F Preferred Stock and warrants to purchase an additional 111,030 shares of our common stock issuable upon conversion of our Series F Preferred Stock; and Citiventure 2000, L.P. will be the record holder of 93,826 shares of our common stock issuable upon conversion of our Series F Preferred Stock and warrants to purchase an additional 18,765 shares of our common stock issuable upon conversion of our Series F Preferred Stock.

On November 15, 2002, we issued and sold $1.9 million aggregate principal amount of subordinated convertible notes bearing simple interest at the prevailing prime rate plus 1.00% to four of our significant stockholders. Upon completion of the Series G Preferred Stock financing in December 2002, $1.0 million of principal and accrued interest thereon was repaid and the remaining subordinated convertible notes and accrued interest were converted into shares of Series G Preferred Stock.

The following table sets forth the names of the stockholders that purchased the notes and the corresponding aggregate principal amount of the notes that each such stockholder acquired:


(1)	Crosspoint Venture Partners 1997, L.P. was the record holder of $1,000,000 aggregate principal amount of the notes.

(2)	Euromedia Venture Fund was the record holder of $181,350 aggregate principal amount of the notes; Citiventure 2000, L.P. was the record holder of $30,650 aggregate principal amount of the notes; Chancellor V, L.P. was the record holder of $196,100 aggregate principal amount of the notes; and Chancellor V-A, L.P. was the record holder of $91,900 aggregate principal amount of the notes.

(3)	Crescendo World Fund, LLC was the record holder of $209,946 aggregate principal amount of the notes and Eagle Ventures WF, LLC was the record holder of $10,054 aggregate principal amount of the notes.

(4)	ONSET Enterprise Associates III, L.P. was the record holder of $180,000 aggregate principal amount of the notes.

On December 24, 2002, we issued and sold 8,000,000 shares of our Series G Preferred Stock, which are convertible into 4,799,996 shares of our common stock, at a purchase price of $1.00 per share of Series G Preferred Stock to four of our significant stockholders. As noted above, a portion of the 8,000,000 shares issued in the Series G Preferred Stock financing was issued upon conversion of the outstanding principal and interest accrued to date on the subordinated convertible notes issued and sold in November of 2002. The remainder of the consideration for the Series G Preferred Stock was paid to us in cash on December 24, 2002. In March 2003, we sold an additional 300,000 shares of our Series G Preferred Stock, which are convertible into 180,000 shares of our common stock, at a purchase price of $1.00 per share of Series G Preferred Stock to four of our executive officers. The following table sets forth the names of the investors, the corresponding number of shares of common stock to be issued upon conversion of the Series G Preferred Stock purchased in the financings assuming completion of this


(1)	Crosspoint Venture Partners 2000 Q, L.P. will be the record holder of 2,119,270 shares of common stock issuable upon conversion of our Series G Preferred Stock and Crosspoint Venture Partners 2000, L.P. will be the record holder of 242,483 shares of common stock issuable upon conversion of our Series G Preferred Stock.

(2)	Chancellor V, L.P. will be the record holder of 386,805 shares of common stock issuable upon conversion of our Series G Preferred Stock; Chancellor V-A, L.P. will be the record holder of 181,272 shares of common stock issuable upon conversion of our Series G Preferred Stock; Euromedia Venture Fund will be the record holder of 357,711 shares of common stock issuable upon conversion of our Series G Preferred Stock; and Citiventure 2000, L.P. will be the record holder of 60,457 shares of common stock issuable upon conversion of our Series G Preferred Stock.

(3)	Crescendo World Fund, LLC will be the record holder of 698,547 shares of common stock issuable upon conversion of our Series G Preferred Stock and Eagle Ventures WF, LLC will be the record holder of 33,452 shares of common stock issuable upon conversion of our Series G Preferred Stock.

(4)	ONSET Standby Fund, L.P. will be the record holder of 480,000 shares of common stock issuable upon conversion of our Series G Preferred Stock, GS PEP I ONSET Standby Fund, L.P. will be the record holder of 162,142 shares of common stock issuable upon conversion of our Series G Preferred Stock, and GS PEP I Offshore ONSET Standby Fund, L.P. will be the record holder of 77,857 shares of Series G Preferred Stock.

In January 1998, Mr. Taussig, our President, Chief Executive Officer and Chairman of the Board of Directors, purchased 289,200 shares of our common stock at an exercise price of $0.17 per share pursuant to an exercise of stock options for restricted stock. In partial payment of the purchase price, Mr. Taussig executed a full recourse secured note in favor of Callidus in the principal amount of $47,718, bearing interest at 6.13% per annum, compounded annually. As of June 30, 2003, the aggregate principal and interest outstanding on the loan was approximately $66,000. The loan is due and payable, together with interest accrued to date, on January 7, 2008.

In December 1998, Mr. Welch, our Vice President, Worldwide Client Services, purchased 45,000 shares of our common stock at an exercise price of $0.83 per share pursuant to an exercise of stock options for restricted stock. In payment of the purchase price, Mr. Welch executed a full recourse secured note in favor of Callidus in the principal amount of $37,500, bearing interest at 4.52% per annum, compounded annually. As of June 30, 2003, the aggregate principal and interest outstanding on the loan

In December 1998, Mr. Tidd, our Vice President, Client Services, purchased 60,000 shares of our common stock at an exercise price of $0.83 per share pursuant to an exercise of stock options for restricted stock. In payment of the purchase price, Mr. Tidd executed a full recourse secured note in favor of Callidus in the principal amount of $50,000, bearing interest at 4.52% per annum, compounded annually. As of June 30, 2003, the aggregate principal and interest outstanding on the loan was approximately $61,000. The loan is due and payable, together with interest accrued to date on December 31, 2003.

The following table sets forth information known to us with respect to the beneficial ownership of our common stock as of June 30, 2003 and after the sale of shares of common stock by us in this offering, by the following:


	•	each person known by us to own beneficially more than 5% of our common stock;

	•	each of the directors and named executive officers individually; and

	•	all directors and executive officers as a group.

Beneficial ownership is determined in accordance with SEC rules, which generally attribute beneficial ownership of securities to each person who possesses, either solely or shared with others, the power to vote or dispose of those securities. These rules also treat as outstanding all shares of capital stock that a person would receive upon exercise of stock options or warrants held by that person that are immediately exercisable or exercisable within 60 days of the determination date, which in the case of the following table is June 30, 2003. Shares issuable pursuant to stock options and warrants exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person. The information presented in this table assumes the conversion of our preferred stock to common stock upon the consummation of this offering and the number of shares of common stock outstanding after this offering includes shares of common stock being offered for sale by us in this offering. The percentage of beneficial ownership for the following table is based on 17,420,414 shares of common stock outstanding as of June 30, 2003, and shares of common stock outstanding after the completion of this offering, assuming no exercise of the underwriters’ over-allotment option. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.


	(1)	Includes 88,527 shares of common stock that may be acquired upon exercise of common stock warrants exercisable within 60 days after June 30, 2003. The affiliates of Crosspoint Venture Partners are Crosspoint Venture Partners 1997, L.P., Crosspoint Venture Partners LS 2000, Crosspoint Venture Partners 2000 Q, L.P. and Crosspoint Venture Partners 2000, L.P.

	(2)	Includes 148,677 shares of common stock that may be acquired upon exercise of common stock warrants exercisable within 60 days after June 30, 2003. Also includes 3,750 shares that may be acquired from Robert Gillette, a former employee, upon exercise of a common stock option on or before October 14, 2004. The affiliates of ONSET Ventures are ONSET Venture Services Corporation, ONSET Enterprise Associates II, L.P., ONSET Enterprise Associates III, L.P., ONSET Standby Fund, L.P., GS PEP I ONSET Standby Fund, L.P., and GS PEP I Offshore ONSET Standby Fund, L.P. Terry L. Opdendyk, in his capacity as a general partner of ONSET Ventures, may be deemed to have shared voting or dispositive power over these shares. Mr. Opdendyk disclaims this beneficial ownership, except to the extent of his pecuniary interest therein.

	(3)	Includes 306,121 shares of common stock that may be acquired upon exercise of convertible warrants exercisable within 60 days after June 30, 2003. The affiliates of INVESCO Private Capital are Chancellor V, LP, Chancellor V-A, LP, Citiventure 2000 LP and Euromedia Venture Fund.

	(4)	Includes 20,537 shares of common stock that may be acquired upon exercise of common stock warrants exercisable within 60 days after June 30, 2003. The affiliates of Crescendo Ventures are Crescendo World Fund, LLC, Eagle Ventures WF, LLC and Wessel German American Venture Partners Gbr. R. David Spreng, in his capacity as a managing general partner of Crescendo Ventures may be deemed to have shared voting or dispositive power over these shares. Mr. Spreng disclaims this beneficial ownership, except to the extent of his pecuniary interest therein.

	(5)	Includes 82,441 shares of common stock that may be acquired upon exercise of common stock warrants exercisable within 60 days after June 30, 2003. The affiliates of The Goldman Sachs Group, Inc. are Stone Street Fund 1998, L.P., Bridge Street Fund 1998, L.P., and Stone Street Fund 1999, L.P.

	(6)	Includes 365,799 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003 and excludes shares that will vest upon the consummation of this offering. Includes 3,600 shares of common stock beneficially owned by Kathryn E. Taussig, 3,600 shares of common stock beneficially owned by Madeline G. Taussig, and


		3,600 shares of common stock beneficially owned by Olivia J. Taussig, to which Mr. Taussig may be deemed in his capacity as their father to have shared voting or dispositive power.

	(7)	Includes 147,197 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003.

	(8)	Includes 172,500 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003.

	(9)	Includes 112,300 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003.


(10)	Includes 397,500 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003 and excludes shares that will vest upon the consummation of this offering.

(11)	Includes 132,300 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003.

(12)	Includes 47,300 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003.

(13)	Includes 44,525 shares of common stock that may be acquired upon the exercise of stock options exercisable within 60 days after June 30, 2003.

(14)	Represents 2,983,169 shares of common stock beneficially owned by affiliates of ONSET Ventures, including 148,677 shares that may be acquired by affiliates of ONSET Ventures upon the exercise of common stock warrants within 60 days after June 30, 2003 and 3,750 shares that may be acquired by affiliates of ONSET Ventures from Robert Gillette, a former employee, upon exercise of a common stock option on or before October 14, 2004 of which Mr. Opdendyk may be deemed in his capacity as a founder and general partner of ONSET Ventures, to have shared voting or dispositive power. Mr. Opdendyk disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein.

(15)	Represents 2,350,128 shares of common stock beneficially owned by affiliates of Crescendo Ventures, including 20,537 shares that may be acquired upon the exercise of common stock warrants within 60 days after June 30, 2003, of which Mr. Spreng may be deemed, in his capacity as a managing general partner of Crescendo Ventures, to have shared voting or dispositive power. Mr. Spreng disclaims beneficial ownership of these shares, except to the extent of his pecuniary interest therein.

(16)	Includes shares issuable upon exercise of options and warrants as described in footnotes (6)-(15) above as well as an immediately exercisable option to acquire 180,000 shares of our common stock held by Mr. Rankin, our Senior Vice President, Worldwide Marketing.

Subject to stockholder approval, we intend to amend our certificate of incorporation and bylaws. These amendments will be effective prior to closing of this offering. The following description of capital stock assumes the effectiveness of these amendments except as otherwise noted.

Upon the closing of this offering, we will be authorized to issue 100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value.

As of June 30, 2003, there were 1,488,421 shares of common stock outstanding which were held of record by approximately 120 stockholders. There will be shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options, after giving effect to the sale of the shares of common stock offered hereby.

The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any 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. See “Dividend Policy.” In the event of liquidation, dissolution or winding up of Callidus, 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 non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable.

Our board of directors has the authority, without action by our stockholders, to designate and issue preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, any or all of which may be greater than the rights of the common stock, 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. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of the preferred stock. However, these effects might include:


	•	restricting dividends on the common stock;

	•	diluting the voting power of the common stock;

	•	impairing the liquidation rights of the common stock; and

	•	delaying or preventing a change in control of our company without further action by the stockholders.

Immediately after this offering there will be no shares of preferred stock outstanding. We have no present plans to issue any shares of preferred stock.

At June 30, 2003, assuming the conversion of our preferred stock upon the consummation of this offering, warrants to purchase an aggregate of 843,197 shares of our common stock were outstanding. These warrants generally expire five to ten years from the date of issue and have a weighted average exercise price of $3.63 per share.

Certain provisions of Delaware law and our certificate of incorporation and bylaws could make the acquisition of our company through a tender offer, a proxy contest or other means more difficult and could make the removal of incumbent officers and directors more difficult. We expect these provisions to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of our company to first negotiate with our board of directors.

After this offering, we will be subject to the “business combination” provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, such provisions will prohibit us from engaging in various “business combination” transactions with any “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:


	•	the transaction is approved by our board of directors prior to the date the interested stockholder obtained such status;

	•	upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (1) shares owned by persons who are directors and also officers and (2) shares owned 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 our board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of our outstanding voting stock which is not owned by the interested stockholder.


	•	any merger or consolidation involving us and the interested stockholder;

	•	any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of our assets;

	•	subject to exceptions, any transaction that results in the issuance or transfer by us of any of our stock to 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 us.


	•	any entity or person beneficially owning 15% or more of our outstanding voting stock; and

	•	any entity or person affiliated with or controlling or controlled by the entity or person.

A Delaware corporation may “opt out” of the anti-takeover law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. We have not “opted out” of the provisions of the anti-takeover law. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

Classified Board of Directors. Our board of directors will be divided into three classes, each serving staggered three-year terms. As a result, only a portion of our board of directors will be elected each year. To implement the classified structure, prior to the closing of this offering, two of the nominees to the board will be appointed to one-year terms, two will be appointed to two-year terms and one will be appointed to a three-year term. Thereafter, directors will be elected for three-year terms at each annual meeting of stockholders. Directors may be removed only for cause and with the approval of the holders of

Stockholder Meetings. Under our certificate of incorporation, only the board of directors, the chairman of the board, the president or the secretary may call special meetings of stockholders.

Requirements for Advance Notification of Stockholder Nominations and Proposals. Our bylaws contain advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board.

No Cumulative Voting. Our certificate of incorporation does not provide for cumulative voting in the election of directors, which, may frustrate the ability of minority stockholders to obtain representation on the board of directors.

No Action By Written Consent. Delaware law provides that stockholders may execute an action by written consent in lieu of a stockholder meeting unless such ability is eliminated by a certificate of incorporation provision. Elimination of written consents of stockholders may lengthen the amount of time and increased expense required to take stockholder actions because actions by written consent are not subject to the minimum notice requirement of a stockholder’s meeting. Without the availability of stockholders’ actions by written consent, a holder controlling a majority of our capital stock would not be able to amend our certificate of incorporation or bylaws or remove directors without holding a stockholder meeting. The stockholder would have to obtain the consent of a majority of the board of directors, the chairman of the board, the president or the secretary to call a stockholders’ meeting and satisfy the notice periods determined by the board of directors.

Preferred Stock. We have undesignated preferred stock that may be issued by the board of directors at any time, which may have the effect of delaying or preventing a change of control of our company.

Our certificate of incorporation provides that the vote of the holders of at least two-thirds of the outstanding shares entitled to vote at the election of directors, voting together as a single class, is required to amend the following provisions of our certificate of incorporation:


	•	Article 6, which relates to removal of directors and vacancies on the board of directors;

	•	Article 7, which relates to corporate governance, including provisions relating to stockholder action by written consent and special meetings of stockholders;

	•	Article 10, which relates to the limitation of liability and indemnification of directors and officers;

	•	Article 11, which relates to amendment of our bylaws; and

	•	Article 12, which relates to amendment of the preceding provisions of the certificate of incorporation.

Our bylaws and our certificate of incorporation provide that amendment of any provision of our bylaws requires the affirmative vote of at least two-thirds of the outstanding shares entitled to vote at the election of directors, voting together as a single class.

Application has been made to have our common stock approved for quotation on the Nasdaq National Market under the symbol “CALD”.

The Transfer Agent and Registrar for our common stock is American Stock Transfer and Trust Company.

Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.

Upon completion of this offering, we will have shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option, and no exercise of any options or warrants after June 30, 2003. Of these shares, shares, or shares if the underwriters exercise their over-allotment option in full, sold in this offering will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by one of our existing “affiliates,” as that term is defined in Rule 144 under the Securities Act. The remaining shares of common stock existing are “restricted securities” as defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 of the Securities Act. As a result of the contractual lock-up periods described below and the provisions of Rules 144 and 701, these shares will be available for sale in the public market as follows:

In general, under Rule 144 as currently in effect, beginning 90 days after this offering, a person, or persons whose shares are aggregated, who owns shares that were purchased from us or any affiliate at least one year previous to such date, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of our then-outstanding shares of common stock, or approximately shares immediately after this offering, or the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice of the sale on Form 144. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market price for our common stock, the personal circumstances of the stockholder and other factors.

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who owns shares within the definition of “restricted securities” under Rule 144 that were purchased from us or any affiliate at least two years previous to such date, would be entitled to sell shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements described above.

In general, any of our employees, directors, officers, consultants or advisors who purchased shares from us before the effective date of this offering acquired the shares in reliance on the exemption from registration provided by Rule 701.

Securities issued in reliance on Rule 701 are restricted securities but, subject to the contractual restrictions described below, beginning 90 days after the date of this prospectus, may be sold by persons other than “affiliates,” as defined in Rule 144, subject only to the manner of sale provisions of Rule 144

Following this offering, the holders of 17,420,487 shares of our outstanding common stock and the holders of warrants to purchase 843,205 shares of our common stock will, under some circumstances, have the right to require us to register their shares for future sales. These registration rights are generally subject to conditions and limitations, which include the right of the underwriters of an offering to limit the number of shares included in the registration under some circumstances.

Demand Registration Rights. Prior to the earlier of 180 days after the closing of this offering or December 31, 2004, the holders of outstanding shares with registration rights have the right to demand that we file one registration statement if such holders making the request hold, in the aggregate, at least 50% of the registrable securities. We are obligated to register their shares only if the securities to be registered have an anticipated public offering price of $30,000,000 or would include at least 20% of the registrable securities. If we are eligible to file a registration statement on Form S-3, the holders of the shares having registration rights have the right to demand on one occasion in any 12 month period that we file a registration statement on Form S-3, so long as the holders making the request hold, in the aggregate, at least 25% of the registrable shares and the aggregate amount of securities to be sold under the registration statement on Form S-3 exceeds $1,500,000.

Piggyback Registration Rights. If we register any securities for public sale, stockholders with registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to an amount no less than 33 1/3% of all shares to be included in such offering.

Expenses of Registration. We will pay all expenses relating to any demand or piggyback registration other than underwriting discounts and commissions. However, if a request for registration is withdrawn by the holders of a majority of the shares having registration rights after we have begun the registration process, the stockholders having initiated the registration shall be deemed to have forfeited certain of their registration rights, unless such holders agree to reimburse us for our expenses to date in connection with the incomplete registration.

Expiration of Registration Rights. The registration rights described above will expire five years after this offering is completed. The registration rights will terminate earlier for a particular stockholder if that holder, following this offering, holds less than one percent of our outstanding common stock or such holder can resell all of its securities in a three-month period under Rule 144 of the Securities Act.

Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates.

As of June 30, 2003, options to purchase a total of 4,201,026 shares of common stock were outstanding. An additional 158,274 shares of common stock were available for future option grants under our stock plans.

Upon completion of this offering, we intend to file a registration statement under the Securities Act covering all shares of common stock subject to outstanding options or issuable pursuant to our 1997 Stock Option Plan, 2003 Stock Incentive Plan and 2003 Employee Stock Purchase Plan. Subject to Rule 144 volume limitations applicable to affiliates, shares issued after the effective date of the Form S-8 registration statement pursuant to the exercise of stock options or otherwise under these stock plans will be eligible for re-sale in the open market, except to the extent that the shares are subject to vesting restrictions or the contractual restrictions described below.

We, our officers and directors and our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not without the prior written consent of Citigroup, dispose of or hedge any of the shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to limited exceptions. Citigroup in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.

Citigroup Global Markets Inc., Lehman Brothers Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite the underwriter’s name.

The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.

The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $ per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $ per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. The representatives have advised us that the underwriters do not intend sales to discretionary accounts to exceed five percent of the total number of shares of our common stock offered by them.

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares of common stock at the public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter’s initial purchase commitment.

We, our officers and directors and our other stockholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup, dispose of or hedge any of the shares of our common stock or any securities convertible into or exchangeable for our common stock, subject to limited exceptions. Citigroup in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.


	•	it has not offered or sold and, prior to the expiry of a period of six months from the closing date, will not offer or sell any shares included in this offering to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;

	•	it has only communicated and caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any shares included in this offering in circumstances in which section 21(1) of the FSMA does not apply to us;

	•	it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares included in this offering in, from or otherwise involving the United Kingdom; and


	•	the offer in The Netherlands of the shares included in this offering is exclusively limited to persons who trade or invest in securities in the conduct of a profession or business (which include banks, stockbrokers, insurance companies, pension funds, other institutional investors and finance companies and treasury departments of large enterprises).

Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our record of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the initial public offering price or that an active trading market in our common stock will develop and continue after this offering.

We have applied to have our common stock included for quotation on the Nasdaq National Market under the symbol “CALD”.

The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.

In connection with the offering, Citigroup on behalf of the underwriters, may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. “Covered” short sales are sales of shares made in an amount up to the number of shares represented by the underwriters’ over-allotment option. Transactions to close out the covered syndicate short involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. The underwriters may also make “naked” short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Citigroup repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the Nasdaq National Market or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

The underwriters may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business.

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. The representatives will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of common stock by a beneficial owner that is a “non-U.S. holder” and that does not own, and is not deemed to own, more than 5% of our common stock. A “non-U.S. holder” is a person or entity that, for U.S. federal income tax purposes, is a:


	•	non-resident alien individual, other than certain former citizens and residents of the United States subject to tax as expatriates,

	•	foreign corporation or

	•	foreign estate or trust.

A “non-U.S. holder” does not include an individual who is present in the United States for 183 days or more in the taxable year of disposition and is not otherwise a resident of the United States for U.S. federal income tax purposes. Such an individual is urged to consult his or her own tax advisor regarding the U.S. federal income tax consequences of the sale, exchange or other disposition of common stock.

This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to non-U.S. holders in light of their particular circumstances and does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. Prospective holders are urged to consult their tax advisors with respect to the particular tax consequences to them of owning and disposing of common stock, including the consequences under the laws of any state, local or foreign jurisdiction.

As discussed under “Dividend Policy” above, we do not currently expect to pay dividends. In the event that we do pay dividends, dividends paid to a non-U.S. holder of common stock generally will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty. In order to obtain a reduced rate of withholding, a non-U.S. holder will be required to provide an Internal Revenue Service Form W-8BEN certifying its entitlement to benefits under a treaty.

The withholding tax does not apply to dividends paid to a non-U.S. holder who provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. holder were a U.S. resident. A non-U.S. corporation receiving effectively connected dividends may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate).

A non-U.S. holder generally will not be subject to U.S. federal income tax on gain realized on a sale or other disposition of common stock unless:


	•	the gain is effectively connected with a trade or business of the non-U.S. holder in the United States, or

	•	we are or have been a U.S. real property holding corporation, as defined in the Code, at any time within the five-year period preceding the disposition or the non-U.S. holder’s holding period, whichever period is shorter, and our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale or disposition occurs.

We are not, and do not anticipate becoming, a U.S. real property holding corporation.

Information returns will be filed with the Internal Revenue Service in connection with payments of dividends and the proceeds from a sale or other disposition of common stock. You may be required to comply with certification procedures to establish that you are not a U.S. person in order to avoid information reporting and backup withholding tax requirements. The certification procedures required to claim a reduced rate of withholding under a treaty will satisfy the certification requirements necessary to avoid the backup withholding tax as well. The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is furnished to the Internal Revenue Service.

An individual non-U.S. holder who is treated as the owner of, or has made certain lifetime transfers of, an interest in the common stock will be required to include the value of the stock in his gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.

The validity of the issuance of the shares of common stock offered hereby will be passed upon for Callidus by Davis Polk & Wardwell, Menlo Park, California. Shearman & Sterling LLP, Menlo Park, California, will pass upon certain legal matters in connection with this offering for the underwriters.

The consolidated balance sheets of Callidus Software Inc. and subsidiaries as of December 31, 2001 and 2002 and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002 have been included in this prospectus in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, upon the authority of said firm as experts in accounting and auditing. KPMG LLP’s audit report refers to a change in accounting for goodwill and other intangible assets effective January 1, 2002.

We have filed with the Securities and Exchange Commission (SEC), a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to us and our common stock, reference is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov, from which interested persons can electronically access the registration statement, including the exhibits and any schedules thereto. The registration statement, including the exhibits and schedules thereto, are also available for reading and copying at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.

As a result of the offering, we will become subject to the full informational requirements of the Securities Exchange Act of 1934, as amended. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We intend to furnish our stockholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. We also maintain an Internet site at http://www.callidussoftware.com.

When the reverse common stock split referred to in Note 1 to the Consolidated Financial Statements has been consummated, we will be in a position to render the following report.

We have audited the accompanying consolidated balance sheets of Callidus Software Inc. and subsidiaries (the Company) as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Callidus Software Inc. and subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

The Company is a provider of Enterprise Incentive Management (EIM) software systems to global companies across multiple industries. Large enterprises use EIM systems to model, administer, analyze and report on pay-for-performance plans, which are designed to align employee, sales and channel tactics with targeted business objectives, and thereby increase productivity, improve profitability and achieve competitive advantage. The Company develops, markets, installs and supports rules-based enterprise application software to solve the complex problems of large scale enterprise incentive compensation systems.

The accompanying consolidated balance sheet as of June 30, 2003, the consolidated statements of operations and cash flows for the six months ended June 30, 2002 and 2003, and the consolidated statement of stockholders’ equity and comprehensive loss for the six months ended June 30, 2003 are unaudited. In the opinion of management, such information includes all adjustments consisting of normal recurring adjustments necessary for a fair presentation of this interim information when read in conjunction with the audited consolidated financial statements and notes hereto. Results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

On September 22, 2003, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission (SEC) to sell shares of its common stock in an initial public offering (IPO). On August 26, 2003, the Board of Directors approved an amendment to the Company’s certificate of incorporation to set the authorized number of shares of common stock at 100 million and the authorized number of shares of preferred stock at 5 million. The amendment is subject to stockholder approval and is expected take effect upon consummation of the IPO.

The unaudited pro forma balance sheet as of June 30, 2003 reflects the assumed automatic conversion of the Series A through G convertible preferred stock into 15,932,037 shares of common stock as though the completion of the IPO had occurred on June 30, 2003. Common stock issued in such IPO and any related estimated net proceeds are excluded from such pro forma information.

On August 26, 2003, the Board of Directors authorized a three-for-five reverse stock split of the Company’s common stock, to be effective prior to the IPO. Accordingly, all share and per share amounts for the Company’s common stock, common stock issuable upon exercise of stock options, exercise or conversion of warrants and conversion of the Company’s convertible preferred stock, and net loss per common share information have been restated to retroactively reflect the reverse stock split.

The consolidated financial statements include the accounts of Callidus Software Inc. and its wholly owned subsidiaries (collectively, the Company), which include wholly-owned subsidiaries in the United

Kingdom, Germany and Australia. All intercompany transactions and balances have been eliminated in consolidation.

The Company’s products and services are concentrated in the software industry, which is characterized by rapid technological advances and changes in customer requirements. A critical success factor is management’s ability to anticipate or to respond quickly and adequately to technological developments in its industry and changes in customer requirements. Any significant delays in the development or introduction of products or services could have a material adverse effect on the Company’s business and operating results.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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.

The functional currencies of the Company’s foreign subsidiaries are their respective local currencies. Accordingly, gains and losses from the translation of the financial statements of the foreign subsidiaries are reported as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in other income, net in the accompanying consolidated statements of operations.

For purposes of the accompanying consolidated statements of cash flows, the Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. Cash equivalents as of December 31, 2001 and 2002 consisted of money market accounts, certificates of deposit, high quality corporate debt obligations or United States government securities.

The fair value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying value due to their short maturity. The carrying value of the Company’s debt approximates fair market value based upon the borrowing rates available to the Company for loans with similar terms. Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Management believes the financial risks associated with these financial instruments are minimal. The Company maintains its cash and cash equivalents with high quality financial institutions.

The Company’s customer base consists of businesses throughout North America, Europe and Asia-Pacific. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. As of December 31, 2001, the Company had two customers, comprising 17% and 11%, respectively, of accounts receivable. As of December 31, 2002, the Company had two customers, comprising 28% and 21%, respectively, of accounts receivable. As of June 30, 2003, the Company had three customers, comprising 17%, 13%, and 10%, respectively, of accounts receivable.

Trade accounts receivable are recorded at the invoiced amount where revenue has been recognized and do not bear interest. The Company offsets gross trade accounts receivable with its allowance for doubtful accounts and sales return reserve. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The sales return reserve is the Company’s best estimate of the probable amount of remediation services it will have to provide for ongoing professional service arrangements. To determine the adequacy of the sales return reserve, the Company analyzes historical experience of actual remediation service claims as well as current information on remediation service requests. Provisions for allowance for doubtful accounts are recorded in general and administrative expenses, while provisions for sales returns are offset against maintenance and service revenues.

Below is a summary of the changes in the Company’s valuation accounts for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2003 (in thousands):

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the lesser of the assets’ estimated useful lives or the related lease term.

The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires long-lived assets, such as property and equipment and purchased intangibles subject to amortization to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated and undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized

equal to the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Long-lived assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell and the Company ceases depreciation (amortization).

Software development costs associated with new products and enhancements to existing products are expensed as incurred until technological feasibility, in the form of a working model, is established, at which time any additional development costs would be capitalized in accordance with SFAS No. 86, Computer Software to Be Sold, Leased, or Otherwise Marketed. To date, the Company’s software development has been completed concurrently with the establishment of technological feasibility and accordingly, no costs have been capitalized.

In July 1999, the Company acquired all of the outstanding stock of The Rob Hand Consulting Group, Inc. (HCG), in exchange for 30,000 shares of the Company’s common stock. HCG was a software consulting company located in Austin, Texas. The acquisition was accounted for as a purchase resulting in total goodwill of $632,000, of which $211,000 was amortized to general and administrative expense in each of 2000 and 2001.

The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Upon adoption of SFAS No. 142, the Company identified a single reporting unit. The Company then compared the implied fair value of the reporting unit with the carrying amount of the reporting unit, both of which were measured as of the date of adoption. The carrying amount of the reporting unit exceeded its implied fair value, resulting in a transitional impairment loss of $123,000 that reduced the carrying value of goodwill to zero, which was recognized as a cumulative effect of a change in accounting principle in the consolidated statements of operations.

Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the estimated useful life of three years and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows. Had goodwill not been amortized in previous periods consistent with SFAS No. 142, the adjusted net loss and adjusted basic and diluted net loss per share, excluding amortization of goodwill, would have been as follows (in thousands, except per share data):

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company has stock-based employee compensation plans, which are described more fully in Notes 5 and 9. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, deferred stock-based compensation expense is based on the difference, if any, on the date of the grant between the fair value of the Company’s stock and the exercise price of related equity awards. Deferred stock-based compensation is amortized and expensed in accordance with the accelerated method provided for in Financial Accounting Standards Board (FASB) Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. As such, the Company recorded deferred stock-based compensation totaling $1.7 million, $-0-, $-0- and $4.5 million during the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2003, respectively. Amortization of deferred stock-based compensation recognized during the years ended December 31, 2000, 2001, and 2002 and the six months ended June 30, 2002 and 2003, totaled $4.3 million, $1.9 million, $424,000, $280,000 and $440,000, respectively. In addition, in the six months ended June 30, 2003, the Company also recorded $1.6 million of stock-based compensation in connection with the sale of Series G Preferred Stock to certain of its employees.

The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands):

Revenues consist of fees for licenses of the Company’s software products, maintenance and support, consulting, and training.

The Company recognizes license revenues using the residual method in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. Under the residual method, revenues are recognized in a multiple-element arrangement in which vendor-specific objective evidence (VSOE) of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. The Company has determined that it has VSOE for its maintenance and support, consulting and training services. For the majority of the Company’s arrangements, fair value of the maintenance portion is based on the price charged when that element is sold separately; however, for a certain class of transactions, fair value is based on stated renewal rates in the arrangement. The fair value of consulting and training services is based on the rates charged for those services when sold independently from a software license. If evidence of fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue from the arrangement is deferred until evidence of fair value can be established, or until the items are delivered. If the only undelivered element is maintenance, then the entire amount of revenue is recognized over the maintenance delivery period.

Revenues from license fees are recognized when an agreement has been signed, delivery of the product has occurred, the fee is fixed or determinable, collectibility is probable, and the arrangement does not require services that are essential to the functionality of the software. If an arrangement provides for unspecified additional software products during a contractual period, the license revenues are recognized ratably over that period. Revenues from maintenance agreements providing technical support and software update and upgrade rights are recognized ratably over the term of the maintenance agreements. Revenues

from services that are not essential to the functionality of the software are recognized as the services are performed.

Where the Company provides services that are deemed essential to the functionality of the software, such as where the payment of the license fees is dependent upon performance of the services, the Company recognizes the software license and service revenues for the entire arrangement using the percentage-of-completion method, as required by AICPA SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Progress toward completion is generally measured by the level of labor costs incurred relative to the total estimated labor costs to complete the project. The Company generally sells its services on a time-and-materials basis. To the extent the Company enters into a fixed-fee services contract, a loss will be recognized any time total estimated project costs exceed total project revenues.

Certain arrangements result in the payment of customer referral fees to third parties that resell the Company’s software products. In these arrangements, license revenues are recorded, net of such referral fees, at the time the software license has been delivered to a third-party reseller and an end-user customer has been identified. To the extent a referral fee is paid to a third party when the Company sells directly to the end-user, the referral fee is recorded as a selling expense.

In situations where the Company purchases products or services from a third party and sells products or services to the same party within a relatively short time period, the Company recognizes license and associated maintenance and service revenues based on the fair value of the software and services exchanged, which is determined based upon VSOE of the fair value for the bundled license and maintenance software product and for the professional services. During 2000, the Company entered into four sets of such concurrent transactions in which the Company and third parties purchased each other’s software products for internal use. In these transactions, the Company received net cash consideration of $604,000. Excluding net cash consideration, revenues recognized from these transactions were $1.2 million, or 6% of total revenues, in 2000 and $402,000, or 2% of total revenues, in 2001. The fair value of products purchased were recorded as property and equipment in the amount of $1.1 million, and are being amortized over their useful lives of three years. The amounts we paid for maintenance and services of $105,000 and $480,000 in 2000 and 2001, respectively, in these transactions were recorded as general and administrative expense as incurred. The Company did not enter into any concurrent transactions in 2001, 2002 or the six months ended June 30, 2003.

Deferred revenues are recorded when cash payments are received from customers in advance of the Company recognizing the associated revenues and when invoices have been issued for maintenance and support arrangements that have contractually commenced but for which cash has not yet been received.

Cost of license revenues consists primarily of third-party royalties. Cost of maintenance and service revenues consists primarily of salaries, benefits, travel and allocated overhead costs related to consulting, training and other professional services personnel, including cost of services provided by third-party consultants engaged by the Company.

The Company expenses advertising costs in the period incurred. Advertising expense was $718,000, $287,000, $200,000, $114,000 and $260,000 for the years ended December 31, 2000, 2001, and 2002 and for the six months ended June 30, 2002 and 2003, respectively.

Basic and diluted net loss per share is calculated by dividing net loss attributable to common stockholders for the period by the weighted-average common shares outstanding during the period, less shares subject to repurchase. Net loss attributable to common stockholders is the same as net loss except in 2001, when the net loss attributable to common stockholders was increased due to an in-substance preferred stock dividend. Basic and diluted net loss per share consists of the following components for the periods presented (in thousands):

Diluted net loss per share does not include the effect of the following antidilutive potential common shares because the Company was in a net loss position for all periods presented (in thousands):

The weighted-average exercise price of stock options excluded as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003 was $5.85, $2.11, $1.53, $1.78 and $3.62, respectively. The weighted-average exercise price of warrants excluded as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003 was $15.08, $4.08, $3.75, $4.08 and $7.26, respectively.

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share is as follows (in thousands, except per share amounts):

Pro forma basic and diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period (excluding shares subject to repurchase) plus the weighted average number of shares of common stock resulting from the assumed conversion of outstanding shares of convertible preferred stock upon the closing of the planned IPO as if the shares had been converted immediately upon their issuance.

Comprehensive loss is the total of net loss and foreign currency translation adjustments. Foreign currency translation adjustment amounts are excluded from net loss and are reported in accumulated other comprehensive loss in the accompanying consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. As used in SFAS No. 143, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 as of January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other provisions, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. Accordingly, gains or losses from extinguishment of debt are not reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of APB 30. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 as of January 1, 2003. The adoption of SFAS No. 145 did not have a material impact on consolidated financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Previous guidance, provided under Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring), required an exit cost liability be recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by a company after December 31, 2002. The Company adopted SFAS No. 146 as of January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on consolidated financial position or results of operations.

In November 2002, the FASB issued FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The adoption of FIN 45 did not have a material impact on the Company’s consolidated financial position or results of operations.

decide whether to consolidate that entity. This interpretation applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. As of June 30, 2003, the Company did not have any investments in variable interest entities.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 will not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 will not have a material impact on the Company’s consolidated financial position or results of operations.

Certain prior period amounts have been reclassified to conform to the current period presentation.

In 2001, the Company had a credit facility in the form of a revolving line of credit and an equipment finance line, which was collateralized by substantially all of the Company’s assets. The revolving line of credit bore interest at the lender’s prime rate plus 2.0% but not less than 8.0% per annum, payable monthly. The amount outstanding under the revolving line of credit was $1.9 million as of December 31, 2001 and was fully repaid upon expiration in 2002.

During 2002, the Company entered into a master loan and security agreement (Master Agreement) including a revolving line of credit and two term loans. The Master Agreement is collateralized by substantially all of the Company’s assets. The amount available under the revolving line of credit is the lesser of $7.0 million or 80% of eligible accounts receivable as determined by the lender. The credit line bears interest at the higher of lender’s prime rate plus 2.00% or 6.25% per annum (6.50% and 6.25% as of December 31, 2002 and June 30, 2003, respectively), payable monthly and expires in March 2004. The amount outstanding under the Master Agreement revolving line of credit was $2.9 million and $5.5 million as of December 31, 2002 and June 30, 2003, respectively.

As discussed in Note 5, in connection with the signing of the credit facility and the Master Agreement, the Company issued fully vested common stock warrants to the lenders. The fair value of the warrants is included on the accompanying consolidated balance sheets as a discount to bank line of credit. The debt discount is being amortized over the terms of the respective agreements and the amortization is classified as interest expense on the accompanying consolidated statements of operations. As a result of the additional interest expense associated with the debt issuance cost amortization, the effective interest rates on the revolving line of credit under the Master Agreement for the year ended December 31, 2002 and the six months ended June 30, 2003 were 12.9% and 9.1%, respectively. As of December 31, 2001 and 2002 and June 30, 2003, the unamortized debt issuance cost was $48,000, $122,000, and $95,000, respectively.

In September 2000, the Company entered into an equipment loan and security agreement with a lender for a credit facility collateralized by the equipment being financed. Amounts were borrowed in the form of individual term loans, payable in 36 monthly installments bearing interest at a weighted-average rate of 12.64% as of December 31, 2002. Amounts outstanding under the agreement were $785,000, $494,000 and $308,000 as of December 31, 2001 and 2002 and June 30, 2003, respectively. A balloon payment equal to 10% of the loan principal is due at the end of each loan term.

As of December 31, 2001, the Company had $1.7 million outstanding under a loan agreement, which bore interest at a rate of 14.17% and was fully repaid in 2002.

Under the Master Agreement discussed in the Bank Line of Credit section, the Company entered into two term loans. The first term loan was for $1.5 million, bears interest at the higher of lender’s prime rate plus 2.25% or 6.50% per annum (6.75% and 6.50% as of December 31, 2002 and June 30, 2003, respectively), and is payable in 36 monthly installments ending in September 2005. The amount outstanding under the first term loan was $1.4 million and $1.1 million as of December 31, 2002 and June 30, 2003, respectively. The second term loan allows for borrowings of up to $1.0 million, bears interest at the higher of lender’s prime rate plus 3.50% or 7.75% (7.75% as of June 30, 2003), and is payable in 36 monthly installments ending in June 2006. The amount outstanding under the second term loan was $289,000 as of June 30, 2003. The terms of the Master Agreement provide for the maintenance of a number of financial covenants. The Company was not in compliance with the revenue covenant for the quarter ended December 31, 2002, for which it obtained a waiver. The Company was in compliance with all of the covenants as of June 30, 2003.

The aggregate maturities of long-term debt as of December 31, 2002 are due as follows:

In September and December 2000, the Company issued a total of $8.0 million of subordinated convertible promissory notes (the First Subordinated Convertible Notes) due June 16, 2001, bearing interest at the prime rate plus 1.0% per annum payable annually. The First Subordinated Convertible Notes were unsecured and subordinate in right of payment to any present and future senior indebtedness of the Company. Upon completion of the Series F preferred stock financing in March 2001, the First Subordinated Convertible Notes and accrued interest of $8,232,000 were converted into 2,121,063 shares of Series F preferred stock.

In November 2002, the Company issued a total of $1.9 million of subordinated convertible promissory notes (the Second Subordinated Convertible Notes) due December 31, 2002 bearing interest at the prime rate plus 1.0% per annum payable annually. The Second Subordinated Convertible Notes were unsecured and subordinate in right of payment to any present and future senior indebtedness of the Company. Upon completion of the Series G preferred stock financing in December 2002, $1.0 million of principal and accrued interest was repaid and the remaining Second Subordinated Convertible Notes and accrued interest of $905,000 were converted into 905,048 shares of Series G preferred stock.

Interest expense related to all borrowings was $792,000, $916,000, $582,000, $263,000 and $217,000 in the years ended December 31, 2000, 2001, and 2002, and for the six months ended June 30, 2002 and 2003, respectively.

On or about March 29, 2002, the Company received a copy of a complaint filed by Gordon Food Service in the United States District Court for the Western District of Michigan alleging breach of contract and misrepresentation in connection with software purchased by Gordon Food. On December 9, 2002, the court granted the Company’s motion to transfer venue and ordered that the case be transferred to the San Jose division of the United States District Court for the Northern District of California. Gordon Food has moved the court to file an amended complaint asserting, among other things, breach of contract and misrepresentation.

At December 31, 2002, the Company was a defendant in various lawsuits, including the Gordon Food litigation discussed above. Management and legal counsel for the Company determined that a loss on these lawsuits was both probable and estimable, and accordingly, accrued for the probable loss as of December 31, 2002, related to these litigation matters. In the six months ended June 30, 2003, one of the lawsuits was settled at the amount accrued.

The Company is also involved with certain other litigation matters in the ordinary course of business. In the opinion of management, the claims are without merit and none of the claims will have a material adverse effect on the Company’s business or financial condition.

The Company generally warrants that its products shall perform to its standard documentation. Under the terms of the warranty, should a product not perform as specified in the documentation, the Company will repair or replace the product. Such warranties are accounted for in accordance with SFAS 5, Accounting for Contingencies. To date the Company has not incurred material costs related to warranty obligations.

The Company’s product license agreements include a limited indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are

accounted for in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The indemnification is limited to the amount paid by the customer. To date the Company has not incurred any costs related to such indemnification provisions.

The Company leases its facilities under several noncancelable operating leases, which expire through December 2010, including the new facilities lease agreement entered into in September 2003 (see Note 9). For leases with escalating rent payments, rent expense is amortized on a straight-line basis over the life of the lease. The Company had deferred rent of $146,000, $128,000 and $111,000 as of December 31, 2001 and 2002 and June 30, 2003, respectively.

Future minimum lease payments under the Company’s operating leases as of December 31, 2002 are as follows (in thousands):

In 2000, the Company issued warrants to purchase 5,400 shares of common stock with an exercise price of $11.67 per share in connection with a building lease. These warrants vested immediately and the estimated fair value of $90,000 was recorded in other assets in the accompanying consolidated balance sheets and is being amortized into rent expense over the lease term of five years. As of December 31, 2002, these common stock warrants remained unexercised and outstanding.

Rent expense for the years ended December 31, 2000, 2001, and 2002 and for the six months ended June 30, 2002 and 2003 was $1.8 million, $2.1 million, $2.3 million, $1.1 million and $1.1 million, respectively.

The Company has authorized 31,927,656 shares of convertible preferred stock at a par value of $0.001 per share. The amounts and terms of the Company’s convertible preferred stock are as follows:


*	Adjusted for a 2-for-l common stock split in March 1998, a 1-for-2 reverse common stock split in March 2001 and the 3-for-5 reverse common stock split described in Note 1.

The rights, preferences, and privileges of the convertible preferred stock are as follows:


	•	Each share of the Series A, B, C, D, E, F and G preferred stock is convertible at the option of the holder at any time into such number of fully paid and nonassessable shares of common stock as is determined by dividing the original issue price by the conversion price in effect at the time that the certificate is surrendered for conversion. All shares of Series A, B, C, D, E, F and G preferred stock automatically convert into common stock upon the earlier of an initial public offering of the Company’s common stock resulting in aggregate proceeds of not less than $25.0 million and an offering price of at least $8.33 per share, or the written election of holders of not less than the majority of the then outstanding shares of preferred stock.

	•	Holders of Series A, B, C, D, E, F and G preferred stock are entitled to receive noncumulative annual dividends at the rate of $0.10, $0.25, $0.197, $0.309, $0.60, $0.392, and $0.10 per share, respectively, with certain adjustments for stock splits, stock dividends, recapitalization, and similar events, when and if declared by the board of directors. No dividends have been declared as of December 31, 2001 and 2002 and June 30, 2003.

	•	The liquidation preference for the Series A, B, C, D, E, F and G preferred stock is $1.00, $2.50, $1.97, $3.09, $6.00, $7.84, and $2.00 per share, respectively, plus all declared but unpaid dividends. If the assets are insufficient to make payments in full to all holders of preferred stock, assets will be distributed ratably (i) first, to holders of Series F and Series G preferred stock, until such holders have received the liquidation preference of $7.84 and $2.00 per share, respectively, and (ii) second, among the holders of Series A, B, C, D and E preferred stock in proportion to the full amounts to which they would have otherwise been entitled. Any remaining assets shall be distributed ratably among the holders of the Series A, B, C, D and E preferred stock and common stock on an “as-if converted” basis until such time that aggregate distributions to holders of Series A, B, C, D and E preferred stock (including preferential distributions) equals $5.00, $5.00, $2.50, $3.49, and $6.60 per share, respectively, plus all declared but unpaid dividends. After that time, any remaining assets will be distributed on a pro rata basis to the holders of common stock.


	•	The holders of Series A, B, C, D, E, F and G preferred stock have voting rights on an “as-if converted” basis. Each holder of preferred stock is entitled to the number of votes equal to the number of shares of common stock into which the shares of preferred stock could be converted. All shares of all series of preferred stock and all shares of common stock vote together as a single class, except with respect to certain matters specified in the Company’s Certificate of Incorporation, on which the holders of preferred stock are entitled to a class or series vote.

In March 2003, the Company issued Series G preferred stock to officers and employees of the Company at a discount to the fair value of such stock. Accordingly, a stock compensation charge of $1.6 million was recorded in the three months ended March 31, 2003, and is reflected as stock-based compensation on the accompanying consolidated statements of operations.

The Company has reserved 21,975,354 shares of common stock for issuance under its stock option plan, upon exercise of warrants and upon the conversion of outstanding convertible preferred stock.

As of December 31, 2002 and June 30, 2003, the Company had reserved 5,200,082 shares of common stock under its 1997 Stock Option Plan (the Plan) which provides for the granting of stock options to employees, directors or consultants.

Under the Plan, incentive and nonstatutory options to purchase the Company’s common stock may be granted to employees at prices not lower than the fair value of the stock at the date of grant for incentive stock options and not less than 85% of the fair value for nonstatutory options. These options vest as determined by the board, generally over 4 years at a rate of 25% 12 months after the vesting commencement date and 1/48 th each month thereafter and expire 10 years from the date of grant. In certain instances, holders of options granted under the Plan may exercise their options prior to complete vesting of shares, subject to the Company’s right of repurchase of unvested shares.

As of December 31, 2001 and 2002, 486,450 shares of common stock were outstanding pursuant to the exercise of unvested stock options for cash and full recourse promissory notes. The promissory notes totaled $238,000 with market interest rates and terms of 5 to 10 years. The shares issued vest according to the employees’ normal stock option vesting schedule. The unvested shares are subject to repurchase at the option of the Company at the original purchase price (ranging from $0.17 to $3.17) upon termination of the holder’s employment. A total of 146,250 shares were repurchased during 2001. Approximately $214,000 was recorded as compensation expense in 2001 relating to repurchases of vested shares at a price above the fair value of the Company’s common stock. No shares were repurchased during 2002. The number of shares subject to repurchase at December 31, 2000, 2001, and 2002 and June 30, 2003 was 273,832, 41,311, 1,540 and 234, respectively.

During 2002, the Company granted an option to an executive, outside of the Plan, to purchase 150,000 shares of the Company’s common stock with an exercise price of $0.83 per share. This option vests upon the earlier of (i) 100% on the seventh anniversary of the date of grant or (ii) 25% upon an IPO or sale of the Company with a minimum valuation of $6.67 per share, and 1/36 th each month thereafter.

During 1997, the Company granted options to certain consultants to purchase 30,225 shares of the Company’s common stock with an exercise price of $0.02. The options were fully vested at the date of grant. In 2000, 9,520 shares from these option grants were exercised. The fair value of the options on the date of grant, determined using the Black-Scholes option-pricing model, was not significant. These options were not issued under a specific option plan.

A summary of the status of the Company’s options under the Plan are as follows:

The per share weighted-average fair value of options granted with exercise prices that equal fair value in 2000, 2001, and 2002, was $1.98, $0.10 and $0.08, respectively. In 2000 and for the six months ended June 30, 2003, the per share weighted average fair value of options granted with exercise prices less than fair value was $10.47 and $6.28, respectively. The fair value of each option was estimated using the Black-Scholes option-pricing model (excluding a volatility assumption) with the following weighted average assumptions: no dividend yield; weighted average risk-free interest rate of 6.0%, 4.9%, 3.8% and 2.7% for fiscal 2000, 2001 and 2002 and for the six months ended June 30, 2003, respectively; and an expected life of 2.4, 2.8, 2.8 and 2.8 years for 2000, 2001, 2002 and for the six months ended June 30, 2003, respectively. These calculations are based on a multiple-option valuation approach and forfeitures are recognized as they occur.

As of December 31, 2002, the range of exercise prices and weighted average remaining contractual life of outstanding options were as follows:

As of June 30, 2003, the range of exercise prices and weighted average remaining contractual life of outstanding options were as follows:

In connection with the Master Agreement (see Note 3), the Company issued warrants to purchase up to 260,000 shares of the Company’s Series G preferred stock at an exercise price of $1.00 per share. The warrants are fully exercisable for ten years from the date of issuance. The estimated fair value of the warrants, $236,000, was recorded as a discount to bank line of credit and is being amortized to interest expense over the commitment period. The unamortized amount as of December 31, 2002 and June 30, 2003 was $122,000 and $95,000, respectively.

In connection with the credit facility (see Note 3), the Company issued warrants to purchase up to 10,500 shares of the Company’s common stock at an exercise price of $10.30 per share in February 1999, 2,625 shares of the Company’s common stock at an exercise price of $20.00 per share in May 2000, and 19,132 shares of the Company’s Series F preferred stock at an exercise price of $3.92 per share in September 2001. These warrants are fully exercisable for between five and ten years from the date of issuance. The estimated fair value of the warrants, $74,000, $33,000 and $64,000 in 1999, 2000 and 2001, respectively, were recorded as a discount to bank line of credit and amortized to interest expense over the commitment periods.

In connection with the equipment finance line (see Note 3), the Company issued a warrant to the lender to purchase up to 8,490 shares of the Company’s common stock at an exercise price of $20.00 per share. The warrant is fully exercisable until the later of (a) seven years after the date of grant or (b) three years after the closing of an initial public offering of the Company’s common stock. The estimated fair value of the warrants, $56,000, was recorded as a discount to the current portion of long-term debt and is being amortized to interest expense over the commitment period.

In connection with its Series F preferred stock financing, the Company issued warrants to purchase 340,182 shares of the Company’s common stock at an exercise price of $0.83 per share in 2001 and warrants to purchase 510,203 shares of the Company’s Series F preferred stock at an exercise price of $3.92 per share in 2001. The warrants are fully exercisable for a period of five years from the date of issuance. The estimated fair value of these warrants is recorded in additional paid-in capital.

The 510,203 warrants to purchase Series F preferred stock issued in 2001 represented an in-substance preferred stock dividend amounting to $1.3 million. This dividend resulted in an increase to net loss available to common stockholders and is reflected in Note 1, Net Loss Per Share.

During 2000 and 2001, the Company issued options and warrants to nonemployees and advisors for the purchase of 4,500 and 6,000 shares of common stock at a weighted average exercise price of $16.90 and $0.83, respectively. These options and warrants vest over a period of two to four years and are exercisable 10 years from the date of issuance. The Company accounted for these options and warrants under the fair-value method and as variable awards. Accordingly, the Company recorded an expense at the grant date equal to the fair value of the options on the grant date and adjusted the expense at the end of each period until the vesting date. For the years ended December 31, 2000 and 2001, such adjustments resulted in an expense of $52,000 and a credit of $18,000, respectively.

As of December 31, 2002, all nonemployee options and warrants described above remained unexercised and outstanding.

The Company used the Black-Scholes option-pricing model and the following assumptions in its calculations of the estimated fair value of the equity instruments issued to nonemployees:

Loss before cumulative effect of change in accounting principle included losses from the Company’s foreign subsidiaries of approximately ($2,909,000) for 2000, ($942,000) for 2001 and ($526,000) for 2002.

The provision for income taxes differs from the expected tax benefit amount computed by applying the statutory federal income tax rates to loss before taxes as follows:

Deferred income taxes reflect the net tax effect of temporary timing differences between the carrying amount of assets and liabilities for financial reporting purposes, and the amount used for income tax purposes. Net deferred income tax assets as of December 31, 2001 and 2002 consist of the following (in thousands):

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of the future taxable income during the periods in which those temporary differences become deductible. Based on the level of historical taxable income and projections for future taxable income over the period, which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of such deferred assets. As of December 31, 2001 and 2002, the net deferred tax assets were fully offset by a valuation allowance due to the uncertainty of the Company’s ability to realize such assets. The net changes in the total valuation allowance for the years ended December 31, 2000, 2001 and 2002 was an increase of $7.4 million, $7.5 million, and $7.4 million, respectively.

The Company has net operating loss carryforwards for federal and California income tax purposes of approximately $69.4 million and $28.6 million, respectively, available to reduce future income subject to income taxes. The federal net operating loss carryforwards, if not utilized, will expire over 20 years beginning in 2012. The California net operating loss carryforward, if not utilized, will expire over 12 years beginning in 2006.

The Company also has research credit carryforwards for federal and California income tax purposes of approximately $2.7 million and $1.9 million, respectively, available to reduce future income taxes. The

federal research credit carryforward, if not utilized, will expire over 20 years beginning in 2012. The California research credit carries forward indefinitely.

Federal and California tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code. The Company has not yet determined if an ownership change has occurred. Should an ownership change have previously occurred or were one to occur in the future, the Company’s ability to utilize its net operating loss and tax credit carryforwards may be subject to restriction pursuant to these provisions.

In 1999, the Company established a 401(k) tax-deferred savings plan, whereby eligible employees may contribute a percentage of their eligible compensation (presently from 1% up to the maximum allowed under IRS rules). Company contributions are discretionary. No such Company contributions have been made since the inception of this plan.

The Company has adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the reporting by business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining what information is reported is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision maker is considered to be the Company’s chief executive officer (CEO). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. By this definition, the Company operates in one business segment, which is the development, marketing and sale of enterprise software.

Substantially all of the Company’s long-lived assets are located in the United States.

The Company increased the number of shares of common stock reserved under its 1997 Stock Option Plan from 5,200,082 to 5,800,082 shares in July 2003 and from 5,800,082 to 6,700,082 shares in August 2003.

In July 2003, the Company granted to employees options to purchase 263,025 shares of common stock. In connection with these option grants, deferred stock-based compensation of $2.2 million has been recorded based on the fair value of the common stock on the date of grant.

In August 2003, the Company granted to employees options to purchase 871,800 shares of common stock. In connection with these option grants, deferred stock-based compensation of $6.0 million has been recorded based on the fair value of the common stock on the date of grant.

In July 2003, the Company repaid approximately $5.5 million of debt that was outstanding under a bank line of credit as of June 30, 2003.

In August 2003, the board of directors adopted the 2003 Stock Incentive Plan, subject to approval by the Company’s stockholders. The 2003 Stock Incentive Plan will become effective upon the completion of the IPO. Under the plan, the board of directors may grant stock options or other types of stock-based awards, such as restricted stock, restricted stock units, stock bonus awards or stock appreciation rights. Incentive stock options may be granted to the Company’s employees. Nonstatutory stock options and other stock-based awards may be granted to employees, consultants or nonemployee directors. Upon effectiveness, 2,000,000 shares of common stock will be reserved for issuance under the plan. On July 1 of each year beginning July 1, 2004, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to the lesser of (i) 5% of the Company’s outstanding shares, (ii) 2,800,000 shares or (iii) a lesser number of shares approved by the board.

In August 2003, the board of directors adopted the 2003 Employee Stock Purchase Plan, subject to approval by the Company’s stockholders. The 2003 Employee Stock Purchase Plan will become effective upon the completion of the IPO, and is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The Employee Stock Purchase Plan is designed to enable eligible employees to purchase shares of the Company’s common stock at a discount on a periodic basis through payroll deductions. Upon effectiveness, 1,200,000 shares of common stock will be reserved for issuance under the plan. The number of shares reserved for issuance under the plan will increase automatically on July 1 of each year beginning July 1, 2004 by an amount equal to the lesser of (i) 2% of the Company’s outstanding shares, (ii) 1,200,000 shares or (iii) a lesser number of shares approved by the board. Except for the first offering period, each offering period will be for 12 months and will consist of consecutive six-month purchase periods. The purchase price for shares of common stock purchased under the purchase plan will be 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable offering period or the fair market value of the Company’s common stock on the last day of each purchase period.

In September 2003, the Company amended the lease on its corporate headquarters in San Jose, California to increase the square footage and extend the term for seven years through 2010. As a result of the lease amendment, rent obligations will increase to $1.8 million in 2004, $1.6 million in 2005, $1.4 million in 2006, $1.5 million in 2007, $1.6 million in 2008, $1.6 million in 2009 and $1.0 million in 2010.

The following table sets forth the costs and expenses, other than the underwriting discount, payable by the registrant in connection with the sale of the securities being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.

Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee or agent to the Registrant. The Delaware General Corporation Law provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. Section 10 of the Registrant’s certificate of incorporation provides for indemnification by the Registrant of its directors, officers and employees to the fullest extent permitted by the Delaware General Corporation Law.

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions, or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant’s certificate of incorporation provides for such limitation of liability.

The Registrant’s policy is to enter into indemnification agreements with each of its directors, executive officers and certain of its other key employees that provide the maximum indemnity allowed to directors and executive officers by Section 145 of the Delaware General Corporation Law and the certificate of incorporation, as well as certain additional procedural protections. In addition, the indemnification agreements provide that the Registrant’s directors, executive officers and specified key employees will be indemnified to the fullest possible extent not prohibited by law against all expenses, including attorney’s fees, and settlement amounts paid or incurred by them in any action or proceeding, including any derivative action by or in the right of the Registrant, on account of their services as directors, or executive

officers or employees of the Registrant or as directors or officers of any other company or enterprise when they are serving in these capacities at the request of the Registrant. The Registrant will not be obligated pursuant to the indemnification agreements to indemnify or advance expenses to an indemnified party with respect to proceedings or claims initiated by the indemnified party and not by way of defense, except with respect to proceedings specifically authorized by the Registrant’s board of directors or brought to enforce a right to indemnification under the indemnification agreement, the Registrant’s certificate of incorporation or any statute or law. Under the agreements, the Registrant is not obligated to indemnify the indemnified party (1) for any expenses incurred by the indemnified party with respect to any proceeding instituted by the indemnified party to enforce or interpret the agreement, if a court of competent jurisdiction determines that each of the material assertions made by the indemnified party in any proceeding was not made in good faith or was frivolous; (2) for any amounts paid in settlement of a proceeding unless the Registrant consents to such settlement; (3) with respect to any proceeding brought by the Registrant to enforce or interpret an indemnification agreement if a court determines that each of the material defenses asserted by the indemnitee was made in bad faith or was frivolous; (4) on account of any suit in which judgment is rendered against the indemnified party for an accounting of profits made from the purchase or sale by the indemnified party of securities of the Registrant pursuant to the provisions of §16(b) of the Securities Exchange Act of 1934, and related laws; (5) on account of the indemnified party’s conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct or a knowing violation of the law; (6) on account of any conduct from which the indemnified party derived an improper personal benefit; (7) on account of conduct the indemnified party believed to be contrary to the best interests of the Registrant or its stockholders; (8) on account of conduct that constituted a breach of the indemnified party’s duty of loyalty to the registrant or its stockholders; or (9) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful.

The indemnification provisions in the certificate of incorporation and the indemnification agreements entered into between the Registrant and its directors, executive officers and key employees may be sufficiently broad to permit indemnification of the Registrant’s officers, directors and key employees for liabilities arising under the Securities Act of 1933.

The Registrant maintains standard policies of insurance under which coverage is provided (a) to its directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act, and (b) to the Registrant with respect to payments which may be made by the Registrant to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law.

The proposed form of Underwriting Agreement, which will be filed as Exhibit 1.1 to this Registration Statement, provides for indemnification of directors and officers of the Registrant by the underwriters against certain liabilities.

During the past three years, the Registrant has issued securities in the following transactions, each of which was exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) of the Securities Act, as transactions by an issuer not involving any public offering, or under Rule 701 thereunder. The common stock share numbers summarized below have been adjusted to reflect the three-for-five reverse stock split expected to be effective prior to the effectiveness of this Registration Statement. No underwriters were involved in any of the below-referenced sales of securities.

From September 2000 to December 2000, the Registrant issued and sold an aggregate principal amount of $8,000,002 convertible promissory notes to certain of its stockholders, convertible into shares of its Series F Preferred Stock, and agreed to issue warrants to purchase common stock upon conversion of the notes, based on a specified formula. In March 2001, when the notes were converted into Series F

On March 13, 2001, the Registrant issued and sold an aggregate of 6,667,896 shares of its Series F Preferred Stock (convertible upon the consummation of this offering into 4,000,732 shares of the Registrant’s common stock) to ten accredited investors, all of whom were stockholders of the Registrant, for $26,138,148 pursuant to Section 4(2) of the Securities Act.

On October 26, 2001, the Registrant issued and sold an aggregate of 3,048,471 shares of its Series F Preferred Stock (convertible upon the consummation of this offering into 1,829,080 shares of the Registrant’s common stock) to six accredited investors and warrants to purchase an additional 510,203 shares of Series F Preferred Stock (convertible upon the consummation of this offering into 306,121 shares of the Registrant’s common stock) to four accredited investors for an aggregate purchase price of $11,950,006 pursuant to Section 4(2) of the Securities Act.

On January 22, 2002, the Registrant issued and sold an aggregate of 497,448 shares of its Series F Preferred Stock (convertible upon the consummation of this offering into 298,468 shares of the Registrant’s common stock) to one accredited investor for $1,949,996 pursuant to Section 4(2) of the Securities Act.

On November 15 2002, the Registrant issued and sold an aggregate principal amount of $1,900,000 convertible promissory notes, convertible into shares of its Series G Preferred Stock, to eight accredited investors, all of whom were stockholders of the Registrant, pursuant to Section 4(2) of the Securities Act.

On December 24, 2002, the Registrant issued and sold an aggregate of 8,000,000 shares of its Series G Preferred Stock (convertible upon the consummation of this offering into 4,799,996 shares of the Registrant’s common stock) to nine accredited investors, all of whom were stockholders of the Registrant, for $8,000,000 pursuant to Section 4(2) of the Securities Act.

In March 2003, the Registrant issued and sold an aggregate of 453,000 shares of its Series G Preferred Stock (convertible upon the consummation of this offering into 271,800 shares of the Registrant’s common stock) to eight accredited investors pursuant to Section 4(2) of the Securities Act.

From July 1, 2000 to June 30, 2001, the Registrant issued and sold 43,255 shares of common stock to twenty-eight employees for $82,737 pursuant to Rule 701 of the Securities Act.

From July 1, 2001 to June 30, 2002, the Registrant issued and sold 36,662 shares of common stock to ten employees for $22,386 pursuant to Rule 701 of the Securities Act.

From July 1, 2002 to June 30, 2003, the Registrant issued and sold 98,883 shares of common stock to fourteen employees for $81,762 pursuant to Rule 701 of the Securities Act.

The recipients of securities in each such 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 thereof and appropriate legends were affixed to the share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us.

(a) The following exhibits are filed as part of this Registration Statement:


*	To be filed by amendment.

†	Confidential treatment will be requested with respect to certain portions of this exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed 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, 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.


	(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon


	Rule 430A and contained in a form of prospectus filed by 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 of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 22nd day of September 2003.


	By:	/s/ REED D. TAUSSIG


	Name: Reed D. Taussig


	Title:	President, Chief Executive Officer and Chairman of the Board of Directors

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Reed D. Taussig and Ronald J. Fior, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, 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 any and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his 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 in the capacities and on the dates indicated.


*	To be filed by amendment.

†	Confidential treatment will be requested with respect to certain portions of this exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission.

EX-3.1 3 f92629orexv3w1.txt EXHIBIT 3.1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CALLIDUS SOFTWARE INC. (INCORPORATED SEPTEMBER 6, 1996) The undersigned, Reed D. Taussig and Ron J. Fior, do hereby verify that: I. They are the duly elected and acting President and Secretary of Callidus Software Inc., a Delaware corporation (the "corporation"). II. The Certificate of Incorporation of the corporation, originally filed with the Delaware Secretary of State on September 6, 1996 under the name of Tally Up Software, Inc. and amended and restated to date, is hereby amended and restated to read in its entirety as follows: ONE. The name of this Corporation is: Callidus Software Inc. TWO. The address of the corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THREE. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("DELAWARE Law"). The Corporation shall have perpetual existence. FOUR. The total number of shares of stock which the Corporation shall have authority to issue is 105,000,000, consisting of 100,000,000 shares of Common Stock, par value $0.001 per share (the "COMMON STOCK"), and 5,000,000 shares of Preferred Stock, par value $0.001 per share (the "PREFERRED STOCK"). The Board of Directors is hereby empowered to authorize by resolution or resolutions from time to time the issuance of one or more classes or series of Preferred Stock and to fix the designations, powers, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to each such class or series of Preferred Stock and the number of shares constituting each such class or series, and to increase or decrease the number of shares of any such class or series to the extent permitted by Delaware Law. FIVE. Each holder of Common Stock, as such, shall be entitled to one vote for each share of Common Stock held of record by such holder on all matters on which stockholders generally are entitled to vote; provided, however, that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designations relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any Certificate of Designations relating to any series of Preferred Stock) or pursuant to Delaware Law. SIX. (1) The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors; the exact number of directors to be determined from time to time solely by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. (2) The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Each director shall serve for a term ending on the date of the third annual meeting of stockholders next following the annual meeting at which such director was elected, provided that directors initially designated as Class I directors shall serve for a term ending on the date of the 2004 annual meeting, directors initially designated as Class II directors shall serve for a term ending on the 2005 annual meeting, and directors initially designated as Class III directors shall serve for a term ending on the date of the 2006 annual meeting. Notwithstanding the foregoing, each director shall hold office until such director's successor shall have been duly elected and qualified or until such director's earlier death, resignation or removal. In the event of any change in the number of directors, the Board of Directors shall apportion any newly created directorships among, or reduce the number of directorships in, such class or classes as shall equalize, as nearly as possible, the number of directors in each class. In no event will a decrease in the number of directors shorten the term of any incumbent director. (3) The names of the persons who are to serve initially as directors of each Class are: ~~Class I George James and Reed D. Taussig Class II David Spreng and Terry Opdendyk Class III Michael Braun~~

(4) There shall be no cumulative voting in the election of directors. (5) Vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors may be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, and each director so elected shall hold office for a term that shall coincide with the term of the Class to which such director shall have been elected. (6) No director may be removed from office by the stockholders except for cause with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. SEVEN. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with the Delaware Law, as amended from time to time, and may not be taken by written consent of stockholders without a meeting. EIGHT. Special meetings of the stockholders may be called by the Board of Directors, the Chairman of the Board of Directors, the President or the Secretary of the Corporation and may not be called by any other person. NINE. Election of directors need not be by written ballot unless the bylaws of the Corporation so provide. TEN. (1)A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by Delaware Law. (2)(a) Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware Law. The right to indemnification conferred in this ARTICLE TEN shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware Law. The right to indemnification conferred in this ARTICLE TEN shall be a contract right. (b) The Corporation may, by action of its Board of Directors, provide indemnification to such of the employees and agents of the Corporation to such extent and to such effect as the Board of Directors shall determine to be appropriate and authorized by Delaware Law. (3) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under Delaware Law. (4) The rights and authority conferred in this ARTICLE TEN shall not be exclusive of any other right which any person may otherwise have or hereafter acquire. (5) Neither the amendment nor repeal of this ARTICLE TEN, nor the adoption of any provision of this Certificate of Incorporation or the bylaws of the Corporation, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall eliminate or reduce the effect of this ARTICLE TEN in respect of any acts or omissions occurring prior to such amendment, repeal, adoption or modification. ELEVEN. The Board of Directors shall have the power to adopt, amend or repeal the bylaws of the Corporation. The stockholders may adopt, amend or repeal the bylaws only with the affirmative vote of the holders of not less than sixty-six and two-thirds percent of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. TWELVE. The Corporation reserves the right to amend this Certificate of Incorporation in any manner permitted by the Delaware Law and all rights and powers conferred upon stockholders, directors and officers herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in ARTICLES SIX, SEVEN, EIGHT, TEN, ELEVEN and this ARTICLE TWELVE may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of the provisions set forth in ARTICLES SIX, SEVEN, EIGHT, TEN, ELEVEN or this ARTICLE TWELVE unless such action is approved by the affirmative vote of the holders of not less than sixty-six and two-thirds percent of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class." III. The foregoing amendment and restatement of the Certificate of Incorporation has been duly approved by the Board of Directors of the Corporation. IV. The foregoing amendment and restatement of the Certificate of Incorporation has been duly approved by the written consent of the stockholders in accordance with Delaware Law. The number of shares held by stockholders who consented to this amendment in writing equaled or exceeded the required percentage. Pursuant to Section 228 of the Delaware General Corporation Law, prompt written notice of this amendment and restatement has been or shall be given to all stockholders who did not consent to this amendment. We further declare under penalty of perjury under the laws of the State of Delaware that the matters set forth in this certificate are true, correct and of our own knowledge. Executed at San Jose, California, on _______________, 2003. /s/ Reed D. Taussig -------------------------- Reed D. Taussig President /s/ Ron J. Fior -------------------------- Ron J. Fior Secretary EX-3.2 4 f92629orexv3w2.txt EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF CALLIDUS SOFTWARE INC. ARTICLE 1 OFFICES Section 1.01. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 1.02. Other Offices. 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. Section 1.03. Books. The books of the Corporation may be kept within or 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 2 MEETINGS OF STOCKHOLDERS Section 2.01. Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a designation by the Board of Directors). Section 2.02. Annual Meetings. An annual meeting of stockholders, commencing with the year 2004 shall be held for the election of directors and to transact such other business as may properly be brought before the meeting. Section 2.03 Special Meetings. Special meetings of stockholders may be called by the Board of Directors or the chairman of the Board of Directors, the President or the Secretary of the Corporation and may not be called by any other person. Section 2.04. Notice of Meetings and Adjourned Meetings; Waivers of Notice. (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("DELAWARE LAW"), such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time, place, if any, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or 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. (b) A written waiver of any such notice signed by the person entitled thereto, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (c) Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 2.05. Quorum. Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders present in person or represented by proxy shall adjourn the meeting, 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. Section 2.06. Voting. (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Any share of capital stock of the Corporation held by the Corporation shall have no voting rights. Unless otherwise provided in Delaware Law, the certificate of incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by written proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders. (b) Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him or her by written proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 2.07. Action by Consent. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with Delaware Law and may not be taken by written consent of stockholders without a meeting. Section 2.08. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or in the Chairman's absence or if one shall not have been elected, the director designated by the vote of the majority of the directors present at such meeting, shall act as chairman of the meeting. The Secretary (or in the Secretary's absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. Section 2.09. Order of Business. The order of business at all meetings of stockholders shall be as determined by the chairman of the meeting. Section 2.10 Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in these bylaws shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 2.10, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 2.10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not later than the close of business on the ninetieth calendar day, nor earlier than the close of business on the one hundred and twentieth calendar day, prior to the first anniversary of the preceding year's annual meeting, provided, however, that in the event that the date of the annual meeting is advanced more than thirty calendar days prior to, or delayed more than sixty calendar days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the later of the sixtieth calendar day prior to such annual meeting or the tenth calendar day following the calendar day on which public announcement of the date of such meeting is first made by the Corporation. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible to serve as a director of the Corporation unless nominated in accordance with the procedures set forth in this bylaw. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 2.10, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.10. Section 2.11 Notice of Business. At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this Section 2.11, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 2.11. For business to be properly brought before a stockholder meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not later than the close of business on the ninetieth calendar day, nor earlier than the close of business on the one hundred and twentieth calendar day, prior to the first anniversary of the preceding year's annual meeting, provided, however, that in the event that the date of the annual meeting is advanced more than thirty calendar days prior to, or delayed more than sixty calendar days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the later of the sixtieth calendar day prior to such annual meeting or the tenth calendar day following the calendar day on which public announcement of the date of such meeting is first made by the Corporation. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at a stockholder meeting except in accordance with the procedures set forth in this Section 2.11. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing, provisions of this Section 2.11, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, and the rules and regulations thereunder with respect to the matters set forth in this Section 2.11. ARTICLE 3 DIRECTORS Section 3.01. General Powers. Except as otherwise provided in Delaware Law or the certificate of incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Section 3.02. Number, Election and Term Of Office. The Board of Directors shall consist of not less than five nor more than nine directors, with the exact number of directors to be determined from time to time solely by resolution adopted by the affirmative vote of a majority of the entire Board of Directors. The Board may from time to time elect one director to serve as the Chairman of the Board, to have the powers specified in these bylaws. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Except as otherwise provided in the certificate of incorporation, each director shall serve for a term ending on the date of the third annual meeting of stockholders next following the annual meeting at which such director was elected. Notwithstanding the foregoing, each director shall hold office until such director's successor shall have been duly elected and qualified or until such director's earlier death, resignation or removal. Directors need not be stockholders. Section 3.03. Quorum and Manner of Acting. Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat shall adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.04. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors). Section 3.05. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 3.07 herein or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice. Section 3.06. Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given. Section 3.07. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or Secretary on the written request of three directors. Notice of special meetings of the Board of Directors shall be given to each director at such person's business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram, facsimile or other electronic transmission, or orally by telephone. If mailed by first class mail, such notice shall be deemed adequately delivered when deposited in the United States mail so addressed, with postage thereon prepaid, at least four calendar days before the time of the holding of the meeting. If the notice is delivered by telegram, overnight mail or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or the notice is delivered to the overnight mail or courier service company at least 48 hours before such meeting. If by telephone, other electronic transmission or hand delivery, the notice shall be given at least 24 hours prior to the time set for the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Section 3.08. Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting and not disqualified from voting, whether or not such member or members 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 the following matter: (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware Law to be submitted to the stockholders for approval or (b) adopting, amending or repealing any bylaw of the Corporation. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 3.09. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions, are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Section 3.10. Telephonic Meetings. 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 such committee, as the case may be, by means of conference telephone or other 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. Section 3.11. Resignation. Any director may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.12. Vacancies. Unless otherwise provided in the certificate of incorporation, vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors may be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director. Each director so elected shall hold office for a term that shall coincide with the term of the Class to which such director shall have been elected. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. Unless otherwise provided in the certificate of incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of the other vacancies. Section 3.13. Removal. No director may be removed from office by the stockholders except for cause with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the corporation then entitled to vote generally in the election of directors, voting together as a single class. Section 3.14. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses. ARTICLE 4 OFFICERS Section 4.01. Principal Officers. The principal officers of the Corporation shall be a President, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary. Section 4.02. Election, Term of Office and Remuneration. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine. Section 4.03. Subordinate Officers. In addition to the principal officers enumerated in Section 4.01 herein, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees. Section 4.04. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors. Section 4.05. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.06. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors. ARTICLE 5 GENERAL PROVISIONS Section 5.01. Fixing the Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. 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 that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders 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 a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.02. Dividends. Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, in property or in shares of the capital stock of the Corporation. Section 5.03. Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year. Section 5.04. Corporate Seal. The corporate seal shall have 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, affixed or otherwise reproduced. Section 5.05. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. Section 5.06. Amendments. Subject to the certificate of incorporation, these bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the stockholders entitled to vote thereon at any annual or special meeting thereof or by the Board of Directors. EX-4.2 5 f92629orexv4w2.txt EXHIBIT 4.2 EXHIBIT 4.2 CALLIDUS SOFTWARE INC. AMENDED AND RESTATED REGISTRATION AND INFORMATION RIGHTS AGREEMENT This Amended and Restated Registration and Information Rights Agreement (the "AGREEMENT") is made effective as of December 24, 2002 by and among Callidus Software Inc., a Delaware corporation (the "COMPANY"), the purchasers (the "PURCHASERS") of Series G Preferred Stock of the Company as set forth in Exhibit A attached hereto pursuant to the Series G Preferred Stock Purchase Agreement dated as of the date hereof (the "PURCHASE AGREEMENT"), the holder of Series A Preferred Stock as set forth in Exhibit A attached hereto (the "SERIES A HOLDER"), the holders of Series B Preferred Stock as set forth in Exhibit A attached hereto (the "SERIES B HOLDERS"), the holders of Series C Preferred Stock as set forth in Exhibit A attached hereto (the "SERIES C HOLDERS"), the holders of Series D Preferred Stock as set forth in Exhibit A attached hereto (the "SERIES D HOLDERS"), the holders of Series E Preferred Stock as set forth in Exhibit A attached hereto (the "SERIES E HOLDERS"), the holders of the Series F Preferred Stock and Warrants as set forth in Exhibit A attached hereto (the "SERIES F HOLDERS"), Andrew L. Swett and Scott Kitayama (the "FOUNDERS"), Transamerica Business Credit Corporation Funding Trust II ("TRANSAMERICA") and the holders of Warrants to purchase Common Stock of the Company as set forth in Exhibit A hereto (the "WARRANT HOLDERS"). RECITALS A. The Company, the Series A Holder, the Series B Holders, the Series C Holders, the Series D Holders, the Series E Holders, the Series F Holders, Transamerica and the Founders are parties to the Company's Registration and Information Rights Agreement, as amended and restated effective as of March 13, 2001, as further amended by that certain Amendment No. 1 to Amended and Restated Registration and Information Rights Agreement effective as of October 26, 2001 (the "RESTATED AGREEMENT"). B. The Company, the Series A Holder, the Series B Holders, the Series C Holders, the Series D Holders, the Series E Holders, the Series F Holders, Transamerica and the Founders wish to induce the Purchasers to purchase the Series G Preferred Stock by amending and restating the Restated Agreement to add the Purchasers as parties and make certain other changes. C. Section 11 of the Restated Agreement allows for amendment and the addition of parties with the consent of the Company, the holders of a majority of the Registrable Securities and the holders of a majority of the Registrable Securities of any class affected in a manner different from the holders generally. 1 D. The obligations of the Company and the Purchasers under the Purchase Agreement are conditioned, among other things, upon the execution and delivery of this Agreement by the Company and the Purchasers. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, all parties hereto agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "COMMISSION" means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. "CONVERSION STOCK" means the Common Stock issued or issuable pursuant to (i) conversion of the Preferred Stock and (ii) the Series F Warrants (or any underlying convertible security issued or issuable pursuant to such warrants), to the extent not otherwise already included in clause (i). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any similar Federal rule or statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "FOUNDERS' STOCK" means the Common Stock acquired by the Founders pursuant to the Founder's Stock Purchase Agreements with the Company; provided, however, that, for the purposes of Sections 5.1, 5.2 and 5.3, Founders' Stock shall not include any Common Stock subject to a right of repurchase in favor of the Company pursuant to a Founder's Stock Purchase Agreement between the Company and a Founder unless, until, and to the extent that such right of repurchase has lapsed. "HOLDER" means any Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser, Founder, Transamerica or Warrant Holder holding Registrable Securities, or any person holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 5.10 hereof. "INITIATING HOLDERS" means any Holder or Holders who, in the aggregate, hold not less than the required percentage of the Registrable Securities then outstanding (the "REQUIRED PERCENTAGE"). The Required Percentage shall be (i) 50% for the purposes of Section 5.1 or (ii) 25% for the purposes of Section 5.3 hereof, in each case exclusive of Founder's Stock. 2 "PREFERRED STOCK" shall mean 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 Series F Preferred Stock and Series G Preferred Stock of the Company. "REGISTRABLE SECURITIES" means (i) the Conversion Stock, (ii) the Founders' Stock, (iii) the Warrant Stock, (iv) any Common Stock of the Company issued or issuable in respect of any of the foregoing upon any conversion, stock split, stock dividend, recapitalization, or similar event; provided, however, that securities shall only be treated as Registrable Securities if and so long as (i) they have not been registered or sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction and (ii) the registration rights with respect to such securities have not terminated pursuant to Section 5.11. The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "REGISTRATION EXPENSES" shall mean all expenses, except as otherwise stated below, incurred by the Company in complying with Sections 5.1, 5.2 and 5.3 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). Registration Expenses shall also include the fees and disbursements for one special counsel to the selling stockholders, not to exceed $20,000 per registration, for one (1) registration pursuant to Section 5.1, one (1) registration pursuant to Section 5.2 and three (3) registrations pursuant to Section 5.3 hereof. "RESTRICTED SECURITIES" shall mean the securities of the Company required to bear the legends set forth in Section 3 hereof. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar Federal rule or statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "SELLING EXPENSES" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth above, all fees and disbursements of counsel for any Holder. "WARRANTS" shall mean (i) the warrant for the purchase of 17,500 shares of Common Stock issued to Transamerica on March 26, 1999, (ii) the warrant for the purchase of 4,375 shares of Common Stock issued to Transamerica on May 31, 2000, (iii) the warrant for the purchase of 19,133 shares of Series F Preferred Stock issued to Transamerica on September 28, 2001, (iv) any other warrant issued in connection with the Loan and Security Agreement between the Company and Transamerica Business Credit Corporation dated March 26, 1999, as amended from time to time and 3 (v) all warrants to purchase Common Stock issued in connection with the Closing of the sale of the Series F Preferred Stock on March 13, 2001. "WARRANT STOCK" shall mean the Common Stock issued or issuable upon exercise of the Warrants. 2. RESTRICTIONS ON TRANSFERABILITY. The Preferred Stock, the Conversion Stock, the Founders' Stock, the Warrants, the Warrant Stock and any other securities issued in respect of such stock upon any stock split, stock dividend, recapitalization, merger, or similar event, shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Each Holder or transferee will cause any proposed purchaser, assignee, transferee, or pledgee of any such shares held by the Holder or transferee to agree to take and hold such securities subject to the restrictions and upon the conditions specified in this Agreement, including without limitation the restrictions set forth in Sections 7 and 10. 3. RESTRICTIVE LEGEND. Each certificate representing the Preferred Stock, the Conversion Stock, the Founders' Stock, the Warrant Stock or any other securities issued in respect of such stock upon any stock split, stock dividend, recapitalization, merger, or similar event, shall (unless otherwise permitted by the provisions of Section 4 below) be stamped or otherwise imprinted with legends in substantially the following form (in addition to any legends required by agreement or by applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH SHARES GENERALLY MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCKUP PERIOD OF UP TO 180-DAYS FOLLOWING THE EFFECTIVE DATE OF CERTAIN REGISTRATION STATEMENTS OF THE COMPANY FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AS SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH LOCKUP PERIOD IS BINDING ON TRANSFEREES OF THESE SHARES. 4 Each Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of its capital stock in order to implement the restrictions on transfer established in this Agreement. 4. NOTICE OF PROPOSED TRANSFERS. The holder of each certificate representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 4. Without in any way limiting the immediately preceding sentence, no sale, assignment, transfer or pledge of Restricted Securities shall be made by any holder thereof to any person unless such person shall first agree in writing to be bound by the restrictions of this Agreement including, without limitation, Section 7 and this Section 4. Prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and, if requested by the Company, the holder shall also provide, at such holder's expense, either (i) a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company; provided, however, that the Company shall not request an opinion of counsel or a "no action" letter with respect to (i) a transfer not involving a change in beneficial ownership, (ii) a transaction involving the distribution without consideration of Restricted Securities by the holder to its constituent partners or members in proportion to their ownership interests in the holder, (iii) a transaction involving the transfer without consideration of Restricted Securities by an individual holder during such holder's lifetime by way of gift or on death by will or intestacy, or (iv) a transfer or assignment by The Goldman Sachs Group, L.P. and/or its affiliates (collectively, "GOLDMAN") to a successor entity in connection with a public offering by Goldman. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144, the appropriate restrictive legend set forth in Section 3 above, except that such certificate shall not bear such restrictive legend if in the opinion of counsel for such holder and counsel for the Company such legend is not required in order to establish compliance with any provision of the Securities Act. Notwithstanding the foregoing, each holder of Restricted Securities agrees that it will not request that a transfer of the Restricted Securities be made or that the legend set forth in Section 3 be removed from the certificate representing the Restricted Securities, solely in reliance on Rule 144(k) if, as a result thereof, the Company would be rendered subject to the reporting requirements of the Exchange Act. 5. REGISTRATION. 5.1 REQUESTED REGISTRATION. 5 (a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect any registration with respect to shares of Registrable Securities, the Company will: (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration as part of a firm commitment underwritten public offering with underwriters reasonably acceptable to the Initiating Holders and the Company (including, without limitation, appropriate qualification under applicable state securities laws and appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request by delivering a written notice to such effect to the Company within twenty (20) days after the date of such written notice from the Company. Notwithstanding the foregoing, the Company shall not be obligated to take any action to effect or complete any such registration pursuant to this Section 5.1: (A) Prior to the earlier of (i) 180 days after the effective date of the Company's first registered public offering of its Common Stock or (ii) December 31, 2004; (B) Unless the requested registration would include at least 20% of the Registrable Securities or any lesser percentage so long as the aggregate offering price of all Registrable Securities sought to be registered by all Holders, net of underwriting discounts and commissions, would exceed $30,000,000; (C) 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 six (6) months immediately following the effective date of any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; (D) After the Company has effected one registration pursuant to this subparagraph 5.1(a), and such registration has been declared or ordered effective; or (E) If the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future. In such case, the Company's obligation to use its 6 best efforts to register, qualify or comply under this Section 5.1(a) shall be deferred for a period not to exceed 180 days from the date of receipt of the written request from the Initiating Holders, provided that the Company may not exercise this deferral right more than once per twelve month period. Subject to the foregoing clauses (A) through (E), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders. (b) Underwriting. In the event of a registration pursuant to Section 5.1, the Company shall advise the Holders as part of the notice given pursuant to Section 5.1(a)(i) that the right of any Holder to registration pursuant to Section 5.1 shall be conditioned upon such Holder's participation in the underwriting arrangements required by this Section 5.1, and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested shall be limited to the extent provided herein. The Company shall, together with all Holders proposing to distribute their securities through such underwriting, enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by a majority in interest of the Initiating Holders, but subject to the Company's reasonable approval. Notwithstanding any other provision of this Section 5.1, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders requesting to be included in the registration and underwriting, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all Holders requesting to be included in the registration and underwriting in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by them at the time of filing the registration statement, provided, however, that in the event of such limitation on the number of shares to be underwritten, then no shares of Founder's Stock shall be included unless all shares of Registrable Securities held requested by the Holders other than the Founders, including any shares issued in respect thereof upon conversion or otherwise, to be included in such underwriting are so included. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder of Registrable Securities disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company. 5.2 COMPANY REGISTRATION. (a) Notice of Registration. If at any time or from time to time the Company shall determine to register any of its equity securities, either for its own account or the account of a Holder or other holders, other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Rule 145 transaction, or (iii) a registration in which the 7 only equity security being registered is Common Stock issuable upon conversion of convertible debt securities which are also being registered, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualifications including compliance with Blue Sky laws), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within 20 days after the date of such written notice from the Company, by any Holder. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 5.2(a)(i). In such event, the right of any Holder to registration pursuant to Section 5.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting shall be limited to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other Holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5.2, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the Registrable Securities to be included in such registration (i) in the case of the Company's initial public offering, to zero, and (ii) in the case of any other offering, to an amount no less than 33-1/3% of all shares to be included in such offering. The Company shall so advise all Holders requesting to be included in the registration and underwriting and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all the Holders requesting to be included in the registration and underwriting in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by them at the time of filing the registration statement, provided, however, that in the event of such limitation on the number of shares to be underwritten, then no shares of Founder's Stock shall be included unless all shares of Registrable Securities held requested by the Holders other than the Founders to be included in such underwriting are so included. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company. (c) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 5.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. 8 5.3 REGISTRATION ON FORM S-3. (a) Request for Registration. In case the Company shall receive from Initiating Holders a written request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3) for a public offering of shares of the Registrable Securities the aggregate price to the public of which, net of underwriting discounts and commissions, would exceed $1,500,000, and the Company is a registrant entitled to use Form S-3 to register the Registrable Securities for such an offering, the Company shall use its best efforts to cause such Registrable Securities to be registered for the offering on such form and to cause such Registrable Securities to be qualified in such jurisdictions as such Holder or Holders may reasonably request; provided, however, that the Company shall not be required to effect more than one registration pursuant to this Section 5.3 in any twelve (12) month period. If such offer is to be an underwritten offer, the underwriters must be acceptable to both the Initiating Holders and the Company. The Company shall inform the other Holders of the proposed registration and offer them upon at least twenty (20) days written notice the opportunity to participate. In the event the registration is proposed to be part of a firm commitment underwritten public offering, the substantive provisions of Section 5.1(b) shall be applicable to each such registration initiated under this Section 5.3. (b) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 5.3: (i) If the Company, within ten (10) days of the receipt of the request of the Initiating Holders, gives notice of its bona fide intention to effect the filing of a registration statement with the Commission within ninety (90) days of receipt of such request (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities); (ii) 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 six (6) months immediately following the effective date of, any registration statement pertaining to securities of the Company (other than a registration of securities in a Rule 145 transaction or with respect to an employee benefit plan), provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (iii) If the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors, it would be seriously detrimental to the Company or its stockholders for a registration statement to be filed in the near future, then the Company's obligation to use its best efforts to file a registration statement shall be deferred for a period not to exceed 180 days from the receipt of the request to file such registration by such Initiating Holder or Holders, provided that the Company may not exercise this deferral right more than once per twelve month period. 9 5.4 SUBSEQUENT REGISTRATION RIGHTS. (a) Without the consent of any holder of Registrable Securities hereunder, the Company may grant to any holder of securities of the Company registration rights inferior to those granted hereunder. (b) Subject to Section 11, the Company may enter into an agreement granting any holder or prospective holder of any securities of the Company registration rights superior to or on a pari passu basis with the rights granted the Holders hereunder only if the Company first obtains the written consent of the holders of a majority of the Registrable Securities. 5.5 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with (i) one registration pursuant to Section 5.1, (ii) all registrations pursuant to Section 5.2, and (iii) all registrations pursuant to Section 5.3 shall be borne by the Company. Notwithstanding the foregoing, in the event that Initiating Holders cause the Company to begin a registration pursuant to Section 5.1 or Section 5.3, and the request for such registration is subsequently withdrawn by the Initiating Holders or such registration is not completed due to failure to meet the net proceeds requirement set forth in such section or is otherwise not successfully completed due to no fault of the Company, all Holders shall be deemed to have forfeited their right to one registration under Section 5.1, or a registration under Section 5.3 for a period of 12 months, as applicable, unless the Initiating Holders pay for, or reimburse the Company for, the Registration Expenses incurred in connection with such withdrawn or incomplete registration. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of the Holders and all other registration expenses shall be borne by the Holders of such securities pro rata on the basis of the number of shares so registered or proposed to be so registered. 5.6 REGISTRATION PROCEDURES. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder advised in writing as to the initiation of such registration and as to the completion thereof. The Company will: (a) Prepare and file with the Commission a registration statement and such amendments and supplements as may be necessary and use its best efforts to cause such registration statement to become and remain effective for at least 90 days or until the distribution described in the registration statement has been completed, whichever first occurs; and (b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities. 5.7 INDEMNIFICATION. (a) The Company will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of 10 the Securities Act, with respect to which registration has been effected pursuant to this Agreement, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act, the Exchange Act, state securities laws or any rule or regulation promulgated under such laws applicable to the Company in connection with any such registration, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, for any legal and any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission, or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder or controlling person, and stated to be specifically for use therein; provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus on file with the Commission at the time the registration statement becomes effective or the amended prospectus filed with the Commission pursuant to Rule 424(b) (the "FINAL PROSPECTUS"), such indemnity agreement shall not inure to the benefit of any Holder, if a copy of the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act, and if the Final Prospectus would have cured the defect giving rise to the loss, liability, claim or damage. (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration is being effected, indemnify the Company, each of its directors and officers, other holders of the Company's securities covered by such registration statement, each person who controls the Company within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Holder of the Securities Act, the Exchange Act, state securities laws or any rule or regulation promulgated under such laws applicable to the Holder, and will reimburse the Company, such other Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred, as such expenses are incurred, in connection with investigating or defending any such claim, loss, damage, liability or action, but in the case of the Company or the other Holders or their officers, directors or controlling 11 persons, only to the extent that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with information furnished to the Company by such Holder. Notwithstanding the foregoing, the liability of each Holder under this subsection 5.7(b) shall be limited to an amount equal to the net proceeds from the offering received by such Holder. (c) Each party entitled to indemnification under this Section 5.7 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which there is a conflict of interest or there are separate and different defenses. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party (whose consent shall not be unreasonably withheld), consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 5.8 INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration referred to in this Agreement. 5.9 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to use all reasonable efforts to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and 12 (c) So long as a Holder owns any Restricted Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 5.10 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register securities granted to Holders under Sections 5.1, 5.2 and 5.3 may be assigned to a transferee or assignee reasonably acceptable to the Company in connection with any transfer or assignment of Registrable Securities by the Holder provided that: (i) such transfer is otherwise effected in accordance with applicable securities laws and the terms of this Agreement, (ii) such assignee or transferee (together with its affiliates, as such term is defined in Rule 405 of the Securities Act) acquires at least 500,000 shares (as adjusted for stock splits, stock dividends, stock combinations and the like) of Registrable Securities (including Preferred Stock convertible into Registrable Securities), (iii) written notice is promptly given to the Company and (iv) such transferee agrees to be bound by the provisions of this Agreement. Notwithstanding the foregoing, the rights to cause the Company to register securities may be assigned without compliance with item (ii) above to (x) any constituent partner or member of a Holder which is a partnership or limited liability company, or an affiliate (as such term is defined in Rule 405 of the Securities Act) of a Holder which is a corporation, partnership or limited liability company, a successor entity to any of the foregoing, or an officer, shareholder or other equity holder of a Holder and, in the case of this clause (x), such person shall be deemed "reasonably acceptable" to the Company, or (y) a family member or trust for the benefit of a Holder who is an individual, or a trust for the benefit of a family member of such a Holder. 5.11 TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant to Sections 5.1, 5.2 and 5.3 of this Agreement shall terminate as to any Holder upon the earlier of (i) the date five years after the effective date of the Company's initial public offering and (ii) provided that the Company's shares are traded on a national stock exchange or the Nasdaq National Market System, such time as the Registrable Securities held by the Holder represent less than 1% of the outstanding capital stock of the Company or such Holder may sell all of such Registrable Securities in any single three-month period under Rule 144. 6. FINANCIAL INFORMATION RIGHTS. (a) The Company will provide the following reports to each Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder and Purchaser who continues to hold shares of Preferred Stock or Conversion Stock: (i) As soon as practicable after the end of each fiscal year, and in any event within 120 days after the end of each such fiscal year, consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of 13 operations and consolidated statements of cash flows and stockholders' equity of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and audited by independent public accountants of national standing selected by the Company, and a capitalization table in reasonable detail for such fiscal year; and (ii) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of operations and consolidated statements of cash flows of the Company and its subsidiaries, if any, for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles (other than accompanying notes), subject to changes resulting from year-end audit adjustments, in reasonable detail and signed by the principal financial or accounting officer of the Company, and a capitalization table in reasonable detail for such quarterly period. (b) The Company will provide the following information to each Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder and Purchaser that continues to hold at least 1,500,000 shares of Registrable Securities: (i) At least 30 days prior to the beginning of each fiscal year, a budget as adopted by the Company's Board of Directors for the fiscal year; and (ii) As soon as practicable after the end of the first and second month of each quarterly accounting period, a consolidated balance sheet of the Company and its subsidiaries (if any), as of the end of each such monthly period, and consolidated statements of operations and consolidated statements of cash flows of the Company and its subsidiaries (if any), for such persons and for the current quarter to date, prepared in accordance with generally accepted accounting principles (other than accompanying notes), subject to changes resulting from quarter-end and year-end adjustments, in reasonable detail and signed by the principal financial or accounting officer of the Company. (c) For purposes of determining the minimum holdings pursuant to this Section 6, any Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder or Purchaser that is a partnership or limited liability company shall be deemed to hold any Preferred Stock originally purchased by such Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder or Purchaser and subsequently distributed to constituent partners or members of such Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder or Purchaser, but which have not been resold by such partners or members. If the partnership or limited liability company is still in existence, the Company may satisfy any obligation to distribute reports to individual partners of the partnership or members of a limited liability company by delivering a single copy of each report to the partnership or limited liability company as agent for the constituent partners or members. 14 (d) The rights granted pursuant to Section 6(b) may be assigned to any transferee, other than a competitor or potential competitor of the Company (as reasonably determined by the Company's Board of Directors), that holds or acquires (together with its affiliates, as such term is defined in Rule 405 of the Securities Act) at least 1,500,000 shares of Registrable Securities (as adjusted for stock splits, stock dividends, stock combinations and the like), so long as such transferee agrees in writing to be bound by the provisions of Section 6(e), below. (e) Each Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser or transferee of rights under this Section 6 acknowledges and agrees that any information obtained pursuant to this Section 6 which may be considered nonpublic information will be maintained in confidence by such Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser or transferee and will not be utilized by such Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser or transferee in connection with purchases or sales of the Company's securities except in compliance with applicable state and Federal securities laws. (f) The covenants of the Company set forth in this Section 6 shall terminate and be of no further force or effect upon the closing of a firm commitment underwritten public offering or at such time as the Company is required to file reports pursuant to Section 13 or 15(d) of the Exchange Act, whichever shall occur first. 7. LOCKUP AGREEMENT. Each Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser, Founder, Transamerica, Warrant Holder and transferee who receives Conversion Stock, Founders' Stock, Warrant Stock and any Common Stock of the Company issued or issuable in respect of any of the foregoing upon any conversion, stock split, stock dividend, recapitalization, or similar event, hereby agrees that, in connection with the first registration of the offering of any securities of the Company under the Securities Act for the account of the Company, if so requested by the Company or any representative of the underwriters (the "MANAGING UNDERWRITER"), such Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser, Founder, Transamerica, Warrant Holder or transferee shall not sell or otherwise transfer any securities of the Company during the period specified by the Company's Board of Directors at the request of the Managing Underwriter (the "MARKET STANDOFF PERIOD"), with such period not to exceed 180 days following the effective date of the registration statement of the Company filed under the Securities Act with respect to such offering. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. The Company shall use its reasonable best efforts to place similar contractual lockup restrictions on all capital stock issued now or hereafter to officers, directors, employees and consultants of the Company, and holders of registration rights with respect to capital stock of the Company, unless determined otherwise by the Company's Board of Directors (including the affirmative vote of a majority of the directors designated by the holders of Preferred Stock, for so long as the holders of Preferred Stock, voting as a separate class, are entitled, under the Company's Certificate of Incorporation, to elect directors). Notwithstanding the foregoing, the provisions of this Section 7 shall not apply to a registration 15 relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a transaction within Rule 145 of the Securities Act on Form S-4 or similar form which may be promulgated in the future. Notwithstanding the foregoing, Goldman may engage in brokerage, investment advisory, investment company, financial advisory, anti-raid advisory, financing, asset management, trading, market making, arbitrage and other similar activities conducted in the ordinary course of their business to the extent Goldman would have engaged in these activities without regard to its ownership of shares of the Company's Series D Preferred Stock, Series E Preferred or Stock Series F Preferred Stock. 8. (INTENTIONALLY LEFT BLANK) 9. (INTENTIONALLY LEFT BLANK) 10. VOTING AGREEMENT. In connection with any election of the Company's Board of Directors, the Holders and Founders hereby agree to vote all shares of Common Stock then held by them in favor of electing the Company's chief executive officer, currently Reed D. Taussig, and Andrew L. Swett to the Board of Directors. For so long as the Company's Certificate of Incorporation provides that the holders of Common Stock exclusively are entitled to fill one or more Board seats, the seats so filled by the Company's chief executive officer and Andrew L. Swett shall be deemed to constitute two (2) of such seats to be filled exclusively by the holders of Common Stock. This Section 10 is intended by the parties hereto to be a voting agreement within the meaning of Section 218(c), or any successor provision, of the General Corporation Law of Delaware. Each certificate representing the stock subject to this voting agreement shall be stamped or otherwise imprinted with a legend in substantially the following form (in addition to any legends required by agreement or by applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING AGREEMENT SET FORTH IN AN AGREEMENT BETWEEN THE HOLDER, THE ISSUER, AND CERTAIN OTHER HOLDERS OF STOCK OF THE ISSUER, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. The requirements of this Section 10 shall terminate and be of no further force or effect upon the closing of the Company's initial public offering of its Common Stock pursuant to a registration statement declared effective by the Commission. 11. AMENDMENT. Except as otherwise provided above, additional parties may be added to this Agreement, any provision of this Agreement may be amended or the observance thereof 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 a majority of the Registrable Securities then outstanding. Notwithstanding the foregoing, no amendment shall be made to this Agreement which by its terms adversely affects, or which was motivated primarily by an intent to adversely affect, a particular class of Holders (i.e., Founders, Series A Holder, Series B Holders, Series C Holders, Series D Holders, Series E Holders, Series F Holders, Purchasers, Transamerica or Warrant Holder) in a manner differently from the other Holders without the written consent of a majority of 16 the Registrable Securities held by the Holders in such adversely affected class. In addition, the Founders hereby agree that any amendment pursuant to Section 5.4 in connection with any subsequent rounds of financing described therein shall not require the consent of the Founders. Any amendment or waiver effected in accordance with Section 5.4 or Section 11, as applicable, shall be binding upon each Series A Holder, Series B Holder, Series C Holder, Series D Holder, Series E Holder, Series F Holder, Purchaser, Founder, Transamerica, Warrant Holder or Holder of Registrable Securities at the time outstanding, each future holder of any of such securities, and the Company. The Company, the Holders and the Founders hereby agree that, with the exception of Section 8 of the Restated Agreement, which shall remain in full force and effect among the parties to the Restated Agreement, this Agreement shall supersede the Restated Agreement in all respects, and that the Restated Agreement shall have no further force or effect from and after the date hereof. Notwithstanding the foregoing, the Holders and the Founders hereby consent to the Amendment of this Agreement for the purpose of adding as additional parties purchasers of additional shares of Series G Preferred Stock in one or more closings after the date hereof pursuant to the terms of the Purchase Agreement. 12. GOVERNING LAW. Except for Section 10 ("VOTING AGREEMENT"), which by its terms is intended to be governed by Delaware law, this Agreement shall be governed in all respects by the internal laws of the State of California without regard to conflict of laws provisions. 13. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and Agreement among the parties regarding the matters set forth herein. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon the successors, assigns, heirs, executors and administrators of, the parties hereto. 14. NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by facsimile transmission, by hand or by messenger, addressed: (a) if to a Holder, at such Holder's address as set forth in Exhibit A, or at such other address as such Holder shall have furnished to the Company. (b) if to the Company, to: Callidus Software Inc. 160 West Santa Clara Avenue 15th Floor San Jose, California 95113 Attn: Reed D. Taussig Fax: (408) 271-2662 17 or at such other address as the Company shall have furnished to the Holders, with a copy to: Davis Polk & Wardwell 1600 El Camino Real Menlo Park, CA 94025 Attn: Francis S. Currie, Esq. Fax: (650) 752-2111 Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, if sent by facsimile, the first business day after the date of confirmation that the facsimile has been successfully transmitted to the facsimile number for the party notified, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid. 15. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above. "COMPANY" Callidus Software Inc., a Delaware Corporation By: /s/ Reed D. Taussig -------------------------- Reed D. Taussig, President "PURCHASERS" ONSET ENTERPRISE ASSOCIATES II, L.P. By: OEA II Management, L.P., The General Partner of ONSET Enterprise Associates II, L.P. By: ____________________________________ Name: Title: ONSET ENTERPRISE ASSOCIATES III, L.P. By: OEA III Management, L.P., The General Partner of ONSET Enterprise Associates III, L.P. By: /s/ Terry Opdendyk ------------------------------------ Name: Title: 19 CROSSPOINT VENTURE PARTNERS LS 2000 By: /s/ John Mumford ------------------------------------ Name: Title: EAGLE VENTURES WF, LLC By: /s/ Kevin Spreng ------------------------------------ Name: Title: CRESCENDO WORLD FUND, LLC By: Crescendo Ventures WF, LLC, Managing Member By: /s/ Kevin Spreng ------------------------------------ Name: Title: CROSSPOINT VENTURE PARTNERS 1997 L.P. By: CROSSPOINT ASSOCIATES 1997, L.L.C., General Partner By: /s/ John Mumford ------------------------------------ Name: Title: 20 PRISMA GERMAN AMERICAN VENTURE PARTNERS GBR By: Crescendo Capital Management, LLC By: /s/ Kevin Spreng ------------------------------------ Name: Title: ________________________________________ By: ____________________________________ Name: Title: CHANCELLOR V, L.P. By: IPC Direct Associates V, L.L.C., its General Partner By: INVESCO Private Capital, Inc., its Managing Member By: /s/ Johnston Evans ------------------------------------ Name: Title: 21 CHANCELLOR V-A, L.P. By: IPC Direct Associates V, L.L.C., its General Partner By: INVESCO Private Capital, Inc., its Managing Member By: /s/ Johnston Evans ------------------------------------ Name: Title: EUROMEDIA VENTURE FUND (cotenancy of IPC Direct Associates V, L.L.C. and EuroMedia Venture Belgique SA) By: IPC EuroMedia Associates, L.L.C., its Managing Member By: INVESCO Private Capital, Inc., its Managing Member By: /s/ Johnston Evans ------------------------------------ Name: Title: CITIVENTURE 2000, L.P. By: IPC Direct Associates V, L.L.C., its General Partner By: INVESCO Private Capital, Inc., its Managing Member By: /s/ Johnston Evans ------------------------------------ Name: Title: 22 "HOLDERS" THE GOLDMAN SACHS GROUP, INC. By: /s/ John Bowman ------------------------------------ Name: John E. Bowman Title: Attorney-in Fact STONE STREET FUND 1998, L.P. By: Stone Street 1998, L.L.C. By: /s/ John Bowman ------------------------------------ Name: John E. Bowman Title: Vice President STONE STREET FUND 1999, L.P. By: Stone Street 1999, L.L.C. By: ____________________________________ Name: Title: BRIDGE STREET FUND 1998, L.P. By: Stone Street 1998, L.L.C. By: /s/ John Bowman ------------------------------------ Name: John E. Bowman Title: Vice President 23 ONSET ENTERPRISE ASSOCIATES II, L.P. By: OEA II Management, L.P., The General Partner of ONSET Enterprise Associates II, L.P. By: /s/ Terry Opdendyk ------------------------------------ Name: Title: ONSET ENTERPRISE ASSOCIATES III, L.P. By: OEA III Management, L.P., The General Partner of ONSET Enterprise Associates III, L.P. By: /s/ Terry Opdendyk ------------------------------------ Name: Title: CROSSPOINT VENTURE PARTNERS LS 2000 By: /s/ John Mumford ------------------------------------ Name: Title: EAGLE VENTURES WF, LLC By: /s/ Kevin Spreng ------------------------------------ Name: Title: 24 CRESCENDO WORLD FUND, LLC By: Crescendo Ventures WF, LLC, Managing Member By: /s/ Kevin Spreng ------------------------------------ Name: Title: CROSSPOINT VENTURE PARTNERS 1997 L.P. By: CROSSPOINT ASSOCIATES 1997, L.L.C., General Partner By: /s/ John Mumford ------------------------------------ Name: Title: PRISMA GERMAN AMERICAN VENTURE PARTNERS GBR By: Crescendo Capital Management, LLC By: /s/ Kevin Spreng ------------------------------------ Name: Title: 25 CHANCELLOR V, L.P. By: IPC Direct Associates V, L.L.C., its General Partner By: INVESCO Private Capital, Inc., its Managing Member By: ____________________________________ Name: Title: CHANCELLOR V-A, L.P. By: IPC Direct Associates V, L.L.C., its General Partner By: INVESCO Private Capital, Inc., its Managing Member By: ____________________________________ Name: Title: EUROMEDIA VENTURE FUND (cotenancy of IPC Direct Associates V, L.L.C. and EuroMedia Venture Belgique SA) By: IPC EuroMedia Associates, L.L.C., its Managing Member By: INVESCO Private Capital, Inc., its Managing Member By: ____________________________________ Name: Title: 26 CITIVENTURE 2000, L.P. By: IPC Direct Associates V, L.L.C., its General Partner By: INVESCO Private Capital, Inc., its Managing Member By: /s/ Johnston Evans ------------------------------------ Name: Title: 27 EXHIBIT A (to the Amended and Restated Registration and Information Rights Agreement dated March 13, 2001) SCHEDULE OF HOLDERS "THE FOUNDERS" Andrew L. Swett 492,224 shares of Common Stock 2004 Avy Avenue Menlo Park, CA 94025 Scott Kitayama 210,901 shares of Common Stock 209 Cypress Point Drive Mountain View, CA 94043 "THE SERIES A HOLDER" ONSET ENTERPRISE ASSOCIATES II, L.P. 1,000,000 shares of Series A Preferred 2490 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 "THE SERIES B HOLDERS" ONSET ENTERPRISE ASSOCIATES II, L.P. 600,000 shares of Series B Preferred 2490 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 CROSSPOINT VENTURE PARTNERS 1997 L.P. 1,000,000 shares of Series B Preferred 2925 Woodside Road Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 28 "THE SERIES C HOLDERS" ONSET ENTERPRISE ASSOCIATES II, L.P. 761,422 shares of Series C Preferred 2490 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 CROSSPOINT VENTURE PARTNERS 1997 L.P. 634,518 shares of Series C Preferred 2925 Woodside Road Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 CRESCENDO WORLD FUND, LLC (formerly 1,332,145 shares of Series C Preferred IAI WORLD FUND, LLC) Stock 800 LaSalle Avenue, Suite 2250 Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 EAGLE VENTURES WF, LLC 63,794 shares of Series C Preferred 800 LaSalle Avenue, Suite 2250 Stock Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 PRISMA GERMAN AMERICAN VENTURE 126,904 shares of Series C Preferred PARTNERS GBR Stock 800 LaSalle Avenue, Suite 2250 Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 WS INVESTMENT COMPANY 98A 12,690 shares of Series C Preferred c/o Wilson Sonsini Goodrich & Rosati Stock 650 Page Mill Road Palo Alto, CA 94304 Attn: Gail Husick Fax: (650) 493-6811 29 HUSICK FAMILY TRUST U/D/T FEB. 7, 1996 12,690 shares of Series C Preferred c/o Wilson Sonsini Goodrich & Rosati Stock 650 Page Mill Road Palo Alto, CA 94304 Attn: Gail Husick Fax: (650) 493-6811 "THE SERIES D HOLDERS" THE GOLDMAN SACHS GROUP, L.P. 1,941,748 shares of Series D Preferred 85 Broad Street Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 STONE STREET FUND 1999, L.P. 323,624 shares of Series D Preferred 85 Broad Street Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 STONE STREET FUND 1998, L.P. 248,597 shares of Series D Preferred 85 Broad Street Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 BRIDGE STREET FUND 1998, L.P. 75,027 shares of Series D Preferred 85 Broad Street Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 ONSET ENTERPRISE ASSOCIATES II, L.P. 323,624 shares of Series D Preferred 2490 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 30 CROSSPOINT VENTURE PARTNERS 1997 L.P. 323,624 shares of Series D Preferred 2925 Woodside Road Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 PRISMA GERMAN AMERICAN VENTURE 53,938 shares of Series D Preferred PARTNERS GBR Stock 800 LaSalle Avenue, Suite 2250 Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 EAGLE VENTURES WF, LLC 27,114 shares of Series D Preferred 800 LaSalle Avenue, Suite 2250 Stock Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 CRESCENDO WORLD FUND, LLC 566,197 shares of Series D Preferred 800 LaSalle Avenue, Suite 2250 Stock Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 "THE SERIES E HOLDERS" THE GOLDMAN SACHS GROUP, INC. 145,834 shares of Series E Preferred 85 Broad Street Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 STONE STREET FUND 1998, L.P. 16,000 shares of Series E Preferred 85 Broad Street Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 31 BRIDGE STREET FUND 1998, L.P. 4,833 shares of Series E Preferred Stock 85 Broad Street New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 ONSET ENTERPRISE ASSOCIATES II, L.P. 41,666 shares of Series E Preferred 2490 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 CROSSPOINT VENTURE PARTNERS LS 1999 833,334 shares of Series E Preferred 2925 Woodside Road Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 PRISMA GERMAN AMERICAN VENTURE 52,500 shares of Series E Preferred PARTNERS GBR Stock 800 LaSalle Avenue, Suite 2250 Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 CRESCENDO WORLD FUND, LLC 477,150 shares of Series E Preferred 800 LaSalle Avenue, Suite 2250 Stock Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 EAGLE VENTURES WF, LLC 23,333 shares of Series E Preferred 800 LaSalle Avenue, Suite 2250 Stock Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 32 The Alexander Group, Inc. 58,334 shares of Series E Preferred 90 New Montgomery St. Stock Suite 250 San Francisco, CA 94105 Attn: Robert Conti Fax: (415) 550-6411 Robert Conti 8,334 shares of Series E Preferred Stock 834 Dolores St. San Francisco, CA 94110 Fax: (415) 550-6411 David Cichelli 8,334 shares of Series E Preferred Stock 11 Trivota Irvine, CA 92720 (714) 838-9367 Gary Tubridy 8,334 shares of Series E Preferred Stock 14 Glen Avon Riverside, CT 06878 Fax: (203) 637-4923 Robert Hawk 35,000 shares of Series E Preferred 2925 Woodside Road Stock Woodside, CA 94062 Fax: (650) 851-7661 ONSET ENTERPRISE ASSOCIATES II, L.P. 41,668 shares of Series E Preferred 2400 Sand Hill Road, Suite 150 Stock Menlo Park, CA 94025 Attn: Terry L. Opdendyk Fax: (650) 529-0777 ONSET ENTERPRISE ASSOCIATES III, L.P. 500,000 shares of Series E Preferred 2400 Sand Hill Road, Suite 150 Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 "TRANSAMERICA" 33 TRANSAMERICA BUSINESS CREDIT 17,500 shares of Warrant Stock CORPORATION FUNDING TRUST II Riverway II, West Office Tower 9399 West Higgins Road Rosemont, IL 60018 Attn: Legal Department TRANSAMERICA BUSINESS CREDIT 4,375 shares of Warrant Stock CORPORATION FUNDING TRUST II Riverway II, West Office Tower 9399 West Higgins Road Rosemont, IL 60018 Attn: Legal Department TRANSAMERICA BUSINESS CREDIT Warrant to purchase 19,133 shares of CORPORATION FUNDING TRUST II Series F Preferred Stock Riverway II, West Office Tower 9399 West Higgins Road Rosemont, IL 60018 Attn: Legal Department "WARRANT HOLDERS" CRESCENDO WORLD FUND, LLC (formerly Warrant to purchase 29,946 shares of IAI WORLD FUND, LLC) Common Stock 800 LaSalle Avenue, Suite 2250 Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 CROSSPOINT VENTURE PARTNERS LS 2000 Warrant to purchase 147,546 shares of 2925 Woodside Road Common Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 EAGLE VENTURES WF, LLC Warrant to purchase 1,434 shares of 800 LaSalle Avenue, Suite 2250 Common Stock Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 34 THE GOLDMAN SACHS GROUP, INC. Warrant to purchase 103,053 shares of 85 Broad Street Common Stock New York, NY 10004 Attn: Randall A. Blumenthal Fax: (212) 357-5505 ONSET ENTERPRISE ASSOCIATES II, L.P. Warrant to purchase 123,898 shares of 2400 Sand Hill Road, Suite 150 Common Stock Menlo Park, CA 94025 Attn: Terry L. Opdendyk Fax: (650) 529-0777 ONSET ENTERPRISE ASSOCIATES III, L.P. Warrant to purchase 123,900 shares of 2400 Sand Hill Road, Suite 150 Common Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 PRISMA GERMAN AMERICAN VENTURE Warrant to purchase 2,853 shares of PARTNERS GBR Common Stock 800 LaSalle Avenue, Suite 2250 Minneapolis, MN 55402 Attn: James Behnke Fax: (612) 607-2801 STONE STREET FUND 1999, L.P. Warrant to purchase 17,176 shares of 85 Broad Street Common Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 STONE STREET FUND 1998, L.P. Warrant to purchase 13,194 shares of 85 Broad Street Common Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 BRIDGE STREET FUND 1998, L.P. Warrant to purchase 3,982 shares of 85 Broad Street Common Stock New York, NY 10004 Attn: Martin Stapleton Fax: (212) 357-5505 35 "THE SERIES F HOLDERS" CROSSPOINT VENTURE PARTNERS LS 2000 5,102,041 shares of Series F Preferred 2925 Woodside Road Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 ONSET ENTERPRISE ASSOCIATES II, LP 460,757 shares of Series F Preferred 2400 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 ONSET ENTERPRISE ASSOCIATES III, L.P. 460,756 shares of Series F Preferred 2400 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 CRESCENDO WORLD FUND, LLC 586,084 shares of Series F Preferred 480 Cowper Street Stock Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 EAGLE VENTURES WF, LLC 28,067 shares of Series F Preferred 480 Cowper Street Stock Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 PRISMA GERMAN AMERICAN 10,609 shares of Series F Preferred VENTURE PARTNERS GBR Stock 480 Cowper Street Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 36 GOLDMAN SACHS GROUP, INC. 387,774 shares of Series F Preferred 480 Cowper Street Stock Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 STONE STREET FUND 1999, L.P. 64,629 shares of Series F Preferred 480 Cowper Street Stock Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 STONE STREET FUND 1998, L.P. 49,646 shares of Series F Preferred 480 Cowper Street Stock Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 BRIDGE STREET FUND 1998, L.P. 14,983 shares of Series F Preferred 480 Cowper Street Stock Suite 300 Palo Alto, CA 94301 Attn: Richard Grogan-Crane Fax: (650) 470-1201 Chancellor V, L.P. 1,000,510 shares of Series F Preferred INVESCO Private Capital, Inc. Stock 200,102 Warrant Shares 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address 37 Chancellor V-A, L.P. 468,878 shares of Series F Preferred INVESCO Private Capital, Inc. Stock 93,775 Warrant Shares 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address EUROMEDIA VENTURE FUND. 925,255 shares of Series F Preferred INVESCO Private Capital, Inc. Stock 185,051 Warrant Shares 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address CITIVENTURE 2000, L.P. 156,378 shares of Series F Preferred INVESCO Private Capital, Inc. Stock 31,275 Warrant Shares 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address 38 "THE SERIES G HOLDERS" CROSSPOINT VENTURE PARTNERS 2000 Q, 3,532,118 shares of Series G Preferred L.P Stock 2925 Woodside Road Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 CROSSPOINT VENTURE PARTNERS 2000, L.P 404,139 shares of Series G Preferred 2925 Woodside Road Stock Woodside, CA 94062 Attn: John Mumford Fax: (650) 851-7661 ONSET ENTERPRISE ASSOCIATES III, L.P. 1,200,000 shares of Series G Preferred 2400 Sand Hill Road Stock Menlo Park, CA 94025 Attn: Terry Opdendyk Fax: (650) 529-0777 CRESCENDO WORLD FUND, LLC 1,164,246 shares of Series G Preferred 800 LaSalle Avenue Stock Suite 2250 Minneapolis, MN 55402 Attn: Kevin Spreng EAGLE VENTURES WF, LLC 55,754 shares of Series G Preferred 800 LaSalle Avenue Stock Suite 2250 Minneapolis, MN 55402 Attn: Kevin Spreng 39 Chancellor V, L.P. 644,676 shares of Series G Preferred INVESCO Private Capital, Inc. Stock 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address Chancellor V-A, L.P. 302,120 shares of Series G Preferred INVESCO Private Capital, Inc. Stock 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address EUROMEDIA VENTURE FUND. 596,185 shares of Series G Preferred INVESCO Private Capital, Inc. Stock 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address 40 CITIVENTURE 2000, L.P. 100,762 shares of Series G Preferred INVESCO Private Capital, Inc. Stock 525 University Avenue, Suite 600 Palo Alto, CA 94301 INVESCO Private Capital c/o Ben Gruder 1166 Avenue of the Americas New York, NY 10036 Fax: (212) 278-3723 WITH COPIES TO: Andrew Dworkin at the same address 41 EX-10.3 6 f92629orexv10w3.txt EXHIBIT 10.3 Exhibit - 10.3 SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT Borrower: Callidus Software, Inc. Address: 160 W. Santa Clara Street, Suite 1500 San Jose, California 95113 Date: Dated as of September 26, 2002. THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered into on the above date between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above (jointly and severally, the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall for all purposes be deemed to be a part of this Agreement, and the same is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth in Section 8 below.) 1. LOANS. 1.1.1 REVOLVING LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts determined by Silicon in its good faith business judgment, up to the amounts (the "Credit Limit") shown on the Schedule, provided no Default or Event of Default has occurred and is continuing, and subject to deduction of Reserves for accrued interest and such other Reserves as Silicon deems proper from time to time in its good faith business judgment. 1.1.2 TERM LOAN. Bank will make a Term Loan available to Borrower on the Effective Date. The Term Loan shall be payable in thirty six (36) equal installments of principal, plus accrued interest (each a "Term Loan Payment"). Each Term Loan Payment is payable on the 1st day of each month beginning on October 1, 2002. Borrower's final Term Loan Payment, due on September 1, 2005, includes all outstanding Term Loan principal and accrued interest. 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule, except where expressly set forth to the contrary in this Agreement. Interest shall be payable monthly, on the last day of the month. Interest may, in Silicon's discretion, be charged to Borrower's loan account, and the same shall thereafter bear interest at the same rate as the other Loans. Silicon may, in its discretion, charge interest to Borrower's Deposit Accounts maintained with Silicon. 1.3 OVERADVANCES. Unless otherwise agreed to in writing by Silicon in its sole discretion, if at any time OR for any reason the total of all outstanding Loans and all other monetary Obligations exceeds the Credit Limit (an "Overadvance"), Borrower shall immediately pay the amount of the excess to Silicon, without notice or demand. Without limiting Borrower's obligation to repay to Silicon the amount of any Overadvance, Borrower agrees to pay Silicon interest on the outstanding amount of any Overadvance, on demand, at the Default Rate. 1.4 FEES. Borrower shall pay Silicon the fees shown on the Schedule, which are in addition to all INTEREST and other sums payable to Silicon and are not refundable. 1.5 LOAN REQUESTS. To obtain a Loan, Borrower shall make a request to Silicon by facsimile or telephone. Loan requests received after 12:00 Noon (Pacific time) will not be considered by Silicon until the next Business Day. Silicon may rely on any telephone request for a Loan given by a person whom Silicon 1 believes is an authorized representative of Borrower, and Borrower will indemnify Silicon for any loss Silicon suffers as a result of that reliance. 1.6 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its good faith business judgment, issue or arrange for the issuance of letters of credit for the account of Borrower in each case in form and substance satisfactory to Silicon in its sole discretion (collectively, "Letters of Credit"). The aggregate face amount of all Letters of Credit from time to time outstanding shall not exceed the amount shown on the Schedule (the "Letter of Credit Sublimit"), and unless otherwise collateralized by cash or cash equivalents, shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Borrower shall pay all bank charges (including charges of Silicon) for the issuance of Letters of Credit, together with such additional fee as Silicon's letter of credit department shall charge in connection with the issuance of the Letters of Credit. Any payment by Silicon under or in connection with a Letter of Credit shall constitute a Loan hereunder on the date such payment is made. Each Letter of Credit shall have an expiry date no later than thirty (30) days prior to the Line of Credit Maturity Date. Borrower hereby agrees to indemnify and hold Silicon harmless from any loss, cost, expense, or liability, including payments made by Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising out of or in connection with any Letters of Credit. Borrower agrees to be bound by the regulations and interpretations of the issuer of any Letters of Credit guaranteed by Silicon and opened for Borrower's account or by Silicon's interpretations of any Letter of Credit issued by Silicon for Borrower's account, and Borrower understands and agrees that Silicon shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto. Borrower understands that Letters of Credit may require Silicon to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect to any loss, cost, expense, or liability incurred by Silicon under any Letter of Credit as a result of Silicon's indemnification of any such issuing bank. The provisions of this Loan Agreement, as it pertains to Letters of Credit, and any other Loan Documents relating to Letters of Credit are cumulative. 1.7 CASH MANAGEMENT SERVICES. Borrower may use up to the Cash Management Services Sublimit (as hereinafter defined) of the loans for Silicon's Cash Management Services, which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in various cash management services agreements related to such services (the "Cash Management Services"). The aggregate face amount of all Letters of Credit, Cash Management Services and the Foreign Exchange Sublimit from time to time outstanding shall not exceed the amount shown on the Schedule, and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. Any amounts Silicon pays on behalf of Borrower or any amounts that are not paid by Borrower for any Cash Management Services will be treated as Loans and will accrue interest at the rate provided for herein. 1.8 FOREIGN EXCHANGE SUBLIMIT. At the request of Borrower, Silicon may, in its good faith business judgment, permit the Borrower to enter into foreign exchange forward contracts with Silicon under which Borrower commits to purchase from or sell to Silicon a set amount of foreign currency more than one (1) Business Day after the contract date (the "FX Forward Contract"). Silicon will subtract ten percent (10%) of each outstanding FX Forward Contract (the "FX Reserve") from the Foreign Exchange Sublimit (as hereinafter defined). The total FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FX Reserve. Silicon may terminate the FX Forward Contracts if a Default or an Event of Default occurs and is continuing. The aggregate face amount of all FX Forward Contracts and the amount of all FX Reserves shall not exceed the amount shown on the Schedule (the "Foreign Exchange Sublimit"), and shall be reserved against Loans which would otherwise be available hereunder, and in the event at any time there are insufficient Loans available to Borrower for such reserve, Borrower shall deposit and maintain with Silicon cash collateral in an amount at all times equal to such deficiency, which shall be held as Collateral for all purposes of this Agreement. 2. SECURITY INTEREST. To secure the payment and performance of all of the Obligations when 2 due, Borrower hereby grants to Silicon a security interest in all of the following (collectively, the "Collateral"): all right, title and interest of Borrower in and to all of the following, whether now owned or hereafter arising or acquired and wherever located: all Accounts; all Inventory; all Equipment; all Deposit Accounts; all General Intangibles (including without limitation all intellectual property); all Investment Property; all other property; and any and all claims, rights and interests in any of the above, and all guaranties and security for any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above, and all Borrower's books relating to any and all of the above. NOTWITHSTANDING THE FOREGOING, THE SECURITY INTEREST GRANTED HEREIN DOES NOT EXTEND TO AND THE TERM "COLLATERAL" DOES NOT INCLUDE ANY LICENSES WHERE BORROWER IS THE LICENSEE TO THE EXTENT THAT (I) THE GRANTING OF A SECURITY INTEREST THEREIN WOULD BE CONTRARY TO APPLICABLE LAW, OR (II) THAT SUCH RIGHTS ARE NON-ASSIGNABLE BY THEIR TERMS (BUT ONLY TO THE EXTENT SUCH PROHIBITION IS ENFORCEABLE UNDER APPLICABLE LAW, INCLUDING THE CODE). EXCEPT AS DISCLOSED ON THE SCHEDULE ATTACHED HERETO, BORROWER REPRESENTS AND WARRANTS TO SILICON THAT IT IS NOT A PARTY TO, NOR IS IT BOUND BY, ANY SUCH LICENSE OR OTHER AGREEMENT. BORROWER SHALL AT ALL TIMES USE COMMERCIALLY REASONABLE EFFORTS TO CAUSE LICENSE AND OTHER AGREEMENTS THAT ARE MATERIAL TO ITS BUSINESS TO PERMIT THE GRANT BY BORROWER OF A SECURITY INTEREST THEREIN TO SILICON 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER. In order to induce Silicon to enter into this Agreement and to make Loans, Borrower represents and warrants to Silicon as follows, and Borrower covenants that the following representations will continue to be true, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement and until all Obligations have been paid and performed in full: 3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would result in a Material Adverse Change. The execution, delivery and performance by Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to creditors' rights generally), and (iii) do not violate Borrower's articles or certificate of incorporation, or Borrower's by-laws, or any law or any material agreement or instrument which is binding upon Borrower or its property, and (iv) do not constitute grounds for acceleration of any material indebtedness or obligation under any agreement or instrument which is binding upon Borrower or its property. 3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the heading to this Agreement is its correct name. Listed in the Representations are all prior names of Borrower and all of Borrower's present and prior trade names. Borrower shall give Silicon thirty (30) days prior written notice before changing its name or doing business under any other name. Borrower has complied, and will in the future comply, in all material respects, with all laws relating to the conduct of business under a fictitious business name, except where the failure to so comply would not reasonably be expected to result in a Material Adverse Change. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is Borrower's chief executive office. In addition, Borrower has places of business and Collateral is located only at the locations set forth in the Representations. Borrower will give Silicon at least thirty (30) days prior written notice before opening any additional place of business, changing its chief executive office, or moving any of the Collateral to a location other than Borrower's Address or one of the locations set forth in the Representations, except that Borrower may maintain sales offices in the ordinary course of business at which not more than a total of $50,000 fair market value of Equipment is located. 3.4 TITLE TO COLLATERAL; PERFECTION; PERMITTED LIENS. 3 (a) Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of Equipment which are leased to Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. Silicon now has, and will continue to have, a first-priority perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and Borrower will at all times defend Silicon and the Collateral against all claims of others. (b) Borrower has set forth in the Representations all of Borrower's Deposit Accounts, and Borrower will give Silicon five (5) Business Days advance written notice before establishing any new Deposit Accounts and will cause the institution where any such new Deposit Account is maintained to execute and deliver to Silicon a control agreement in form sufficient to perfect Silicon's security interest in the Deposit Account and otherwise satisfactory to Silicon in its good faith business judgment. Nothing herein limits any requirements which may be set forth in the Schedule as to where Deposit Accounts will be maintained. (c) In the event that Borrower shall at any time after the date hereof have any commercial tort claims against others, which it is asserting or intends to assert, and in which the potential recovery exceeds $100,000, Borrower shall promptly notify Silicon thereof in writing and provide Silicon with such information regarding the same as Silicon shall request (unless providing such information would waive the Borrower's attorney-client privilege). Such notification to Silicon shall constitute a grant of a security interest in the commercial tort claim and all proceeds thereof to Silicon, and Borrower shall execute and deliver all such documents and take all such actions as Silicon shall request in connection therewith. (d) None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture. Borrower is not and will not become a lessee under any real property lease pursuant to which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which any third party has an interest, Borrower shall, whenever requested by Silicon, use its best efforts to cause such third party to execute and deliver to Silicon, in form acceptable to Silicon, such waivers and subordinations as Silicon shall specify in its good faith business judgment. Borrower will keep in full force and effect, and will comply with all material terms of, any lease of real property where any of the Collateral now or in the future may be located. 3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and Borrower will not use the Collateral for any unlawful purpose. Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral. 3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with GAAP. 3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with GAAP and now and in the future will fairly present the results of operations and financial condition of Borrower, in accordance with GAAP, at the times and for the periods therein stated. Between the last date covered by any such statement provided to Silicon and the date hereof, there has been no Material Adverse Change. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed, and will timely file, all required tax returns and reports, and Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by Borrower. Borrower may, however, defer payment of any contested taxes, provided that Borrower (i) in good faith contests Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and 4 Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. 3.9 COMPLIANCE WITH LAW. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations applicable to Borrower, including, but not limited to, those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, and all environmental matters. 3.10 LITIGATION. There is no claim, suit, litigation, proceeding or investigation pending or (to best of Borrower's knowledge) threatened against or affecting Borrower in any court or before any governmental agency (or any basis therefor known to Borrower) which could reasonably be expected to result, either separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted against Borrower involving any single claim of $100,000 or more, or involving $250,000 or more in the aggregate. 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. Borrower is not purchasing or carrying any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any "margin stock" or to extend credit to others for the purpose of purchasing or carrying any "margin stock." 3.12 INVESTMENTS. Provided no Default or Event of Default has occurred and is continuing, Borrower may (i) make investments in accordance with Section 5.5 (vii) and (ii) other investments pursuant to an investment policy duly adopted by Borrower's Board of Directors and consented to by Silicon. 4. ACCOUNTS. 4.1 REPRESENTATIONS RELATING TO ACCOUNTS. Borrower represents and warrants to Silicon as follows: Each Account with respect to which Loans are requested by Borrower shall, on the date each Loan is requested and made, (i) represent an undisputed bona fide existing unconditional obligation of the Account Debtor created by the sale, delivery, and acceptance of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, in the ordinary course of Borrower's business, and (ii) meet the Minimum Eligibility Requirements set forth in Section 8 below. 4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower represents and warrants to Silicon as follows: All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Accounts are and shall be true and correct and all such invoices, instruments and other documents and all of Borrower's books and records are and shall be genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Account shall comply in all material respects with all applicable laws and governmental rules and regulations. To the best of Borrower's knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Accounts are and shall be genuine, and all such documents, instruments and agreements are and shall be legally enforceable in accordance with their terms. 4.3 SCHEDULES AND DOCUMENTS RELATING TO ACCOUNTS. Borrower shall deliver to Silicon transaction reports and schedules of collections, as provided in the Schedule, on Silicon's standard forms; provided, however, that Borrower's failure to execute and deliver the same shall not affect or limit Silicon's security interest and other rights in all of Borrower's Accounts, nor shall Silicon's failure to advance or lend against a specific Account affect or limit Silicon's security interest and other rights therein. If requested by Silicon, Borrower shall furnish Silicon with copies (or, at Silicon's request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts, and Borrower warrants the genuineness of all of the fore going. Borrower shall also furnish to Silicon an aged accounts receivable trial balance as provided in the Schedule. In addition, Borrower shall deliver to Silicon, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all 5 necessary endorsements, and copies of all credit memos. 4.4 COLLECTION OF ACCOUNTS. Borrower shall have the right to collect all Accounts, unless and until a Default or an Event of Default has occurred and is continuing. Whether or not an Event of Default has occurred and is continuing, Borrower shall hold all payments on, and proceeds of, Accounts in trust for Silicon, and Borrower shall immediately deliver all such payments and proceeds to Silicon in their original form, duly endorsed, to be applied to the Obligations in such order as Silicon shall determine. All proceeds of Collateral shall be immediately deposited by Borrower on a daily basis into a lockbox account, or such other "blocked account" as Silicon may specify, pursuant to a blocked account agreement in such form as Silicon may specify in its good faith business judgment. 4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of any Collateral shall be delivered, in kind, by Borrower to Silicon in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations in such order as Silicon shall determine; provided that, if no Default or Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Silicon the proceeds of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm's length transaction for an aggregate purchase price of $50,000 or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower's other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Silicon. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement. 4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or claims relating to Accounts. Borrower shall not forgive (completely or partially), compromise or settle any Account for less than payment in full, or agree to do any of the foregoing, except that Borrower may do so, provided that: (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, and in arm's length transactions, which are reported to Silicon on the regular reports provided to Silicon; (ii) no Default or Event of Default has occurred and is continuing; and (iii) taking into account all such discounts, settlements and forgiveness, the total outstanding Loans will not exceed the Credit Limit. 4.7 RETURNS. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly determine the reason for such return and promptly issue a credit memorandum to the Account Debtor in the appropriate amount. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrower shall hold the returned Inventory in trust for Silicon, and immediately notify Silicon of the return of the Inventory. 4.8 VERIFICATION. Silicon may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, by means of mail, telephone or otherwise, either in the name of Borrower or Silicon or such other name as Silicon may choose. 4.9 NO LIABILITY. Silicon shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Silicon be deemed to be responsible for any of Borrower's obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Silicon from liability for its own gross negligence or willful misconduct. 5. ADDITIONAL DUTIES OF BORROWER. 5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule. 5.2 INSURANCE. Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require and that are customary and in accordance with standard practices 6 for Borrower's industry and locations, and Borrower shall provide evidence of such insurance to Silicon. All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its good faith business judgment, except that, provided no Default or Event of Default has occurred and is continuing, Silicon shall release to Borrower insurance proceeds with respect to Equipment totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at Borrower's expense. Borrower shall promptly deliver to Silicon copies of all material reports made to insurance companies. 5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the written reports set forth in the Schedule, and such other written reports with respect to Borrower (including budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time specify in its good faith business judgment. 5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on one Business Day's notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records; provided that Silicon anticipates that such inspections or audits after the initial inspection and audit shall occur on a quarterly basis or as conditions may warrant. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower's expense and the charge therefor shall be $750 per person per day (or such higher amount as shall represent Silicon's then current standard charge for the same), plus reasonable out of pocket expenses. 5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule, Borrower shall not, without Silicon's prior written consent (which shall be a matter of its good faith business judgment), do any of the following: (i) merge or consolidate with another corporation or entity; (ii) acquire any assets, except in the ordinary course of business; (iii) enter into any other transaction outside the ordinary course of business; (iv) sell or transfer any Collateral, except for the sale of finished Inventory in the ordinary course of Borrower's business, and except for the sale of obsolete or unneeded Equipment in the ordinary course of business subject to the limitations set forth in Section 4.5; (v) store any Inventory or other Collateral with any warehouseman or other third party; (vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis; (vii) make any loans of any money or other assets other than loans or advances to any individual employee in an amount not to exceed $150,000 in the aggregate, which are made in the ordinary course of business prior to the occurrence and continuance of any Default or Event of Default, provided that the aggregate of all such loans and advances shall not exceed $250,000 outstanding at any time (viii) make "cashless" loans to employees for the purposes of purchasing stock of Borrower, (ix) incur any debts, outside the ordinary course of business, which would result in a Material Adverse Change; (x) guarantee or otherwise become liable with respect to the obligations of another party or entity, other than any liability which may arise by virtue of Borrower certifying certain financial statements and reports of its operating subsidiaries; (xi) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower); (xii) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's stock, except for repurchase of stock owned by employees, directors and consultants of Borrower pursuant to the terms of any employment, consulting or other stock restrictions agreement at such time as any such employee, director or consultant terminates his or her affiliations with the Borrower, provided that no Default or Event of Default shall exist either immediately prior to or after giving effect to such repurchase an further provided that the total amount paid in connection therewith by Borrower shall not exceed $250,000 in any twelve (12) month period; (xiii) make any change in Borrower's capital structure which would result in a Material Adverse Change; or (xiv) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related thereto; or (xv) dissolve or elect to dissolve. Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a result of such transaction. 5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or relating to Borrower, Borrower shall, without expense to Silicon, 7 make available Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. 5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by Silicon, to execute all documents and take all actions, as Silicon, may, in its good faith business judgment, deem necessary or useful in order to perfect and maintain Silicon's perfected first-priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by this Agreement. 6. TERM. 6.1 MATURITY DATE. This Agreement shall continue in effect until the later of (a) the Line of Credit Maturity Date set forth on the Schedule, or (b) the Term Loan Maturity Date set forth in the Schedule (the latter of (a) or (b) being referred to herein as the "Maturity Date"), subject to Section 6.2 below. 6.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by Borrower, effective three (3) Business Days after written notice of termination is given to Silicon; or (ii) by Silicon at any time after the occurrence and during the continuance of an Event of Default, without notice, effective immediately. If this Agreement is terminated by Borrower or by Silicon under this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount equal to Fifty Five Thousand Dollars ($55,000) for the first twelve (12) months of the Loan and thereafter pro-rated each month by 1/24th, provided that no termination fee shall be charged if the credit facilities hereunder are replaced with new facilities from another division of Silicon Valley Bank. The termination fee shall be due and payable on the effective date of termination and thereafter shall bear interest at a rate equal to the highest rate applicable to any of the Obligations. 6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. Without limiting the generality of the foregoing, if on the Line of Credit Maturity Date, or on any earlier effective date of termination, there are any outstanding Letters of Credit is sued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to 105% of the face amount of all such Letters of Credit plus all interest, fees and cost due or to become due in connection therewith (as estimated by Silicon in its good faith business judgment), to secure all of the Obligations relating to said Letters of Credit, pursuant to Silicon's then standard form cash pledge agreement. Notwithstanding any termination of this Agreement, all of Silicon's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and termination of this Agreement, Silicon shall promptly terminate its financing statements with respect to the Borrower and deliver to Borrower such other documents as may be required to fully terminate Silicon's security interests. 7. EVENTS OF DEFAULT AND REMEDIES. 7.1 EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by Borrower or any of Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in a material respect when made or deemed to be made; or (b) Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans outstanding at any .time shall exceed the Credit Limit; or (d) Borrower shall fail to comply with any of the financial covenants set forth in the Schedule, or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or shall fail to permit Silicon to conduct an inspection or audit as specified in Section 5.4 hereof; or (e) Borrower shall fail to perform any other non-monetary Obligation, which failure is not cured within five (5) 8 Business Days after the date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made on all or any part of the Collateral which is not cured within ten (10) days after the occurrence of the same; or (g) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable cure period or waived in writing by the holder of the Permitted Lien; or (h) Borrower breaches any material contract or obligation, which has resulted or may reasonably be expected to result in a Material Adverse Change; or (i) dissolution, termination of existence, insolvency or business failure of Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (j) the commencement of any proceeding against Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within thirty (30) days after the date commenced; or (k) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (l) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing, or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (m) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement, or if any Person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (n) there shall be a change in the record or beneficial ownership of an aggregate of more than 20% of the outstanding shares of stock of Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of Borrower in effect on the date hereof, without the prior written consent of Silicon; or (o) Borrower shall generally not pay its debts as they become due, or Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or (p) a Material Adverse Change shall occur. Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred and is continuing. 7.2 REMEDIES. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, Silicon, at its option, and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose Borrower hereby authorizes Silicon without judicial process to enter onto any of Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as Silicon deems it necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other agreement; - -provided, however, that should Silicon seek to take possession of any of the Collateral by court process, Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f) Sell, lease or otherwise dispose of any of the Collateral (except as permitted under Section 4.5), in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the 9 time scheduled for sale. Silicon shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse or sign Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon's good faith business judgment, to grant extensions of time to pay, compromise claims and settle Accounts and the like for less than- face value; (h) Offset against any sums in any of Borrower's general, special or other Deposit Accounts with Silicon against any or all of the Obligations; and (i) Demand and receive possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon's rights and remedies, from and after the occurrence and during the continuance of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent per annum (the "Default Rate"). 7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Silicon agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to Borrower at least ten (10) days prior to the sale, and, in the case of a public sale, notice of the sale is published at least five (5) days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. Silicon shall be free to employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 7.4 POWER OF ATTORNEY. Upon the occurrence and during the continuance of any Event of Default, without limiting Silicon's other rights and remedies, Borrower grants to Silicon an irrevocable power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but Silicon agrees that if it exercises any right hereunder, it will do so in good faith and in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that Silicon may, in its good faith business judgment, deem advisable in order to perfect and maintain Silicon's security interest in the Collateral, or in order to exercise a right of Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (c) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon's possession; (d) Endorse all checks and other forms of remittances received by Silicon; (e) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control of any books or records belonging to, or relating to, Borrower to 10 give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (j) Take any action or pay any sum required of Borrower pursuant to this Agreement and any other Loan Documents. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon's rights under the foregoing power of attorney or any of Silicon's other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of Borrower. 7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Silicon shall have the option, exercisable at any time, in its good faith business judgment, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor. 7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 8. DEFINITIONS. As used in this agreement, the following terms have the following meanings: "Account Debtor" means the obligor on an Account. "Accounts" means all present and future "accounts" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all accounts receivable and other sums owing to Borrower. "Adjustment Date" means the earlier of the date on which Borrower (i) closes on a round of equity after the date of this Agreement which raises not less than $4,000,000, or (ii) provides Silicon with financial statements in accordance with this Agreement, which demonstrate to Silicon's satisfaction that Borrower has met or exceeded the revenue covenant for the quarter ending December 31, 2002. "Affiliate" means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any parent or subsidiary of such Person, or any Person controlling, controlled by or under common control with such Person. "Business Day" means a day on which Silicon is open for business. "Code" means the Uniform Commercial Code as adopted and in effect in the State of California from time to time. "Collateral" has the meaning set forth in Section 2 above. "continuing" and "during the continuance of" when used with reference to a Default or Event of Default means that the Default or Event of Default has occurred and has not been either waived in writing by Silicon or cured within any applicable cure period. 11 "Default" means any event which with notice or passage of time or both, would constitute an Event of Default. "Default Rate" has the meaning set forth in Section 7.2 above. "Deposit Accounts" means all present and future "deposit accounts" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts, checking accounts, savings accounts and certificates of deposit. "EBITDA" means for any period of determination thereof, the sum of Borrower's net income, plus income taxes, plus interest expense, plus depreciation, amortization and other non-cash charges. "EBITDA Qualification Date" is the date upon which Borrower establishes to Silicon's sole discretion that it has maintained a ratio of EBITDA to the outstanding principal balance of the Term Loan of not less than 2.0 to 1.0 for two (2) consecutive fiscal quarters. "Effective Date" is the date this Agreement is executed by Silicon. "Eligible Accounts" means Accounts and General Intangibles arising in the ordinary course of Borrower's business from the sale of goods or the rendition of services, or the non-exclusive licensing of Intellectual Property, which Silicon, in its good faith business judgment, shall deem eligible for borrowing. Without limiting the fact that the determination of which Accounts are eligible for borrowing is a matter of Silicon's good faith business judgment, the following (the "Minimum Eligibility Requirements") are the minimum requirements for a Account to be an Eligible Account: (i) the Account must not be outstanding for more than ninety (90) days from its invoice date (the "Eligibility Period"), (ii) the Account must not represent progress billings, or be due under a fulfillment or requirements contract with the Account Debtor, unless in Silicon's good faith business judgment, such progress billings are for non-refundable product payments, software installation fees or maintenance services, (iii) the Account must not be subject to any contingencies (including Accounts arising from sales on consignment, guaranteed sale or other terms pursuant to which payment by the Account Debtor may be conditional), (iv) the Account must not be owing from an Account Debtor with whom Borrower has any dispute (whether or not relating to the particular Account), (v) the Account must not be owing from an Affiliate of Borrower, (vi) the Account must not be owing from an Account Debtor which is subject to any insolvency or bankruptcy proceeding, or whose financial condition is not acceptable to Silicon, or which, fails or goes out of a material portion of its business, (vii) the Account must not be owing from the United States or any department, agency or instrumentality thereof (unless there has been compliance, to Silicon's satisfaction, with the United States Assignment of Claims Act), (viii) the Account must not be owing from an Account Debtor located outside the United States or Canada (unless pre-approved by Silicon in its discretion in writing, or backed by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to Silicon) to the extent such Account (a) is not billed from the United States and subject to a first lien perfected security interest in favor of Silicon or (b) causes the total aggregate amount of all such Accounts to exceed 15% of Borrower's total aggregate Eligible Accounts, (ix) the Account must not be owing from an Account Debtor to whom Borrower is or may be liable for goods purchased from such Account Debtor or otherwise (but, in such case, the Account will be deemed not eligible only to the extent of any amounts owed by Borrower to such Account Debtor). Accounts owing from one Account Debtor will not be deemed Eligible Accounts to the extent they exceed 35% of the total Accounts outstanding. In addition, if more than 50% of the Accounts owing from an Account Debtor are outstanding for a period longer than their Eligibility Period (without regard to unapplied credits) or are otherwise not Eligible Accounts, then all Accounts owing from that Account Debtor will be deemed ineligible for borrowing. Silicon may, from time to time, in its good faith business judgment, revise the Minimum Eligibility Requirements, upon written notice to Borrower. "Equipment" means all present and future "equipment" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing. 12 "Event of Default" means any of the events set forth in Section 7.1 of this Agreement. "GAAP" means generally accepted accounting principles consistently applied. "General Intangibles" means all present and future "general intangibles" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind. "good faith business judgment" means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of Silicon's business judgment. "including" means including (but not limited to). "Intellectual Property" means all present and future (a) copyrights, copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights, including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles, and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) computer software and computer software products; (g) designs and design rights; (h)technology; (i) all claims for damages by way of past, present and future infringement of any of the rights included above; (j) all licenses or other rights to use any-property or rights of a type described above. "Inventory" means all present and future "inventory" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returned goods and any documents of title representing any of the above. "Investment Property" means all present and future investment property, securities, stocks, bonds, debentures, debt securities, partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts, commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated. "Loan Documents" means, collectively, this Agreement, the Representations, and all other present and future documents, instruments and agreements between Silicon and Borrower, including, but not limited to those relating to this Agreement, and all amendments and modifications thereto and replacements therefor. "Material Adverse Change" means any of the following: (i) a material adverse change in the business, operations, or financial or other condition of the Borrower, or (ii) a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) a material impairment of the value or priority of Silicon's security interests in the Collateral. "Obligations" means all present and future Loans, the Term Loan, all advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness at any time owing by Borrower to Silicon, whether evidenced by this Agreement or any note or other instrument or document, or otherwise, whether arising from an extension of credit, opening of a letter of credit, banker's acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without limitation, those acquired by assignment and any participation by Silicon in Borrower's debts owing to others), absolute or contingent, due 13 or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's fees, expert witness fees, audit fees, letter of credit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and any other sums chargeable to Borrower under this Agreement or under any other Loan Documents. "Other Property" means the following as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and all rights relating thereto: all present and future "commercial tort claims" (including without limitation any commercial tort claims identified in the Representations), "documents", "instruments", "promissory notes", "chattel paper", "letters of credit", "letter-of-credit rights", "fixtures", "farm products" and "money"; and all other goods and personal property of every kind, tangible and intangible, whether or not governed by the California Uniform Commercial Code. "Permitted Liens" means the following: (i) purchase money security interests in specific items of Equipment; (ii) leases of specific items of Equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon, which consent may be withheld in its good faith business judgment; (v) security interests being terminated substantially concurrently with this Agreement; (vi) liens of materialmen, mechanics, ware housemen, carriers, or other similar liens arising in the ordinary course of business and securing obligations which are not delinquent or are being contested in good faith and for which Borrower maintains adequate reserves on its books, provided such liens have no priority over any of Silicon's security interests; (vii) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described above in clauses (i) or (ii) above, provided that any extension, renewal or replacement lien is limited to the property encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; (viii) Liens in favor of customs and revenue authorities which-secure payment of customs duties in connection with the importation of goods, (ix) leases or subleases and nonexclusive -licenses or sublicenses granted to others not interfering in any material respect with the business of the Borrower, and (x) liens in the nature of a lessor's interest under any lease entered into by Borrower which is otherwise permitted under the terms of this Agreement. Silicon will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, government, or any agency or political division thereof, or any other entity. "Representations" means the written Representations and Warranties provided by Borrower to Silicon referred to in the Schedule. "Reserves" means, as of any date of determination, such amounts as Silicon may from time to time establish and revise in its good faith business judgment, reducing the amount of Loans, Letters of Credit and other financial accommodations which would otherwise be available to Borrower under the lending formula(s) provided in the Schedule: (a) to reflect events, conditions, contingencies or risks which, as determined by Silicon in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower or any guarantor of the Obligations, or (iii) the security interests and other rights of Silicon in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Silicon's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Silicon is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Silicon determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. "Streamline Period" is defined in the Schedule. 14 "Term Loan" a loan of One Million Five Hundred Thousand Dollars ($1,500,000). Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in accordance with GAAP, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the meanings provided by the Code, to the extent such terms are defined therein. 9. GENERAL PROVISIONS. 9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all checks and other items of payment received by Silicon (including proceeds of Accounts and payment of the Obligations in full) shall be deemed applied by Silicon on account of the Obligations three (3) Business Days after receipt by Silicon of immediately available funds, and, for purposes of the foregoing, any such funds received after 12:00 Noon (Pacific Time) on any day shall be deemed received on the next Business Day. Silicon shall not, however, be required to credit Borrower's account for the amount of any item of payment which is unsatisfactory to Silicon in its good faith business judgment, and Silicon may charge Borrower's loan account for the amount of any item of payment which is returned to Silicon unpaid. 9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations may be applied, and in Silicon's good faith business judgment reversed and re-applied, to the Obligations, in such order and manner as Silicon shall determine in its good faith business judgment. 9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower's Deposit Accounts maintained with Silicon. 9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an account of advances, charges, expenses and payments made pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for reverses and reapplications of payments made and corrections of errors discovered by Silicon), unless Borrower notifies Silicon in writing to the contrary within sixty (60) days after such account is rendered, describing the nature of any alleged errors or omissions. 9.5 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by reputable private delivery service or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or Borrower at each of the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. Notices to Silicon shall be directed to the Commercial Finance Division, to the attention of the Division Manager or the Division Credit Manager. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following delivery to the private delivery service, or two (2) Business Days following the deposit thereof in the United States mail, with postage prepaid. 9.6 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 9.7 INTEGRATION. This Agreement and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. 9.8 WAIVERS; INDEMNITY. The failure of Silicon at any time or times to require Borrower to strictly comply with any of the provisions of this Agreement or any other Loan Document shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any 15 default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar. None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an authorized officer of Silicon and delivered to Borrower. Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document, and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at any time held by Silicon on which Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. Borrower hereby agrees to indemnify Silicon and its affiliates, subsidiaries, parent, directors, officers, employees, agents, and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of action, penalties, costs and expenses (including reasonable attorneys' fees), of every kind, which they may sustain or incur based upon or arising out of any of the Obligations, or any relationship or agreement between Silicon and Borrower, or any other matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to damages proximately caused by the indemnitee's own gross negligence or willful misconduct. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect. 9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing Silicon, but nothing herein shall relieve Silicon from liability for its own gross negligence or willful misconduct. 9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by Borrower and a duly authorized officer of Silicon. 9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement. 9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and all present and future documents relating to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon's security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to Borrower. In satisfying Borrower's obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon's attorneys, Troutman Sanders LLP, but Borrower acknowledges and agrees that Troutman Sanders LLP is representing only Silicon and not Borrower in connection with this Agreement. If either Silicon or Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. 9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of Borrower and Silicon; provided, however, that Borrower may not assign or transfer any of its rights under this Agreement 16 without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall me lease Borrower from its liability for the Obligations. 9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one Person, their liability shall be joint and several, and the compromise of any claim with, or the me lease of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. 9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against Silicon, its directors, officers, employees, agents, accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by the filing of a complaint within one year after the first act, occurrence or omission upon which such claim or cause of action, or any part thereof, is based, and the service of a summons and complaint on an officer of Silicon, or on any other person authorized to accept service on behalf of Silicon, within thirty (30) days thereafter. Borrower agrees that such one-year period is a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided herein shall not be waived, tolled, or extended except by the written consent of Silicon in its sole discretion. This provision shall survive any termination of this Loan Agreement or any other Loan Document. 9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. Borrower and Silicon acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or Borrower under any rule of construction or otherwise. Notwithstanding anything set forth in this Agreement or any Loan Document to the contrary, this Agreement and all of the Loan Documents shall not be effective until the date on which Silicon executes this Agreement as indicated on the signature page to this Agreement. 9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to Silicon to enter into this Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall, at Silicon's option, be litigated in courts located within California, and that the exclusive venue therefor shall be Santa Clara County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. 9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. Borrower: Silicon: CALLIDUS SOFTWARE INC. SILICON VALLEY BANK By: /s/ RON J. FIOR By: /s/ Illegible --------------- ------------- Name: Ron J. Fior Name: 17 Title: VP. Finance/CFO Title: Signed by Silicon Valley Bank as of the 26th day of September, 2002 (the "Effective Date"). 18 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: CALLIDUS SOFTWARE, INC. ADDRESS: 160 W. SANTA CLARA STREET, SUITE 1500 SAN JOSE, CALIFORNIA 95113 DATE: DATED AS OF SEPTEMBER 26, 2002 This Schedule forms an integral part of the Loan and Security Agreement between Silicon Valley Bank and the above-borrower of even date. 1. CREDIT LIMIT (Section 1.1): Silicon has agreed to provide two (2) credit facilities to the Borrower consisting of a term loan and a revolving loan in a combined amount not to exceed Five Million Five Hundred Thousand Dollars ($5,500,000). The Term Loan In an amount not to exceed One Million Five Hundred Thousand Dollars ($1,500,000). The Revolving Loan In an amount not to exceed the lesser of: (i) Four Million Dollars ($4,000,000) at any one time outstanding (the "Maximum Credit Limit"); or (ii) Eighty Percent (80%) (the "Advance Rate") of the amount of Borrower's Eligible Accounts (as defined in Section 8 above), and at all times prior to the EBITDA Qualification Date, less the then outstanding principal balance of the Term Loan. Silicon may, from time to time, modify the Advance Rate, in its good faith business judgment, upon notice to the Borrower, based on changes in collection experience with respect to Accounts or other issues or factors relating to the Accounts or other Collateral. LETTER OF CREDIT SUBLIMIT (Section 1.6): Two Million Dollars ($2,000,000), minus all amounts utilized by Borrower under the Cash Management Services Sublimit, minus all amounts utilized by Borrower under the Foreign Exchange Sublimit. CASH MANAGEMENT SERVICES SUBLIMIT (Section 1.7): Two Million Dollars ($2,000,000), minus the aggregate face amounts of all outstanding Letters of Credit, minus all amounts utilized by Borrower under the Foreign Exchange Sublimit. FOREIGN EXCHANGE SUBLIMIT (Section 1.8): Two Million Dollars ($2,000,000), minus the aggregate face amounts of all outstanding Letters of Credit, minus all amounts utilized by Borrower under the Cash Management Services Sublimit. 2. INTEREST. Interest Rate (Section 1.2): (a) Loans: From the date of this Agreement until the Adjustment Date, a rate equal to the "Prime Rate" in effect from time to time, plus two and one quarter of one percent (2.25%) per annum. From and after the Adjustment Date, a rate equal to the "Prime Rate" in effect from time to time, plus two percent (2.0%) per annum. (b) Term Loan: From the date of this Agreement until the Adjustment Date, a rate equal to the "Prime Rate" ii effect from time to time, plus two and one half of one percent (2.50%) per annum. From and after the Adjustment Date, a -rate equal to the "Prime Rate" in effect from time to time, plus two and one quarter of one percent (2.25%) per annum. (c) Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. 3. FEES (Section 1.4): Loan Fee: Twenty Seven Thousand Five Hundred Dollars ($27,500), payable concurrently herewith. Collateral Monitoring Fee: One Thousand Two Hundred Fifty Dollars ($1,250), per month, payable in arrears (prorated for any partial month at the beginning and at termination of this Agreement) (the "Collateral Monitoring Fee"); provided such Collateral Monitoring Fee shall not be due in any month in which the Streamline Period is in effect. 4. MATURITY DATES (Section 6.1): a. Line of Credit Maturity Date September 25, 2003. b. Term Loan Maturity Date September 1, 2005. 5. FINANCIAL COVENANTS (Section 5.1): Borrower shall comply with each of the following covenants. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below: MONTHLY CASH COLLECTIONS Borrower shall maintain minimum cash collections of not less than the following amounts for the three (3) month period ending as of the following dates: 1. September 30, 2002 $4,500,000; 2. October 31, 2002 $4,600,000; 3. November 30, 2002 $4,700,000; 4. December 31, 2002 $4,800,000; 5. January 31, 2003 $4,900,000; and 6. February 28, 2003 and $5,000,000. as of the end of each month thereafter QUARTERLY REVENUES: Borrower will maintain (the "Revenue Covenant") total aggregate quarterly revenues of not less than the following amounts as of the following quarterly periods: 1. Quarter ending September 30, 2002 $6,000,000; 2. Quarter ending December 31, 2002 $8,500,000; 3. Quarter ending March 31, 2003 and each quarter thereafter $10,000,000. 6. REPORTING. (Section 5.3): Borrower shall provide Silicon with the following: 1. At least weekly and at any time Borrower requests a Loan transaction reports and schedules of collections, on Silicon's standard form. 2. Monthly accounts receivable agings, aged by invoice date, within fifteen (15) days after the end of each month. 3. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within fifteen (15) days after the end of each month. 4. Monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports, and general ledger, within fifteen (15) days after the end of each month. 5. Monthly unaudited financial statements, as soon as available, and in any event within thirty (30) days after the end of each month. 6. Monthly Compliance Certificates, within thirty (30) days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks. 7. Monthly deferred revenue schedules and backlog reports within fifteen (15) days after the end of each month. 8. Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty (30) days prior to the end of each fiscal year of Borrower. 9. Annual financial statements, as soon as available, and in any event within one hundred twenty (120) days following the end of Borrower's fiscal year, certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Silicon. STREAMLINE PERIOD. Notwithstanding anything to the contrary set forth in this Agreement, so long as: (A) no Default or Event of Default has occurred and is continuing; (B) Borrower is not in breach of its obligations under this Agreement; and (C) no Loans are outstanding at such time: 1. Daily Delivery of Proceeds of Accounts and Collateral Not Required. Borrower shall not be required to deposit the proceeds of the Accounts and Collateral into a lock box account at Silicon upon receipt, as provided in Section 4.4 of this Agreement. 2. Reporting Requirements. Borrower shall provide Silicon with monthly agings of accounts receivables and accounts payables, transaction reports on Silicon's standard form, including, sales, credit memos and collections journals within fifteen (15) days after the end of each month. 3. Notice Prior to Future Loans. Borrower shall provide Silicon with at least thirty (30) days' prior written notice of Borrower's desire to have Silicon make any future Loans to Borrower (the "30 Day Notice"). Such Loans, if any, shall be made in accordance with the terms and conditions of this Agreement. Prior to Silicon making such Loans, if any, Silicon shall have received the results, satisfactory to Silicon in its good faith business judgment, of an audit as provided for in Section 5.4 of this Agreement. 4. Collateral Monitoring Fee. During any Streamline Period, the monthly Collateral Monitoring Fee shall be $0. Upon the earliest to occur of (a) the request by Borrower for a Loan after the date hereof, (b) the occurrence of a Default or Event of Default, or (c) a breach of Borrower's obligations under this Agreement, the Streamline Period will automatically and without notice terminate and the standard terms and conditions as provided for in this Agreement will immediately take effect without any further action on the part of Silicon or Borrower. The application of the foregoing provisions shall be referred to in this Agreement as the "Streamline Period". The Streamline Period shall automatically terminate upon Borrower giving Bank the 30 Day Notice. 7. BORROWER INFORMATION: Borrower represents and warrants that the information set forth in the Representations and Warranties of the Borrower dated August 21, 2002 previously submitted to Silicon (the "Representations") is true and correct as of the date hereof. 8. ADDITIONAL PROVISIONS 1. BANKING RELATIONSHIP. Borrower shall at all times maintain its primary banking relationship with Silicon. Without limiting the generality of the foregoing, Borrower shall, at all times, maintain not less than 90% of its total cash and investments on deposit with Silicon. As to any Deposit Accounts and investment accounts maintained with another institution, Borrower shall cause such institution, within thirty (30) days after the date of this Agreement, to enter into a control agreement in form acceptable to Silicon in its good faith business judgment in order to perfect Silicon's first-priority security interest in said Deposit Accounts and investment accounts. 2. SUBORDINATION OF INSIDE DEBT. All present and future indebtedness of Borrower to its officers, directors and shareholders ("Inside Debt") shall, at all times, be subordinated to the Obligations pursuant to a subordination agreement on Silicon's standard form. Borrower represents and warrants that there is no Inside Debt presently outstanding, except for the following: (N/A). Prior to incurring any Inside Debt in the future, Borrower shall cause the person to whom such Inside Debt will be owed to execute and deliver to Silicon a subordination agreement on Silicon's standard form. 3. INTELLECTUAL PROPERTY SECURITY AGREEMENT. As a condition precedent to the effectiveness of this Agreement, the Borrower shall have executed and delivered an Intellectual Property Security Agreement (the "IP Security Agreement"), substantially in the form attached hereto as Exhibit B. Borrower: Silicon: CALLIDUS SOFTWARE, INC. SILICON VALLEY BANK By: /s/ RON J. FIOR By: /s/ Illegible --------------- ------------- Name: Ron J. Fior Name: Title: VP. Finance/CFO Title: COMPLIANCE CERTIFICATE To: Silicon Valley Bank 3003 Tasman Drive Santa Clara, California 95054 From: Callidus Software, Inc. 160 W. Santa Clara Street, Suite 1500 San Jose, California 95113 The undersigned authorized Officer of Callidus Software, Inc. ("Borrower"), hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement, as modified from time to time, the Borrower is in complete compliance for the period ending _____________ of all required conditions and terms except as noted below. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistent from one period to the next except as explained in an accompanying letter or footnotes. Please indicate compliance status by circling Yes/No under "Complies" column.
REPORTING COVENANT REQUIRED COMPLIES Financials & Comp. Cert. Monthly w/in 30 days YES/NO Receivable agings (invoice Monthly w/in 15 days YES/NO date) Reconciliations of A/R agings, Monthly w/in 15 days YES/NO Transactions reports, G/L Weekly YES/NO Payables agings Monthly w/in 15 days YES/NO Held Checks YES/NO If YES, Held Checks Register Monthly w/in 15 days YES/NO Audited Annual Financials FYE w/in 120 days YES/NO Annual Operating Budget W/in 30 days prior YES/NO to FYE During any Streamline Period, Borrower will provide: Receivable agings (invoice date) Monthly w/in 15 days YES/NO Transactions reports, G/L Monthly w/in 15 days YES/NO Payables agings Monthly w/in 15 days YES/NO
FINANCIAL COVENANTS 1. Monthly Cash Collections
PERIOD REQUIRED ACTUAL - ------ -------- ------ September 30, 2002 $4,500,000; October 31, 2002 $4,600,000; November 30, 2002 $4,700,000; December 31, 2002 $4,800,000; January 31, 2003 $4,900,000; March 31, 2003 and as of the $5,000,000 end of each month thereafter
COMPLIES? YES/NO 2. Quarterly Revenues
PERIOD REQUIRED ACTUAL - ------ -------- ------ ~~September 30, 2002 $6,000,000; December 31, 2002 $8,500,000; March 31, 2003 and as of the $10,000,000 end of each quarter thereafter~~
COMPLIES? YES/NO Terms are defined in the Schedule to the Loan Agreement, Section 5.1. Comments regarding financial covenants: Callidus Software, Inc. By: ________________________________ Name: ______________________________ Title: _____________________________ Received: By: ________________________________ Name: ______________________________ Title: _____________________________ WARRANT TO PURCHASE STOCK THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION. WARRANT TO PURCHASE STOCK Company: CALLIDUS SOFTWARE, INC., a Delaware corporation Number of Shares: The amount of shares equal to $180,000 divided by the Warrant Price. Class of Stock: Series G Preferred Stock; provided, however, that in the event that the Company does not close on its Series G round of equity financing on or before the Expiration Date, this Warrant shall be for the Company's Series F Preferred Stock. Warrant Price: The lesser of (i) $3.92 or (ii) the price per share paid by the lead investor (as determined by the Holder) in the Company's Series G round of equity financing for the Company's Series G Preferred Stock. Issue Date: September 26, 2002 Expiration Date: September 26, 2012 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the company (the "Company") at the Warrant Price, all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE. 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix I to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Article 1.2, Holder shall also deliver to the Company a check, wire transfer (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Article 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Article 1.3. 1.3 Fair Market Value. If the Company's common stock is traded in a public market and the shares are common stock, the fair market value of each Share shall be the closing price of a Share reported for the business day immediately before Holder delivers its Notice of Exercise to the Company (or in the instance where the Warrant is exercised immediately prior to the effectiveness of the Company's initial public offering, the "price to public" per share price specified in the final prospectus relating to such offering). If the Company's common stock is traded in a public market and the Shares are preferred stock, the fair market value of a Share shall be the closing price of a share of the Company's common stock reported for the business day immediately before Holder delivers its Notice of Exercise to the Company (or, in the instance where the Warrant is exercised immediately prior to the effectiveness of the Company's initial public offering, the initial "price to public" per share price specified in the final prospectus relating to such offering), in both cases, multiplied by the number of shares of the Company's common stock into which a Share is convertible. If the Company's common stock is not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. 1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, but in any event within ten (10) days of such exercise or conversion, and, if applicable, the Company receives payment of the aggregate Warrant Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company shall, at its expense, execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6 Treatment of Warrant Upon Acquisition of Company. 1.6.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2 Treatment of Warrant at Acquisition. (a) Upon the written request of the Company, Holder agrees that, in the event of an Acquisition in which the sole consideration is cash, either (a) Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant will expire upon the consummation of such Acquisition. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as the Holder may request in connection with such contemplated Acquisition giving rise to such notice), which is to be delivered to Holder not less than ten (10) days prior to the closing of the proposed Acquisition. (b) Upon the written request of the Company, Holder agrees that, in the event of an Acquisition that is an "arms length" sale of all or substantially all of the Company's assets (and only its assets) to a third party that is not an Affiliate (as defined 2 below) of the Company (a "True Asset Sale"), either (a) Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant will continue until the Expiration Date if the Company continues as a going concern following the closing of any such True Asset Sale. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as the Holder may request in connection with such contemplated Acquisition giving rise to such notice), which is to be delivered to Holder not less than ten (10) days prior to the closing of the proposed Acquisition. (c) Upon the closing of any Acquisition other than those particularly described in subsections (A) and (B) above, the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price and/or number of Shares shall be adjusted accordingly. As used herein "Affiliate" shall mean any person or entity that owns or controls directly or indirectly ten (10) percent or more of the stock of Company, any person or entity that controls or is controlled by or is under common control with such persons or entities, and each of such person's or entity's officers, directors, joint venturers or partners, as applicable. ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on the Shares payable in common stock, or other securities, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend occurred. If the Company subdivides the Shares by reclassification or otherwise into a greater number of shares or takes any other action which increase the amount of stock into which the Shares are convertible, the number of shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased. 2.2 Reclassification, Exchange, Combinations or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles or Certificate (as applicable) of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exercise or conversion of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exercise or conversion of this Warrant. The amendment to this Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without 3 limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Article 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth in the Company's Articles or Certificate of Incorporation as if the Shares were issued and outstanding on and as of the date of any such required adjustment. The provisions set forth for the Shares in the Company's Articles or Certificate (as applicable) of Incorporation relating to the above in effect as of the Issue Date may not be amended, modified or waived, without the prior written consent of Holder unless such amendment, modification or waiver affects the rights associated with the Shares in the same manner as such amendment, modification or waiver affects the rights associated with all other shares of the same series and class as the Shares granted to the Holder. 2.4 No Impairment. The Company shall not, by amendment of its Articles or Certificate (as applicable) of Incorporation or through a reorganization, 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 under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. 2.5 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder the amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company shall promptly notify Holder in writing, and, at the Company's expense, promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 4 (c) The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of Shares of authorized but unissued stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. (d) The Capitalization Table previously provided to Holder remains true and complete as of the Issue Date. 3.2 Notice of Certain Events. If the Company proposes at any time (a) to declare any dividend or distribution upon any of its stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for sale additional shares of any class or series of the Company's stock; (c) to effect any reclassification or recapitalization of any of its stock; (d) to merge or consolidate with or into any other corporation, or sell, lease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder: (1) at least 10 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 10 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall have certain incidental, or "Piggyback," registration rights pursuant to and as set forth in the Company's Investor Rights Agreement or similar agreement. The provisions set forth in the Company's Investors' Right Agreement or similar agreement relating to the above in effect as of the Issue Date may not be amended, modified or waived without the prior written consent of Holder unless such amendment, modification or waiver affects the rights associated with the Shares in the same manner as such amendment, modification, or waiver affects the rights associated with all other shares of the same series and class as the Shares granted to the Holder. 3.4 No Shareholder Rights. Except as provided in this Warrant, the Holder will not have any rights as a shareholder of the Company until the exercise of this Warrant. 3.5 REPRESENTATIONS, WARRANTIES OF THE HOLDER. The Holder represents and warrants to the Company as follows: 3.6 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by the Holder will be acquired for investment for the Holder's account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that the Holder has not been formed for the specific purpose of acquiring this Warrant or the Shares. 3.7 Disclosure of Information. The Holder has received or has had full 5 access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. The Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Holder or to which the Holder has access. 3.8 Investment Experience. The Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. The Holder has experience as an investor in securities of companies in the development stage and acknowledges that the Holder can bear the economic risk of such Holder's investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that the Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables the Holder to be aware of the character, business acumen and financial circumstances of such persons. 3.9 Accredited Investor Status. The Holder is an "accredited investor" within the meaning of Regulation D promulgated under the Act. 3.10 The Act The Holder understands that this Warrant and the Shares issuable upon exercise or conversion hereof have not been registered un the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder's investment intent as expressed herein. The Holder understands that this Warrant and the Shares issued upon any exercise or conversion hereof must be held indefinitely unless subsequently registered under the 1933 Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. ARTICLE 4. MISCELLANEOUS. 4.1 Term: This Warrant is exercisable in whole or in part at any time and from time to time on or before the Expiration Date. 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE ACT, OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION. 6 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to Silicon Valley Bancshares (Holder's parent company) or any other affiliate of Holder. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. At the written request of the Holder, who proposes to sell Stock issuable upon the exercise of the Warrant in compliance with Rule 144, within ten (10) days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. In addition, the Company agrees to provide the Holder within ten (10) days of written request such additional documents as the Holder may require in order to exercise its rights under this Warrant and transfer the Shares issued hereunder and carry out the intent of this Warrant, including, without limitation, an opinion of counsel for the benefit of the Holder or any underwriter or broker. 4.4 Transfer Procedure. Upon receipt by Holder of the executed Warrant, Holder will transfer all of this Warrant to Silicon Valley Bancshares, Holder's parent company, by execution of an Assignment substantially in the form of Appendix 2. Subject to the provisions of Article 5.3 and upon providing Company with written notice, Silicon Valley Bancshares and any subsequent Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the Shares issuable directly or indirectly, upon conversion of the Shares, if any) to any transferee, provided, however, in connection with any such transfer, Silicon Valley Bancshares or any subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). The Company may refuse to transfer this Warrant or the Shares to any person who directly competes with the Company, unless, in either case, the stock of the Company is publicly traded. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may (or on the first business day after transmission by facsimile) be, in writing by the Company or such holder from time to time. Effective upon receipt of the fully executed Warrant and the initial transfer described in Article 5.4 above, all notices to the Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise: Silicon Valley Bancshares Attn: Treasury Department 3003 Tasman Drive, HA 200 Santa Clara, CA 95054 Telephone: 408-654-7400 Facsimile: 408-496-2405 7 Notice to the Company shall be addressed as follows until the Holder receives notice of a change in address: Callidus Software, Inc. Attn: Chief Financial Officer 160 W. Santa Clara St., Suite 1500 San Jose, California 95113 Telephone: 408-808-6400 Facsimile: 408-271-2662 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 4.7 Attorney's Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney's fees. 4.8 Automatic Conversion upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be converted pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised or converted, and the Company shall promptly deliver a certificate representing the Shares (or such other securities) issued upon such conversion to the Holder. 4.9 Counterparts. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 8 4.10 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" CALLIDUS SOFTWARE, INC. By: /s/ RON J. FIOR By: --------------- ------------------------------ Name: Ron J. Fior Name: Title: VP Finance/CFO Title: "HOLDER" SILICON VALLEY BANK By: /s/ Illegible ------------- Name: Title: Vice President 9 APPENDIX 1 NOTICE OF EXERCISE 1. Holder elects to purchase ________ shares of the Series _____ Preferred Stock of Callidus Software, Inc. pursuant to the terms of the attached Warrant, and tenders payment of the purchase price of the shares in full. [or] 1. Holder elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised for _________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing the shares in the name specified below: _______________________________________ Holders Name _______________________________________ _______________________________________ (Address) 3. By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Article 4 of the Warrant as the date hereof. HOLDER: _______________________________________ By: ___________________________________ Name: Title: (Date): _______________________________ 10 APPENDIX 2 ASSIGNMENT FOR VALUE RECEIVED, SILICON VALLEY BANK HEREBY SELLS, ASSIGNS AND TRANSFERS UNTO NAME: SILICON VALLEY BANCSHARES ADDRESS: 3003 TASMAN DRIVE (HA-200) SANTA CLARA, CA 95054 TAX ID: 91-1962278 that certain Warrant to Purchase Stock issued by Callidus Software, Inc. (the "Company"), on August ___, 2002 (the "Warrant") together with all rights, title and interest therein. SILICON VALLEY BANK By: _________________________ Name: Title: Date: [insert Issue Date]_____________ By its execution below, and for the benefit of the Company, Silicon Valley Bancshares makes each of the representations and warranties set forth in Article 4 of the Warrant as of the date hereof. SILICON VALLEY BANCSHARES By: _________________________ Name: Title: 11 INTELLECTUAL PROPERTY SECURITY AGREEMENT This Intellectual Property Security Agreement is entered into as of September , 2000 (sic) by and between SILICON VALLEY BANK ("Bank") and CALLIDUS SOFTWARE, INC. ("Grantor"). RECITALS A. Bank has agreed to make certain advances of money and to extend certain financial accommodation to Grantor (the "Loans") in the amounts and manner set forth in that certain Loan and Security Agreement by and between Bank and Grantor dated of even date herewith (as the same may be amended, modified or supplemented from time to time, the "Loan Agreement"; capitalized terms used herein are used as defined in the Loan Agreement). Bank is willing to make the Loans to Grantor, but only upon the condition, among others, that Grantor shall grant to Bank a security interest in certain Copyrights, Trademarks and Patents to secure the obligations of Grantor under the Loan Agreement. B. Pursuant to the terms of the Loan Agreement, Grantor has granted to Bank a security interest in all of Grantor's right, title and interest, whether presently existing or hereafter acquired in, to and under all of the Collateral. NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, as collateral security for the prompt and complete payment when due of its obligations under the Loan Agreement, grantor hereby represents, warrants, covenants and agrees as follows: AGREEMENT To secure its obligations under the Loan Agreement, grantor grants and pledges to Bank a security interest in all of Grantor's right, title and interest in, to and under its Intellectual Property Collateral (including without limitation those Copyrights, Patents and Trademarks listed on Schedules A, B and C hereto), and including without limitation all proceeds thereof (such as, by way of example but not by way of limitation, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world and all re-issues, divisions continuations, renewals, extensions and continuations-in-part thereof. This security interest is granted in conjunction with the security interest granted to Bank under the Loan Agreement. The rights and remedies of Bank with respect to the security interest granted hereby are in addition to those set forth in the Loan Agreement and the other Loan Documents, and those which are now or hereafter available to Bank as a matter of law or equity. Each right, power and remedy of Bank provided for herein or in the Loan Agreement or any of the Loan Documents, or now or hereafter existing at law or in equity shall be cumulative and concurrent and shall be in addition to every right, power or remedy provided for herein and the exercise by Bank of any one or more of the rights, powers or remedies provided for in this Intellectual Property Security Agreement, the Loan Agreement or any of the other Loan Documents, or now or hereafter existing at law or in equity, shall not preclude the simultaneous or later exercise by any person, including Bank, of any or all other rights, powers or remedies. IN WITNESS WHEREOF, the parties have cause this Intellectual Property Security Agreement to be duly executed by its officers thereunto duly authorized as of the first date written above. GRANTOR: Address of Grantor: CALLIDUS SOFTWARE, INC. 160 W. Santa Clara St., Suite 1500 San Jose, California 95113 By: /s/ RON J. FIOR --------------- Name: Ron J. Fior Attn: Chief Financial Officer Title: VP Finance & CFO ----------------------- BANK: Address of Bank: SILICON VALLEY BANK 3003 Tasman Drive By: /s/ SCOTT CHAMBERLIN Santa Clara, CA 95054-1191 -------------------- Name: Scott Chamberlin Title: Vice President Attn: Scott Chamberlin 2 EXHIBIT A CALLIDUS SOFTWARE, INC. APPLICATIONS/REGISTRATIONS
MARK SERIAL NO. ATTORNEY FILING DATE FILE NO. GOODS OFFICE ACTION COMMENTS STATUS ----------- -------- ----- ------------- -------- ------ CALLIDUS 9695-0001-35 Software for the financial Examiner requested United States Registered. SOFTWARE & Oblon, Spivak, et. al. field for business 1. Disclaimer of the Design performance, modeling, term "Software" 75/561,082 management and/or 2. Amendment to ID of September 29, 1998 reporting of business goods-additional programs explanation CALLIDUS 9695-0002-35 Software for the financial Examiner requested United States Registered. SOFTWARE Oblon, Spivak, et. al. field for business 1. Disclaimer of the 75/561,081 performance, modeling, term "Software" September 29, 1998 management and/or 2. Amendment to ID of reporting of business goods-additional programs explanation
3
MARK SERIAL NO. ATTORNEY FILING DATE FILE NO. GOODS OFFICE ACTION COMMENTS STATUS ----------- -------- ----- ------------- -------- ------ CALLIDUS 196362EU-9695-35 Class 9, 16. Software for European Registered. SOFTWARE Oblon, Spivak, et. al. the financial field for Community: 001827716 business performance, Australia, August 25, 2000 modeling, management Benelux, and/or reporting business Germany, programs. User manuals Denmark, related to software for Spain, the financial field for Sweden, business performance, Finland, modeling, management France, and/or reporting business United programs. Kingdom, Greece, Ireland, Italy, Portugal TRUECOMP 9695-0004-35 Computer software to No bar to registration United States Registered. 75/728,363 Oblon, Spivak, et. al. manage variable cost June 14, 1999 accounting processes and user manuals sold as a unit
4 EXHIBIT A CALLIDUS SOFTWARE, INC. APPLICATIONS/REGISTRATIONS
MARK SERIAL NO. ATTORNEY FILING DATE FILE NO. GOODS OFFICE ACTION COMMENTS STATUS ----------- -------- ----- ------------- -------- ------ TRUECHANNEL 9695-0005-35 Financial software for the Registration initially United States Awaiting 75/797,607 Oblon, Spivak, et. al. modeling, administration refused because the registration September 13, 1999 and reporting of financial proposed mark merely data. describes the goods and because of likelihood of confusion with prior registration of TRUE CHANNEL DIRECT TRUECHANNEL 196373EU-9695-35 Class 9, 16: Computer European Registered. 001827765 Oblon, Spivak, et. al. software for modeling, Community: August 25, 2000 administration and Australia, reporting of financial Benelux, data. User manuals Germany, relating to software for Denmark, the modeling, Spain, administration, and Sweden, reporting of financial Finland, data. France, United Kingdom, Greece, Ireland, Italy, Portugal
5 EXHIBIT A CALLIDUS SOFTWARE, INC. APPLICATIONS/REGISTRATIONS
MARK SERIAL NO. ATTORNEY FILING DATE FILE NO. GOODS OFFICE ACTION COMMENTS STATUS ----------- -------- ----- ------------- -------- ------ TRUE PERFORMANCE 9695-0007-35 Software for sales and Awaiting 75/816,018 Oblon, Spivak, et. al. quota management, product registration October 5, 1999 performance and administration of territories and the like.
6 EXHIBIT A CALLIDUS SOFTWARE, INC. APPLICATIONS/REGISTRATIONS COPYRIGHT APPLICATION
TITLE OF WORK FILING DATE ATTORNEY NATURE OF AUTHORSHIP FIRST PUBLICATION COMMENTS STATUS ----------- -------- -------------------- ----------------- -------- ------ TrueComp Kenneth B. Wilson Computer Program March 30, 1999 Form TX Certificate of April 30, 1999 Wilson Sonsini For a Registration Registered 5/3/99 kwilson@wsgr.com nondramatic Received- Literary Work Effective as of May 3, 1999
7 EX-10.4 7 f92629orexv10w4.txt EXHIBIT 10.4 Exhibit 10.4 LOAN MODIFICATION AGREEMENT THIS LOAN MODIFICATION AGREEMENT (this "Agreement") is entered into as of March 27, 2003, by and between CALLIDUS SOFTWARE, INC. ("Borrower") whose address is 160 W. Santa Clara Street, Suite 1500, San Jose, California 95113 and SILICON VALLEY BANK ("Bank") whose address is 3003 Tasman Drive, Santa Clara, California 95054. 1. DESCRIPTION OF EXISTING OBLIGATIONS: 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 26, 2002, together with Schedule A thereto (the "Schedule"; as may be amended from time to time, the "Loan Agreement"). The Loan Agreement provides for, among other things, a committed line of credit in the original maximum principal amount of Four Million Dollars ($4,000,000) (the "Revolving Facility") and a Term Loan in the principal amount of One Million Five Hundred Thousand Dollars ($1,500,000). Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Obligations." 2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and an Intellectual Property Security Agreement dated September 26, 2002. Hereinafter, the above-described security documents, together with all other documents securing repayment of the Obligations shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Obligations shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modifications to Loan Agreement. 1. The following is added to the Loan Agreement immediately after Section 1.1.2 of the Loan Agreement as Section 1.1.2A of the Loan Agreement: 1.1.2 TERM LOAN TWO. (a) From March 27, 2003 until December 31, 2003 (the "Term Loan Two Availability End Date"), Bank will make a term loan available to Borrower to purchase "Eligible Equipment". Each advance (a "Term Loan Two Advance") shall be payable in thirty six (36) equal installments of principal, plus accrued interest (each a "Term Loan Two Payment"). Each Term Loan Two Payment is payable on the first day of the first month after the date of the Term Loan Two Advance. (b) The first Term Loan Two Advance may be used to finance or refinance Eligible Equipment purchased on or after April 1, 2002, provided such Term Loan Two Advance is made on or before April __, 2003. Thereafter all Term Loan Two Advances shall be only used to finance the purchase of new Eligible Equipment. Term Loan Two Advances may not exceed one hundred percent (100%) of the equipment invoice, excluding taxes, shipping, warranty charges, freight discounts and installation expense. Transferable licenses, leasehold improvements, and other soft cost, including taxes, shipping, warranty charges, freight discounts and installation expenses may constitute up to forty percent (40%) of the aggregate amount of all Term Loan Two Advances. Each Term Loan Two Advance must be for a minimum of One Hundred Thousand Dollars ($100,000). The number of Equipment Advances is limited to seven (7). 2. The following definition is added to Section 8 of the Loan Agreement: "Eligible Equipment" means Equipment in which Bank has a valid first priority security interest and may include new or used computer, office, lab and test equipment, and furnishings. B. Modifications to Schedule. 1. CREDIT LIMIT. Section 1.1 of the Schedule is amended and restated in its entirety as follows: CREDIT LIMIT (Section 1.1): Silicon has agreed to provide three (3) credit facilities to the Borrower consisting of a term loan (the "Term Loan") a revolving loan (the "Loans" or the "Revolving Facility") and a second term loan ("Term Loan Two"). 2 The Term Loan: The Term Loan is in the original amount not to exceed One Million Five Hundred Thousand Dollars ($1,500,000). Term Loan Two: Term Loan Two shall be in the original principal amount not to exceed One Million Dollars ($1,000,000). The Revolving Loan: In an amount not to exceed the lesser of: (i) Seven Million Dollars ($7,000,000) at any one time outstanding (the "Maximum Credit Limit"); or (ii) Eighty Percent (80%) (the "Advance Rate") of the amount of Borrower's Eligible Accounts (as defined in Section 8 above), and at all times prior to the EBITDA Qualification Date, less the then outstanding principal balance of the Term Loan. Silicon may, from time to time, modify the Advance Rate, in its good faith business judgment, upon notice to the Borrower, based on changes in collection experience with respect to Accounts or other issues or factors relating to the Accounts or other Collateral. 2. INTEREST RATE. Section 1.2 of the Schedule is amended and restated in its entirety as follows: INTEREST RATE (Section 1.2): (a) Loans: Interest on the Loans shall accrue interest at a rate equal to the higher of (i) the Prime Rate (as hereinafter defined) in effect from time to time, plus two percent (2.00%) per annum, or (ii) six and one quarter percent (6.25%) per annum. (b) Term Loan: Interest on the Term Loan shall accrue at a rate equal to the higher of (i) the Prime Rate in effect from time to time, plus two and one quarter of one percent (2.25%) per annum, or (ii) six and one half percent (6.50%) per annum. (c) Term Loan Two: Interest on Term Loan Two shall accrue at a rate equal to the higher of (i) the Prime Rate in effect from time to time, plus three and one half percent (3.50%) per annum, or (ii) seven 3 and three quarters of one percent (7.75%) per annum. (d) Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. 3. MATURITY DATES. Section 4 of the Schedule is amended and restated in its entirety as follows: 4. MATURITY DATES (Section 6.1): (a) Line of Credit Maturity Date: March ___, 2004. (b) Term Loan Maturity Date: September 1, 2005. (c) Term Loan Two Maturity Date: December 31, 2006 4. FINANCIAL COVENANTS. Section 5 of the Schedule is amended and restated in its entirety as follows: 5. FINANCIAL COVENANTS (Section 5.1): Borrower shall comply with each of the following covenants. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below: MONTHLY CASH COLLECTIONS: Borrower shall maintain minimum cash collections of not less than the following amounts for the three (3) month period ending as of the following dates: 1. February 28, 2003 $6,000,000; 2. March 31, 2003 $6,500,000; 3. April 30, 2003 $7,000,000; 4. May 31, 2003 $7,000,000; 5. June 30, 2003 $7,000,000; 6. July 31, 2003 $7,500,000; 7. August 31, 2003 $8,000,000 and as of the end of each month

4 thereafter QUARTERLY REVENUES: Borrower will maintain (the "Revenue Covenant") total aggregate quarterly revenues of not less than the following amounts as of the following quarterly periods: 1. Quarter ending March 31, 2003 $8,500,000; 2 Quarter ending June 30, 2003 $9,500,000; 3. Quarter ending September 30, 2003 $10,500,000; 4. Quarter ending December 31, 2003 and each quarter thereafter $11,500,000.

MINIMUM BOOKINGS: Borrower will maintain license bookings of not less than the following amounts as of the following quarterly periods: 1. Quarter ending March 31, 2003 $4,000,000; 2 Quarter ending June 30, 2003 $4,750,000; 3. Quarter ending September 30, 2003 $5,500,000; 4. Quarter ending December 31, 2003 and each quarter thereafter $6,250,000.

5. STREAMLINE PERIOD. Notwithstanding anything set forth in the Loan Agreement and the Schedule to the contrary, from and after the date hereof, the Streamline Period will automatically and without notice terminate and the standard terms and conditions as provided for in this Agreement will immediately take effect without any further action on the part of Silicon or Borrower upon the earliest to occur of: (a) the request by Borrower for a Loan under the Revolving Facility after the date hereof; (b) the occurrence of a Default or Event of Default; (c) a breach of Borrower's obligations under this Agreement; or (d) the date on which the Bank makes the first Term Loan Two Advance. In addition, the Streamline Period shall automatically terminate upon Borrower giving Bank the 30 Day Notice described in the Loan Agreement. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. PAYMENT OF LOAN FEE. In consideration of Bank's Agreement to increase the Revolving Facility and make Term Loan Two, Borrower shall pay to Bank a non refundable fee in the amount of Twenty Thousand Dollars ($20,000) 5 (the "Loan Fee"), plus all out-of-pocket expenses, including without limitation, the Bank's legal fees. 6. NO DEFENSES OF BORROWER. Borrower agrees that as of the date hereof, the outstanding principal balance of the Term Loan is One Million Two Hundred Thousand Forty Nine Thousand Nine Hundred Ninety Nine and 98/100 Dollars ($1,249,999.98) and that it has no defenses against the payment of any of the Obligations. 7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, 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 Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Obligations pursuant to this Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Agreement shall constitute a satisfaction of the Obligations. 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 Agreement. The terms of this paragraph apply not only to this Agreement, but also to all subsequent loan modification agreements. 8. CONDITIONS. The effectiveness of this Agreement is conditioned upon the following: 1. Borrower's payment of the Loan Fee; 2. Delivery of a Warrant to Purchase Stock in the form of Exhibit A, attached hereto. 9. RENEWAL. Bank agrees that in the event it provides Borrower with an opportunity to renew the Revolving Facility at maturity, among the options it will provide to the Borrower will be an option to renew the Revolving Facility without the requirement that Bank receive additional warrants. Nothing in this paragraph shall be construed or interpreted as a commitment to extend the Revolving Facility beyond the maturity date set forth herein. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 6 This Agreement is executed as of the date first written above.
BORROWER: BANK: CALLIDUS SOFTWARE, INC. SILICON VALLEY BANK By: /s/ RON J. FIOR By: /s/ Illegible ------------------ ----------------- Name: Ron J. Fior Name: Title: VP/CFO Title: SVP
7 COMPLIANCE CERTIFICATE To: Silicon Valley Bank 3003 Tasman Drive Santa Clara, California 95054 From: Callidus Software, Inc. 160 W. Santa Clara Street, Suite 1500 San Jose, California 95113 The undersigned authorized Officer of Callidus Software, Inc. ("Borrower"), hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement, as modified from time to time, the Borrower is in complete compliance for the period ending ____________ of all required conditions and terms except as noted below. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistent from one period to the next except as explained in an accompanying letter or footnotes. Please indicate compliance status by circling Yes/No under "Complies" column.
REPORTING COVENANT REQUIRED COMPLIES Financials & Comp. Cert. Monthly w/in 30 days YES/NO Receivable agings Monthly w/in 15 days YES/NO (invoice date) Reconciliations of Monthly w/in 15 days YES/NO A/R agings, Transactions Weekly YES/NO reports, GIL Payables agings Monthly w/in 15 days YES/NO Held Checks YES/NO If YES, Held Checks Monthly w/in 15 days YES/NO Register Audited Annual Financials FYE w/in 120 days YES/NO Annual Operating Budget W/in 30 days prior to FYE YES/NO
During any Streamline Period, Borrower will provide: Receivable agings Monthly w/in 15 days YES/NO (invoice date) Transactions Monthly w/in 15 days YES/NO reports, GIL Payables agings Monthly w/in 15 days YES/NO

FINANCIAL COVENANTS 1. Monthly Cash Collections
PERIOD REQUIRED ACTUAL COMPLIES ------ -------- ------ -------- February 28, 2003 $6,000,000 ___________ YES/NO March 31, 2003 $6,500,000 ___________ YES/NO April 30, 2003 $7,000,000 ___________ YES/NO May 31, 2003 $7,500,000 ___________ YES/NO
8
PERIOD REQUIRED ACTUAL COMPLIES ------ -------- ------ -------- ~~June 30, 2003 $8,000,000 ___________ YES/NO And as of the end of each month thereafter~~
2. Quarterly Revenues
PERIOD REQUIRED ACTUAL COMPLIES ------ -------- ------ -------- March 31, 2003 $8,500,000 $___________ YES/NO June 30, 2003 $9,500,000 $___________ YES/NO September 30, 2003 $10,500,000 $___________ YES/NO December 31, 2003 $11,500,000 $___________ YES/NO and as of the end of each quarter thereafter
3. Minimum Bookings:
PERIOD REQUIRED ACTUAL COMPLIES ------ -------- ------ -------- March 31, 2003 $4,000,000 $___________ YES/NO June 30, 2003 $4,250,000 $___________ YES/NO September 30, 2003 $5,250,000 $___________ YES/NO December 31, 2003 $6,250,000 $___________ YES/NO and as of the end of each quarter thereafter
Terms are defined in the Schedule to the Loan Agreement, Section 5.1. Comments regarding financial covenants: Callidus Software, Inc. By: _________________________________ Name: _______________________________ Title: ______________________________ Received: By: _________________________________ Name: _______________________________ Title: ______________________________ 9 WARRANT TO PURCHASE STOCK THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT'), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION. WARRANT TO PURCHASE STOCK Company: CALLIDUS SOFTWARE, INC., a Delaware corporation Number of Shares: The amount of shares equal to $80,000 divided by the Warrant Price. Class of Stock: Series H Preferred Stock; provided, however, that in the event that the Company does not close on its Series H round of equity financing on or before the Expiration Date, this Warrant shall be for the Company's Series G Preferred Stock. Warrant Price: The lesser of (i) $1.00 or (ii) the price per share paid by the lead investor (as determined by the Holder) in the Company's Series H round of equity financing for the Company's Series H Preferred Stock. Issue Date: March 27, 2003 Expiration Date: March 27, 2013 THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for other good and valuable consideration, SILICON VALLEY BANK ("Holder") is entitled to purchase the number of fully paid and nonassessable shares of the class of securities (the "Shares") of the company (the "Company") at the Warrant Price, all as set forth above and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant. ARTICLE 1. EXERCISE. 1.1 Method of Exercise. Holder may exercise this Warrant by delivering a duly executed Notice of Exercise in substantially the form attached as Appendix 1 to the principal office of the Company. Unless Holder is exercising the conversion right set forth in Article 1.2, Holder shall also deliver to the Company a check, wire transfer (to an account designated by the Company), or other from of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased. 1.2 Conversion Right. In lieu of exercising this Warrant as specified in Article 1.1, Holder may from time to time convert this Warrant, in whole or in part, into a number of Shares determined by dividing (a) the aggregate fair market value of the Shares or other securities otherwise issuable upon exercise of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair market value of one Share. The fair market value of the Shares shall be determined pursuant to Article 1.3. 1.3 Fair Market Value. If the Company's common stock is traded in a public market and the shares are common stock, the fair market value of each Share shall be the closing price of a Share reported for the business day immediately before Holder delivers its Notice of Exercise to the Company (or in the instance where the Warrant is exercised immediately prior to the effectiveness of the Company's initial public offering, the "price to public" per share price specified in the final prospectus relating to such offering). If the Company's common stock is traded in a public market and the Shares are preferred stock, the fair market value of a Share shall be the closing price of a share of the Company's common stock reported for the business day immediately before Holder delivers its Notice of Exercise to the Company (or, in the instance where the Warrant is exercised immediately prior to the effectiveness of the Company's initial public offering, the initial "price to public" per share price specified in the final prospectus relating to such offering), in both cases, multiplied by the number of shares of the Company's common stock into which a Share is convertible. If the Company's common stock is not traded in a public market, the Board of Directors of the Company shall determine fair market value in its reasonable good faith judgment. 1.4 Delivery of Certificate and New Warrant. Promptly after Holder exercises or converts this Warrant, but in any event within ten (10) days of such exercise or conversion, and, if applicable, the Company receives payment of the aggregate Warrant Price, the Company shall deliver to Holder certificates for the Shares acquired and, if this Warrant has not been fully exercised or converted and has not expired, a new Warrant representing the Shares not so acquired. 1.5 Replacement of Warrants. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of mutilation, or surrender and cancellation of this Warrant, the Company shall, at its expense, execute and deliver, in lieu of this Warrant, a new warrant of like tenor. 1.6 Treatment of Warrant Upon Acquisition of Company. 1.6.1 "Acquisition". For the purpose of this Warrant, "Acquisition" means any sale, license, or other disposition of all or substantially 2 all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company's securities before the transaction beneficially own less than 50% of the outstanding voting securities of the surviving entity after the transaction. 1.6.2 Treatment of Warrant at Acquisition. (a) Upon the written request of the Company, Holder agrees that, in the event of an Acquisition in which the sole consideration is cash, either (a) Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant will expire upon the consummation of such Acquisition. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as the Holder may request in connection with such contemplated Acquisition giving rise to such notice), which is to be delivered to Holder not less than ten (10) days prior to the closing of the proposed Acquisition. (b) Upon the written request of the Company, Holder agrees that, in the event of an Acquisition that is an "arms length" sale of all or substantially all of the Company's assets (and only its assets) to a third party that is not an Affiliate (as defined below) of the Company (a "True Asset Sale"), either (a) Holder shall exercise its conversion or purchase right under this Warrant and such exercise will be deemed effective immediately prior to the consummation of such Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant will continue until the Expiration Date if the Company continues as a going concern following the closing of any such True Asset Sale. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as the Holder may request in connection with such contemplated Acquisition giving rise to such notice), which is to be delivered to Holder not less than ten (10) days prior to the closing of the proposed Acquisition. (c) Upon the closing of any Acquisition other than those particularly described in subsections (A) and (B) above, the successor entity shall assume the obligations of this Warrant, and this Warrant shall be exercisable for the same securities, cash, and property as would be payable for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on the record date for the Acquisition and subsequent closing. The Warrant Price and/or number of Shares shall be adjusted accordingly. As used herein "Affiliate" shall mean any person or entity that owns or controls directly or indirectly ten (10) percent or more of the stock of Company, any person or entity that controls or is controlled by or is under common control with such persons or entities, and each of such person's or entity's officers, directors, joint venturers or partners, as applicable. 3 ARTICLE 2. ADJUSTMENTS TO THE SHARES. 2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a dividend on the Shares payable in common stock, or other securities, then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without cost to Holder, the total number and kind of securities to which Holder would have been entitled had Holder owned the Shares of record as of the date the dividend occurred. If the Company subdivides the Shares by reclassification or otherwise into a greater number of shares or takes any other action which increase the amount of stock into which the Shares are convertible, the number of shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased. 2.2 Reclassification, Exchange, Combinations or Substitution. Upon any reclassification, exchange, substitution, or other event that results in a change of the number and/or class of the securities issuable upon exercise or conversion of this Warrant, Holder shall be entitled to receive, upon exercise or conversion of this Warrant, the number and kind of securities and property that Holder would have received for the Shares if this Warrant had been exercised immediately before such reclassification, exchange, substitution, or other event. Such an event shall include any automatic conversion of the outstanding or issuable securities of the Company of the same class or series as the Shares to common stock pursuant to the terms of the Company's Articles or Certificate (as applicable) of Incorporation upon the closing of a registered public offering of the Company's common stock. The Company or its successor shall promptly issue to Holder an amendment to this Warrant setting forth the number and kind of such new securities or other property issuable upon exercise or conversion of this Warrant as a result of such reclassification, exchange, substitution or other event that results in a change of the number and/or class of securities issuable upon exercise or conversion of this Warrant. The amendment to this Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 2 including, without limitation, adjustments to the Warrant Price and to the number of securities or property issuable upon exercise of the new Warrant. The provisions of this Article 2.2 shall similarly apply to successive reclassifications, exchanges, substitutions, or other events. 2.3 Adjustments for Diluting Issuances. The Warrant Price and the number of Shares issuable upon exercise of this Warrant or, if the Shares are Preferred Stock, the number of shares of common stock issuable upon conversion of the Shares, shall be subject to adjustment, from time to time in the manner set forth in the Company's Articles or Certificate of Incorporation as if the Shares were issued and outstanding on and as of the date of any such required adjustment. The provisions set forth for the Shares in the Company's Articles or Certificate (as applicable) of Incorporation relating to the above in effect as of the Issue Date may not be amended, modified or waived, without the prior written 4 consent of Holder unless such amendment, modification or waiver affects the rights associated with the Shares in the same manner as such amendment, modification or waiver affects the rights associated with all other shares of the same series and class as the Shares granted to the Holder. 2.4 No Impairment. The Company shall not, by amendment of its Articles or Certificate (as applicable) of Incorporation or through a reorganization, 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 under this Warrant by the Company, but shall at all times in good faith assist in carrying out of all the provisions of this Article 2 and in taking all such action as may be necessary or appropriate to protect Holder's rights under this Article against impairment. 2.5 Fractional Shares. No fractional Shares shall be issuable upon exercise or conversion of the Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional share interest arises upon any exercise or conversion of the Warrant, the Company shall eliminate such fractional share interest by paying Holder the amount computed by multiplying the fractional interest by the fair market value of a full Share. 2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant Price, the Company shall promptly notify Holder in writing, and, at the Company's expense, promptly compute such adjustment, and furnish Holder with a certificate of its Chief Financial Officer setting forth such adjustment and the facts upon which such adjustment is based. The Company shall, upon written request, furnish Holder a certificate setting forth the Warrant Price in effect upon the date thereof and the series of adjustments leading to such Warrant Price. ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY. 3.1 Representations and Warranties. The Company represents and warrants to the Holder as follows: (a) The initial Warrant Price referenced on the first page of this Warrant is not greater than (i) the price per share at which the Shares were last issued in an arms-length transaction in which at least $500,000 of the Shares were sold and (ii) the fair market value of the Shares as of the date of this Warrant. (b) All Shares which may be issued upon the exercise of the purchase right represented by this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. 5 (c) The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of Shares of authorized but unissued stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. (d) The Capitalization Table previously provided to Holder remains true and complete as of the Issue Date. 3.2 Notice of Certain Events, If the Company proposes at any time (a) to declare any dividend or distribution upon any of its stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend; (b) to offer for sale additional shares of any class or series of the Company's stock; (c) to effect any reclassification or recapitalization of any of its stock; (d) to merge or consolidate with or into any other corporation, or sell, tease, license, or convey all or substantially all of its assets, or to liquidate, dissolve or wind up; or (e) offer holders of registration rights the opportunity to participate in an underwritten public offering of the company's securities for cash, then, in connection with each such event, the Company shall give Holder: (1) at least 10 days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of common stock will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (c) and (d) above; (2) in the case of the matters referred to in (c) and (d) above at least 10 days prior written notice of the date when the same will take place (and specifying the date on which the holders of common stock will be entitled to exchange their common stock for securities or other property deliverable upon the occurrence of such event); and (3) in the case of the matter referred to in (e) above, the same notice as is given to the holders of such registration rights. 3.3 Registration Under Securities Act of 1933, as amended. The Company agrees that the Shares or, if the Shares are convertible into common stock of the Company, such common stock, shall have certain incidental, or "Piggyback," registration rights pursuant to and as set forth in the Company's Investor Rights Agreement or similar agreement. The provisions set forth in the Company's Investors' Right Agreement or similar agreement relating to the above in effect as of the Issue Date may not be amended, modified or waived without the prior written consent of Holder unless such amendment, modification or waiver affects the rights associated with the Shares in the same manner as such amendment, modification, or waiver affects the rights associated with all other shares of the same series and class as the Shares granted to the Holder. 3.4 No Shareholder Rights. Except as provided in this Warrant, the Holder will not have any rights as a shareholder of the Company until the exercise of this Warrant. 3.5 REPRESENTATIONS, WARRANTIES OF THE 6 HOLDER. The Holder represents and warrants to the Company as follows: 3.6 Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by the Holder will be acquired for investment for the Holder's account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that the Holder has not been formed for the specific purpose of acquiring this Warrant or the Shares. 3.7 Disclosure of Information. The Holder has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. The Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Holder or to which the Holder has access. 3.8 Investment Experience. The Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. The Holder has experience as an investor in securities of companies in the development stage and acknowledges that the Holder can bear the economic risk of such Holder's investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that the Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables the Holder to be aware of the character, business acumen and financial circumstances of such persons. 3.9 Accredited Investor Status. The Holder is an "accredited investor" within the meaning of Regulation D promulgated under the Act. 3.10 The Act. The Holder understands that this Warrant and the Shares issuable upon exercise or conversion hereof have not been registered un the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder's investment intent as expressed herein. The Holder understands that this Warrant and the Shares issued upon any exercise or conversion hereof must be held indefinitely unless subsequently registered under the 1933 Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. ARTICLE 4. MISCELLANEOUS. 4.1 Term: This Warrant is exercisable in whole or in part at any time and from time to time on or before the Expiration Date. 7 4.2 Legends. This Warrant and the Shares (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) shall be imprinted with a legend in substantially the following form: THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE ACT, OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION. 4.3 Compliance with Securities Laws on Transfer. This Warrant and the Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to Silicon Valley Bancshares (Holder's parent company) or any other affiliate of Holder. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of current information as referenced in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in reasonable detail, the selling broker represents that it has complied with Rule 144(f), and the Company is provided with a copy of Holder's notice of proposed sale. At the written request of the Holder, who proposes to sell Stock issuable upon the exercise of the Warrant in compliance with Rule 144, within ten (10) days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. In addition, the Company agrees to provide the Holder within ten (10) days of written request such additional documents as the Holder may require in order to exercise its rights under this Warrant and transfer the Shares issued hereunder and carry out the intent of this Warrant, including, without limitation, an opinion of counsel for the benefit of the Holder or any underwriter or broker. 4.4 Transfer Procedure. Upon receipt by Holder of the executed Warrant, Holder will transfer all of this Warrant to Silicon Valley Bancshares, Holder's parent company, by execution of an Assignment substantially in the form of Appendix 2. Subject to the provisions of Article 5.3 8 and upon providing Company with written notice, Silicon Valley Bancshares and any subsequent Holder may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the Shares issuable directly or indirectly, upon conversion of the Shares, if any) to any transferee, provided, however, in connection with any such transfer, Silicon Valley Bancshares or any subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). The Company may refuse to transfer this Warrant or the Shares to any person who directly competes with the Company, unless, in either case, the stock of the Company is publicly traded. 4.5 Notices. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may (or on the first business day after transmission by facsimile) be, in writing by the Company or such holder from time to time. Effective upon receipt of the fully executed Warrant and the initial transfer described in Article 5.4 above, all notices to the Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise: Silicon Valley Bancshares Attn: Treasury Department 3003 Tasman Drive, HA 200 Santa Clara, CA 95054 Telephone: 408-654-7400 Facsimile: 408-496-2405 Notice to the Company shall be addressed as follows until the Holder receives notice of a change in address: Callidus Software, Inc. Attn:_______________________ 160 W. Santa Clara St., Suite 1500 San Jose, California 95113 Telephone:_________________ Facsimile:__________________ 4.6 Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 9 4.7 Attorney's Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney's fees. 4.8 Automatic Conversion upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be converted pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised or converted, and the Company shall promptly deliver a certificate representing the Shares (or such other securities) issued upon such conversion to the Holder. 4.9 Counterparts. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. [SIGNATURES APPEAR ON THE FOLLOWING PAGE] 10 4.10 Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law. "COMPANY" CALLIDUS SOFTWARE, INC. By: /s/ RON J. FIOR By: --------------- --------------------- Name: Ron J. Fior Name: Title: VP/CFO Title: "HOLDER" SILICON VALLEY BANK By: /s/ Illegible ------------- Name: Title: 11 APPENDIX 1 NOTICE OF EXERCISE 1. Holder elects to purchase ____________ shares of the Series ______ Preferred Stock of Callidus Software, Inc. pursuant to the terms of the attached Warrant, and tenders payment of the purchase price of the shares in full. [or] 1. Holder elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised for ______________________ of the Shares covered by the Warrant. [Strike paragraph that does not apply.] 2. Please issue a certificate or certificates representing the shares in the name specified below: ----------------------------------- Holders Name ----------------------------------- ----------------------------------- (Address) 3. By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Article 4 of the Warrant as the date hereof. HOLDER: ----------------------- By: -------------------- Name: Title: (Date): 12 APPENDIX 2 ASSIGNMENT FOR VALUE RECEIVED, SILICON VALLEY BANK HEREBY SELLS, ASSIGNS AND TRANSFERS UNTO NAME: SILICON VALLEY BANCSHARES ADDRESS: 3003 TASMAN DRIVE (HA-200) SANTA CLARA, CA 95054 TAX ID: 91-1962278 THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY CALLIDUS SOFTWARE, INC. (THE "COMPANY"), ON MARCH ___, 2003 (THE "WARRANT") TOGETHER WITH ALL RIGHTS, TITLE AND INTEREST THEREIN. SILICON VALLEY BANK By: ------------------------------ Name: Title: Date: [insert Issue Date] ----------------- By its execution below, and for the benefit of the Company, Silicon Valley Bancshares makes each of the representations and warranties set forth in Article 4 of the Warrant as of the date hereof. SILICON VALLEY BANCSHARES By: ------------------------------ Name: Title: 13 EX-10.5 8 f92629orexv10w5.txt EXHIBIT 10.5 EXHIBIT 10.5 - -------------------------------------------------------------------------------- [OFFICE - CALIFORNIA] LEASE AGREEMENT BETWEEN W9/PHC II SAN JOSE, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY AS LANDLORD, AND CALLIDUS SOFTWARE, INC., A DELAWARE CORPORATION AS TENANT DATED: AUGUST 28, 2003 160 W. SANTA CLARA STREET SAN JOSE, CALIFORNIA 95113 - -------------------------------------------------------------------------------- BASIC LEASE INFORMATION Lease Date: August 28, 2003 Landlord: W9/PHC II SAN JOSE, L.L.C., a Delaware limited liability company Tenant: CALLIDUS SOFTWARE, INC., a Delaware corporation Premises: (i) Suite 800, which contains 15,751 rentable square feet, (ii) Suite 1300, which contains 7,066 rentable square feet, (iii) Suite 1350, which contains 7,015 rentable square feet, (iv) Suite 1500, which contains 14,314 rentable square feet, and (v) the server room on the 14th floor (the "SERVER ROOM"), which contains 390 rentable square feet, for a total of 44,536 rentable square feet, collectively referred to herein as the "Premises," in the office building whose street address is 160 West Santa Clara Street, San Jose, California 95113 (the "BUILDING"). The Premises are outlined on the plan attached to the Lease as Exhibit A. The land on which the Building is located (the "LAND") is described on Exhibit B. The term "PROJECT" shall collectively refer to the Building, the Land and the driveways, parking facilities, and similar improvements and easements associated with the foregoing or the operation thereof. Term: 84 months, commencing on the Commencement Date and ending at 5:00 p.m. local time on the last day of the 84th full calendar month following the Commencement Date, subject to adjustment and earlier termination as provided in the Lease. Option to Renew: Two options for 36 months each Commencement Date: For Suites 800, 1500 and the Server Room: This Lease shall commence with respect to Suite 800, 1500 and the Server Room on the date on which this Lease is fully executed by Landlord and Tenant. For Suite 1300: This Lease shall commence with respect to Suite 1300 on the earliest of (a) the date on which Tenant occupies any portion of Suite 1300 and begins conducting its regular business therein, (b) the date on which the Suite 1300 Work (as defined in Exhibit D hereto) in Suite 1300 is Substantially Completed (as defined in Exhibit D hereto), or (c) the date on which such Suite 1300 Work would have been Substantially Completed but for the occurrence of any Tenant Delay Days (as defined in Exhibit D hereto) with respect to Suite 1300 (the "SUITE 1300 CD"). For Suite 1350: This Lease shall commence with respect to Suite 1350 on the earliest of (a) the date on which Tenant occupies any portion of Suite 1350 and begins conducting its regular business therein, (b) the date on which the Suite 1350 Work (as defined in Exhibit D hereto) in Suite 1350 is Substantially Completed, or (c) the date on which such Suite 1350 Work would have been Substantially Completed but for the occurrence of any Tenant Delay Days with respect to Suite 1350 (the "SUITE 1350 CD"). Basic Rent: Basic Rent shall be the following amounts for the following ii periods of time:
Suite Number Lease Month Monthly Basic Rent 800, 500, Server Room 1-42 $77,660.25 43-84 $86,796.75 1350 Suite 1350 CD-42 $17,888.25 43-84 $19,992.75 1300 Suite 1300 CD-42 $18,018.30 43-84 $20,138.10 Temporary Space 1-Suite 1300 CD $21,858.60
Summary of Monthly Basic Rent for Premises and Temporary Space:
Lease Month Monthly Basic Rent 1 - Suite 1350 CD $99,518.85 Suite 1350 CD-Suite 1300 CD $117,407.10 Suite 1300 CD-42 $113,566.80 43-84 $126,927.60
As used herein, the term "LEASE MONTH" shall mean each calendar month during the Term (and if the Commencement Date does not occur on the first day of a calendar month, the period from the Commencement Date to the first day of the next calendar month shall be included in the first Lease Month for purposes of determining the duration of the Term and the prorated amount of the monthly Basic Rent rate applicable for such partial month). All Lease Months referenced in this Lease shall be measured from the Commencement Date for Suites 800, 1500 and the Server Room. Supplemental Rent: Supplemental Rent shall be the following amounts for the following periods of time:
Suite Number Lease Month Monthly Supplemental Rent 800, 1500, Server Room 1-84 $2,131.85 1350 Suite 1350 CD-84 $491.05 1300 Suite 1300 CD-84 $494.62 Temporary Space 1-Suite 1300 CD $600.04
Summary of Monthly Supplement Rent for Premises and Temporary Space:
Lease Month Monthly Supplemental Rent ~~1-Suite 1350 CD $2,731.89 Suite 1350 CD-Suite 1300 CD $3,222,94 Suite 1300 CD-84 $3,117.52~~
iii Security Deposit: None; Landlord and Tenant acknowledge and agree that Landlord currently holds a cash Security Deposit on behalf of Tenant in the amount of $50,558.14. Landlord shall apply all of such Security Deposit toward Monthly Basic Rent payable by Tenant for the first Lease Month of the Term. Letter of Credit: See Section 28. Rent: Basic Rent, Supplemental Rent, Tenant's Proportionate Share of Taxes, Tenant's share of Additional Rent, and all other sums that Tenant may owe to Landlord or otherwise be required to pay under the Lease. Permitted Use: General office use and other legally permitted uses. Tenant's Proportionate Share:
Suite Number Proportionate Share 800, 1500, Server Room 14.38% 1350 3.31% 1300 3.34% Temporary Space 4.05%
Summary of Tenant's Proportionate Share:
Lease Months Proportionate Share ~~1-Suite 1350 CD 18.43% Suite 1350 CD-Suite 1300 CD 21.74% Suite 1300 CD-84 21.03%~~
Tenant's Proportionate Share is the percentage obtained by dividing (a) the number of rentable square feet in the relevant portion of the Premises as stated above by (b) the 211,757 rentable square feet in the Building. Landlord and Tenant stipulate that the number of rentable square feet in the Premises and in the Building set forth above is conclusive and shall be binding upon them. Expense Stop: Operating Costs for the calendar year 2004 (grossed up as provided in Section 4(b)(5) of the Lease). Base Tax Year: The calendar year 2004. Initial Liability Insurance Amount: $3,000,000. Maximum Construction Allowance: N/A; See Exhibit D. Guarantor: None Temporary Space: Upon the full execution by Landlord and Tenant of this Lease, and up to and until the Suite 1300 CD, Tenant shall occupy Suite 1400, iv containing 8,572 rentable square feet (the "TEMPORARY SPACE") in the Building. The Temporary Space is outlined on the plan attached to this Lease as Exhibit G. Tenant shall pay to Landlord, Basic Rent for the Temporary Space in the amount of $21,858.60 per month, and Supplemental Rent for the Temporary Space in the amount of $600.04 per month, without offset or deduction on the first day of each month. Basic Rent and Supplemental Rent due for any partial month for the Temporary Space shall be prorated as provided in Section 4(a) of this Lease. Tenant shall vacate and surrender the Temporary Space by 5:00 p.m. on the Suite 1300 CD in the condition required by this Lease. Except as otherwise set forth in this Section, occupancy of the Temporary Space by Tenant shall be subject to all of the provisions of this Lease. Termination of Previous Leases: Upon the Commencement Date of this Lease, (i) that certain Lease Agreement dated April 21, 2000, by and between Landlord's predecessor in interest and Tenant, as amended by that certain First Amendment to Lease dated June 7, 2001, and (ii) that certain Office Building Lease dated February 1998, by and between Landlord's predecessor in interest and Tenant's predecessor in interest, as amended by (a) that certain First Amendment to Lease dated September 23, 1998, (b) that certain Second Amendment to Lease dated November 9, 1998, (c) that certain Third Amendment to Lease dated January 11, 1999, (d) that certain Fourth Amendment to Lease dated April 5, 1999, (e) that certain Fifth Amendment to Lease dated April 26, 1999, and (f) that certain Sixth Amendment to Lease dated September 10, 1999 (collectively, the "PREVIOUS LEASES"), shall terminate and be of no further force and effect, except for (i) issues of Tenant's defaults or unpaid rent and other monetary obligations due Landlord, (ii) those matters related to Tenant's reconciliation and audit rights and corresponding reimbursements for payments made by Tenant under the Previous Leases, and (iii) provisions of the Previous Leases that are specifically said to survive the expiration or earlier termination of said lease.
Tenant's Address: For all Notices: With a copy to: --------------- -------------- Callidus Software, Inc. Hopkins & Carley, APC 160 W. Santa Clara Street, Suite 1500 P.O. Box 1469 San Jose, California 95113 San Jose, California 95109 Attention: Brian S. Cabrera Attention: Real Estate Department Telephone: (408) 808-6470 Telephone: (408) 286-9800 Telecopy: (408) 271-2663 Telecopy: (408) 998-4790
v
Landlord's Address: For all Notices: With a copy to: --------------- -------------- W9/PHC II San Jose, L.L.C. W9/PHC II San Jose, L.L.C. c/o CB Richard Ellis c/o Archon Group, L.P. 160 W Santa Clara Street, Two California Plaza Suite 550 350 S. Grand Avenue, Suite 4600 San Jose, Califonria 95113 Los Angeles, California 90071 Attention: Property Manager Attention: Nancy M. Haag Telephone: (408) 293-2400 Telephone: (213) 633-5800 Telecopy: (408) 971-9880 Telecopy: (213) 633-5870 For Rent Payments: ----------------- W9/PHC II San Jose, L.L.C. 160 W. Santa Clara Street File 57026 Los Angeles, California 90074-7026
[SIGNATURE PAGE FOLLOWS] vi The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control. LANDLORD: W9/PHC II SAN JOSE, L.L.C., a Delaware limited liability company By: ------------------------------------- Name: Nancy M. Haag Title: Assistant Vice President TENANT: CALLIDUS SOFTWARE, INC., a Delaware corporation By: ------------------------------------- Name: Title: By: ------------------------------------- Name: Title: Tax I.D. No.: --------------------------- *NOTE: IF TENANT IS A CORPORATION INCORPORATED IN A STATE OTHER THAN CALIFORNIA, then Tenant shall deliver to Landlord a certified copy of a corporate resolution in a form reasonably acceptable to Landlord authorizing the signatory(ies) to execute this Lease. vii TABLE OF CONTENTS
Page ---- 1. Definitions and Basic Provisions.................................... 1 2. Lease Grant......................................................... 1 3. Tender of Possession................................................ 1 (a) Suites 800, 1500 and the Server Room............................ 1 (b) Suite 1350...................................................... 1 (c) Suite 1300...................................................... 2 (d) Confirmation of Commencement Date............................... 2 4. Rent................................................................ 2 (a) Payment......................................................... 2 (b) Operating Costs; Taxes.......................................... 2 (c) Tenant's Inspection Right....................................... 5 5. Delinquent Payment; Handling Charges................................ 6 6. INTENTIONALLY DELETED............................................... 6 7. Landlord's Obligations.............................................. 6 (a) Services........................................................ 6 (b) Excess Utility Use.............................................. 7 (c) Restoration of Services; Abatement.............................. 7 8. Improvements; Alterations; Repairs; Maintenance..................... 8 (a) Improvements; Alterations....................................... 8 (b) Repairs; Maintenance............................................ 9 (c) Performance of Work............................................. 9 (d) Mechanic's Liens................................................ 9 9. Use ................................................................ 10 10. Assignment and Subletting........................................... 10 (a) Transfers ...................................................... 10 (b) Consent Standards............................................... 11 (c) Request for Consent............................................. 11 (d) Conditions to Consent........................................... 11 (e) Attornment by Subtenants........................................ 12 (f) Cancellation.................................................... 12 (g) Additional Compensation......................................... 12 (h) Permitted Transfers............................................. 12 11. Insurance; Waivers; Subrogation; Indemnity.......................... 13 (a) Tenant's Insurance.............................................. 13 (b) Landlord's Insurance............................................ 14 (c) No Subrogation.................................................. 14 (d) Indemnity....................................................... 14 12. Subordination; Attornment; Notice to Landlord's Mortgagee........... 15 (a) Subordination................................................... 15 (b) Attornment...................................................... 15 (c) Notice to Landlord's Mortgagee.................................. 15 (d) Landlord's Mortgagee's Protection Provisions.................... 16 (e) Subordination, Non-Disturbance and Attornment Agreement......... 16 13. Rules and Regulations............................................... 16 14. Condemnation........................................................ 16 (a) Total Taking.................................................... 16 (b) Partial Taking - Tenant's Rights................................ 17 (c) Partial Taking - Landlord's Rights.............................. 17 (d) Temporary Taking................................................ 17 (e) Award........................................................... 17 15. Fire or Other Casualty.............................................. 17 (a) Repair Estimate................................................. 17 (b) Tenant's Rights................................................. 17
viii (c) Landlord's Rights............................................... 18 (d) Repair Obligation............................................... 18 (e) Waiver of Statutory Provisions.................................. 18 (f) Abatement of Rent............................................... 18 16. Personal Property Taxes............................................. 18 17. Events of Default................................................... 19 (a) Payment Default................................................. 19 (b) Abandonment .................................................... 19 (c) Estoppel........................................................ 19 (d) Insurance....................................................... 19 (e) Mechanic's Liens................................................ 19 (f) Other Defaults.................................................. 19 (g) Insolvency...................................................... 19 18. Remedies............................................................ 19 (a) Termination of Lease............................................ 20 (b) Enforcement of Lease............................................ 20 (c) Sublessees of Tenant............................................ 20 (d) Efforts to Relet ............................................... 21 19. Payment by Tenant; Non-Waiver; Cumulative Remedies.................. 21 (a) Payment by Tenant............................................... 21 (b) No Waiver....................................................... 21 (c) Cumulative Remedies............................................. 21 20. INTENTIONALLY DELETED............................................... 21 21. Surrender of Premises............................................... 21 22. Holding Over........................................................ 22 23. Certain Rights Reserved by Landlord................................. 22 (a) Building Operations............................................. 22 (b) Security........................................................ 22 (c) Prospective Purchasers and Lenders.............................. 23 (d) Prospective Tenants............................................. 23 24. INTENTIONALLY DELETED............................................... 23 25. Miscellaneous....................................................... 23 (a) Landlord Transfer............................................... 23 (b) Landlord's Liability; Tenant's Liability........................ 23 (c) Force Majeure................................................... 23 (d) Brokerage....................................................... 23 (e) Estoppel Certificates........................................... 24 (f) Notices......................................................... 24 (g) Separability.................................................... 24 (h) Amendments; Binding Effect; No Electronic Records............... 24 (i) Quiet Enjoyment................................................. 24 (j) No Merger....................................................... 25 (k) No Offer........................................................ 25 (l) Entire Agreement................................................ 25 (m) Waiver of Jury Trial............................................ 25 (n) Governing Law................................................... 25 (o) Recording....................................................... 25 (p) Joint and Several Liability..................................... 25 (q) Financial Reports............................................... 25 (r) Landlord's Fees................................................. 26 (s) Attorneys' Fees................................................. 26 (t) Telecommunications.............................................. 26 (u) INTENTIONALLY DELETED........................................... 26 (v) Authority....................................................... 26 (w) Hazardous Materials............................................. 27 (x) Parking......................................................... 27

ix (y) Signage......................................................... 28 (z) List of Exhibits................................................ 28 26. Renewal Option...................................................... 28 (a) Grant of Option................................................. 28 (b) Basic Rent...................................................... 29 (c) Termination of Option........................................... 30 27. Satellite Equipment................................................. 30 28. Letter of Credit.................................................... 31 (a) General Provisions.............................................. 31 (b) Drawings under Letter of Credit................................. 31 (c) Use of Proceeds by Landlord..................................... 31 (d) Additional Covenants of Tenant.................................. 32 (e) Transfer of Letter of Credit.................................... 33 (e) Transfer of Letter of Credit........................................ 33 (f) Reduction in Letter of Credit Amount............................ 33 (g) Nature of Letter of Credit...................................... 33 29. Expansion Option for Suite 1400 .................................... 33 (a) Grant of Offer.................................................. 33 (b) Possession...................................................... 34 (c) Termination of Rights........................................... 35 30. Expansion Option for Suite 1450..................................... 35 (a) Grant of Offer.................................................. 35 (b) Possession...................................................... 35 (c) Termination of Rights........................................... 36 31. Expansion Option for Suite 1200..................................... 36 (a) Grant of Offer.................................................. 36 (b) Possession...................................................... 36 (c) Termination of Rights........................................... 37

x LIST OF DEFINED TERMS
Page ---- Additional Rent.......................................................... 2 Affiliate................................................................ 1 AS-IS........................................................... 29, 30, 32, 1 Base Tax Year............................................................ iv Basic Lease Information.................................................. 1 Basic Rent .............................................................. iii Building................................................................. ii Building's Structure..................................................... 1 Building's Systems....................................................... 1 Casualty................................................................. 15 Class A San Jose Buildings............................................... 25 Commencement Date........................................................ ii Damage Notice............................................................ 15 Default Rate............................................................. 5 Disabilities Acts........................................................ 9 Event of Default......................................................... 16 Expense Stop............................................................. iv Extended Term............................................................ 25 Extra HVAC............................................................... 6 Final LC Expiration Date................................................. 27 GAAP .................................................................... 12 Guarantor................................................................ iv Hazardous Materials...................................................... 23 HVAC .................................................................... 6 including................................................................ 1 Initial Liability Insurance Amount....................................... iv Land .................................................................... ii Landlord................................................................ ii, 1 Landlord's Mortgagee..................................................... 13 Law .................................................................... 1 Laws .................................................................... 1 LC Proceeds Account...................................................... 27 Lease.................................................................... 1 Lease Date............................................................... ii Lease Month.............................................................. iii Letter of Credit......................................................... 27 Letter of Credit Amount.................................................. 27 Loss .................................................................. 13, 27 Maximum Construction Allowance........................................... iv Mortgage................................................................. 13 Operating Costs.......................................................... 2 Operating Costs and Tax Statement........................................ 4 Option to Renew.......................................................... ii Parking Area............................................................. 23 Partial Premises......................................................... 1 Permitted Delays......................................................... 1 Permitted Transfer....................................................... 11 Permitted Transferee..................................................... 11 Permitted Use............................................................ iv Pre-approved Alterations................................................. 7 Premises................................................................. ii Prevailing Rental Rate................................................... 25
xi Previous Lease........................................................... v Previous Leases.......................................................... v Primary Lease............................................................ 13 Project.................................................................. ii Punchlist Items.......................................................... 1 Renewal Premises ........................................................ 25 Rent .................................................................... iv Repair Period............................................................ 15 Satellite Equipment...................................................... 26 Security Deposit......................................................... iii Security Deposit Laws.................................................... 29 Server Room.............................................................. ii SNDA .................................................................... 14 Space Plans.............................................................. 1 Substantial Completion................................................... 2 Substantially Completed.................................................. 2 Suite 1200 Commencement Date............................................. 32 Suite 1200 Expansion Space............................................... 32 Suite 1300 CD............................................................ ii Suite 1300 Estimated Delivery Date....................................... 1 Suite 1350 CD............................................................ ii Suite 1350 Estimated Delivery Date....................................... 1 Suite 1400 Commencement Date............................................. 29 Suite 1400 Expansion Space............................................... 29 Suite 1400 Lease Amendment............................................... 29 Suite 1450 Commencement Date............................................. 31 Suite 1450 Expansion Space............................................... 30 Suite 1450 Lease Amendment............................................... 31 Taking................................................................... 14 Tangible Net Worth....................................................... 12 Taxes.................................................................... 4 Telecommunications Services.............................................. 23 Temporary Space.......................................................... iv Tenant........................................................... ii, 1, 17, 1 Tenant Delay Day......................................................... 2 Tenant Party............................................................. 1 Tenant's Off-Premises Equipment.......................................... 1 Tenant's Proportionate Share............................................. iv Term .................................................................... ii Transfer................................................................. 9 Work .................................................................... 2 Working Drawings......................................................... 2

xii LEASE THIS LEASE AGREEMENT (this "LEASE") is entered into as of August 28, 2003, between W9/PHC II SAN JOSE, L.L.C., a Delaware limited liability company ("LANDLORD"), and CALLIDUS SOFTWARE, INC., a Delaware corporation ("TENANT"). 1. DEFINITIONS AND BASIC PROVISIONS. The definitions and basic provisions set forth in the Basic Lease Information (the "BASIC LEASE INFORMATION") executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes. Additionally, the following terms shall have the following meanings when used in this Lease: "AFFILIATE" means any person or entity which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the party in question; "BUILDING'S STRUCTURE" means the Building's exterior walls, roof, elevator shafts, footings, foundations, structural portions of load-bearing walls, structural floors and subfloors, and structural columns and beams; "BUILDING'S SYSTEMS" means the Building's HVAC, life-safety, plumbing, electrical, and mechanical systems; "INCLUDING" means including, without limitation; "LAWS" means all federal, state, and local laws, ordinances, rules and regulations, all court orders, governmental directives, and governmental orders and all interpretations of the foregoing, and all restrictive covenants affecting the Project, and "LAW" shall mean any of the foregoing; "TENANT'S OFF-PREMISES EQUIPMENT" means any of Tenant's equipment or other property that may be located on or about the Project (other than inside the Premises); and "TENANT PARTY" means any of the following persons: Tenant; any assignees claiming by, through, or under Tenant; any subtenants claiming by, through, or under Tenant; and any of their respective agents, contractors, employees, and invitees. 2. LEASE GRANT. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises. 3. TENDER OF POSSESSION. (a) SUITES 800, 1500 AND THE SERVER ROOM. This Lease with respect to Suites 800, 1500 and the Server Room shall commence on the date on which Landlord and Tenant fully execute this Lease. Landlord and Tenant acknowledge and agree that Tenant is already in possession of such portion of the Premises pursuant to the Previous Leases. (b) SUITE 1350. Landlord and Tenant presently anticipate that possession of Suite 1350 will be tendered to Tenant Substantially Completed on December 1, 2003 (the "SUITE 1350 ESTIMATED DELIVERY DATE") If Landlord is unable to tender possession of Suite 1350 in such condition to Tenant by the Suite 1350 Estimated Delivery Date, then (a) the validity of this Lease shall not be affected or impaired thereby, (b) Landlord shall not be in default hereunder or be liable for damages therefor, and (c) Tenant shall accept possession of Suite 1350 when Landlord tenders possession thereof to Tenant Substantially Completed, which shall then be the Suite 1350 CD; provided, however, if the Suite 1350 CD has not occurred by February 1, 2004, for reasons other than Permitted Delays, Basic Rent for the Temporary Space shall abate until the occurrence of the Suite 1350 CD. By occupying Suite 1350 for the purpose of conducting its regular business therein, Tenant shall be deemed to have accepted Suite 1350 in its condition as of the date of such occupancy, subject to the performance of punch-list items in Suite 1350 that remain to be performed by Landlord, if any. As used herein, "PERMITTED DELAYS" shall mean any delays attributable to Force Majeure, Tenant Delay Days or a holdover tenant (provided Landlord has not consented to such tenant holding over and is using commercially reasonable efforts to promptly recover possession of the Suite). (c) SUITE 1300. Landlord and Tenant presently anticipate that possession of Suite 1300 will be tendered to Tenant Substantially Completed in the condition required by this Lease on April 1, 2004 (the "SUITE 1300 ESTIMATED DELIVERY DATE"). If Landlord is unable to 1 tender possession of Suite 1300 in such condition to Tenant by the Suite 1300 Estimated Delivery Date, then (a) the validity of this Lease shall not be affected or impaired thereby, (b) Landlord shall not be in default hereunder or be liable for damages therefor, and (c) Tenant shall accept possession of Suite 1300 when Landlord tenders possession thereof to Tenant Substantially Completed, which shall then be the Suite 1300 CD; provided, however, if the Suite 1300 CD has not occurred by June 1, 2004, for reasons other than Permitted Delays, Basic Rent for the Temporary Space shall abate until the occurrence of the Suite 1300 CD. By occupying Suite 1300 for the purpose of conducting its regular business therein, Tenant shall be deemed to have accepted Suite 1300 in its condition as of the date of such occupancy, subject to the performance of punchlist items in Suite 1300 that remain to be performed by Landlord, if any. (d) CONFIRMATION OF COMMENCEMENT DATE. Immediately upon occupying any portion of the Premises for the purpose of conducting its regular business therein, Tenant shall execute and deliver to Landlord a letter substantially in the form of Exhibit E hereto confirming (1) the Commencement Date with respect to that portion of the Premises and the expiration date of the initial Term, (2) that Tenant has accepted that portion of the Premises, and (3) that Landlord has performed all of its obligations with respect to that portion of the Premises (except for punch-list items specified in such letter); however, the failure of the parties to execute such letter shall not defer any Commencement Date hereunder or otherwise invalidate this Lease. 4. RENT. (a) PAYMENT. Tenant shall timely pay to Landlord Rent, without notice, demand, deduction or set off (except as otherwise expressly provided herein), by good and sufficient check drawn on a national banking association at Landlord's address provided for in this Lease or as otherwise reasonably specified by Landlord. The obligations of Tenant to pay Basic Rent, Supplemental Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Basic Rent and Supplemental Rent, adjusted as herein provided, shall be payable monthly in advance. The first monthly installment of Basic Rent and Supplemental Rent, less the application of the security deposit held by Landlord pursuant to the Previous Leases in the amount of $50,558.14, shall be payable contemporaneously with the execution of this Lease; thereafter, Basic Rent shall be payable on the first day of each month beginning on the first day of the second full calendar month of the Term. The monthly Basic Rent and Supplemental Rent for any partial month at the beginning of the Term shall equal the product of 1/365 of the annual Basic Rent and Supplemental Rent in effect during the partial month and the number of days in the partial month, and shall be due on the Commencement Date. Payments of Basic Rent and Supplemental Rent for any fractional calendar month at the end of the Term shall be similarly prorated. Tenant shall pay Additional Rent at the same time and in the same manner as Basic Rent and Supplemental Rent. (b) OPERATING COSTS; TAXES. (1) Tenant shall pay to Landlord the amount (per each rentable square foot in the Premises) ("ADDITIONAL RENT") by which the annual Operating Costs (defined below) per rentable square foot in the Building exceed the Expense Stop (per rentable square foot in the Building). Landlord may make a good faith estimate of the Additional Rent to be due by Tenant for any calendar year or part thereof during the Term. During each calendar year or partial calendar year of the Term (after the base year, if the Expense Stop is calculated on a base year basis), Tenant shall pay to Landlord, in advance concurrently with each monthly installment of Basic Rent, an amount equal to the estimated Additional Rent for such calendar year or part thereof divided by the number of months therein. From time to time, Landlord may estimate and reestimate the Additional Rent to be due by Tenant and deliver a copy of the estimate or re-estimate to Tenant. Thereafter, the monthly installments of Additional Rent payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of the Additional Rent as estimated by 2 Landlord. Any amounts paid based on such an estimate shall be subject to adjustment as herein provided when actual Operating Costs are available for each calendar year. (2) The term "OPERATING COSTS" shall mean all expenses and disbursements (subject to the limitations set forth below) that Landlord incurs in connection with the ownership, operation, and maintenance of the Project, determined in accordance with sound accounting principles consistently applied, including the following costs: (A) wages and salaries of all on-site employees at or below the grade of senior building manager engaged in the operation, maintenance or security of the Project (together with Landlord's reasonable allocation of expenses of off-site employees at or below the grade of senior building manager who perform a portion of their services in connection with the operation, maintenance or security of the Project), including taxes, insurance and benefits relating thereto; (B) all supplies and materials used in the operation, maintenance, repair, replacement, and security of the Project; (C) costs for improvements made to the Project which, although capital in nature, are reasonably expected and are primarily intended to reduce the normal operating costs (including all utility costs) of the Project, as amortized using a commercially reasonable interest rate over the time period reasonably estimated by Landlord to recover the costs thereof taking into consideration the anticipated cost savings, as determined by Landlord using its good faith, commercially reasonable judgment, as well as capital improvements made in order to comply with any Law hereafter promulgated by any governmental authority or any interpretation hereafter rendered with respect to any existing Law, as amortized using a commercially reasonable interest rate over the useful economic life of such improvements as determined by Landlord in its reasonable discretion; (D) cost of all utilities, except the cost of other utilities reimbursable to Landlord by the Project's tenants other than pursuant to a provision similar to this Section 4(b); (E) insurance expenses provided that the deductible attributable to earthquake insurance alone shall not exceed $35,000 to Tenant each calendar year; (F) repairs, replacements, and general maintenance of the Project; (G) fair market rental and other costs with respect to the management office for the Building; and (H) service, maintenance and management contracts with independent contractors for the operation, maintenance, management, repair, replacement, or security of the Project (including alarm service, window cleaning, and elevator maintenance); provided that the management fee for the Project shall not exceed three percent of gross revenues of the Project. Operating Costs shall not include costs for (i) capital improvements made to the Building (including any amortized costs related thereto), other than capital improvements described in Section 4(b)(2)(C) and except for items which are generally considered maintenance and repair items, such as painting of common areas, replacement of carpet in elevator lobbies, and the like; (ii) repair, replacements and general maintenance paid by proceeds of insurance or by Tenant or other third parties; (iii) interest, amortization or other payments on loans to Landlord; (iv) depreciation; (v) leasing commissions; (vi) legal expenses for services, other than those that benefit the Project tenants generally (e.g., disputes regarding Taxes); (vii) renovating or otherwise improving space for occupants of the Project or vacant space in the Project; (viii) Taxes, taxes assessed against the personal property of tenants of the Project and any federal, state or local income, estate, inheritance, gift, documentary transfer or franchise taxes or similar assessments or levies; (ix) federal income taxes imposed on or measured by the income of Landlord from the operation of the Project; (x) repairs or other work occasioned by or incurred in connection with (a) earthquake, fire, windstorm, or other casualty of the type which Landlord has insured against or is required to insure against pursuant to the terms of this Lease, or for which Landlord is reimbursed from third parties, (b) the exercise of the right of eminent domain, or (c) the maintenance and repair of the Building's Structure; (xi) marketing costs, leasing commissions, finders' fees, attorneys' fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with tenants, other occupants, prospective tenants or third parties, or the sale or refinancing of the Building, or legal fees incurred in connection with this Lease; (xii) expenses, including permits, license, design, space planning and inspection costs, incurred in tenant build-out, renovating or otherwise improving or decorating, painting or redecorating space for tenants or other occupants of space; (xiii) Landlord's costs of electricity and other services sold or provided to tenants in the Building and for which Landlord is entitled to be reimbursed, whether 3 or not collected, by such tenants as a separate additional charge or rental over and above the basic rent or escalation payment payable under the lease with such tenant; (xiv) expenses in connection with non-Building standard services or benefits of a type which are not provided to Tenant but which are provided to other tenants or occupants of the Building, or for which Tenant is charged directly but which are provided to another tenant or occupant of the Building without direct charge; (xv) cost of electricity and other utilities consumed by other tenants or occupants in excess of levels provided by Landlord to tenants for normal office consumption; (xvi) costs incurred due to violation by Landlord or any tenant or other occupant of the terms and conditions of any lease or other rental arrangements covering space in the Building; (xvii) amounts paid to subsidiaries or other Affiliates of Landlord for services on or to the Project or the Premises (or any portion thereof), to the extent only that the costs of such services exceed competitive costs of such services were they not so rendered by a subsidiary or other Affiliate of Landlord; (xviii) bad debt expenses, payments of principal, interest, late fees, prepayment fees or other charges on any debt or amortization payments on any mortgage or mortgages executed by Landlord covering the Project or the Building (or any portion thereof) now or in the future, rental concessions or negative cash flow guaranties, or rental payments under any ground or underlying lease or leases; (xix) Landlord's general administrative overhead expenses for services not specifically performed for the Building, or salaries of any officer or employee of Landlord (or any subsidiary or Affiliate of Landlord) above the grade of building manager; (xx) all items and services for which Tenant pays directly to third parties or for which tenants reimburse Landlord; (xxi) advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building or any other tenant of the Building; (xxii) any fines or penalties incurred due to violations by Landlord or another tenant of any Laws or governmental rule or authority; (xxiii) costs for or relating to sculpture, paintings, or other art; (xxiv) any costs necessitated by or resulting from the sole or gross negligence of Landlord, its agents, employees and/or independent contractors; (xxv) charitable or political contributions; (xxvi) costs associated with the operation of the business of the partnership or entity which constitutes Landlord, or the operation of any parent, subsidiary or Affiliate of Landlord, as the same are distinguished from the costs of operation of the Building, including without limitation partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Project, and costs of any disputes between Landlord and its partners, members and employees or disputes of Landlord with third-party building management; (xxvii) any and all costs of Landlord in complying with Laws regarding Hazardous Materials including, but not limited to, the costs and expenses of clean-up, remediation, environmental surveys/assessments, compliance with environmental Laws, consulting fees, treatment and monitoring charges, transportation expenses and disposal fees, except if such costs are a result of Tenant's use of or activities in or on the Building; (xxviii) any compensation paid to clerks, attendants, or other persons in commercial concessions operated by Landlord; and (xxix) costs of installing, operating, and maintaining any specialty services operated by Landlord, including, without limiting any of the foregoing, any luncheon club, athletic facility, public meeting rooms, art galleries, concierge, or retail facility. If the Expense Stop is calculated on a base year basis, Operating Costs for the base year only shall not include temporary market-wide labor-rate increases due to extraordinary circumstances, including boycotts and strikes; and temporary utility rate increases due to extraordinary circumstances, including conservation surcharges, boycotts, embargos or other shortages; or amortized costs relating to capital improvements. (3) Tenant shall also pay Tenant's Proportionate Share of any increase in Taxes for each year and partial year falling within the Term over the Taxes for the Base Tax Year. Tenant shall pay Tenant's Proportionate Share of Taxes in the same manner as provided above for Tenant's Proportionate Share of Operating Costs. "TAXES" shall mean taxes, assessments, and governmental charges or fees whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing or by others, subsequently created or otherwise, and any other taxes and assessments (including non-governmental assessments for common charges under a restrictive covenant or other private agreement that are not treated as part of Operating Costs) now or hereafter attributable to the Project (or its operation) during the Term hereof, excluding, however, penalties and interest thereon, any taxes assessed 4 against the personal property of tenants of the Project and federal, state and local income (except as provided below), estate, inheritance, gift, documentary transfer or franchise taxes or similar assessments or levies (if the present method of taxation changes so that in lieu of or in addition to the whole or any part of any Taxes, there is levied on Landlord a capital tax directly on the rents received therefrom or a franchise tax, assessment, or charge based, in whole or in part, upon such rents for the Project, then all such taxes, assessments, or charges, or the part thereof so based, shall be deemed to be included within the term "Taxes" for purposes hereof). Taxes shall include the costs of consultants retained in an effort to lower Taxes and all costs incurred in disputing any Taxes or in seeking to lower the tax valuation of the Project. For property tax purposes, Tenant waives all rights to protest or appeal the appraised value of the Premises, as well as the Project, unless they are patently excessive and all rights to receive notices of reappraisement. (4) By April 1 of each calendar year, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of Operating Costs for the previous year, in each case adjusted as provided in Section 4(b)(5), and of the Taxes for the previous year (the "OPERATING COSTS AND TAX STATEMENT"). If Tenant's estimated payments of Operating Costs or Taxes under this Section 4(b) for the year covered by the Operating Costs and Tax Statement exceed Tenant's Proportionate Share of such items as indicated in the Operating Costs and Tax Statement, then Landlord shall promptly credit or reimburse Tenant for such excess; likewise, if Tenant's estimated payments of Operating Costs or Taxes under this Section 4(b) for such year are less than Tenant's Proportionate Share of such items as indicated in the Operating Costs and Tax Statement, then Tenant shall pay Landlord such deficiency within 30 days after written notice thereof. (5) With respect to any calendar year or partial calendar year in which the Building is not occupied to the extent of 95% of the rentable area thereof, or Landlord is not supplying services to 95% of the rentable area thereof, the Operating Costs for such period shall, for the purposes hereof, be increased to the amount which would have been incurred had the Building been occupied to the extent of 95% of the rentable area thereof and Landlord had been supplying services to 95% of the rentable area thereof. (c) TENANT'S INSPECTION RIGHT. After giving Landlord 30 day's prior written notice thereof, Tenant may reasonably inspect or audit Landlord's records relating to Operating Costs and Taxes for any periods of time within one year before the audit or inspection; however, no audit or inspection shall extend to periods of time before the Commencement Date, except to the extent reasonably required to establish the actual Expense Stop or Base Tax Year. If Tenant fails to object to the calculation of Operating Costs and Taxes on an annual Operating Costs and Tax Statement within one year after the statement has been delivered to Tenant, then Tenant shall have waived its right to object to the calculation of Operating Costs and Taxes for the year in question and the calculation of Operating Costs and Taxes set forth on such statement shall be final. Tenant's audit or inspection shall be conducted only during business hours reasonably designated by Landlord. Each party shall pay its own cost of such audit or inspection. If the total Operating Costs and Taxes for the time period in question is determined to be in error by more than five percent in the aggregate, Landlord shall pay to Tenant the audit costs incurred by Tenant. Tenant may not conduct an inspection or have an audit performed more than once during any calendar year. Tenant or the accounting firm conducting such audit shall, at no charge to Landlord, submit its audit report in draft form to Landlord for Landlord's review and comment before the final approved audit report is submitted to Landlord, and any reasonable comments by Landlord shall be incorporated into the final audit report. If such inspection or audit reveals that an error was made in the Operating Costs and Taxes previously charged to Tenant, then Landlord shall refund to Tenant any overpayment of any such costs, or Tenant shall pay to Landlord any underpayment of any such costs, as the case may be, within 30 days after notification thereof. Tenant shall maintain the results of each such audit or inspection confidential and shall not be permitted to use any third party to perform such audit or inspection, other than an independent firm of certified public accountants (A) reasonably acceptable to Landlord, (B) which is not compensated on a contingency fee basis or in any other manner which is dependent upon the results of such audit or 5 inspection (and Tenant shall deliver the fee agreement or other similar evidence of such fee arrangement to Landlord upon request), and (C) which agrees with Landlord in writing to maintain the results of such audit or inspection confidential. 5. DELINQUENT PAYMENT; HANDLING CHARGES. All past due payments required of Tenant hereunder shall bear interest from the date which is five days after the date due until paid at the lesser of ten percent per annum or the maximum lawful rate of interest (such lesser amount is referred to herein as the "DEFAULT RATE"); additionally, Landlord, in addition to all other rights and remedies available to it, may charge Tenant a fee equal to five percent of the delinquent payment to reimburse Landlord for its cost and inconvenience incurred as a consequence of Tenant's delinquency, unless such delinquent payment is paid within five days after the date due. In no event, however, shall the charges permitted under this Section 5 or elsewhere in this Lease, to the extent they are considered to be interest under applicable Law, exceed the maximum lawful rate of interest. Notwithstanding the foregoing, the late fee referenced above shall not be charged with respect to the first occurrence (but not any subsequent occurrence) during any 12-month period that Tenant fails to make payment when due, if the delinquent amount is paid within five days after Landlord delivers written notice of such delinquency to Tenant, and each late fee shall be deemed waived by Landlord if not assessed in writing to Tenant within 90 days after the date such payment was due. 6. INTENTIONALLY DELETED. 7. LANDLORD'S OBLIGATIONS. (a) SERVICES. Landlord shall use all reasonable efforts to furnish to Tenant (1) water at those points of supply provided for general use of tenants of the Building; (2) heated and refrigerated air conditioning ("HVAC") as appropriate, at such temperatures and in such amounts as are standard for comparable buildings in the vicinity of the Building; (3) janitorial service to the Premises on weekdays, other than holidays, for Building-standard installations and such window washing as may from time to time be reasonably required; (4) elevators for ingress and egress to the floor on which the Premises are located, in common with other tenants, provided that Landlord may reasonably limit the number of operating elevators during non-business hours and holidays; and (5) electrical current during normal business hours for equipment that does not require more than 110 volts and whose electrical energy consumption does not exceed normal office usage. Landlord shall maintain the common areas of the Building in reasonably good order and condition, except for damage caused by a Tenant Party. If Tenant desires any of the services specified in Section 7(a)(2): (1) at any time other than between 7:30 a.m. and 6:00 p.m. on weekdays (other than holidays), or (2) on Saturday, Sunday or holidays, then such services shall be supplied to Tenant upon the written request of Tenant delivered to Landlord before 3:00 p.m. on the business day preceding such extra usage, and Tenant shall pay to Landlord the direct cost of providing such services within 30 days after Landlord has delivered to Tenant an invoice therefor. Notwithstanding the foregoing to the contrary, Landlord shall furnish to Tenant, in the Server Room and in the Customer Visiting Center on the 13th floor, HVAC at such temperatures and in such amounts as are standard for comparable buildings in the vicinity of the Building 24 hours per day, seven days per week ("EXTRA HVAC"). Landlord shall provide the Extra HVAC, at Landlord's option, either by (i) installing a separate HVAC unit in the Premises or (2) upgrading, modifying or augmenting the existing HVAC system serving the Premises, the cost of which shall be paid by Tenant to Landlord within 30 days after demand therefore. In the event Landlord installs a separate HVAC unit to supply the Extra HVAC, Tenant shall be responsible for and shall pay to Landlord, Landlord's actual cost to install, operate and maintain such separate unit within 30 days after demand therefore. The direct costs incurred by Landlord in providing after-hour HVAC service and/or Extra HVAC service to Tenant shall include Landlord's actual costs for electricity, water, sewage, water treatment, labor, metering, filtering, and maintenance for providing such service and shall not include any markup for profit to Landlord. In the event Tenant vacates an entire floor of the Premises, (1) Tenant shall notify Landlord of such vacation, (2) Landlord shall suspend janitorial service to such floor, (3) Tenant shall have no obligation to 6 pay for janitorial service to the vacated floor for the duration of time that such janitorial service is suspended, and (4) Tenant shall receive a credit from Landlord for any amounts billed by Landlord for such janitorial service after the date of Tenant's written notification of such vacation. (b) EXCESS UTILITY USE. Landlord shall not be required to furnish electrical current for equipment that requires more than 110 volts or other equipment whose electrical energy consumption exceeds normal office usage. If Tenant's requirements for or consumption of electricity exceed the electricity to be provided by Landlord as described in Section 7(a), Landlord shall, at Tenant's expense, make reasonable efforts to supply such service through the then-existing feeders and risers serving the Building and the Premises, and Tenant shall pay to Landlord the cost of such service within 30 days after Landlord has delivered to Tenant an invoice therefor. Landlord may determine the amount of such additional consumption and potential consumption by any verifiable method, including installation of a separate meter in the Premises installed, maintained, and read by Landlord, at Tenant's expense. Tenant shall not install any electrical equipment requiring unusual wiring or requiring voltage in excess of 110 volts unless approved in advance by Landlord, which approval shall not be unreasonably withheld. Tenant shall not install any electrical equipment requiring voltage in excess of Building capacity unless approved in advance by Landlord, which approval may be withheld in Landlord's sole discretion. The use of electricity in the Premises shall not exceed the capacity of existing feeders and risers to or wiring in the Premises. Any risers or wiring required to meet Tenant's excess electrical requirements shall, upon Tenant's written request, be promptly installed by Landlord, at Tenant's cost, if, in Landlord's reasonable judgment, the same shall not cause permanent damage to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable alterations, repairs, or expenses, or unreasonably interfere with or disturb other tenants of the Building. If Tenant uses machines or equipment in the Premises which affect the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, Landlord may install supplemental air conditioning units or other supplemental equipment in the Premises, and the cost thereof, including the cost of installation, operation, use, and maintenance, shall be paid by Tenant to Landlord within 30 days after Landlord has delivered to Tenant an invoice therefor. (c) RESTORATION OF SERVICES; ABATEMENT. Landlord shall use reasonable efforts to restore any service required of it that becomes unavailable; however, such unavailability shall not render Landlord liable for any damages caused thereby, be a constructive eviction of Tenant, constitute a breach of any implied warranty, or, except as provided in the next sentence, entitle Tenant to any abatement of Tenant's obligations hereunder, except to the extent caused by the gross negligence or willful misconduct of Landlord. If, however, Tenant is prevented from using in a commercially reasonable manner and does not use the Premises or a material portion of the Premises because of the unavailability of any such service for a period of 10 consecutive business days (or five consecutive business days because of the unavailability and the restoration of such services is within the reasonable control of Landlord) without consideration for Force Majeure following Landlord's receipt from Tenant of a written notice regarding such unavailability and such unavailability was not caused by a Tenant Party or a governmental directive, then Tenant shall, as its exclusive remedy be entitled to a reasonable abatement of Rent for each consecutive day (after such 10-business day period, or after such five-business day period, as applicable) that Tenant is so prevented from using the Premises. 8. IMPROVEMENTS; ALTERATIONS; REPAIRS; MAINTENANCE. (a) IMPROVEMENTS; ALTERATIONS. Except as otherwise provided hereunder, improvements to the Premises shall be installed at Tenant's expense only in accordance with plans and specifications which have been previously submitted to and approved in writing by Landlord, which approval shall be governed by the provisions set forth in this Section 8(a). Except as otherwise provided hereunder, no alterations or physical additions in or to the Premises may be made without Landlord's prior written consent, which shall not be unreasonably withheld and shall be provided within 15 business days after Landlord's receipt of Tenant's substantially 7 complete submission of such plans and specifications; however, Landlord may withhold its consent to any alteration or addition that would adversely affect (in the reasonable discretion of Landlord) (1) the Building's Structure or the Building's Systems (including the Building's restrooms or mechanical rooms), (2) the exterior appearance of the Building, (3) the appearance of the Building's common areas or elevator lobby areas, or (4) provision of services to other occupants of the Building. In connection with Landlord's review and approval of any of Tenant's proposed alterations, additions or improvements to the Premises, Landlord shall notify Tenant in writing, contemporaneously with Landlord's notice of approval to Tenant with respect to the improvements in question, whether Landlord will require Tenant to remove such alterations prior to the expiration of the Term. In the event Landlord does not so require Tenant to remove such alterations prior to the expiration of the Term, Tenant shall have the option to remove such alterations or to leave such alterations in the Premises upon such expiration. Except as otherwise provided hereunder, Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type visible from the exterior of the Premises without the prior written consent of Landlord, which consent may be withheld in Landlord's sole and absolute discretion. All alterations, additions, and improvements shall be, except as otherwise provided hereunder, constructed, maintained, and used by Tenant, at its risk and expense, in accordance with all Laws; Landlord's consent to or approval of any alterations, additions or improvements (or the plans therefor) of Tenant shall not constitute a representation or warranty by Landlord, nor Landlord's acceptance, that the same comply with sound architectural and/or engineering practices or with all applicable Laws, and Tenant shall be solely responsible for ensuring all such compliance. Notwithstanding the foregoing, Tenant shall not be required to obtain Landlord's consent for repainting, recarpeting, or other alterations, tenant improvements, or physical additions to the Premises which are not structural in nature totaling less than $20,000 in any single instance or series of related alterations performed within a three-month period (the "PRE-APPROVED ALTERATIONS") (provided that Tenant shall not perform any improvements, alterations or additions as to the Premises in stages as a means to subvert this provision), in each case provided that (A) Tenant delivers to Landlord written notice thereof, a list of contractors and subcontractors to perform the work (and certificates of insurance for each such party) and any plans and specifications therefor prior to commencing any such alterations, additions, or improvements (for informational purposes only so long as no consent is required by Landlord as required by this Lease), (B) the installation thereof does not involve any core drilling or the reconfiguration or relocation of any exterior or interior load-bearing walls of the Building, and (C) such alterations, additions and improvements will not adversely affect (in Landlord's reasonable discretion) (i) the Building's Structure or the Building's Systems, (ii) the provision of services to other Building tenants, or (iii) the appearance of the Building's common areas or the exterior of the Building. Tenant may, when notifying Landlord of the Pre-approved Alterations as set forth in subsection 8(a)(A) above, request that Landlord notify Tenant in writing, to be delivered to Tenant within 15 days after such request by Tenant, whether Landlord will require Tenant to remove the Pre-approved Alterations at the end of the Term. (b) REPAIRS; MAINTENANCE. Tenant shall maintain the Premises in a clean, safe, and operable condition, and shall not permit or allow to remain any waste or damage to any portion of the Premises. Additionally, Tenant, at its sole expense, shall repair, replace and maintain in good condition and in accordance with all Laws and the equipment manufacturer's suggested service programs, all portions of the Premises, Tenant's Off-Premises Equipment and all areas, improvements and systems exclusively serving the Premises. Tenant shall repair or replace, subject to Landlord's direction and supervision, any damage to the Building caused by a Tenant Party. If Tenant fails to make such repairs or replacements within 30 days after obtaining knowledge of the occurrence of such damage (except for emergencies), then Landlord may make the same at Tenant's cost. If any such damage occurs outside of the Premises, then Landlord may elect to repair such damage at Tenant's expense, rather than having Tenant repair such damage. The cost of all maintenance, repair or replacement work performed by Landlord under this Section 8 shall be paid by Tenant to Landlord within 30 days after Landlord has invoiced Tenant therefor. Tenant hereby waives and releases its right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or 8 hereafter in effect. Notwithstanding any provision of this Lease to the contrary, Landlord shall, at its sole cost and expense (and without right to reimbursement from Tenant pursuant to Section 4(b)), maintain in good condition and repair the Building's Structure. Tenant's obligation to repair as set forth in this Section shall not apply to damage from normal wear and tear, casualty, condemnation and any other damage caused, created or, with respect to actions of a third party other than a Tenant Party, consented to by Landlord. (c) PERFORMANCE OF WORK. All work described in this Section 8 shall be performed only by Landlord or by subcontractors reasonably approved in writing by Landlord. Tenant shall cause all subcontractors that it contracts with to procure and maintain insurance coverage naming Landlord, Landlord's property management company and Landlord's asset management company as additional insureds against such risks, in such amounts, and with such companies as Landlord may reasonably require. Tenant shall provide Landlord with the identities, mailing addresses and telephone numbers of all persons performing work or supplying materials prior to beginning such construction and Landlord may post on and about the Premises notices of non-responsibility pursuant to applicable Laws. All such work shall be performed in accordance with all Laws and in a good and workmanlike manner so as not to damage the Building (including the Premises, the Building's Structure and the Building's Systems). All such work which may affect the Building's Structure or the Building's Systems must be approved by the Building's engineer of record, at Tenant's expense and, at Landlord's election, must be performed by Landlord's usual contractor for such work, provided that the cost of such contractor's work shall not exceed the cost of other similar-quality contractors for similar services in other similar-class office buildings located in the submarket in the city in which the Building is located. All work affecting the roof of the Building must be performed by Landlord's roofing contractor and no such work will be permitted if it would void or reduce the warranty on the roof. (d) MECHANIC'S LIENS. All work performed, materials furnished, or obligations incurred by or at the request of a Tenant Party shall be deemed authorized and ordered by Tenant only, and Tenant shall not permit any mechanic's liens to be filed against the Premises or the Project in connection therewith. Upon completion of any such work, Tenant shall deliver to Landlord final lien waivers from all contractors, subcontractors and materialmen who performed such work. If such a lien is filed, then Tenant shall, within ten days after Landlord has delivered notice of the filing thereof to Tenant (or such earlier time period as may be necessary to prevent the forfeiture of the Premises, the Project or any interest of Landlord therein or the imposition of a civil or criminal fine with respect thereto), either (1) pay the amount of the lien and cause the lien to be released of record, or (2) diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has invoiced Tenant therefor. Landlord and Tenant acknowledge and agree that their relationship is and shall be solely that of "landlord-tenant" (thereby excluding a relationship of "owner-contractor," "owner-agent" or other similar relationships). Nothing herein shall be deemed a consent by Landlord to any liens being placed upon the Premises, the Project or Landlord's interest therein due to any work performed by or for Tenant or deemed to give any contractor or subcontractor or materialman any right or interest in any funds held by Landlord to reimburse Tenant for any portion of the cost of such work. Tenant shall defend, protect, indemnify and hold harmless Landlord and its agents and representatives from and against all claims, demands, causes of action, suits, judgments, damages and expenses (including attorneys' fees) in any way arising from or relating to the failure by any Tenant Party to pay for any work performed, materials furnished, or obligations incurred by or at the request of a Tenant Party. This indemnity provision shall survive termination or expiration of this Lease. 9. USE. Tenant shall occupy and use the Premises only for the Permitted Use and shall comply with all Laws relating to the use, condition, access to, and occupancy of the Premises and will not commit waste, overload the Building's Structure or the Building's Systems or subject the Premises to use that would damage the Premises, normal wear and tear and casualty excepted. 9 The population density within the Premises as a whole shall at no time exceed one person for each 200 rentable square feet in the Premises. Tenant shall not conduct second or third shift operations within the Premises; however, Tenant may use the Premises after normal business hours, so long as Tenant is not generally conducting significant and ongoing business from the Premises after normal business hours. Notwithstanding anything in this Lease to the contrary, as between Landlord and Tenant, (a) Tenant shall bear the risk of complying with Title III of the Americans With Disabilities Act of 1990, any state laws governing handicapped access or architectural barriers, and all rules, regulations, and guidelines promulgated under such laws, as amended from time to time (the "DISABILITIES ACTS") in the Premises, and (b) Landlord shall bear the risk of complying with the Disabilities Acts in the common areas of the Building, other than compliance that is necessitated by the use of the Premises for other than the Permitted Use or as a result of any alterations or additions made by or on behalf of a Tenant Party (which risk and responsibility shall be borne by Tenant), but excluding any initial tenant improvement work in any of the Suites covered by this Lease (which risk and responsibility shall be borne by Landlord). The Premises shall not be used for any use which is disreputable, creates extraordinary fire hazards, or results in an increased rate of insurance on the Building or its contents, or for the storage of any Hazardous Materials (other than typical office supplies [e.g., photocopier toner] and then only in compliance with all Laws). Tenant shall not use any substantial portion of the Premises for a "call center," any other telemarketing use, or any credit processing use. If, as a direct result of Tenant's or a Tenant Party's acts or because Tenant vacates the Premises, the rate of insurance on the Building or its contents increases, then Tenant shall pay to Landlord the amount of such increase attributable to Tenant on written demand (which demand shall include reasonable evidence that any such cost increase is attributable to Tenant), and acceptance of such payment shall not waive any of Landlord's other rights. If Tenant fails to cease or remediate such acts within five days after Landlord's written request that Tenant do so, then such acts shall be an Event of Default. Tenant shall conduct its business and control each other Tenant Party so as not to create any nuisance or unreasonably interfere with other tenants or Landlord in its management of the Building. 10. ASSIGNMENT AND SUBLETTING. (a) TRANSFERS. Except as provided in Sections 10(h) and 10(i), Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed, (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law, (2) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization, (3) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant, (4) sublet any portion of the Premises, (5) grant any license, concession, or other right of occupancy of any portion of the Premises, or (6) permit the use of the Premises by any parties other than Tenant (any of the events listed in Section 10(a)(1) through 10(a)(6) being a "TRANSFER"). (b) CONSENT STANDARDS. Landlord shall not unreasonably withhold its consent to any assignment or subletting of the Premises, provided that the proposed transferee (1) is creditworthy, (2) has a good reputation in the business community, (3) will use the Premises for the Permitted Use (thus, excluding, without limitation, uses for credit processing and telemarketing) and will not use the Premises in any manner that would conflict with any exclusive use agreement or other similar agreement entered into by Landlord with any other tenant of the Building or the Project, (4) will not use the Premises, the Building or the Project in a manner that would materially increase the pedestrian or vehicular traffic to the Premises, the Building or the Project, (5) is not a governmental entity, or subdivision or agency thereof, (6) is not another occupant of the Building or the Project with whom Landlord is then, or has been within the 120-day period prior to the time Tenant seeks to enter into such assignment or subletting, actively negotiating to lease space in the Building or Project if Landlord then has available space for rent in the Building or Project and is willing to accommodate such existing occupant's space requirements within their budgetary confines, and (7) is not a person or entity with whom Landlord is then, or has been within the 30-day period prior to the time Tenant seeks to enter into 10 such assignment or subletting, actively negotiating to lease space in the Building or the Project or any Affiliate of any such person or entity if Landlord has available space for rent in the Building or Project and is willing to accommodate such person's or entity's space requirement within their budgetary confines. Additionally, Landlord may withhold its consent in its sole discretion to any proposed Transfer if any Event of Default by Tenant then exists and continues beyond all applicable cure periods. (c) REQUEST FOR CONSENT. If Tenant requests Landlord's consent to a Transfer, then, at least ten business days prior to the effective date of the proposed Transfer, Tenant shall provide Landlord with a written description of all material terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee: name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferee's creditworthiness and character. Concurrently with Tenant's notice of any request for consent to a Transfer, Tenant shall pay to Landlord a fee of $500 to defray Landlord's expenses in reviewing such request, and Tenant shall also reimburse Landlord immediately upon request for its reasonable attorneys' fees incurred in connection with considering any request for consent to a Transfer. (d) CONDITIONS TO CONSENT. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes Tenant's obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer for the period of the Transfer. No Transfer shall release Tenant from its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor. Landlord's consent to any Transfer shall not waive Landlord's rights as to any subsequent Transfers. If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so following the occurrence of an Event of Default hereunder. Tenant shall pay for the cost of any demising walls or other improvements necessitated by a proposed subletting or assignment. (e) ATTORNMENT BY SUBTENANTS. Each sublease by Tenant hereunder shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and each subtenant by entering into a sublease is deemed to have agreed that in the event of termination, re-entry or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublandlord, under such sublease, and such subtenant shall, at Landlord's option and provided its rights under the sublease are not materially modified, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (1) liable for any previous act or omission of Tenant under such sublease, (2) subject to any counterclaim, offset or defense that such subtenant might have against Tenant, (3) bound by any previous modification of such sublease not approved by Landlord in writing except as expressly provided hereunder or by any rent or additional rent or advance rent which such subtenant might have paid for more than the current month to Tenant, and all such rent shall remain due and owing, notwithstanding such advance payment, (4) bound by any security or advance rental deposit made by such subtenant which is not delivered or paid over to Landlord and with respect to which such subtenant shall look solely to Tenant for refund or reimbursement, or (5) obligated to perform any work in the subleased space which it would not have been obligated to perform for Tenant or to prepare it for occupancy, and in connection with such attornment, the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such attornment. Each subtenant or licensee of Tenant shall be deemed, automatically upon and as a condition of its occupying or using the Premises or any part thereof, to have agreed to be bound by the terms and conditions set forth in this Section 10(e). The 11 provisions of this Section 10(e) shall be self-operative, and no further instrument shall be required to give effect to this provision. (f) CANCELLATION. Except for Permitted Transfers, Landlord may, within 30 days after submission of Tenant's written request for Landlord's consent to (i) an assignment or (ii) a subletting which brings the total amount of the Premises then sublet by Tenant to more than 50% of the Premises for more than 75% of the then-remaining Term, cancel this Lease as to the portion of the Premises proposed to be sublet or assigned as of the date the proposed Transfer is to be effective. If Landlord cancels this Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises and Tenant shall pay to Landlord all Rent accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer. Thereafter, Landlord may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Tenant. (g) ADDITIONAL COMPENSATION. Tenant shall pay to Landlord, immediately upon receipt thereof, 50% of the excess of (1) all compensation received by Tenant for a Transfer less the actual out-of-pocket costs reasonably incurred by Tenant with unaffiliated third parties (i.e., brokerage commissions, attorneys' fees and costs and tenant finish work) in connection with such Transfer (such costs shall be amortized on a straight-line basis over the term of the Transfer in question) over (2) the Rent allocable to the portion of the Premises covered thereby. (h) PERMITTED TRANSFERS. Notwithstanding Section 10(a), Tenant may Transfer all or part of its interest in this Lease or all or part of the Premises (a "PERMITTED TRANSFER") to the following types of entities (a "PERMITTED TRANSFEREE") without the written consent of Landlord and without obligation to comply with Section 10(g): (1) an Affiliate of Tenant; (2) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity in which or with which Tenant, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of business entities, so long as (A) Tenant's obligations hereunder are assumed by the entity surviving such merger or created by such consolidation; and (B) the Tangible Net Worth of the surviving or created entity is not less than the Tangible Net Worth of Tenant as of the date hereof; or (3) any corporation, limited partnership, limited liability partnership, limited liability company or other business entity acquiring all or substantially all of Tenant's assets if such entity's Tangible Net Worth after such acquisition is not less than the Tangible Net Worth of Tenant as of the date hereof. Tenant shall promptly notify Landlord of any such Permitted Transfer. Tenant shall remain liable for the performance of all of the obligations of Tenant hereunder, or if Tenant no longer exists because of a merger, consolidation, or acquisition, the surviving or acquiring entity shall expressly assume in writing the obligations of Tenant hereunder. Additionally, the Permitted Transferee shall comply with all of the terms and conditions of this Lease, including the Permitted Use, and the use of the Premises by the Permitted Transferee may not violate any other agreements affecting the Premises, the Building or the Project, Landlord or other tenants of the Building or the Project. No later than 30 days after the effective date of any Permitted Transfer, Tenant agrees to furnish Landlord with (A) copies of the instrument effecting any of the foregoing Transfers, (B) documentation establishing Tenant's satisfaction of the requirements set forth above applicable to any such Transfer, and (C) evidence of insurance as required under this Lease with respect to the Permitted Transferee. The occurrence of a Permitted Transfer shall not waive Landlord's rights as to any subsequent Transfers. "TANGIBLE NET WORTH" means the excess of total assets over total liabilities, in each case as determined in accordance with generally accepted accounting principles 12 consistently applied ("GAAP"), excluding, however, from the determination of total assets all assets which would be classified as intangible assets under GAAP including goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee shall be subject to the terms of this Section 10. (i) PERMITTED SUBLEASES. Notwithstanding the provisions of this Section 10 to contrary, Tenant shall have the right to sublease the Premises without first obtaining Landlord's consent, subject to the following terms and conditions: (1) the total amount of space under sublease at any time shall not exceed 7,000 rentable square feet of the Premises, (2) no sublease shall extend longer than six months, (3) the sublease(s) must be with a business entity having a contractual joint venture or other strategic contractual business relationship with Tenant involving the sharing of technology or customers in some capacity, (4) within 30 days after the execution of any such executed sublease, Tenant shall deliver a copy of such executed sublease and evidence of such contractual relationship to Landlord, and (5) Sections 10(f) and 10(g) shall not apply to the sublease(s) described in this Section 10(i). 11. INSURANCE; WAIVERS; SUBROGATION; INDEMNITY. (a) TENANT'S INSURANCE. Effective as of the earlier of (1) the date Tenant enters or occupies the Premises, or (2) the Commencement Date, and continuing throughout the Term, Tenant shall maintain the following insurance policies: (A) commercial general liability insurance in amounts of $3,000,000 per occurrence or, following the expiration of the initial Term, such other amounts as Landlord may from time to time reasonably require (and, if the use and occupancy of the Premises include any activity or matter that is or may be excluded from coverage under a commercial general liability policy [e.g., the sale, service or consumption of alcoholic beverages], Tenant shall obtain such endorsements to the commercial general liability policy or otherwise obtain insurance to insure all liability arising from such activity or matter [including liquor liability, if applicable] in such amounts as Landlord may reasonably require), insuring Tenant, Landlord, Landlord's property management company and Landlord's asset management company against all liability for injury to or death of a person or persons or damage to property arising from the use and occupancy of the Premises and (without implying any consent by Landlord to the installation thereof) the installation, operation, maintenance, repair or removal of Tenant's Off-Premises Equipment, (B) insurance covering the full value of all alterations and improvements and betterments in the Premises, naming Landlord and Landlord's Mortgagee as additional loss payees as their interests may appear, (C) insurance covering the full value of all furniture, trade fixtures and personal property (including property of Tenant or others) in the Premises or otherwise placed in the Project by or on behalf of a Tenant Party (including Tenant's Off-Premises Equipment), (D) contractual liability insurance sufficient to cover Tenant's indemnity obligations hereunder (but only if such contractual liability insurance is not already included in Tenant's commercial general liability insurance policy), (E) worker's compensation insurance, and (F) business interruption insurance. Tenant's insurance shall provide primary coverage to Landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlord's policy will be excess over Tenant's policy. Tenant shall furnish to Landlord certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder at least ten days prior to the earlier of the Commencement Date or the date Tenant enters or occupies the Premises, and at least 15 days prior to each renewal of said insurance, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation or a material change of any such insurance policies. All such insurance policies shall be in form, and issued by companies with an A.M. Best rating of A-VII or better, reasonably satisfactory to Landlord. If Tenant fails to comply with the foregoing insurance requirements or to deliver to Landlord the certificates or evidence of coverage required herein after five days written notice thereof from Landlord, Landlord, in addition to any other remedy available pursuant to this Lease or otherwise, may, but shall not be obligated to, obtain such insurance and Tenant shall pay to Landlord on demand the premium costs thereof, plus an administrative fee of 10% of such cost. 13 (b) LANDLORD'S INSURANCE. Throughout the Term of this Lease, Landlord shall maintain, as a minimum, the following insurance policies: (1) property insurance for the Building's replacement value (excluding property required to be insured by Tenant), less a commercially-reasonable deductible if Landlord so chooses, and (2) commercial general liability insurance in an amount of not less than $3,000,000. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary. The cost of all insurance carried by Landlord with respect to the Project shall be included in Operating Costs. The foregoing insurance policies and any other insurance carried by Landlord shall be for the sole benefit of Landlord and under Landlord's sole control, and Tenant shall have no right or claim to any proceeds thereof or any other rights thereunder. (c) NO SUBROGATION. Landlord and Tenant each waives any claim it might have against the other for any damage to or theft, destruction, loss, or loss of use of any property, to the extent the same is insured against under any insurance policy of the types described in this Section 11 that covers the Project, the Premises, Landlord's or Tenant's fixtures, personal property, leasehold improvements, or business, or is required to be insured against under the terms hereof, regardless of whether the negligence of the other party caused such Loss (defined below). Additionally, Tenant waives any claim it may have against Landlord for any uninsured Loss to the extent such Loss is caused by a terrorist act. Each party shall cause its insurance carrier to endorse all applicable policies waiving the carrier's rights of recovery under subrogation or otherwise against the other party. (d) INDEMNITY. Subject to Section 11(c), Tenant shall defend, protect, indemnify, and hold harmless Landlord and its representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages, and expenses (including reasonable attorneys' fees) arising from an injury to or death of any person or the damage to or theft, destruction, loss, or loss of use of any property or inconvenience (a "LOSS"), occurring on the Premises or arising out of the installation, operation, maintenance, repair or removal of any of Tenant's Off-Premises Equipment, in each case even though caused or alleged to be caused by the negligence or fault of Landlord or its agents (other than a Loss arising from the sole or gross negligence or willful misconduct of Landlord or its agents), and even though any such claim, cause of action, or suit is based upon or alleged to be based upon the strict liability of Landlord or its agents. This indemnity is intended to indemnify Landlord and its agents against the consequences of their own negligence or fault as provided above when Landlord or its agents are jointly, comparatively, contributively, or concurrently negligent with Tenant. Subject to Section 11(c), Landlord shall defend, protect, indemnify, and hold harmless Tenant and its agents from and against all claims, demands, liabilities, causes of action, suits, judgments, and expenses (including reasonable attorneys' fees) for any Loss arising from any occurrence in the Building's common areas, even though caused or alleged to be caused by the negligence or fault of Tenant or its agents (other than a Loss arising from the sole or gross negligence or willful misconduct of Tenant or its agents or arising out of the installation, operation, maintenance, repair or removal of any of Tenant's Off-Premises Equipment), and even though any such claim, cause of action, or suit is based upon or alleged to be based upon the strict liability of Tenant or its agents. This indemnity is intended to indemnify Tenant and its agents against the consequences of their own negligence or fault as provided above when Tenant or its agents are jointly, comparatively, contributively, or concurrently negligent with Landlord. The indemnities set forth in this Lease shall survive termination or expiration of this Lease and shall not terminate or be waived, diminished or affected in any manner by any abatement or apportionment of Rent under any provision of this Lease. If any proceeding is filed for which indemnity is required hereunder, the indemnifying party agrees, upon request therefor, to defend the indemnified party in such proceeding at its sole cost utilizing counsel satisfactory to the indemnified party. 12. SUBORDINATION; ATTORNMENT; NOTICE TO LANDLORD'S MORTGAGEE. (a) SUBORDINATION. This Lease shall be subordinate to any deed of trust, mortgage, or other security instrument (each, a "MORTGAGE"), or any ground lease, master lease, or 14 primary lease (each, a "PRIMARY LEASE"), that now or hereafter covers all or any part of the Premises (the mortgagee under any such Mortgage, beneficiary under any such deed of trust, or the lessor under any such Primary Lease is referred to herein as a "LANDLORD'S MORTGAGEE"). Any Landlord's Mortgagee may elect, at any time, unilaterally, to make this Lease superior to its Mortgage, Primary Lease, or other interest in the Premises by so notifying Tenant in writing. The provisions of this Section shall be self-operative and no further instrument of subordination shall be required; however, in confirmation of such subordination, Tenant shall execute and return to Landlord (or such other party designated by Landlord) within ten days after written request therefor such documentation, in recordable form if required, as a Landlord's Mortgagee may reasonably request to evidence the subordination of this Lease to such Landlord's Mortgagee's Mortgage or Primary Lease (including a subordination, non-disturbance and attornment agreement) or, if the Landlord's Mortgagee so elects, the subordination of such Landlord's Mortgagee's Mortgage or Primary Lease to this Lease. (b) ATTORNMENT. Subject to the provisions of this Section 12, Tenant shall attorn to any party succeeding to Landlord's interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease, or otherwise, upon such party's request, and shall execute such agreements confirming such attornment as such party may reasonably request. (c) NOTICE TO LANDLORD'S MORTGAGEE. Tenant shall not seek to enforce any remedy it may have for any default on the part of Landlord without first giving written notice by certified mail, return receipt requested, specifying the default in reasonable detail, to any Landlord's Mortgagee whose address has been given to Tenant, and affording such Landlord's Mortgagee at least 30 days from receipt of such notice to perform Landlord's obligations hereunder. (d) LANDLORD'S MORTGAGEE'S PROTECTION PROVISIONS. If Landlord's Mortgagee shall succeed to the interest of Landlord under this Lease, Landlord's Mortgagee shall not be: (1) liable for any act or omission of any prior lessor (including Landlord); (2) bound by any rent or additional rent or advance rent which Tenant might have paid for more than the current month to any prior lessor (including Landlord), and all such rent shall remain due and owing, notwithstanding such advance payment, except to the extent transferred to or received by Landlord's Mortgagee; (3) bound by any security or advance rental deposit made by Tenant which is not delivered or paid over to Landlord's Mortgagee and with respect to which Tenant shall look solely to Landlord for refund or reimbursement; (4) bound by any termination, material amendment or modification of this Lease made without Landlord's Mortgagee's consent and written approval, except for those terminations, amendments and modifications permitted to be made by Landlord without Landlord's Mortgagee's consent pursuant to the terms of the loan documents between Landlord and Landlord's Mortgagee; (5) subject to the defenses which Tenant might have against any prior lessor (including Landlord), except to the extent they remain applicable against Landlord's Mortgagee after Landlord's Mortgagee acquires the Building; and (6) subject to the offsets which Tenant might have against any prior lessor (including Landlord) except for those offset rights which (A) are expressly provided in this Lease or any permitted amendment thereto, (B) relate to periods of time following the acquisition of the Building by Landlord's Mortgagee, and (C) Tenant has provided written notice to Landlord's Mortgagee and provided Landlord's Mortgagee an opportunity to cure the event giving rise to such offset event consistent with Section 12(c) above. Landlord's Mortgagee shall have no liability or responsibility under or pursuant to the terms of this Lease or otherwise after it ceases to own an interest in the Project. Nothing in this Lease shall be construed to require Landlord's Mortgagee to see to the application of the proceeds of any loan, and Tenant's agreements set forth herein shall not be impaired on account of any modification of the documents evidencing and securing any loan. (e) SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT. Landlord shall use reasonable efforts to obtain a subordination, non-disturbance and attornment agreement ("SNDA") substantially in the form attached hereto as Exhibit H, from the current 15 Landlord's Mortgagee within 90 days after the date of this Lease, and Landlord shall use reasonable efforts to obtain a SNDA from any future Landlord's Mortgagee, in a form reasonably acceptable to Tenant and such Landlord's Mortgagee or other institutional lenders. The subordination of Tenant's rights hereunder to any future Landlord's Mortgagee under Section 12(a) shall be conditioned upon such future Landlord's Mortgagee's execution and delivery of the SNDA in a form reasonably acceptable to Tenant and such Landlord's Mortgagee or other institutional lenders. 13. RULES AND REGULATIONS. Tenant shall comply with the rules and regulations of the Project which are attached hereto as Exhibit C. Landlord may, from time to time, change such rules and regulations for the safety, care, or cleanliness of the Project and related facilities, provided that such changes are applicable to all tenants of the Project, will not unreasonably interfere with Tenant's use of the Premises and are enforced by Landlord in a non-discriminatory manner. Tenant shall be responsible for the compliance with such rules and regulations by each Tenant Party. 14. CONDEMNATION. (a) TOTAL TAKING. If the entire Building or Premises are taken by right of eminent domain or conveyed in lieu thereof (a "TAKING"), this Lease shall terminate as of the date of the Taking. (b) PARTIAL TAKING - TENANT'S RIGHTS. If any part of the Building becomes subject to a Taking and such Taking will prevent Tenant from conducting on a permanent basis its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within 30 days after the Taking, and Basic Rent and Additional Rent shall be apportioned as of the date of such Taking. If Tenant does not terminate this Lease, then Rent shall be abated on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking. (c) PARTIAL TAKING - LANDLORD'S RIGHTS. If any material portion, but less than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds arising from a Taking to a Landlord's Mortgagee in an amount exceeding $100,000, then Landlord may terminate this Lease by delivering written notice thereof to Tenant within 30 days after such Taking, and Basic Rent and Additional Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease, then this Lease will continue, but if any portion of the Premises has been taken, Rent shall abate as provided in the last sentence of Section 14(b). Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of the California Code of Civil Procedure. (d) TEMPORARY TAKING. If all or any portion of the Premises becomes subject to a Taking for a limited period of time, this Lease shall remain in full force and effect and Tenant shall continue to perform all of the terms, conditions and covenants of this Lease, including the payment of Basic Rent and all other amounts required hereunder. Tenant shall be entitled to receive the entire award made in connection with any other temporary condemnation or other taking attributable to any period within the Term. Landlord shall be entitled to the entire award for any such temporary condemnation or other taking which relates to a period after the expiration of the Term or which is allocable to the cost of restoration of the Premises. If any such temporary condemnation or other taking terminates prior to the expiration of the Term, Tenant shall restore the Premises as nearly as possible to the condition prior to the condemnation or other taking, at Tenant's sole cost and expense; provided that, Tenant shall receive the portion of the award attributable to such restoration and excepting damage to the Premises from any intervening casualty. Tenant may, at its election, deem any temporary Taking which exceeds 180 days in duration as a partial Taking under Section 14(b). 16 (e) AWARD. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the Land, the Building, and other improvements taken; however, Tenant may separately pursue a claim (to the extent it will not reduce Landlord's award) against the condemnor for the value of Tenant's personal property which Tenant is entitled to remove under this Lease, moving and relocation costs, and loss of business. 15. FIRE OR OTHER CASUALTY. (a) REPAIR ESTIMATE. If the Premises or the Building are damaged by fire or other casualty (a "CASUALTY"), Landlord shall, within 75 days after such Casualty, deliver to Tenant a good faith estimate (the "DAMAGE NOTICE") of the time needed to repair the damage caused by such Casualty. (b) TENANT'S RIGHTS. If a material portion of the Premises is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord reasonably estimates that the damage caused thereby cannot be repaired within 210 days after the commencement of repairs (the "REPAIR PERIOD"), then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. (c) LANDLORD'S RIGHTS. If a Casualty damages the Premises or a material portion of the Building and (1) Landlord reasonably estimates that the damage to the Premises cannot be repaired within the Repair Period using reasonable diligence, (2) the damage to the Premises exceeds 50% of the replacement cost thereof (excluding foundations and footings), as reasonably estimated by Landlord, and such damage occurs during the last two years of the Term, (3) regardless of the extent of damage to the Premises, the damage is not fully covered (including deductibles) by Landlord's insurance policies or Landlord makes a good faith and reasonable determination that restoring the Building would be uneconomical, or (4) Landlord is required to pay any insurance proceeds arising out of the Casualty to a Landlord's Mortgagee in an amount exceeding $150,000, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. (d) REPAIR OBLIGATION. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, begin to repair the Premises and shall proceed with reasonable diligence to restore the Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any alterations or betterments within the Premises required to be covered by Tenant's insurance hereunder (which shall be promptly and with due diligence repaired and restored by Tenant at Tenant's sole cost and expense) or any furniture, equipment, trade fixtures or personal property of Tenant or others in the Premises or the Building, and Landlord's obligation to repair or restore the Premises shall be limited to the extent of the insurance proceeds actually received after pursuing reasonable negotiation with the insurer by Landlord for the Casualty in question, plus deductibles, unless caused or created by Landlord's gross negligence or willful misconduct. If this Lease is terminated under the provisions of this Section 15, Landlord shall be entitled to the full proceeds of the insurance policies providing coverage for all alterations, improvements and betterments in the Premises, except to the extent they constitute Tenant's trade fixtures and Tenant shall have no obligation to restore or repair same. (e) WAIVER OF STATUTORY PROVISIONS. The provisions of this Lease, including this Section 15, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises or the Building and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations 17 concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises or the Building. (f) ABATEMENT OF RENT. If the Premises are damaged by Casualty, Rent for the portion of the Premises rendered untenantable by the damage shall be abated on a reasonable basis from the date of damage until the completion of Landlord's repairs (or until the date of termination of this Lease by Landlord or Tenant as provided above, as the case may be), unless a Tenant Party caused such damage, in which case, Tenant shall continue to pay Rent without abatement to the extent insurance proceeds are not available to Landlord therefor. 16. PERSONAL PROPERTY TAXES. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises or in or on the Building or Project. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, within 30 days following written request therefor, the part of such taxes for which Tenant is primarily liable hereunder; however, Landlord shall not pay such amount if Tenant notifies Landlord that it will contest the validity or amount of such taxes before Landlord makes such payment, and thereafter diligently proceeds with such contest in accordance with Law and if the non-payment thereof does not pose a threat of loss or seizure of the Project or interest of Landlord therein or impose any fee or penalty against Landlord. 17. EVENTS OF DEFAULT. Each of the following occurrences shall be an "EVENT OF DEFAULT": (a) PAYMENT DEFAULT. Tenant's failure to pay Rent within five days after Landlord has delivered written notice to Tenant that the same is due (any such written notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law); however, an Event of Default shall occur hereunder without any obligation of Landlord to give any notice if Tenant fails to pay Rent when due and, during the 12-month interval preceding such failure, Landlord has given Tenant written notice of failure to pay Rent on two or more occasions; (b) ABANDONMENT. Tenant abandons the Premises; (c) ESTOPPEL. Tenant fails to provide any estoppel certificate after Landlord's written request therefor pursuant to Section 25(e) and such failure shall continue for five days after Landlord's second written notice thereof to Tenant; (d) INSURANCE. Tenant fails to procure, maintain and deliver to Landlord evidence of the insurance policies and coverages as required under and in accordance with Section 11(a); (e) MECHANIC'S LIENS. Tenant fails to pay and release of record, or diligently contest and bond around, any mechanic's lien filed against the Premises or the Project for any work performed, materials furnished, or obligation incurred by or at the request of Tenant, within the time and in the manner required by Section 8(d); (f) OTHER DEFAULTS. Tenant's failure to perform, comply with, or observe any other agreement or obligation of Tenant under this Lease and the continuance of such failure for a period of more than 30 days after Landlord has delivered to Tenant written notice thereof (any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law); and 18 (g) INSOLVENCY. The filing of a petition by or against Tenant (the term "TENANT" shall include, for the purpose of this Section 17(g), any guarantor of Tenant's obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or receiver for all or substantially all of Tenant's property or for Tenant's interest in this Lease; (4) for the reorganization or modification of Tenant's capital structure; or (5) in any assignment for the benefit of creditors proceeding; however, if such a petition is filed against Tenant, then such filing shall not be an Event of Default unless Tenant fails to have the proceedings initiated by such petition dismissed within 90 days after the filing thereof. 18. REMEDIES. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any one or more of the following actions, each and all of which shall be cumulative and non-exclusive, without notice or demand whatsoever: (a) TERMINATION OF LEASE. Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in Rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: (1) The worth at the time of award of any unpaid Rent which has been earned at the time of such termination; plus (2) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (3) The worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and (5) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable Law. The term "Rent" as used in this Section 18(a) shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Sections 18(a)(1) and 18(a)(2) above, the "worth at the time of award" shall be computed by allowing interest at the Interest Rate set forth in Section 5 of this Lease, but in no case greater than the maximum amount of such interest permitted by Law. As used in Section 18(a)(3) above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (b) ENFORCEMENT OF LEASE. Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, Landlord may, from time to time, without 19 terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due. (c) SUBLESSEES OF TENANT. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Section 18, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder. (d) EFFORTS TO RELET. For the purposes of this Section 18, Tenant's right to possession shall not be deemed to have been terminated by efforts of Landlord to relet the Premises, by its acts of maintenance or preservation with respect to the Premises, or by appointment of a receiver to protect Landlord's interests hereunder. The foregoing enumeration is not exhaustive, but merely illustrative of acts which may be performed by Landlord without terminating Tenant's right to possession. 19. PAYMENT BY TENANT; NON-WAIVER; CUMULATIVE REMEDIES. (a) PAYMENT BY TENANT. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys' fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenant's or any other occupant's property, (3) repairing, restoring, altering, remodeling, or otherwise putting the Premises into condition reasonably acceptable to a new tenant, (4) performing Tenant's obligations which Tenant failed to perform, and (5) enforcing, or advising Landlord of, its rights, remedies, and recourses arising out of the default. To the full extent permitted by law, Landlord and Tenant agree the federal and state courts of the state in which the Premises are located shall have exclusive jurisdiction over any matter relating to or arising from this Lease and the parties' rights and obligations under this Lease. (b) NO WAIVER. Landlord's acceptance of Rent following an Event of Default shall not waive Landlord's rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms contained herein shall waive Landlord's rights regarding any future violation of such term. Landlord's acceptance of any partial payment of Rent shall not waive Landlord's rights with regard to the remaining portion of the Rent that is due, regardless of any endorsement or other statement on any instrument delivered in payment of Rent or any writing delivered in connection therewith; accordingly, Landlord's acceptance of a partial payment of Rent shall not constitute an accord and satisfaction of the full amount of the Rent that is due. Landlord's acceptance of a partial Rent payment shall not constitute a waiver of any of Landlord's rights available under this Lease or at law or equity, including, without limitation, the right to recover possession of the Premises. (c) CUMULATIVE REMEDIES. Any and all remedies set forth in this Lease: (1) shall be in addition to any and all other remedies Landlord may have at law or in equity, (2) shall be cumulative, and (3) may be pursued successively or concurrently as Landlord may elect. The exercise of any remedy by Landlord shall not be deemed an election of remedies or preclude Landlord from exercising any other remedies in the future. Additionally, Tenant shall defend, indemnify, protect and hold harmless Landlord, Landlord's Mortgagee and their respective representatives and agents from and against all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys' fees) arising from Tenant's failure to perform its obligations under this Lease. 20. INTENTIONALLY DELETED. 20 21. SURRENDER OF PREMISES. No act by Landlord shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless it is in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located therein in good repair and condition, free of Hazardous Materials placed on the Premises by Tenant or a Tenant Party during the Term, broom-clean, reasonable wear and tear (and condemnation and Casualty damage, as to which Sections 14 and 15 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises or elsewhere in the Building by Tenant (but Tenant may not remove any such item which was paid for, in whole or in part, by Landlord or any wiring or cabling facilities or improvements unless Landlord requires such removal). Additionally, at Landlord's option, Tenant shall remove such alterations (including the Pre-approved Alterations), additions, improvements, trade fixtures, personal property, equipment, wiring, conduits, cabling, and furniture (including Tenant's Off-Premises Equipment) installed by or for Tenant as Landlord may request; however, Tenant shall not be required to remove any addition or improvement to the Premises or the Project unless Landlord has notified Tenant in writing in accordance herewith that the improvement or addition in question need be removed. Tenant shall repair all damage caused by such removal. All items not so removed shall, at Landlord's option, be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items. The provisions of this Section 21 shall survive the end of the Term. 22. HOLDING OVER. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at sufferance and, in addition to all other damages and remedies to which Landlord may be entitled for such holding over, (a) Tenant shall pay, in addition to the other Rent, Basic Rent equal to the greater of (1) 150% of the Basic Rent payable during the last month of the Term, or (2) 125% of the prevailing rental rate in the Building for similar space, and (b) Tenant shall otherwise continue to be subject to all of Tenant's obligations under this Lease. The provisions of this Section 22 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom. 23. CERTAIN RIGHTS RESERVED BY LANDLORD. Provided that the exercise of such rights does not unreasonably interfere with Tenant's use and occupancy of the Premises, and subject to any other provisions of this Lease, Landlord shall have the following rights: (a) BUILDING OPERATIONS. To decorate and to make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Project, or any part thereof; to enter upon the Premises (after giving Tenant reasonable notice thereof, which may be oral notice, of not less than 24 hours, except in cases of real or apparent emergency, in which case no notice shall be required) and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to interrupt or temporarily suspend Building services and facilities; to change the name of the Building; and to change the arrangement and location of entrances or passageways, doors, and doorways, corridors, elevators, stairs, restrooms, or other public parts of the Building; (b) SECURITY. To take such reasonable measures as Landlord deems advisable for the security of the Building and its occupants; evacuating the Building for cause, suspected cause, or for drill purposes with reasonable prior notice to Tenant; temporarily denying access to the Building; and closing the Building after normal business hours and on Sundays and 21 holidays, subject, however, to Tenant's right to enter when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time; (c) PROSPECTIVE PURCHASERS AND LENDERS. To enter the Premises at all reasonable hours to show the Premises to prospective purchasers or lenders; and (d) PROSPECTIVE TENANTS. At any time during the last 12 months of the Term (or earlier if Tenant has notified Landlord in writing that it does not desire to renew the Term) or at any time following the occurrence of an Event of Default, to enter the Premises at all reasonable hours upon not less than 24 hours prior notice to show the Premises to prospective tenants. 24. INTENTIONALLY DELETED. 25. MISCELLANEOUS. (a) LANDLORD TRANSFER. Landlord may transfer any portion of the Project and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any further obligations hereunder arising after the date of transfer, provided that the assignee assumes in writing Landlord's obligations hereunder arising from and after the transfer date. (b) LANDLORD'S LIABILITY; TENANT'S LIABILITY. The liability of Landlord (and its partners, shareholders or members) to Tenant (or any person or entity claiming by, through or under Tenant) for any default by Landlord under the terms of this Lease or any matter relating to or arising out of the occupancy or use of the Premises and/or other areas of the Building shall be, except to the extent attributable to the gross negligence or willful or intentional misconduct of Landlord, limited to Tenant's actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building, and Landlord (and its partners, shareholders or members) shall not be personally liable for any deficiency. Except for any damages which Landlord may suffer because of Tenant's holding over in the Premises following the expiration of the Term (for which Landlord may recover consequential damages from Tenant), the liability of Tenant to Landlord for any monetary damages arising from any default by Tenant under the terms of this Lease shall be limited to Landlord's actual direct, but not consequential damages therefor. Nothing in this Section 25(b) shall affect or limit Landlord's rights to file legal actions to recover possession of the Premises, or for injunctive relief against Tenant, or any other non-monetary relief as provided in Sections 18 or 19 of this Lease. (c) FORCE MAJEURE. Other than for Tenant's obligations under this Lease that can be performed by the payment of money (e.g., payment of Rent and maintenance of insurance) or as otherwise expressly provided herein, whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, terrorist acts or activities, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party. (d) BROKERAGE. Neither Landlord nor Tenant has dealt with any broker or agent in connection with the negotiation or execution of this Lease, other than Landlord's broker, CPS - Commercial Property Services Company (J. Houston/M.McSwain), and Tenant's broker, Cushman & Wakefield of California, Inc. (R. Gage), whose commission shall be paid by Landlord pursuant to a separate written agreement. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, liens and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party. 22 (e) ESTOPPEL CERTIFICATES. From time to time, Tenant shall furnish to any party designated by Landlord, within ten business days after Landlord has made a request therefor, a certificate signed by Tenant confirming and containing such factual certifications and representations as to this Lease as Landlord may reasonably request. Unless otherwise required by Landlord's Mortgagee or a prospective purchaser or mortgagee of the Project, the initial form of estoppel certificate to be signed by Tenant is attached hereto as Exhibit F. If Tenant does not deliver to Landlord the certificate signed by Tenant within such required time period, Landlord, Landlord's Mortgagee and any prospective purchaser or mortgagee, may conclusively presume and rely upon the following facts: (1) this Lease is in full force and effect, (2) the terms and provisions of this Lease have not been changed except as otherwise represented by Landlord, (3) not more than one monthly installment of Basic Rent and other charges have been paid in advance, (4) there are no claims against Landlord nor any defenses or rights of offset against collection of Rent or other charges, and (5) Landlord is not in default under this Lease. In such event, Tenant shall be estopped from denying the truth of the presumed facts, except to the extent of manifest error or intentional misrepresentations of Landlord. (f) NOTICES. All notices and other communications given pursuant to this Leaseshall be in writing and shall be (1) mailed by first class, United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in the Basic Lease Information, (2) hand delivered to the intended addressee, (3) sent by a nationally recognized overnight courier service, or (4) sent by facsimile transmission during normal business hours followed by a confirmatory letter sent in another manner permitted hereunder. All notices shall be effective upon delivery to the address of the addressee. The parties hereto may change their addresses by giving notice thereof to the other in conformity with this provision. (g) SEPARABILITY. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable. (h) AMENDMENTS; BINDING EFFECT; NO ELECTRONIC RECORDS. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. Landlord and Tenant hereby agree not to conduct the transactions or communications contemplated by this Lease by electronic means, except by facsimile transmission as specifically set forth in Section 25(f); nor shall the use of the phrase "in writing" or the word "written" be construed to include electronic communications except by facsimile transmissions as specifically set forth in Section 25(f). The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the parties hereto, and upon their respective successors in interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlord's Mortgagee, no third party shall be deemed a third party beneficiary hereof. (i) QUIET ENJOYMENT. Provided Tenant has performed all of its obligations hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, but not otherwise, subject to the terms and conditions of this Lease. (j) NO MERGER. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof if the same person acquires or holds, 23 directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such fee estate. (k) NO OFFER. The submission of this Lease to Tenant shall not be construed as an offer, and Tenant shall not have any rights under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant. (l) ENTIRE AGREEMENT. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith. The normal rule of construction that any ambiguities be resolved against the drafting party shall not apply to the interpretation of this Lease or any exhibits or amendments hereto. (m) WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, LANDLORD AND TENANT EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LITIGATION OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF OR WITH RESPECT TO THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. (n) GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises are located. (o) RECORDING. Tenant shall not record this Lease or any memorandum of this Lease without the prior written consent of Landlord, which consent may be withheld or denied in the sole and absolute discretion of Landlord, and any recordation by Tenant shall be a material breach of this Lease. Tenant grants to Landlord a power of attorney to execute and record a release releasing any such recorded instrument of record that was recorded without the prior written consent of Landlord. (p) JOINT AND SEVERAL LIABILITY. If Tenant is comprised of more than one party, each such party shall be jointly and severally liable for Tenant's obligations under this Lease. All unperformed obligations of Tenant hereunder not fully performed at the end of the Term shall survive the end of the Term, including payment obligations with respect to Rent and all obligations concerning the condition and repair of the Premises. (q) FINANCIAL REPORTS. Within 15 days after Landlord's request, Tenant will furnish Tenant's most recent audited financial statements (including any notes to them) to Landlord, or, if no such audited statements have been prepared, such other financial statements (and notes to them) as may have been prepared by an independent certified public accountant or, failing those, Tenant's internally prepared financial statements. If Tenant is a publicly traded corporation, Tenant may satisfy its obligations hereunder by providing to Landlord Tenant's most recent annual and quarterly reports. Tenant will discuss its financial statements with Landlord and, following the occurrence of an Event of Default hereunder, will give Landlord access to Tenant's books and records in order to enable Landlord to verify the financial statements. Landlord will not disclose any aspect of Tenant's financial statements that Tenant designates to Landlord as confidential except (1) to Landlord's Mortgagee or prospective mortgagees or purchasers of the Building, (2) in litigation between Landlord and Tenant, and/or (3) if required by court order. Tenant shall not be required to deliver the financial statements required under this Section 25(q) more than once in any 12-month period unless requested by Landlord's Mortgagee or a prospective buyer or lender of the Building or an Event of Default occurs. 24 (r) LANDLORD'S FEES. Whenever Tenant requests Landlord to take any action not required of it hereunder or give any consent or approval required or permitted under this Lease (any such consent or approval of Landlord shall not be unreasonably withheld, conditioned or delayed, except as otherwise expressly provided in this Lease), Tenant will reimburse Landlord for Landlord's reasonable, out-of-pocket costs payable to third parties and incurred by Landlord in reviewing the proposed action or consent, including reasonable attorneys', engineers' or architects' fees, within 30 days after Landlord's delivery to Tenant of a statement of such costs. Tenant will be obligated to make such reimbursement without regard to whether Landlord consents to any such proposed action. If Landlord reasonably believes that the out-of-pocket costs payable to third parties to be incurred by Landlord in reviewing the proposed action or consent will exceed $1,000, Landlord will first notify Tenant of such cost estimate before proceeding with such third party expenses. If Tenant fails to consent to such additional costs and expenses within five business days after Landlord's written notification to Tenant thereof, Tenant shall be deemed to have rescinded its request for such action or consent. (s) ATTORNEYS' FEES. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein, shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. (t) TELECOMMUNICATIONS. Tenant and its telecommunications companies, including local exchange telecommunications companies and alternative access vendor services companies, shall have no right of access to and within the Building other than the Premises, for the installation and operation of telecommunications systems, including voice, video, data, Internet, and any other services provided over wire, fiber optic, microwave, wireless, and any other transmission systems ("TELECOMMUNICATIONS SERVICES"), for part or all of Tenant's telecommunications within the Building and from the Building to any other location without Landlord's prior written consent. All providers of Telecommunications Services shall be required to comply with the rules and regulations of the Building, applicable Laws and Landlord's policies and practices for the Building. Tenant acknowledges that Landlord shall not be required to provide or arrange for any Telecommunications Services and that Landlord shall have no liability to any Tenant Party in connection with the installation, operation or maintenance of Telecommunications Services or any equipment or facilities relating thereto. Tenant, at its cost and for its own account, shall be solely responsible for obtaining all Telecommunications Services. (u) INTENTIONALLY DELETED. (v) AUTHORITY. Tenant (if a corporation, partnership or other business entity) hereby represents and warrants to Landlord that Tenant is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Tenant has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Tenant is authorized to do so. Landlord hereby represents and warrants to Tenant that Landlord is a duly formed and existing entity qualified to do business in the state in which the Premises are located, that Landlord has full right and authority to execute and deliver this Lease, and that each person signing on behalf of Landlord is authorized to do so. (w) HAZARDOUS MATERIALS. The term "HAZARDOUS MATERIALS" means any substance, material, or waste which is now or hereafter classified or considered to be hazardous, toxic, or dangerous under any Law relating to pollution or the protection or regulation of human health, natural resources or the environment, or poses or threatens to pose a hazard to the health or safety of persons on the Premises or in the Project. Tenant shall not use, generate, store, or dispose of, or permit the use, generation, storage or disposal of Hazardous Materials on or about the Premises or the Project except in a manner and quantity necessary for the ordinary performance of 25 Tenant's business, and then in compliance with all Laws. If Tenant breaches its obligations under this Section 25(w), Landlord may immediately take any and all action reasonably appropriate to remedy the same, including taking all appropriate action to clean up or remediate any contamination resulting from Tenant's use, generation, storage or disposal of Hazardous Materials. Notwithstanding Landlord's indemnity contained in Section 11(d), Tenant shall defend, protect, indemnify, and hold harmless Landlord and its representatives and agents from and against any and all claims, demands, liabilities, causes of action, suits, judgments, damages and expenses (including reasonable attorneys' fees and cost of clean up and remediation) arising from Tenant's failure to comply with the provisions of this Section 25(w). This indemnity provision shall survive termination or expiration of this Lease. (x) PARKING. Tenant may use up to the number of unreserved parking spaces set forth below in the parking facilities associated with the Building (the "PARKING AREA") subject to such terms, conditions and regulations as are from time to time applicable to patrons of the Parking Area. Regardless of whether Tenant elects to use such parking spaces, Tenant shall pay to Landlord, contemporaneously with the payment of Basic Rent, parking rent (plus all applicable taxes), during the initial Term equal to the rate then established by Landlord for reserved and unreserved parking spaces, as applicable, in the Parking Area, which are consistent with prevailing market rates for such parking.
Suite Number Unreserved Parking Spaces 800, 1500, Server Room 76 1350 17 1300 18 Temporary Space 21
Summary of Unreserved Parking Spaces:
Lease Month Unreserved Parking Spaces ~~1-Suite 1350 CD 97 Suite 1350 CD-Suite 1300 CD 114 Suite 1300 CD-84 111~~
Tenant shall at all times comply with all Laws respecting the use of the Parking Area. Landlord reserves the right to adopt, modify, and enforce reasonable rules and regulations governing the use of the Parking Area from time to time including any key-card, sticker, or other identification or entrance systems and hours of operations. Landlord may refuse to permit any person who violates such rules and regulations to park in the Parking Area, and any violation of the rules and regulations shall subject the car to removal from the Parking Area. Tenant may validate visitor parking by such method or methods as Landlord may approve, at the validation rate from time to time generally applicable to visitor parking. Unless specified to the contrary above, the parking spaces provided hereunder shall be provided on an unreserved, "first-come, first served" basis. Tenant acknowledges that Landlord has arranged or may arrange for the Parking Area to be operated by an independent contractor, not affiliated with Landlord. There will be a reasonable replacement charge payable by Tenant equal to the amount posted from time to time by Landlord for loss of any magnetic parking card or parking sticker issued by Landlord. If, for any reason, Landlord is unable to provide all or any portion of the parking spaces to which Tenant is entitled hereunder, then Tenant's obligation to pay for such parking spaces 26 shall be abated for so long as Tenant does not have the use thereof; this abatement shall be in full settlement of all claims that Tenant might otherwise have against Landlord because of Landlord's failure or inability to provide Tenant with such parking spaces. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties. (y) SIGNAGE. Tenant shall not erect or maintain any temporary or permanent sign on or about the Premises, the Building or the Project or visible from the exterior without obtaining prior written approval from Landlord, which may be granted or withheld in Landlord's sole and absolute discretion. Any request for approval of a sign shall be made in such detail, as Landlord shall request. All signs, whether erected by Landlord or Tenant, shall conform to Landlord's building standard signage and to all laws, ordinances, rules, regulations, permits, covenants, conditions, restrictions, and easements pertaining to signs, and shall be at Tenant's expense. In the event of a violation of the foregoing by Tenant, Landlord may remove same without any liability, and may charge the expense incurred in such removal to Tenant. Tenant shall remove all approved signs, which it has erected upon the termination of the Lease and repair all damage caused by such removal. Notwithstanding the foregoing, in the event Tenant or a Permitted Transferee (other than a Permitted Transferee who is merely subleasing from Tenant) occupies four full floors in the Building as a direct tenant pursuant to this Lease, Tenant or such Permitted Transferee (who is not merely subleasing from Tenant) shall have the right to install, at Tenant's sole cost and expense, Building parapet signage, subject to (i) the then existing zoning requirements, and (ii) the prior approval of the City of San Jose. Landlord shall also have the right to approve the name of the entity on such sign and the design of same. (z) LIST OF EXHIBITS. All exhibits and attachments attached hereto are incorporated herein by this reference; provided that the terms of the primary Lease document shall control any inconsistencies therewith. Exhibit A - Outline of Premises Exhibit B - Description of the Land Exhibit C - Building Rules and Regulations Exhibit D - Tenant Finish-Work Exhibit D-1- Space Plan Exhibit E - Form of Confirmation of Commencement Date Letter Exhibit F - Form of Tenant Estoppel Certificate Exhibit G - Outline of Temporary Space Exhibit H - Form of SNDA Exhibit I - Suite 1400 Expansion Space and Suite 1450 Expansion Space Exhibit J - Suite 1200 Expansion Space 26. RENEWAL OPTION. (a) GRANT OF OPTION. Provided no Event of Default then exists and Tenant or a Permitted Transferee (other than a Permitted Transferee who is merely subleasing from Tenant) is then occupying at least 75% of the Renewal Premises (as defined below) at the time of such election, Tenant or such Permitted Transferee (who is not merely subleasing from Tenant) may renew this Lease with respect to any portion of the Premises, but not less than a full floor (the "RENEWAL PREMISES") for two additional periods of 36 months each (each, an "EXTENDED TERM"), by delivering written notice of the exercise of each such option to Landlord not earlier than 12 months nor later than nine months before the expiration of the then Term. (b) BASIC RENT. The Basic Rent payable for each month during each such Extended Term shall be 95% of the prevailing rental rate (the "PREVAILING RENTAL RATE"), at the commencement of each such Extended Term, for renewals of space in the Building or other Class "A" office buildings in the downtown San Jose area (defined as (1) Fairmont Plaza, located at 50 W. San Fernando, (2) Opus, located at 225 W. Santa Clara, (3) 10 Almaden, and (4) Riverpark 27 Towers, located at 333 w. San Carlos (collectively, the "CLASS A SAN JOSE Buildings")), of equivalent use, quality, size, utility and location. The determination of the Prevailing Rental Rate for such renewals of space shall also reflect any tenant improvements, free rent and other economic concessions, brokerage commissions, annual escalations, if any, and any other incentives or allowances then being typically provided and with the length of the extended Term and the credit standing of Tenant also to be taken into account. Within 20 business days after receipt of Tenant's notice to renew for each option period, Landlord shall deliver to Tenant written notice of the Prevailing Rental Rate for such Extended Term and shall advise Tenant of the required adjustment to Basic Rent, if any, and the other terms and conditions offered. Tenant shall, within ten days after receipt of Landlord's notice, notify Landlord in writing whether Tenant accepts or rejects Landlord's determination of the Prevailing Rental Rate for each Extended Term. If Tenant timely notifies Landlord that Tenant accepts Landlord's determination of the Prevailing Rental Rate for each Extended Term, then, on or before the commencement date of such Extended Term, Landlord and Tenant shall execute an amendment to this Lease extending the Term on the same terms provided in this Lease, except as follows: (1) Basic Rent for each Extended Term shall be adjusted to 95% of the then Prevailing Rental Rate; (2) The Expense Stop and Base Tax Year shall be adjusted to the calendar year of the commencement date of such Extended Term. (3) After Tenant has exercised both options hereunder, Tenant shall have no further renewal option unless expressly granted by Landlord in writing; (4) Landlord shall lease to Tenant the Renewal Premises in their then current condition, and Landlord shall not provide to Tenant any allowances (e.g., moving allowance, construction allowance, and the like) or other tenant inducements, except as otherwise agreed by Landlord and Tenant; and (5) Tenant shall pay for the parking spaces which it is entitled to use at the rates from time to time charged to patrons of the Parking Area and/or any other parking area associated with the Building during each Extended Term (plus all applicable taxes). If Tenant disagrees with Landlord's determination of Prevailing Rental Rate for either Extended Term, Tenant may, but only within ten days after receipt of Landlord's notice, require by written notice to Landlord that the determination of Prevailing Rental Rate for such Extended Term be made by brokers. In such event, within ten days thereafter, each party shall select a qualified commercial real estate broker with at least ten years experience in appraising the Class A San Jose Buildings. The two brokers shall give their opinion of Prevailing Rental Rate for such Extended Term and other terms within 20 days after their retention. In no event, however, shall the Basic Rent in the first year of each Extended Term be less than $2.55 per rentable square foot of the Renewal Premises. In the event the opinions of the two brokers differ and, after good faith efforts over the succeeding 20-business day period, they cannot mutually agree, the brokers shall immediately and jointly appoint a third broker with the qualifications specified above. This third broker shall immediately (within five business days) choose either the determination of Landlord's broker or Tenant's broker and such choice of this third broker shall be final and binding on Landlord and Tenant. Each party shall pay its own costs for its real estate broker. The parties shall equally share the costs of any third broker. The parties shall immediately confirm the Renewal Premises, Extended Term, Basic Rent and other terms and conditions so determined, in writing. (c) TERMINATION OF OPTION. Tenant's rights under this Section 26 shall terminate if (1) this Lease or Tenant's right to possession of the Premises is terminated, (2) Tenant assigns any of its interest in this Lease (other than to Permitted Transferee but not including any Permitted Transferees that are merely subtenants of Tenant) or sublets more than 25% of the 28 Renewal Premises, or (3) Tenant fails to timely exercise its option under this Section 26, time being of the essence with respect to Tenant's exercise thereof. 27. SATELLITE EQUIPMENT. Provided that Tenant complies with the terms of this Section 27, Tenant may, at its sole risk and expense, install one reasonably sized dish/antenna and related wiring (the "SATELLITE EQUIPMENT") on the roof of the Building at a location approved by Landlord for Tenant's personal, nonprofit use, and may use existing and common area passageways in the Building for ingress and egress to and from the roof as coordinated with Landlord. No direct revenue can be generated or earned by Tenant from such installation and operation without Landlord's prior written consent to be evidenced by entry into a separate document known as Landlord's Antenna Site Agreement. Before installing the Satellite Equipment, Tenant shall submit to Landlord for its approval (which approval shall be in Landlord's reasonable discretion) plans and specifications which (a) specify in detail the design, location, size, and frequency of the Satellite Equipment and (b) are sufficiently detailed to allow for the installation of the Satellite Equipment in a good and workmanlike manner and in accordance with all Laws. If Landlord approves of such plans, Tenant shall install (in a good and workmanlike manner), maintain and use the Satellite Equipment in accordance with all Laws and shall obtain all permits required for the installation and operation thereof; copies of all such permits must be submitted to Landlord before Tenant begins to install the Satellite Equipment. Tenant shall provide five days prior written notice to Landlord and Landlord's property manager of its installation commencement date. Tenant shall maintain all permits necessary for the maintenance and operation of the Satellite Equipment while it is on the Building and operate and maintain the Satellite Equipment in such a manner so as not to unreasonably interfere with any other satellite, antennae, or other transmission facility on the Building's roof or in the Building; provided however, that should such interference occur, Tenant must eliminate such interference or remove its Satellite Equipment. Landlord may require that Tenant screen the Satellite Equipment with a parapet wall or other screening device reasonably acceptable to Landlord. Tenant shall maintain the Satellite Equipment and the screening therefor in good repair and condition. Tenant shall, at its sole risk and expense, remove the Satellite Equipment, within five days after the occurrence of any of the following events: (1) the termination of Tenant's right to possess the Premises; (2) the termination of the Lease; (3) the expiration of the Term; or (4) Tenant's vacating the Premises. If Tenant fails to do so, Landlord may remove the Satellite Equipment and store or dispose of it in any manner Landlord deems appropriate without liability to Landlord; Tenant shall reimburse Landlord for all costs incurred by Landlord in connection therewith within ten days after Landlord's request therefor. Tenant shall repair any damage to the Building caused by or relating to the Satellite Equipment, including that which is caused by its installation, maintenance, use, or removal and shall indemnify Landlord against all liabilities, losses, damages, and costs (a "LOSS") arising from the installation, maintenance, use, or removal of the Satellite Equipment, including that caused by Landlord's negligence (unless the Loss in question was caused by Landlord's sole or gross negligence or willful misconduct). All work relating to the Satellite Equipment shall, at Tenant's sole risk and expense, be coordinated with and comply with the requirements of Landlord's property manager. 28. LETTER OF CREDIT. (a) GENERAL PROVISIONS. Concurrently with Tenant's execution of this Lease, Tenant shall deliver to Landlord, as collateral for the full performance by Tenant of all of its obligations under this Lease and for all losses and damages Landlord may suffer as a result of any default by Tenant under this lease, a standby, unconditional, irrevocable, transferable letter of credit (the "LETTER OF CREDIT") containing the terms required herein, in the face amount of $390,135.36 (the "LETTER OF CREDIT AMOUNT"), naming Landlord as beneficiary, issued (or confirmed) by a financial institution acceptable to Landlord in Landlord's reasonable discretion, permitting multiple and partial draws thereon, and otherwise in form acceptable to Landlord in its reasonable discretion. Except as set forth below in Section 28(f), Tenant shall cause the Letter of Credit to be continuously maintained in effect (whether through replacement, renewal or extension) in the Letter of Credit Amount through the date (the "FINAL LC EXPIRATION DATE") that 29 is 60 days after the scheduled expiration date of the term or any renewal Term. If the Letter of Credit held by Landlord expires earlier than the Final LC Expiration Date (whether by reason of a stated expiration date or a notice of termination or non-renewal given by the issuing bank), Tenant shall deliver a new Letter of Credit or certificate of renewal or extension to Landlord not later than 30 days prior to the expiration date of the Letter of Credit then held by Landlord. Any renewal or replacement Letter of Credit shall comply with all of the provisions of this Section 28, shall be irrevocable, transferable and shall remain in effect (or be automatically renewable) through the Final LC Expiration Date upon the same terms as the expiring Letter of Credit or such other terms as may be acceptable to Landlord in its sole discretion. (b) DRAWINGS UNDER LETTER OF CREDIT. Landlord shall have the right to draw upon the Letter of Credit, in whole or in part, at any time and from time to time: (1) If an Event of Default occurs which is not cured within any applicable grace and cure period; or (2) If the Letter of Credit held by Landlord expires earlier than the Final Letter of Credit Expiration Date (whether by reason of a stated expiration date or a notice of termination or non-renewal given by the issuing bank), and Tenant fails to deliver to Landlord, at least 30 days prior to the expiration date of the Letter of Credit then held by Landlord, a renewal or substitute Letter of Credit that is in effect and that complies with the provisions of this Section 28. No condition or term of this Lease shall be deemed to render the Letter of Credit conditional to justify the issuer of the Letter of Credit in failing to honor a drawing upon such Letter of Credit in a timely manner. Tenant hereby acknowledges and agrees that Landlord is entering into this Lease in material reliance upon the ability of Landlord to draw upon the Letter of Credit upon the occurrence of any Event of Default by Tenant under this Lease or upon the occurrence of any of the other events described above in this Section 28(b). (c) USE OF PROCEEDS BY LANDLORD. Subject to Section 28(b), the proceeds of the Letter of Credit may be applied by Landlord against any Rent payable by Tenant under this Lease that is not paid when due and/or to pay for all losses and damages that Landlord has suffered or that Landlord reasonably estimates that it will suffer as a result of any default by Tenant under this Lease. Landlord shall deposit any unused proceeds in a separate account in the name of Landlord or its designee at a financial institution selected by Landlord in its sole discretion (the "LC PROCEEDS ACCOUNT"). Landlord may apply funds from the LC Proceeds Account against any Rent payable by Tenant under this Lease that is not paid when due and/or to pay for all losses and damages that Landlord has suffered or that Landlord reasonably estimates that it will suffer as a result of any default by Tenant under this Lease. Tenant hereby grants Landlord a security interest in the LC Proceeds Account and agrees that, in addition to all other rights and remedies available to Landlord under applicable Law, Landlord shall have all rights of a secured party under the California Uniform Commercial Code with respect to the LC Proceeds Account. The LC Proceeds Account shall be under the sole control of Landlord. Tenant shall not have any right to direct the disposition of funds from the LC Proceeds Account or any other right or interest in the LC Proceeds Account. Tenant shall, at any time and from time to time, execute, acknowledge and deliver such documents and take such actions as Landlord or the bank with which the LC Proceeds Account is maintained may reasonably request concerning the creation or perfection of the security interest granted to Landlord in (including Landlord's control of) LC Proceeds Account or to effect the provisions of this Section 28(c). Tenant does hereby make, constitute and appoint Landlord its true and lawful attorney-in-fact, for it and in its name, place and stead, to execute and deliver all such instruments and documents, and to do all such other acts and things, as Landlord may deem to be necessary or desirable to protect and preserve the rights granted to Landlord under this Section 28(c). Tenant hereby grants to Landlord the full power and authority to appoint one or more substitutes to perform any of the acts that Landlord is authorized to perform under this Section 28(c), with a right to revoke such appointment of substitution at 30 Landlord's pleasure. The power of attorney granted pursuant to this Section 28(c) is coupled with an interest and therefore is irrevocable. Any person dealing with Landlord may rely upon the representation of Landlord relating to any authority granted by this power of attorney, including the intended scope of the authority, and may accept the written certificate of Landlord that this power of attorney is in full force and effect. Photographic or other facsimile reproductions of this executed Lease may be made and delivered by Landlord, and may be relied upon by any person to the same extent as though the copy were an original. Anyone who acts in reliance upon any representation or certificate of Landlord, or upon a reproduction of this Lease, shall not be liable for permitting Landlord to perform any act pursuant to this power of attorney. Provided Tenant has performed all of its obligations under this Lease, Landlord agrees to pay to Tenant within 30 days after the Final LC Expiration Date the amount of any proceeds of the Letter of Credit received by Landlord and not applied against any Rent payable by Tenant under this Lease that was not paid when due or used to pay for any losses and/or damages suffered by Landlord (or reasonably estimated by Landlord that it will suffer) as a result of any default by Tenant under this Lease; provided, that if prior to the Final LC Expiration Date a voluntary petition is filed by Tenant, or an involuntary petition is filed against Tenant by any of Tenant's creditors, under the Federal Bankruptcy Code, then Landlord shall not obligated to make such payment in the amount of the unused Letter of Credit proceeds until either all preference issues relating to payments under this Lease have been resolved in such bankruptcy or reorganization case or such bankruptcy or reorganization case has been dismissed, in each case pursuant to a final court order not subject to appeal or any stay pending appeal. (d) ADDITIONAL COVENANTS OF TENANT. If, as a result of any application or use by Landlord of all or any part of the Letter of Credit, the amount of the Letter of Credit shall be less than the Letter of Credit Amount, Tenant shall, within ten days thereafter, provide Landlord with additional letter(s) of credit in an amount equal to the deficiency (or a replacement letter of credit in the total Letter of Credit Amount), and any such additional (or replacement) letter of credit shall comply with all of the provisions of this Section 28, and if Tenant fails to comply with the foregoing, notwithstanding anything to the contrary contained in this Lease, the same shall constitute an uncured Event of Default by Tenant. Tenant further covenants and warrants that it will neither assign nor encumber the Letter of Credit or any party thereof or any interest in the LC Proceeds Account and that neither Landlord nor its successors or assigns will be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. (e) TRANSFER OF LETTER OF CREDIT. Landlord may, at any time and without notice to Tenant and without first obtaining Tenant's consent thereto, transfer all or any portion of its interest in and to the Letter of Credit to another party, person or entity, including Landlord's Mortgagee and/or to have the Letter of Credit reissued in the name of Landlord's Mortgagee. If Landlord transfers its interest in the Building and transfers the Letter of Credit (or any proceeds thereof then held by Landlord) in whole or in part to the transferee, Landlord shall, without any further agreement between the parties hereto, thereupon be released by Tenant from all liability therefor, except to the extent of any unauthorized draws. The provisions hereof shall apply to every transfer or assignment of all or any part of the Letter of Credit to a new landlord. In connection with any such transfer of the Letter of Credit by Landlord, Tenant shall, at Tenant's sole cost and expense, execute and submit to the issuer of the Letter of Credit such applications, documents and instruments as may be necessary to effectuate such transfer. Tenant shall be responsible for paying the issuer's transfer and processing fees in connection with any transfer of the Letter of Credit and, if Landlord advances any such fees (without having any obligation to do so), Tenant shall reimburse Landlord for any such transfer or processing fees within ten days after Landlord's written request therefor. (f) REDUCTION IN LETTER OF CREDIT AMOUNT. Provided no Event of Default has occurred hereunder during the 12-month period prior to each reduction and, no less than 30 days prior to each reduction date, Tenant has delivered to Landlord (and Landlord has approved) reasonably sufficient evidence that Tenant has maintained four consecutive quarters of 31 profitability with retained earnings of not less than $4,300,000, Tenant may reduce the Letter of Credit amount to the following amounts for the following periods of time:
Lease Month Required Letter of Credit Amount ~~1-36 $390,135.36 37-48 $260,090.24 49-end of Term $130,045.12~~
(g) NATURE OF LETTER OF CREDIT. Landlord and Tenant (1) acknowledge and agree that in no event or circumstance shall the Letter of Credit or any renewal thereof or substitute therefor or any proceeds thereof (including the LC Proceeds Account) be deemed to be or treated as a "security deposit" under any Law applicable to security deposits in the commercial context ("SECURITY DEPOSIT LAWS"), except in the event of an unauthorized draw, (2) acknowledge and agree that the Letter of Credit (including any renewal thereof or substitute therefor or any proceeds thereof) is not intended to serve as a security deposit, and, except as otherwise provided herein, the Security Deposit Laws shall have no applicability or relevancy thereto, and (3) waive any and all rights, duties and obligations either party may now or, in the future, will have relating to or arising from the Security Deposit Laws to the extent expressly contradicted by this Lease. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code and all other provisions of Law, now or hereafter in effect to the extent they are expressly contradicted in this Lease, which (i) establish the time frame by which Landlord must refund a security deposit under a lease, and/or (ii) provide that Landlord may claim from the Security Deposit only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by Tenant or to clean the Premises, it being agreed that Landlord may, in addition, claim those sums specified in this Section 28 above and/or those sums reasonably necessary to compensate Landlord for any loss or damage caused by Tenant's breach of this Lease or the acts or omission of Tenant or any other Tenant Party. 29. EXPANSION OPTION FOR SUITE 1400. (a) GRANT OF OFFER. Provided no Event of Default then exists and Tenant or a Permitted Transferee (other than a Permitted Transferee who is merely subleasing from Tenant) is occupying at least 75% of the Premises at the time of such election, Tenant may lease all (but not less than all) of Suite 1400 containing 8,572 rentable square feet and more particularly described in Exhibit I attached hereto (the "SUITE 1400 EXPANSION SPACE"), by delivering to Landlord, on or before April 1, 2004, written notice of Tenant's election to include such space in the Premises. (b) POSSESSION. If Tenant timely exercises its option, then (a) possession of the Suite 1400 Expansion Space shall be delivered to Tenant in an "AS-IS" condition, subject to the terms of any applicable work letter agreement (in which event the Suite 1400 Expansion Space shall be delivered Substantially Completed pursuant to the terms of such work letter agreement) and subject to the Building's Systems and the Building's Structure being in good working order and condition, on January 1, 2005, unless otherwise agreed to in writing by the parties (the "SUITE 1400 COMMENCEMENT DATE"), and (b) Tenant and Landlord shall execute an amendment to this Lease (the "SUITE 1400 LEASE AMENDMENT") including the Suite 1400 Expansion Space in the Premises on the same terms as this Lease, except as follows: (1) The rentable square feet of the Premises shall be increased by the rentable square feet in the Suite 1400 Expansion Space; (2) The Basic Rent for the Suite 1400 Expansion Space shall be 95% of the Prevailing Rental Rate (as determined in accordance with Section 26(b)) as of the date 32 of Tenant's exercise of its offer hereunder, and shall be payable commencing on the Suite 1400 Commencement Date; (3) The applicable work letter and allowances, if any (e.g. moving allowance, construction allowance, and the like) or other tenant inducements, if any, shall be negotiated by Landlord and Tenant upon Landlord's receipt of Tenant's expansion option exercise notice in connection with the determination of the Prevailing Rental Rate by the parties pursuant to Section 26(b); and (4) Notwithstanding the above, Tenant shall have the right to enter the Suite 1400 Expansion Space 30 days prior to the Suite 1400 Commencement Date to prepare such Space for Tenant's occupancy. Tenant's early occupancy shall be pursuant to all of the terms and conditions of this Lease other than the obligation to pay Rent. If Tenant fails or is unable to timely exercise its right hereunder, such right shall lapse, time being of the essence with respect to the exercise thereof (it being understood that Tenant's right hereunder is a one-time right only), and Landlord may lease all or a portion of the Suite 1400 Expansion Space to third parties on such terms as Landlord may elect. If Tenant timely exercises its rights hereunder and Landlord is unable to tender possession of the Suite 1400 Expansion Space to Tenant by the Suite 1400 Commencement Date utilizing commercially reasonable efforts and diligence in the condition required by this Lease and any applicable work letter agreement, then (A) Landlord shall not be in default hereunder or be liable for damages therefor, and (B) Tenant shall accept possession of the Suite 1400 Expansion Space when Landlord tenders possession thereof to Tenant in the required condition, which date of acceptance shall then be the Commencement Date for the Suite 1400 Expansion Space, and Tenant shall begin paying Basic Rent hereunder on such date; provided, however, if Landlord has not commenced construction of the tenant improvement work required by the applicable work letter agreement in the Suite 1400 Expansion Space within 120 days after the Suite 1400 Lease Amendment is fully executed (subject to Force Majeure, if any, but in no event later than September 1, 2005), Tenant may withdraw its notice exercising its option under this Section by delivering to Landlord written notice thereof within 30 days of such applicable date. In the event Tenant retains a leasing broker in connection with exercising the option under this Section, commission shall be paid by Landlord pursuant to a separate written agreement. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any other broker or agent claiming the same by, through, or under the indemnifying party. (c) TERMINATION OF RIGHTS. Tenant's rights under this Section shall terminate if (1) this Lease or Tenant's right to possession of the Premises is terminated, or (2) Tenant assigns any of its interest in this Lease (other than to a Permitted Transferee but not including any Permitted Transferees that are merely subtenants of Tenant) or sublets more than 25% of the Premises. 30. EXPANSION OPTION FOR SUITE 1450. (a) GRANT OF OFFER. Provided no Event of Default then exists and Tenant or a Permitted Transferee (other than a Permitted Transferee who is merely subleasing from Tenant) is occupying at least 75% of the Premises at the time of such election, Tenant may lease all (but not less than all) of Suite 1450 containing 5,834 rentable square feet and more particularly described on Exhibit I attached hereto (the "SUITE 1450 EXPANSION SPACE"), by delivering to Landlord, on or before June 1, 2005, written notice of Tenant's election to include such space in the Premises. Landlord and Tenant acknowledge and agree that the Suite 1450 Expansion Space is expected to become available for the commencement of any tenant improvement work to be performed therein on March 1, 2006. 33 (b) POSSESSION. If Tenant timely exercises its option, then (a) possession of the Suite 1450 Expansion Space shall be delivered to Tenant in an "AS-IS" condition, subject to the terms of any applicable work letter agreement (in which event the Suite 1450 Expansion Space shall be delivered Substantially Completed pursuant to the terms of such work letter agreement) and subject to the Building's Systems and the Building's Structure being in good working order and condition, upon the Substantial Completion of the tenant improvement work to be performed in the Suite 1450 Expansion Space (the "SUITE 1450 COMMENCEMENT DATE"), and (b) Tenant and Landlord shall execute an amendment to this Lease (the "SUITE 1450 LEASE AMENDMENT") including the Suite 1450 Expansion Space in the Premises on the same terms as this Lease, except as follows: (1) The rentable square feet of the Premises shall be increased by the rentable square feet in the Suite 1450 Expansion Space; (2) The Basic Rent for the Suite 1450 Expansion Space shall be 95% of the Prevailing Rental Rate (as determined in accordance with Section 26(b)) as of the date of Tenant's exercise of its offer hereunder, and shall be payable commencing on the Suite 1450 Commencement Date; (3) The applicable work letter and allowances, if any (e.g. moving allowance, construction allowance, and the like) or other tenant inducements, if any, shall be negotiated by Landlord and Tenant upon Landlord's receipt of Tenant's expansion option exercise notice in connection with the determination of the Prevailing Rental Rate by the parties pursuant to Section 26(b); and (4) Notwithstanding the above, Tenant shall have the right to enter the Suite 1450 Expansion Space 30 days prior to the Suite 1450 Commencement Date to prepare such Space for Tenant's occupancy. Tenant's early occupancy shall be pursuant to all of the terms and conditions of this Lease other than the obligation to pay Rent. If Tenant fails or is unable to timely exercise its right hereunder, such right shall lapse, time being of the essence with respect to the exercise thereof (it being understood that Tenant's right hereunder is a one-time right only), and Landlord may lease all or a portion of the Suite 1450 Expansion Space to third parties on such terms as Landlord may elect. If Tenant timely exercises its rights hereunder and Landlord is unable to tender possession of the Suite 1450 Expansion Space by the Suite 1450 Commencement Date in the condition required by this Lease and any applicable work letter agreement, then (A) Landlord shall not be in default hereunder or be liable for damages therefor, and (B) Tenant shall accept possession of the Suite 1450 Expansion Space when Landlord tenders possession thereof to Tenant in the required condition, which date of acceptance shall then be the Commencement Date for the Suite 1450 Expansion Space, and Tenant shall begin paying Basic Rent hereunder on such date; provided, however, if Landlord has not commenced construction of the tenant improvement work required by the applicable work letter agreement in the Suite 1450 Expansion Space within 120 days after the Suite 1450 Lease Amendment is fully executed (subject to Force Majeure, if any, but in no event later than November 1, 2006), Tenant may withdraw its notice exercising its option under this Section by delivering to Landlord written notice thereof within 30 days of such applicable date. Landlord and Tenant acknowledge and agree that Landlord's obligation to deliver the Suite 1450 Expansion Space is contingent upon the vacation of the Suite 1450 Expansion Space by the existing tenant therein, and Landlord shall taken all reasonable action to remove such existing tenant from the Suite 1450 Expansion Space if Tenant exercises its rights under this Section. In the event Tenant retains a leasing broker in connection with exercising the option under this Section, commission shall be paid by Landlord pursuant to a separate written agreement. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commissions or other compensation claimed by any other broker or agent claiming the same by, through, or under the indemnifying party. 34 (c) TERMINATION OF RIGHTS. Tenant's rights under this Section shall terminate if (1) this Lease or Tenant's right to possession of the Premises is terminated, or (2) Tenant assigns any of its interest in this Lease (other than to a Permitted Transferee but not including any Permitted Transferees that are merely subtenants of Tenant) or sublets more than 25% of the Premises. 31. EXPANSION OPTION FOR SUITE 1200. (a) GRANT OF OFFER. Provided no Event of Default then exists and Tenant or a Permitted Transferee (other than a Permitted Transferee who is merely subleasing from Tenant) is occupying at least 75% of the Premises at the time of such election, and subject to the written rights held by the existing tenant in Suite 1200, Tenant may lease all (but not less than all) of Suite 1200 containing 14,000 rentable square feet and more particularly described on Exhibit J attached hereto (the "SUITE 1200 EXPANSION SPACE"), by delivering to Landlord, on or before November 1, 2006, written notice of Tenant's election to include such space in the Premises. (b) POSSESSION. If Tenant timely exercises its option, then (a) possession of the Suite 1200 Expansion Space shall be delivered to Tenant in an "AS-IS" condition, subject to the Building's Systems and the Building's Structure being in good working order and condition, on the earlier of September 1, 2007 or the date on which Tenant occupies the Suite 1200 Expansion Space with Landlord's prior written consent (the "SUITE 1200 COMMENCEMENT DATE"), provided however that Tenant shall have the right to enter the Suite 1200 Expansion Space 30 days prior to the Suite 1200 Commencement Date after the existing tenant vacates the space to prepare such space for Tenant's occupancy, and such early occupancy shall be pursuant to all of the terms and conditions of this Lease other than the obligation to pay Rent, and (b) Tenant and Landlord shall execute an amendment to this Lease including the Suite 1200 Expansion Space in the Premises on the same terms as this Lease, except as follows: (1) The rentable square feet of the Premises shall be increased by the rentable square feet in the Suite 1200 Expansion Space; (2) The Basic Rent for the Suite 1200 Expansion Space shall be 95% of the Prevailing Rental Rate (as determined in accordance with Section 26(b)) as of the date of Tenant's exercise of its offer hereunder, and shall be payable commencing on the Suite 1200 Commencement Date; and (3) Landlord shall not provide to Tenant any allowances (e.g. moving allowance, construction allowance, and the like) or other tenant inducements. If Tenant fails or is unable to timely exercise its right hereunder, such right shall lapse, time being of the essence with respect to the exercise thereof (it being understood that Tenant's right hereunder is a one-time right only), and Landlord may lease all or a portion of the Suite 1200 Expansion Space to third parties on such terms as Landlord may elect. If Tenant timely exercises its rights hereunder and Landlord is unable to tender possession of the Suite 1200 Expansion Space by the Suite 1200 Commencement Date, then (A) Landlord shall not be in default hereunder or be liable for damages therefor, and (B) Tenant shall accept possession of the Suite 1200 Expansion Space when Landlord tenders possession thereof to Tenant, which shall then be the Commencement Date for the Suite 1200 Expansion Space, and Tenant shall begin paying Basic Rent hereunder on such date. Landlord and Tenant acknowledge and agree that Landlord's obligation to deliver the Suite 1200 Expansion Space is contingent upon the vacation of the Suite 1200 Expansion Space by the existing tenant therein, and Landlord shall have no obligation to take legal action to remove such existing tenant from the Suite 1200 Expansion Space. In no event shall Landlord be obligated to pay a commission with respect to the Suite 1200 Expansion Space leased by Tenant under this Section, and Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys' fees, and other liability for commissions or other 35 compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party. (c) TERMINATION OF RIGHTS. Tenant's rights under this Section shall terminate if (1) this Lease or Tenant's right to possession of the Premises is terminated, or (2) Tenant assigns any of its interest in this Lease (other than to a Permitted Transferee but not including any Permitted Transferees that are merely subtenants of Tenant) or sublets more than 25% of the Premises. LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE, AND TENANT'S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, DEMAND, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. This Lease is executed on the respective dates set forth below, but for reference purposes, this Lease shall be dated as of the date first above written. If the execution date is left blank, this Lease shall be deemed executed as of the date first written above. LANDLORD: W9/PHC II SAN JOSE, L.L.C., a Delaware limited liability company By: /s/ Nancy M. Haag ---------------------------------------- Name: Nancy M. Haag Title: Assistant Vice President Execution Date: Sept. 22, 2003 ---------------------------- TENANT: CALLIDUS SOFTWARE, INC., a Delaware corporation By: /s/ Ron J. Fior ---------------------------------------- Name: Ron J. Fior Title: VP/CFO Execution Date: Aug. 29, 2003 ---------------------------- By: ---------------------------------------- Name: Title: Execution Date: ---------------------------- Tax I.D. No.: ---------------------------- 36 EXHIBIT A OUTLINE OF PREMISES- SUITE 800 A-1 OUTLINE OF PREMISES- SUITE 1300 AND SUITE 1350 A-2 OUTLINE OF PREMISES- SUITE 1500 A-3 SERVER ROOM A-4 EXHIBIT B DESCRIPTION OF THE LAND PARCEL ONE: PARCEL A, AS SHOWN ON THAT CERTAIN PARCEL MAP FILED IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA ON MAY 7, 1985 IN BOOK 542 OF MAPS, AT PAGES 46 AND 47. PARCEL TWO: AN NON-EXCLUSIVE EASEMENT FOR INGRESS AND EGRESS OVER PARCEL C, AS SHOWN ON THAT CERTAIN PARCEL MAP FILED IN THE OFFICE OF THE RECORDER OF THE COUNTY OF SANTA CLARA, STATE OF CALIFORNIA ON MAY 7, 1985 IN BOOK 542 OF MAPS, AT PAGES 46 AND 47. B-1 EXHIBIT C BUILDING RULES AND REGULATIONS The following rules and regulations shall apply to the Premises, the Building, the Project, the parking garage associated therewith, and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways, and other similar areas shall not be obstructed by tenants or used by any tenant for purposes other than ingress and egress to and from their respective leased premises and for going from one to another part of the Building. 2. Plumbing, fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or deposited therein. Damage resulting to any such fixtures or appliances from misuse by a tenant or its agents, employees or invitees, shall be paid by such tenant. 3. No signs, advertisements or notices (other than those that are not visible outside the Premises) shall be painted or affixed on or to any windows or doors or other part of the Building or the Project without the prior written consent of Landlord. No nails, hooks or screws (other than those which are necessary to hang paintings, prints, pictures, or other similar items on the Premises' interior walls) shall be driven or inserted in any part of the Building or the Project except by Building maintenance personnel. No curtains or other window treatments shall be placed between the glass and the Building standard window treatments. 4. Landlord shall provide and maintain an alphabetical directory for all tenants in the main lobby of the Building. 5. Landlord shall provide all door locks in each tenant's leased premises, at the cost of such tenant, and no tenant shall place any additional door locks in its leased premises without Landlord's prior written consent. Landlord shall furnish to each tenant a reasonable number of keys to such tenant's leased premises, at such tenant's cost. 6. Movement in or out of the Building or the Project of furniture or office equipment, or dispatch or receipt by tenants of any bulky material, merchandise or materials which require use of elevators or stairways, or movement through the Building entrances or lobby shall be conducted under Landlord's supervision at such times and in such a manner as Landlord may reasonably require. Except to the extent attributable to the gross negligence or willful misconduct of Landlord, each tenant assumes all risks of and shall be liable for all damage to articles moved and injury to persons or public engaged or not engaged in such movement, including equipment, property and personnel of Landlord if damaged or injured as a result of acts in connection with carrying out this service for such tenant. 7. Landlord may prescribe weight limitations and determine the locations for safes and other heavy equipment or items, which shall in all cases be placed in the Building so as to distribute weight in a manner acceptable to Landlord which may include the use of such supporting devices as Landlord may require. All damage to the Building or the Project caused by the installation or removal of any property of a tenant, or done by a tenant's property while in the Building or the Project, shall be repaired at the expense of such tenant. 8. Corridor doors, when not in use, shall be kept closed. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds or animals (other than seeing-eye dogs) shall be brought into or kept in, on or about any tenant's leased premises. No C-1 portion of any tenant's leased premises shall at any time be used or occupied as sleeping or lodging quarters. 9. Tenant shall cooperate with Landlord's employees in keeping its leased premises neat and clean. Tenants shall not employ any person for the purpose of such cleaning other than the Project's cleaning and maintenance personnel. 10. To ensure orderly operation of the Project, no ice, mineral or other water, towels, newspapers, etc. shall be delivered to any leased area except by persons approved by Landlord. 11. Tenant shall not make or permit any vibration or improper, objectionable or unpleasant noises or odors in the Building or in the Project or otherwise unreasonably interfere in any way with other tenants or persons having business with them. 12. No machinery of any kind (other than normal office equipment) shall be operated by any tenant on its leased area without Landlord's prior written consent, nor shall any tenant use or keep in the Building or in the Project any flammable or explosive fluid or substance (other than typical office supplies [e.g., photocopier toner] used in compliance with all Laws). 13. Landlord will not be responsible for lost or stolen personal property, money or jewelry from tenant's leased premises or public or common areas regardless of whether such loss occurs when the area is locked against entry or not. 14. No vending or dispensing machines of any kind may be maintained in any leased premises without the prior written permission of Landlord. 15. Tenant shall not conduct any activity on or about the Premises, the Building or the Project other than its normal business operations which will draw pickets, demonstrators, or the like. 16. All vehicles are to be currently licensed, in good operating condition, parked for business purposes having to do with Tenant's business operated in the Premises, parked within designated parking spaces, one vehicle to each space. No vehicle shall be parked as a "billboard" vehicle in the parking lot. Any vehicle parked improperly may be towed away. Tenant, Tenant's agents, employees, vendors and customers who do not operate or park their vehicles as required shall subject the vehicle to being towed at the expense of the owner or driver. Landlord may place a "boot" on the vehicle to immobilize it and may levy a charge of $50.00 to remove the "boot." Tenant shall indemnify, hold and save harmless Landlord of any liability arising from the towing or booting of any vehicles belonging to a Tenant Party. 17. No tenant may enter into phone rooms, electrical rooms, mechanical rooms, or other service areas of the Building or the Project unless accompanied by Landlord or the Building manager. 18. Tenant will not permit any Tenant Party to bring onto the Project any handgun, firearm or other weapons of any kind, illegal drugs or, unless expressly permitted by Landlord in writing, alcoholic beverages. 19. Tenant shall not permit its employees, invitees or guests to smoke in the Premises or the lobbies, passages, corridors, elevators, vending rooms, rest rooms, stairways or any other area shared in common with other tenants in the Building or permit its employees, invitees, or guests to loiter at the Building entrances for the purposes of smoking. Landlord may, but shall not be required to, designate an area for smoking outside the Building. C-2 EXHIBIT D TENANT FINISH-WORK: LANDLORD BUILDS TO PLANS 1. ACCEPTANCE OF PREMISES. Except as set forth in this Exhibit, Tenant accepts the Premises in their "AS-IS" condition on the date that this Lease is entered into; provided that Landlord shall deliver the Premises and the Suites with the Building's Systems and the Building's Structure in good working order and condition. 2. SPACE PLANS. (a) SPACE PLANS. On or before the execution of this Lease, Tenant has delivered to Landlord a space plan depicting improvements to be installed in the Premises, which plans were prepared by Interior Architects and dated ______________, 2003 (the "SPACE PLANS"). The Space Plans are attached hereto as Exhibit D-1. (b) PHASED WORK. Landlord and Tenant acknowledge and agree that Landlord shall be installing improvements in the Premises in phases based on the location of the improvements, including improvements in Suite 1350 (the "Suite 1350 Work"), and in Suite 1300 (the "Suite 1300 Work"). To the extent necessary Landlord shall prepare separate working drawings for each of the phases of the Work and the provisions below shall apply to each phase of the Work as appropriate. Suites 1300 and 1350 are collectively referred to herein as the "Suites." (c) TEST FIT. Landlord shall provide to Tenant one initial test fit floor plan for the Suites and two revisions thereto, at Landlord's sole cost and expense. All other revisions thereto shall be at Tenant's sole cost and expense. The initial Test Fit will be generated by Landlord's architect within ten days after Tenant's authorization. 3. WORKING DRAWINGS. (a) PREPARATION AND DELIVERY. On or before the date which is 30 days following the date on which this Lease is fully executed by both Landlord and Tenant, Landlord shall cause to be prepared final working drawings of all improvements to be installed in the Suites and deliver the same to Tenant for its review and approval (which approval shall not be unreasonably withheld, delayed or conditioned). (b) APPROVAL PROCESS. Tenant shall notify Landlord whether it approves of the submitted working drawings within three business days after Landlord's submission thereof. If Tenant disapproves of such working drawings, then Tenant shall notify Landlord thereof specifying in reasonable detail the reasons for such disapproval, in which case Landlord shall, within five business days after such notice, revise such working drawings in accordance with Tenant's objections and submit the revised working drawings to Tenant for its review and approval. Tenant shall notify Landlord in writing whether it approves of the resubmitted working drawings within three business days after its receipt thereof. This process shall be repeated until the working drawings have been finally approved by Landlord and Tenant. If Tenant fails to notify Landlord that it disapproves of any initial or revised working drawings within three business days after the submission thereof to Tenant, then Tenant shall be deemed to have approved the working drawings in question. Any delay caused by Tenant's unreasonable withholding of its consent or unreasonable delay in giving its written approval as to such working drawings beyond the time periods specified herein shall constitute a Tenant Delay Day (defined below). If the working drawings are not fully approved (or deemed approved) by both Landlord and Tenant by the 20th business day after the delivery of the initial draft thereof to Tenant, and Landlord and Tenant have met their obligations hereof with respect to the delivery, approval and revision of the working D-1 drawings, then each day after such 20-business day period that such working drawings are not fully approved (or deemed approved) by both Landlord and Tenant shall constitute a Tenant Delay Day. (c) LANDLORD'S APPROVAL; PERFORMANCE OF WORK. If any of Tenant's proposed construction work will affect the Building's Structure or the Building's Systems, then the working drawings pertaining thereto must be approved by the Building's engineer of record. Landlord's approval of such working drawings shall not be unreasonably withheld, provided that (1) they comply with all Laws, and (2) the improvements depicted thereon do not adversely affect (in the reasonable discretion of Landlord) the Building's Structure or the Building's Systems (including the Building's restrooms or mechanical rooms), the exterior appearance of the Building, or the appearance of the Building's common areas or elevator lobby areas on multi-tenant floors. As used herein, "WORKING DRAWINGS" shall mean the final working drawings approved by Landlord and Tenant, as amended from time to time by any changes approved by Landlord and Tenant thereto, and "WORK" shall mean all improvements to be constructed by Landlord in accordance with and as indicated on the Working Drawings. Landlord's approval of the Working Drawings shall not be a representation or warranty of Landlord that such drawings are adequate for any use or comply with any Law, but shall merely be the consent of Landlord thereto. Tenant shall, at Landlord's request, sign the Working Drawings to evidence its review and approval thereof. After the Working Drawings have been approved, Landlord shall cause the Work to be diligently performed in substantial accordance with the Working Drawings, using appropriately licensed contractors and subcontractors selected by Landlord and such contractors shall be reasonably approved by Tenant. Landlord shall be responsible for obtaining any required pricing estimates or construction bids related to the Work. 4. CHANGE ORDERS. Tenant may initiate changes in the Work. Each such change must receive the prior written approval of Landlord, such approval not to be unreasonably withheld or delayed; however, if such requested change would adversely affect (in the reasonable discretion of Landlord) (1) the Building's Structure or the Building's Systems (including the Building's restrooms or mechanical rooms), (2) the exterior appearance of the Building, or (3) the appearance of the Building's common areas or elevator lobby areas on multi-tenant floors, Landlord may withhold its consent in its sole and absolute discretion. Landlord shall, upon completion of the Work, furnish Tenant with an accurate architectural "as-built" plan of the Work as constructed, which plan shall be incorporated into this Exhibit D by this reference for all purposes. 5. DEFINITIONS. As used herein, a "TENANT DELAY DAY" means each day of delay in the performance of the Work that occurs (a) because of Tenant's failure to timely deliver or approve any Tenant required documentation hereunder such as the Space Plans or Working Drawings, (b) because Tenant fails to timely furnish any information or deliver or approve any required documents such as the Space Plans, Working Drawings (whether preliminary, interim revisions or final), pricing estimates, construction bids, and the like, (c) because of any change by Tenant to the Space Plans or Working Drawings, (d) because Tenant fails to attend any meeting with Landlord, the architect, any design professional, or any contractor, or their respective employees or representatives, as may be required or scheduled hereunder or otherwise necessary in connection with the preparation or completion of any construction documents, such as the Space Plans, Working Drawings, or in connection with the performance of the Work; provided Tenant has not less than one business day prior notice of such meeting and such meeting is held during normal business hours, (e) because of any specification by Tenant of materials or installations in addition to or other than Landlord's standard finish-out materials, or (f) because a Tenant Party otherwise delays completion of the Work. As used herein, "SUBSTANTIAL COMPLETION," "SUBSTANTIALLY COMPLETED" and any derivations thereof mean the Work in the Premises is substantially completed (as reasonably determined by Landlord's architect or contractor) in substantial accordance with the Working Drawings. Substantial Completion shall have occurred even though minor details of construction, decoration, landscaping and mechanical adjustments remain to be completed by Landlord; provided that Landlord has obtained a D-2 temporary certificate of occupancy or similar written approval for such space from the appropriate municipal authorities with jurisdiction over the Premises and the Building and further provided that such incomplete items do not create any health and/or safety risk or adversely affect the operation of the Building's Systems, as reasonably determined by Landlord. 6. WALK-THROUGH; PUNCHLIST. When Landlord considers the Work in the Premises to be Substantially Completed, Landlord will notify Tenant and within three business days thereafter, Landlord's representative and Tenant's representative shall conduct a walk-through of the Premises and identify any necessary touch-up work, repairs and minor completion items that are necessary for final completion of the Work. Neither Landlord's representative nor Tenant's representative shall unreasonably withhold his or her agreement on punchlist items. Landlord shall use reasonable efforts to cause the contractor performing the Work to complete all punchlist items within 30 days after agreement thereon; however, Landlord shall not be obligated to engage overtime labor in order to complete such items. 7. COSTS. Landlord shall bear the entire cost of performing the Work depicted on the Space Plans initially submitted to and approved by Landlord. Tenant shall bear the entire additional costs incurred by Landlord in performing the Work because of any event specified in clauses 5(a), 5(b), 5(c), 5(d), 5(e) or 5(f) of this Exhibit. Tenant shall pay Landlord an amount equal to 50% of the estimated additional costs of any change to the Space Plans or the Working Drawings at the time of such change; Tenant shall pay to Landlord the remaining portion of additional costs incurred in performing the Work because of an event specified in clauses 5(a), 5(b), 5(c), 5(d), 5(e) or 5(f) of this Exhibit within ten days following receipt of an invoice after Substantial Completion of the Work. In consideration for Landlord's management and supervision for services performed in connection with clauses 5(a), 5(b), 5(c), 5(d), 5(e) or 5(f), Tenant shall pay to Landlord a construction management fee equal to five percent of the additional construction costs specified in this Section 7. 8. CONSTRUCTION REPRESENTATIVES. Landlord's and Tenant's representatives for coordination of construction and approval of change orders will be as follows, provided that either party may change its representative upon written notice to the other: LANDLORD'S REPRESENTATIVE: W9/PHC II San Jose, L.L.C. c/o Insiginia/ESG, Inc. 160 W. Santa Clara Street, Suite 550 San Jose, California 95113 Telephone: (408) 293-2400 Telecopy: (408) 971-9880 TENANT'S REPRESENTATIVE: Callidus Software, Inc. 160 W. Santa Clara Street, Suite 1500 San Jose, California 95113 Attn: Brian Cabrera Telephone: (408) 808-6470 Telecopy: (408) 271-2663 9. MISCELLANEOUS. To the extent not inconsistent with this Exhibit, Sections 8(a) and 21 of this Lease shall govern the performance of the Work and Landlord's and Tenant's respective rights and obligations regarding the improvements installed pursuant thereto. D-3 EXHIBIT D-1 SPACE PLANS D-1 EXHIBIT E CONFIRMATION OF COMMENCEMENT DATE ______________, ___ Callidus Software, Inc. 160 W. Santa Clara Street, Suite 1500 San Jose, California 95113 Re: Lease Agreement (the "LEASE") dated August 28, 2003, between W9/PHC II San Jose, L.L.C., a Delaware limited liability company ("LANDLORD"), and Callidus Software, Inc., a Delaware corporation ("TENANT"). Capitalized terms used herein but not defined shall be given the meanings assigned to them in the Lease. Ladies and Gentlemen: Landlord and Tenant agree as follows: 1. CONDITION OF PREMISES. Tenant has accepted possession of a portion of the Premises pursuant to the Lease described as _____________ (the "PARTIAL PREMISES"). Any improvements required by the terms of the Lease to be made by Landlord to the Partial Premises have been completed to the full and complete satisfaction of Tenant in all respects except for the punchlist items described on Exhibit A hereto (the "PUNCHLIST ITEMS"), and except for such Punchlist Items, Landlord has fulfilled all of its duties under the Lease with respect to such initial tenant improvements for the Partial Premises. Furthermore, Tenant acknowledges that the Partial Premises are suitable for the Permitted Use. 2. COMMENCEMENT DATE. The Commencement Date of the Lease for the Partial Premises is __________, 2003. 3. EXPIRATION DATE. The Term is scheduled to expire on the last day of the 84th full calendar month of the Term, which date is ______________, 20____. 4. CONTACT PERSON. Tenant's contact person in the Premises is: Callidus Software, Inc. 160 W. Santa Clara Street, Suite 1500 San Jose, California 95113 Attn: Brian S. Cabrera Telephone: (408) 808-6470 Telecopy: (408) 271-2663 5. RATIFICATION. Tenant hereby ratifies and confirms its obligations under the Lease, and represents and warrants to Landlord that it has no defenses thereto. Additionally, Tenant further confirms and ratifies that, as of the date hereof, (a) the Lease is and remains in good standing and in full force and effect, and (b) Tenant has no claims, counterclaims, set-offs or defenses against Landlord arising out of the Lease or in any way relating thereto or arising out of any other transaction between Landlord and Tenant. 6. BINDING EFFECT; GOVERNING LAW. Except as modified hereby, the Lease shall remain in full effect and this letter shall be binding upon Landlord and Tenant and their respective E-1 successors and assigns. If any inconsistency exists or arises between the terms of this letter and the terms of the Lease, the terms of this letter shall prevail. This letter shall be governed by the laws of the state in which the Premises are located. Please indicate your agreement to the above matters by signing this letter in the space indicated below and returning an executed original to us. Sincerely, CB RICHARD ELLIS, on behalf of Landlord By: --------------------------------- Name: --------------------------------- Title: --------------------------------- Agreed and accepted: CALLIDUS SOFTWARE, INC., a Delaware corporation By: ------------------------------- Name: ------------------------------- Title: ------------------------------- By: ------------------------------- Name: ------------------------------- Title: ------------------------------- E-2 EXHIBIT A PUNCHLIST ITEMS Please insert any punchlist items that remain to be performed by Landlord. If no items are listed below by Tenant, none shall be deemed to exist. A-1 EXHIBIT F FORM OF TENANT ESTOPPEL CERTIFICATE The undersigned is the Tenant under the Lease (defined below) between W9/PHC II San Jose, L.L.C., a Delaware limited liability company, as Landlord, and the undersigned as Tenant, for the Premises in Suite ______ on the _________________________ floor of the office building located at 160 West Santa Clara Street, San Jose, California 95113 and hereby certifies as follows: 1. The Lease consists of the original Lease Agreement dated as of August 28, 2003 between Tenant and Landlord [`s predecessor-in-interest] and the following amendments or modifications thereto (if none, please state "none"):________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ The documents listed above are herein collectively referred to as the "LEASE" and represent the entire agreement between the parties with respect to the Premises. All capitalized terms used herein but not defined shall be given the meaning assigned to them in the Lease. 2. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Section 1 above. 3. The Term commenced on __________________, 200___ and the Term expires, excluding any renewal options, on _____________________, 20___, and Tenant has no option to purchase all or any part of the Premises or the Building or, except as expressly set forth in the Lease, any option to terminate or cancel the Lease. 4. Tenant currently occupies the Premises described in the Lease and Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows (if none, please state "none"): ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ 5. All monthly installments of Basic Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through ___________. The current monthly installment of Basic Rent is $ _____________. 6. All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder. In addition, Tenant has not delivered any notice to Landlord regarding a default by Landlord thereunder. 7. As of the date hereof, there are no existing defenses or offsets, or, to the undersigned's knowledge, claims or any basis for a claim, that the undersigned has against Landlord and no event has occurred and no condition exists, which, with the giving of notice or the passage of time, or both, will constitute a default under the Lease. 8. No rental has been paid more than 30 days in advance and no security deposit has been delivered to Landlord except as provided in the Lease. 9. If Tenant is a corporation, partnership or other business entity, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant F-1 is a duly formed and existing entity qualified to do business in the state in which the Premises are located and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so. 10. There are no actions pending against Tenant under any bankruptcy or similar laws of the United States or any state. 11. Other than in compliance with all applicable laws and incidental to the ordinary course of the use of the Premises, the undersigned has not used or stored any hazardous substances in the Premises. 12. All tenant improvement work to be performed by Landlord under the Lease has been completed in accordance with the Lease and has been accepted by the undersigned and all reimbursements and allowances due to the undersigned under the Lease in connection with any tenant improvement work have been paid in full. Tenant acknowledges that this Estoppel Certificate may be delivered to Landlord, Landlord's Mortgagee or to a prospective mortgagee or prospective purchaser, and their respective successors and assigns, and acknowledges that Landlord, Landlord's Mortgagee and/or such prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in disbursing loan advances or making a new loan or acquiring the property of which the Premises are a part and that receipt by it of this certificate is a condition of disbursing loan advances or making such loan or acquiring such property. Executed as of ____________, ____. TENANT: CALLIDUS SOFTWARE, INC., a Delaware corporation By: ------------------------------ Name: ------------------------------ Title: ------------------------------ By: ------------------------------ Name: ------------------------------ Title: ------------------------------ F-2 EXHIBIT G TEMPORARY SPACE - SUITE 1400 G-1 EXHIBIT H SUBORDINATION NON DISTURBANCE AND ATTORNMENT AGREEMENT RECORDING REQUESTED BY ) AND WHEN RECORDED MAIL TO: ) Bank of America, N.A. ) Capital Markets Servicing Group ) Mail Code: CA9-706-06-42 ) 555 S. Flower Street, 6th Floor ) Los Angeles, CA 90071-2385 ) Attn.: ) Loan No.: ) - -------------------------------------------------------------------------------- Space Above for Recorder's Use SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT NOTICE: THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT. THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (the "Agreement") is made as of this _______ day of ____________________, 2003, which date shall be the effective date of this Agreement, between Callidus Software, Inc., a Delaware corporation (the "Tenant") and Wells Fargo Bank Minnesota, N.A., as Trustee for the registered holders of Banc of America Large Loan Inc., Commercial Mortgage Pass-Through Certificates, Series 2002-FLT2 (together with its successors and/or assigns, the "Lender"), acting through its Sub-Servicer, Bank of America, N.A., a national banking association (the "Sub-Servicer"). The Tenant is the lessee under the lease described in Exhibit A attached hereto (as the same may from time to time be assigned, subleased, renewed, extended, amended, modified or supplemented, collectively the "Lease"). Bank of America, N.A. (the "Original Lender") has previously made a loan (the "Loan") to W9/PHC II San Jose L.L.C., a Delaware limited liability company or its successors and/or assigns with respect to the landlord's interest under the Lease (the "Landlord"), evidenced by a promissory note in the original principal amount of approximately $_______________ (the "Note") executed by the Landlord and payable to the Original Lender and secured by a first priority deed of trust, mortgage or deed to secure debt on certain real and personal property and improvements (the "Premises"), recorded in the appropriate records of ______________ County, on _______________, as Instrument No. ____________________ (the "Security Instrument"). [Alternative language to be used when there is a separate Assignment of Leases and Rents.] [Bank of America National Trust and Savings Association, as predecessor to Bank of America, N.A. (the "Original Lender") has previously made a loan (the "Loan") to ___________________, a _________________ or its successors and/or assigns with respect to the landlord's interest under the Lease (the "Landlord"), evidenced by a promissory note in the H-1 original principal amount of approximately $_______________ (the "Note") executed by the Landlord and payable to the Original Lender. The Note is secured by a first priority deed of trust with assignment of rents and leases, security agreement and fixture filing (the "Deed of Trust") on certain real and personal property and improvements (the "Premises"), recorded in the appropriate records of _______________ County, ______________ on __________________ as Instrument No. ________________. The Note is further secured by an assignment of leases and rents (the "Assignment of Leases") affecting the Premises, recorded on ______________ as Instrument No. _______________. The Deed of Trust and Assignment of Leases are collectively referred to herein as the "Security Instrument."] The Original Lender has assigned to the Lender all right, title and beneficial interest in and to the Note, the Security Instrument and certain other documents governing and relating to the Loan. The Lender is the holder of the Note and has appointed the Sub-Servicer to act on its behalf to service the Loan. The Lender has requested the Tenant to confirm the fact that the Lease is subject and subordinate to the Security Instrument. The Tenant is willing to confirm the subordination of the Lease, provided it obtains assurance from the Lender that its possession of the premises demised under the Lease (the "Demised Premises"), which Demised Premises is all or a portion of the Premises, and its right to use any common areas will not be disturbed by reason of or in the event of the foreclosure of the Security Instrument. The Lender is willing to give such assurance. NOW, THEREFORE, for and in consideration of the mutual agreements herein contained and other good and valuable consideration, the parties hereto do hereby mutually covenant and agree as follows: 1. The Tenant hereby subordinates the Lease and all terms and conditions contained therein and all rights, options, liens and charges created thereby to the Security Instrument and the lien thereof, and to all present or future advances under the obligations secured thereby and to all renewals, extensions, amendments, modifications and/or supplements of same, to the full extent of all amounts secured thereby from time to time. 2. So long as no event of default on the part of the Tenant under the Lease shall exist which would entitle the Landlord to terminate the Lease, or if such an event of default shall exist, so long as the Tenant's time to cure the default shall not have expired, the term of the Lease shall not be terminated or modified in any respect whatsoever and the Tenant's right of possession to the Demised Premises and its rights in and to any common areas and its other rights arising out of the Lease will all be fully recognized and protected by the Lender and shall not be disturbed, canceled, terminated or otherwise affected by reason of the Security Instrument or any action or proceeding instituted by the Lender to foreclose the Security Instrument, or any extension, renewal, consolidation or replacement of same, irrespective of whether the Tenant shall have been joined in any action or proceeding. 3. In the event that the Lender takes possession of the Premises, either as the result of foreclosure of the Security Instrument or accepting a deed to the Premises in lieu of foreclosure, or otherwise, or the Premises shall be purchased at such a foreclosure by a third party, the Tenant shall attorn to the Lender or such third party and recognize the Lender or such third party as its landlord under the Lease, and the Lender or such third party will recognize and accept the Tenant as its tenant thereunder, whereupon, the Lease shall continue in full force and effect as a direct lease between the Lender or such third party and the Tenant for the full term thereof, together with all extensions and renewals thereof, and the Lender or such third party shall thereafter assume and H-2 perform all of the Landlord's obligations, as the landlord under the Lease with the same force and effect as if the Lender or such third party were originally named therein as the Landlord; provided, however, that the Lender or such third party shall not be: (a) liable for any act or omission of any prior landlord (including the Landlord), except to the extent the Lender was furnished notice and opportunity to cure the same in accordance with the provisions of this Agreement prior to taking possession of such Premises; or (b) subject to any offsets or defenses which the Tenant might have against any prior landlord (including the Landlord), except to the extent the Lender was furnished notice and opportunity to cure the same in accordance with the provisions of this Agreement prior to taking possession of such Premises; or (c) bound by any rent or additional rent which the Tenant might have paid for more than two (2) months in advance to any prior landlord (including the Landlord); or (d) bound by any amendment or modification of the Lease not consented to in writing by the Lender. 4. Notwithstanding anything to the contrary in this Agreement or otherwise, in the event the Lender or a third party takes possession of the Premises as provided in paragraph 3 above, the liability of the Lender or such third party under the Lease shall be limited to the Lender's or such third party's, as the case may be, interest in the Premises, and upon any assignment or other transfer of the Lender's or such third-party's interest in the Premises, the Lender or such third party, as applicable, shall be discharged and released from any obligation or liability under the Lease arising or accruing after the date of such assignment or transfer. 5. Tenant agrees not to subordinate the Lease to any other lien or encumbrance which (i) affects the Premises under the Lease, or any part thereof, or (ii) is junior to the Security Instrument, without the express written consent of the Lender, and any such subordination or any such attempted subordination or agreement to subordinate without such consent of Lender, shall be void and of no force and effect. 6. Tenant agrees to provide copies of all notices given Landlord under the Lease to Lender at the following address: Lender: Wells Fargo Bank Minnesota, N.A., c/o Bank of America, N.A., as Master Servicer Capital Markets Servicing Group P.O. Box 3609 Los Angeles, California 90051 Telephone: 800.462.0505 Telecopy: 213.345.6587 or to such other address as Lender shall designate in writing; and all such notices shall be in writing and shall be considered as properly given if (i) mailed to the addressee by first class United States mail, postage prepaid, registered or certified with return receipt requested, (ii) by delivering same in person to the addressee, or (iii) by delivery to a third party commercial delivery service for same day or next day delivery to the office of the addressee with proof of delivery; any notice so given shall be effective, as applicable, upon (a) the third (3rd) day following the day such notice is deposited with the United States mail, (b) delivery to the addressee, or (c) upon delivery to such third party delivery service; and any notice given in any other manner shall be effective only if and when received by the addressee. H-3 7. In the event Landlord shall fail to perform or observe any of the terms, conditions or agreements in the Lease, Tenant shall give written notice thereof to Lender and Lender shall have the right (but not the obligation) to cure such default. Tenant shall not take any action with respect to such default under the Lease (including without limitation any action in order to terminate, rescind or avoid the Lease or to withhold any rent or other monetary obligations thereunder) for a period of thirty (30) days following receipt of such written notice by Lender; provided, however, that in the case of any default which cannot with diligence be cured within such thirty (30) day period, if Lender shall proceed promptly to cure such default and thereafter prosecute the curing of such default with diligence and continuity, then the time within which such default may be cured shall be extended for such period as may be necessary to complete the curing of such default with diligence and continuity. 8. Nothing contained in this Agreement shall in any way impair or affect the lien created by the Security Instrument, except as specifically set forth herein. 9. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that in the event of the assignment or transfer of the interest of the Lender to a party that assumes the Lender's obligations and liabilities hereunder, all obligations and liabilities of the Lender under this Agreement shall terminate, and thereupon all such obligations and liabilities shall be the responsibility of the party to whom the Lender's interest is assigned or transferred. 10. In the event of any litigation or other legal proceeding arising between the parties to this Agreement, whether relating to the enforcement of a party's rights under this Agreement or otherwise, the prevailing party shall be entitled to receive its reasonable attorney's fees and costs of suit from the non-prevailing party in such amount as the court shall determine. NOTICE: THIS AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE PERSON OBLIGATED ON YOUR LEASE TO OBTAIN A LOAN, A PORTION OF WHICH MAY BE EXPENDED FOR PURPOSES OTHER THAN IMPROVEMENT OF THE PROPERTY. TENANT: CALLIDUS SOFTWARE, INC., a Delaware corporation By: ------------------------------ Name: ------------------------------ Title: ------------------------------ By: ------------------------------ Name: ------------------------------ Title: ------------------------------ H-4 LENDER: Wells Fargo Bank Minnesota, N.A., as Trustee for the registered holders of Banc of America Large Loan Inc., Commercial Mortgage Pass-Through Certificates, Series 2002-FLT2 By: Bank of America, N.A., as Master Servicer By: ------------------------------ Name: ------------------------------ Title: ------------------------------ H-5 [California acknowledgments] ACKNOWLEDGMENT STATE OF __________________) COUNTY OF _________________) On __________________ before me, _________________________, a Notary Public in and for the State of __________________, personally appeared __________________________________ [and ____________________________], personally known to me (or proved to me on the basis of satisfactory evidence) to be the person[s] whose name[s] [is/are] subscribed to the within instrument and acknowledged to me that [he/she/they] executed the same in [his/her/their] authorized [capacity/capacities], and that by [his/her/their] signature[s] on the instrument the person[s], or the entity upon behalf of which the person[s] acted, executed the instrument. WITNESS my hand and official seal. _____________________________ (Space above for official notarial seal) ACKNOWLEDGMENT STATE OF __________________) COUNTY OF _________________) On __________________ before me, _________________________, a Notary Public in and for the State of __________________, personally appeared __________________________________ [and _____________________________], personally known to me (or proved to me on the basis of satisfactory evidence) to be the person[s] whose name[s] [is/are] subscribed to the within instrument and acknowledged to me that [he/she/they] executed the same in [his/her/their] authorized [capacity/capacities], and that by [his/her/their] signature[s] on the instrument the person[s], or the entity upon behalf of which the person[s] acted, executed the instrument. WITNESS my hand and official seal. _____________________________ (Space above for official notarial seal) H-6 EXHIBIT A LEASE That certain Lease Agreement, dated as of August 28, 2003, by and between Callidus Software, Inc., a Delaware corporation, as tenant, and W9/PHC II San Jose, L.L.C., a Delaware limited liability company, as landlord, relating to the Premises generally described as Suites 800, 1300, 1350 and 1500 containing approximately 44,536 rentable square feet in the office building located at 160 W. Santa Clara Street, San Jose, California 95113, as assigned, subleased, renewed, extended, amended, modified or supplemented from time to time. H-7 EXHIBIT I SUITE 1400 EXPANSION SPACE AND SUITE 1450 EXPANSION SPACE I-1 EXHIBIT J SUITE 1200 EXPANSION SPACE J-1 EX-10.6 9 f92629orexv10w6.txt EXHIBIT 10.6 EXHIBIT 10.6 TALLYUP SOFTWARE INC. 1997 STOCK OPTION PLAN FEBRUARY 3, 1997 1. Purposes of the Plan. The purposes of this Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "Applicable Laws" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended. (e) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (f) "Common Stock" means the Common Stock of the Company. (g) "Company" means TallyUp Software Inc., a Delaware corporation. (h) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (i) "Director" means a member of the Board of Directors of the Company. (j) "Employee" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (1) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (m) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (n) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (o) "Officer" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (p) "Option" means a stock option granted pursuant to the Plan. (q) "Option Agreement" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. (r) "Option Exchange Program" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. (s) "Optioned Stock" means the Common Stock subject to an Option or a Stock Purchase Right. 2 (t) "Optionee" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. (u) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (v) "Plan" means this 1997 Stock Plan. (w) "Restricted Stock" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 11 below. (x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934, as amended. (y) "Service Provider" means an Employee, Director or Consultant. (z) "Share" means a share of the Common Stock, as adjusted in accordance with Section 12 below. (aa) "Stock Purchase Right" means a right to purchase Common Stock pursuant to Section 11 below. (bb) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 12 of the Plan, the maximum aggregate number of Shares which may be subject to option and sold under the Plan is 864,000 shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Option or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Option or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. (a) The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; 3 (ii) to select the Service Providers to whom Options and Stock Purchase Rights may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to determine whether and under what circumstances an Option may be settled in cash under subsection 9(e) instead of Common Stock; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option has declined since the date the Option was granted; (viii) to initiate an Option Exchange Program; (ix) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Optionees to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and (xi) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) Effect of Administrator's Decision. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees. 5. Eligibility. (a) Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. 4 (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (c) Neither the Plan nor any Option or Stock Purchase Right shall confer upon any Optionee any right with respect to continuing the Optionee's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 14 of the Plan. 7. Term of Option. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. (a) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of the grant. (B) granted to any other Service Provider, the per Share exercise 5 price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (iii) Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. (a) Procedure for Exercise: Rights as a Stockholder. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement, but in no case at a rate of less than 20% per year over five (5) years from the date the Option is granted when such Options are granted to persons who are not officers, directors or consultants of the Company or a parent or subsidiary of the Company. Unless the Administrator provides otherwise, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 12 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Relationship as a Service Provider. If an Optionee ceases to be a 6 Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's disability, the Optionee may exercise an Option to the extent the Option is vested on the date of termination, but only within twelve (12) months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement). If such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option on the day three months and one day following such termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant) to the extent vested on the date of death. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (e) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 10. Non-Transferability of Options and Stock Purchase Rights. Options and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Stock Purchase Rights. (a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it 7 shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The terms of the offer shall comply in all respects with Section 260.140.42 of Title 10 of the California Code of Regulations. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. (b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine, but in no case at a rate of less than 20% per year over five years from the date of purchase. (c) Other Provisions. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. (d) Rights as a Stockholder. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a stockholder and shall be a stockholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 12 of the Plan. 12. Adjustments Upon Changes in Capitalization. Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase Right. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior 8 to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to have the right to exercise his or her Option until fifteen (15) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option or Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 13. Time of Granting Options and Stock Purchase Rights. The date of grant of an Option or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Employee or Consultant to whom an Option or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. 9 (b) Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) Investment Representations. As a condition to the exercise of an Option, the Administrator may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Reservation of Shares. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 18. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. 19. Information to Optionees and Purchasers. The Company shall provide to each Optionee and to each individual who acquires Shares pursuant to the Plan, not less frequently than annually during the period such Optionee or purchaser has one or more Options or Stock Purchase Rights outstanding, and, in the case of an individual who acquires Shares pursuant to the Plan, during the period such individual owns such Shares, copies of annual financial statements. The Company shall not be required to provide such statements to key employees whose duties in connection with the Company assure their access to equivalent information. 10 EX-10.7 10 f92629orexv10w7.txt EXHIBIT 10.7 EXHIBIT 10.7 CALLIDUS SOFTWARE INC. 2003 STOCK INCENTIVE PLAN 1. Purposes of the Plan. The purposes of this Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. 2. Definitions. As used herein, the following definitions shall apply: (a) "Administrator" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. (b) "Applicable Laws" means the requirements relating to the administration of stock plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Awards are granted under the Plan. (c) "Award" means any Option or other stock-based award granted under this Plan. (d) "Board" means the Board of Directors of the Company. (e) "Code" means the U.S. Internal Revenue Code of 1986, as amended. (f) "Committee" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. (g) "Common Stock" means the common stock, par value $0.001 per share, of the Company. (h) "Company" means Callidus Software Inc., a Delaware corporation. (i) "Consultant" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting or advisory services to such entity. (j) "Director" means a member of the Board of Directors of the Company. (k) "Employee" means any person employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or protected as a matter of local law or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination (or if such date is not a trading date, on the previous trading date), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "Incentive Stock Option" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (o) "Nonstatutory Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (p) "Option" means a stock option granted pursuant to the Plan. (q) "Option Agreement" means an agreement evidencing the terms and conditions of an individual Option grant. Any Option Agreement is subject to the terms and conditions of the Plan. (r) "Optionee" means the holder of an outstanding Option granted under the Plan. (s) "Outside Director" means a Director who is not an Employee. (t) "Participant" means the holder of an outstanding Award granted under the Plan. (u) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (v) "Plan" means this 2003 Stock Incentive Plan. 2 (w) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3. (x) "Service Provider" means an Employee, Director or Consultant. (y) "Share" means a share of the Common Stock, as adjusted in accordance with Section 13 below. (z) "Subsidiary" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. (a) Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares which may be issued under the Plan is 2,000,000 shares, plus (x) any Shares remaining available for grant of awards under the Company's 1997 Stock Option Plan on the effective date of the Plan and (y) an annual increase on July 1 of each year during the term of the Plan beginning July 1, 2004, in each case in an amount equal to the lesser of (i) 2,800,000 shares, (ii) 5.0% of the outstanding shares on the immediately preceding date or (iii) an amount determined by the Board. The Shares may be authorized but unissued, or reacquired, shares or treasury shares. (b) No Participant may receive Options and stock appreciation rights under the Plan in any calendar year that relate to more than 1,500,000 Shares. (c) If any Shares covered by an Award, or to which such an Award relates, are forfeited, or if an Award otherwise terminates in whole or in part without the delivery of the full number of Shares related thereto, then the Shares covered by such Award, or to which such Award relates, to the extent of any such forfeiture or termination, shall again be, or shall become, available for issuance under the Plan. Shares that have been issued but are repurchased by, or surrendered or forfeited to, the Company shall become available for future grant under the Plan. For purposes of this paragraph, awards and options granted under the Company's 1997 Stock Option Plan shall be treated as Awards. 4. Administration of the Plan. (a) The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. (i) To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "non-employee directors" within the meaning of Section 162(m) of the Code. 3 (ii) To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (b) Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: (i) to determine the Fair Market Value; (ii) to select the Service Providers to whom Awards may from time to time be granted hereunder; (iii) to determine the number of Shares to be covered by each such award granted hereunder; (iv) to approve forms of agreement for use under the Plan; (v) to determine the terms and conditions, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; (vi) to amend the terms of any Award; provided that (A) no such amendment shall directly or indirectly reduce the exercise price of any Award without the approval of the Company's stockholders and (B) no such amendment shall impair the rights of any Participant without the consent of the Participant; (vii) to grant Awards with such terms as the Administrator deems necessary or appropriate in order to comply with or take advantage of the laws of any jurisdiction in which a Participant resides or is employed or to establish a sub-plan under this Plan for such purposes; (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established by the Administrator for the purpose of qualifying for preferred tax treatment under foreign tax laws or complying with foreign securities or other legal requirements; (ix) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued 4 upon exercise of an Award that number of Shares having a Fair Market Value equal to the amount required to be withheld; and (x) to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. (c) All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants. 5. Eligibility. (a) Awards may be granted to Service Providers as determined by the Administrator in its sole discretion, except that Incentive Stock Options may be granted only to Employees. (b) Neither the Plan nor any Award shall confer upon any Participant any right with respect to continuing the Participant's relationship as a Service Provider with the Company or its Subsidiary, nor shall it interfere in any way with his or her right or the right of the Company or its Subsidiary, as appropriate, to terminate such relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective as determined by the Board. It shall continue in effect for a term of ten years unless sooner terminated under Section 14 of the Plan. 7. Terms of Options. (a) The term of each Option shall be stated in the Option Agreement; provided that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. (b) Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 7(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. 5 (c) The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but in the case of any Incentive Stock Option shall be subject to the following: (A) the exercise price of any Incentive Stock Option granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary shall be no less than 110% of the Fair Market Value per Share on the date of grant; and (B) the exercise price of any Incentive Stock Option granted to any other Employee shall be no less than 100% of the Fair Market Value per Share on the date of grant. (d) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 8. Exercise of Option. (a) Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise or unless required by local law, vesting of Options granted hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. (b) An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. 6 Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. (c) Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. 9. Termination of Relationship as a Service Provider. (a) Termination. If an Optionee ceases to be a Service Provider, such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least 30 days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the vested portion of the Option shall remain exercisable for 90 days following the Optionee's termination. If, after termination, the Optionee does not exercise his or her Option within the time specified herein or in the Option Agreement, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (b) Disability of Optionee. If an Optionee ceases to be a Service Provider as a result of the Optionee's disability, the Optionee may exercise an Option to the extent the Option is vested as of the date of termination, but only within 12 months from the date of such termination (and in no event later than the expiration date of the term of such Option as set forth in the Option Agreement). If such disability is not a "disability" as such term is defined in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such Incentive Stock Option shall automatically cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option on the day three months and one day following such termination. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (c) Death of Optionee. If an Optionee dies while a Service Provider, the Option may be exercised at any time within 12 months following the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) to the extent vested as of the date of death. The Option may be exercised by the executor or administrator of the Optionee's estate or, if none, by the person(s) entitled to exercise the Option under the Optionee's will or the laws of descent or distribution. If the Option is not so exercised within 7 the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. (d) Buyout Provisions. The Administrator may at any time offer to buy out, for a payment in cash or Shares, an Award previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Participant at the time that such offer is made. 10. Formula Grants to Outside Directors. Options may be granted to Outside Directors in accordance with the policies established from time to time by the Board specifying the number of shares (if any) to be subject to each such award and the time(s) at which such awards shall be granted. The initial policy with respect to Options granted to Outside Directors under this Section effective as of the effective date of this Plan and continuing until modified or revoked by the Board from time to time, shall be as follows: (a) Initial Grants. As of the date on which any Outside Director first becomes a member of the Board, whether by election by the stockholders or appointment by the Board, such individual shall be granted automatically a Nonstatutory Stock Option to purchase 30,000 Shares (an "Initial Option"). (b) Annual Grants. Immediately after the Company's regularly scheduled annual meeting of stockholders each year, the following grants shall be made (each, an "Annual Option"): (i) Each Outside Director shall be granted automatically a Nonstatutory Stock Option to purchase 10,000 Shares; provided that if such Outside Director has served on the Board for less than one year, the number of Shares subject to such Annual Option shall be reduced pro rata based on the portion of the year that such Outside Director has served on the Board. (ii) The chair of the Audit Committee shall be granted automatically a Nonstatutory Stock Option to purchase 10,000 Shares; provided that if such Director has served in such capacity for less than one year, the number of Shares subject to such Annual Option shall be reduced pro rata based on the portion of the year that such Director has served in such capacity. (iii) The chair of the Compensation Committee and the Nominating and Corporate Governance Committee each shall be granted automatically a Nonstatutory Stock Option to purchase 5,000 Shares; provided that if such Director has served in such capacity for less than one year, the number of Shares subject to such Annual Option shall be reduced pro rata based on the portion of the year that such Director has served in such capacity. 8 (c) Terms of Options. Options granted to Outside Directors pursuant to this Section 10 shall be on the following terms, unless otherwise determined by the Board: (i) The exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option. (ii) Each Initial Option shall vest and become exercisable over four years, with the first 25% vesting on the first anniversary of the grant date and the remainder vesting monthly thereafter. (iii) Each Annual Option shall be fully vested and exercisable immediately. (iv) The term of each such Option shall be ten years. 11. Non-Transferability of Awards. Except as otherwise determined by the Administrator, Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. 12. Other Stock Awards. The Administrator is hereby authorized to grant to Participants such other Awards (including, without limitation, grants of restricted stock, restricted stock units, stock bonus awards, and stock appreciation rights) that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares) as are deemed by the Administrator to be consistent with the purposes of the Plan. Subject to the terms of the Plan, the Administrator shall determine the terms and conditions of such Awards, which shall be set forth in an Award Agreement. 13. Adjustments Upon Changes in Capitalization, Merger or Asset Sale. (a) Changes in Capitalization. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Award, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award, as well as the price per share of Common Stock covered by each such outstanding Award, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any 9 class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for a Participant to have the right to exercise his or her Award prior to such transaction, including Shares as to which the Award would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Award shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action. (c) Merger or Asset Sale. In the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, each outstanding Award shall be continued or assumed or an equivalent award substituted by the Company or the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that any Award is not so continued, assumed or substituted, such Award shall become fully vested and exercisable. If an Award becomes fully vested and exercisable in lieu of continuation, assumption or substitution, the Administrator shall notify the Participant in writing or electronically that the Award shall be fully exercisable for a period of no less than 15 days from the date of such notice, and the Award shall terminate upon the expiration of such period. For the purposes of this paragraph, the Award shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share subject to the Award immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided that if such consideration received is not solely common stock of the successor corporation or its Parent, the Administrator may provide for the consideration to be received upon the exercise of the Award, for each Share subject to the Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock. 14. Amendment and Termination of the Plan. (a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan. 10 (b) Stockholder Approval. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan by the Board shall impair the rights of any Participant with the consent of the Participant. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination. 15. Conditions Upon Issuance of Shares. (a) Legal Compliance. Shares shall not be issued pursuant to any Award granted hereunder unless the issuance and delivery of such Shares shall comply with Applicable Laws. (b) Tax Withholding. The Administrator shall require payment of any amount the Company may determine to be necessary to withhold for any income, employment or social insurance taxes or contributions, as applicable, as a result of the exercise of an award. 16. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Stockholder Approval. The Plan shall be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. 11 EX-10.8 11 f92629orexv10w8.txt EXHIBIT 10.8 EXHIBIT 10.8 CALLIDUS SOFTWARE INC. EMPLOYEE STOCK PURCHASE PLAN SECTION 1. Purpose of the Plan. The purpose of this Employee Stock Purchase Plan (the "PLAN") is to give eligible employees of Callidus Software Inc. (the "COMPANY") and its subsidiaries the ability to share in the Company's future success. The Company expects that it and its stockholders will benefit from the added interest which such eligible employees will have in the welfare of the Company as a result of their increased equity interest in the Company's success. The Plan is intended to qualify under Section 423 of the Code (as defined below). SECTION 2. Definitions. The following capitalized terms used in the Plan have the respective meanings set forth in this Section: (a) "BOARD" means the board of directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. (c) "COMMITTEE" means a committee of the Board designated by the Board to administer the Plan. If no committee is so designated by the Board, the full Board shall be the Committee hereunder. (d) "COMMON STOCK" means the common stock, par value $0.001, of the Company. (e) "COMPENSATION" means base salary and commissions prior to any reductions for pre-tax contributions made to a plan or salary reduction contributions to a plan excludable from income under Sections 125, 132 or 402(g) of the Code. Notwithstanding the foregoing, "Compensation" shall exclude severance pay, bonuses, retirement income, change in control payments, contingent payments, income derived from stock options, stock appreciation rights and other equity-based compensation and other forms of special remuneration. (f) "CORPORATE TRANSACTION" means (i) a merger of the Company with or into another corporation (other than a merger whose sole purpose is to change the state of the Company's incorporation or a merger as a result of which the direct or indirect stockholders of the Company immediately prior to such merger or consolidation hold, directly or indirectly, less than 50% of the voting power of the surviving entity); (ii) the sale of substantially all of the assets or stock of the Company, or (iii) the complete liquidation or dissolution of the Company. (g) "ENROLLMENT DATE" means the first date of an Offering Period. (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or any successor thereto. (i) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination (or if such date is not a trading date, on the previous trading date), as reported in The Wall Street Journal or such other source as the Committee deems reliable; (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Committee. (j) "IPO" means the initial public offering of the Common Stock pursuant to an effective registration statement filed by the Company with the Securities and Exchange Commission. (k) "MAXIMUM SHARE AMOUNT" means subject to applicable law, the maximum number of Shares that a Participant may purchase on any given Purchase Date. (l) "NEW PURCHASE DATE" means the purchase date established pursuant to Section 12 of the Plan. (m) "OFFERING PERIOD" means a period of approximately 12 months consisting of two consecutive Purchase Periods, as set forth in Section 7, or such other period as the Committee may determine in its sole discretion. (n) "OPTION" means an option granted pursuant to Section 7 of the Plan. (o) "PARTICIPANT" means an eligible employee of the Company or a Participating Subsidiary who participates in the Plan. (p) "PARTICIPATING SUBSIDIARY" means a Subsidiary that is selected to participate in the Plan by the Committee in its sole discretion. (q) "PAYROLL DEDUCTION ACCOUNT" means an account to which payroll deductions of a Participant are credited under Section 8(c) of the Plan. (r) "PERSON" means an individual, corporation, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government, but excluding any of the Company, any 2 Subsidiary or any employee benefit plan sponsored or maintained by the Company or any Subsidiary. (s) "PURCHASE DATE" means the last trading day of a Purchase Period. (t) "PURCHASE PERIOD" means the approximately six-month period, or such other period as the Committee may determine in its sole discretion, commencing on February 16 and August 16 of each year and ending with the next Purchase Date. The first Purchase Period shall be lengthened by commencing on the first trading day on or after the date of the IPO and ending on the last trading day before August 16, 2004, unless otherwise determined by the Committee. (u) "PURCHASE PRICE" means, with respect to each Share, 85% of the lesser of (i) the Fair Market Value of a Share on the Enrollment Date and (ii) the Fair Market Value of a Share on the Purchase Date. (v) "SHARE" means a share of Common Stock. (w) "SUBSIDIARY" means any corporation, partnership, joint venture or other legal entity of which the Company owns directly or indirectly, more than 50% of the total combined voting power of all classes of stock or other equity interests of such entity. SECTION 3. Shares Subject To The Plan. The total number of shares of Common Stock subject to the Plan is 1,200,000, plus an annual increase to be added on July 1 of each year during the term of the Plan beginning July 1, 2004, in an amount equal to the lesser of (i) 1,200,000 shares, (ii) 2.0% of the outstanding shares of Common Stock on the last day immediately preceding such date or (iii) a lesser amount determined by the Board. The Shares will consist in whole or in part of authorized but unissued Shares or treasury Shares, including Shares purchased on the open market or otherwise. SECTION 4. Administration. (a) The Plan shall be administered by the Committee. Subject to the terms of the Plan and applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) interpret and administer the Plan; (iii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; (iv) correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable; and (v) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. (b) All decisions of the Committee shall be final, conclusive and binding upon all persons. 3 SECTION 5. Eligibility. Any individual who is employed by the Company or a Participating Subsidiary on a given Enrollment Date is eligible to participate in the Plan, subject to limitations imposed by Section 423 of the Code. Notwithstanding the foregoing, no Employee shall be granted an option under the Plan if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or its Subsidiaries. SECTION 6. Election to Participate. Pursuant to procedures set forth by the Committee, Participants may elect to participate in a given Offering Period under the Plan prior to the Enrollment Date for such Offering Period. Enrollments shall remain in effect for subsequent Offering Periods, except as provided herein. A Participant shall not be enrolled in more than one Offering Period at any time. SECTION 7. Offering Periods; Grant of Option on Enrollment; Purchase of Shares. (a) The Plan shall be implemented by consecutive, overlapping Offering Periods with a new Offering Period commencing on each February 16 and August 16, or as otherwise determined by the Committee, except that the first Offering Period shall be lengthened by commencing on the first trading day on or after the IPO and ending on the last trading day before February 16, 2005, unless otherwise determined by the Committee. (b) With respect to an Offering Period, each Participant enrolled in such Offering Period shall be granted as of the Enrollment Date an Option to purchase on each Purchase Date during the Offering Period a number of Shares equal to the lesser of (i) the Maximum Share Amount or (ii) the number determined by dividing (A) the amount expected to be accumulated in such Participant's Payroll Deduction Account as of a Purchase Date, pursuant to the election made under Section 8, by (B) the Fair Market Value of a Share on the Enrollment Date. (c) In the event that the Committee determines that the number of Shares that may be purchased on a Purchase Date may exceed the number of Shares available under Section 3, the Committee may in its discretion provide for a pro rata purchase on the Purchase Date, and may continue or terminate any Offering Periods then in effect. SECTION 8. Payment of Purchase Price; Changes in Payroll Deductions; Issuance of Shares. (a) Payroll deductions shall be made on each day that a Participant is paid during an Offering Period in respect of a payroll period commencing after the Enrollment Date. The deductions shall be made as a percentage of the Participant's Compensation in 1% increments, from 1% to 15% of such Participant's Compensation, as elected by the 4 Participant; provided that, in accordance with Section 423(b)(8) of the Code and the regulations thereunder, no Participant shall be permitted to accrue rights to purchase Shares under this Plan (and any other employee stock purchase plan of the Company or any of its Subsidiaries) with an aggregate Fair Market Value (as determined as of the date the applicable option is granted) in excess of $25,000 for each calendar year in which such option is outstanding at any time. (b) A Participant may discontinue his or her participation in the Plan as provided in Section 9, or may change the rate of his or her payroll deductions during an Offering Period by completing and filing with the Company a new authorization for payroll deduction, subject to clause (a) above. The Committee may, in its discretion, limit the number of participation rate changes in any Offering Period. The change in rate shall be effective as soon as administratively feasible following the Company's receipt of the new authorization. (c) All payroll deductions made with respect to a Participant shall be credited to the Participant's Payroll Deduction Account under the Plan and shall be deposited with the general funds of the Company, and no interest shall accrue on the amounts credited to such Payroll Deduction Account. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. Except to the extent provided by the Committee, a Participant may not make any separate cash payments into such Participant's Payroll Deduction Account, and payment for Shares purchased under the Plan may not be made in any form other than by payroll deduction. (d) On each Purchase Date, all funds then in the Participant's Payroll Deduction Account shall be applied to purchase Shares (or fractions thereof) pursuant to the automatic exercise of the Option granted on the Enrollment Date. The Committee may determine with respect to all Participants that any fractional shares shall be rounded down to the next lower whole share, in which event the resulting unused amount in any Participant's Payroll Deduction Account may be carried over into the next Purchase Period. (e) Certificates representing the Shares purchased by a Participant under the Plan shall be issued to the Participant as soon as practicable following the end of each Purchase 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. (f) The Participant shall have no interest or voting right in the Shares covered by the Participant's Option until such Option is exercised and the covered Shares are registered in the name of the Participant. SECTION 9. Withdrawal. Each Participant may withdraw from participation prior to the end of an Offering Period or from the Plan in accordance with procedures set forth by the Committee. Upon a Participant's withdrawal from participation in respect of any Offering Period or from 5 the Plan, all accumulated payroll deductions in the Payroll Deduction Account shall be returned, without interest, to such Participant, and such Participant shall not be entitled to any Shares on the Purchase Date or thereafter with respect to the Offering Period in effect at the time of such withdrawal. If a Participant withdraws from an Offering Period, payroll deductions will not resume at the beginning of the succeeding Offering Period unless the Participant re-enrolls in the Plan prior to the applicable Enrollment Date in accordance with the procedures set forth by the Committee. SECTION 10. Termination of Employment. A Participant shall cease to participate in the Plan upon the Participant's termination of employment for any reason (including death) and all accumulated payroll deductions in the Participant's Payroll Deduction Account shall be returned, without interest to such Participant (or Participant's estate, as applicable). For purposes of the Plan, transfers from the Company or a Participating Subsidiary to another Participating Subsidiary or to the Company, as the case may be, shall not be a termination of employment. Employment shall not be deemed to terminate when the Participant goes on a leave of absence approved by the Company in writing, unless otherwise required by the Code and the applicable regulations. SECTION 11. Automatic Transfer to Low Price Offering Period. To the extent permitted by any applicable laws and regulations, if the Fair Market Value of the Shares on any Purchase Date in an Offering Period is lower than the Fair Market Value of the Shares on the Enrollment Date of such Offering Period, then all Participants in such Offering Period shall be automatically withdrawn from such Offering Period immediately after the purchase of their Shares on such Purchase Date and automatically re-enrolled in a new Offering Period as of the first business day after such Purchase Date. SECTION 12. Adjustments Upon Certain Events. Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Options granted under the Plan: (a) In the event of any stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number or type of Shares or other securities issued or reserved for issuance pursuant to the Plan, (ii) the Purchase Price and/or (iii) any other affected terms hereunder. (b) In the event of a Corporate Transaction, unless each outstanding Option shall be continued or assumed or an equivalent option substituted by the Company or the successor corporation or a parent or Subsidiary of the successor corporation, the Committee shall shorten any Offering Period then in progress by setting a New Purchase Date, which shall be before the date of the consummation of the Corporate Transaction. 6 The Committee shall notify each Participant not less than 10 days prior to the New Purchase Date that (i) a New Purchase Date has been set and (ii) the Participant's Option will be exercised automatically on the New Purchase Date unless prior to such date the Participant has withdrawn from the Offering Period as provided in Section 9. Each Offering Period then in effect shall terminate on such New Purchase Date. SECTION 13. Nontransferability. Unless otherwise determined by the Committee, Options granted under the Plan shall not be transferable or assignable by the Participant other than by will or by the laws of descent and distribution. SECTION 14. Legal Compliance. Shares shall not be issued hereunder unless the issuance and delivery of such Shares shall comply with all applicable laws and regulations, including the federal and state securities laws and the regulations of any stock exchange or other securities market on which the Company's securities are traded. SECTION 15. No Right to Employment. The granting of an Option under the Plan shall impose no obligation on the Company or any Subsidiary to continue the employment of a Participant and shall not lessen or affect the Company's or Subsidiary's right to terminate the employment of such Participant. SECTION 16. Amendment or Termination of the Plan. (a) The Plan shall continue until the earliest to occur of the following: (i) termination of the Plan by the Board, (ii) issuance of all of the Shares reserved for issuance under the Plan or (iii) the tenth anniversary of the effective date of the Plan. (b) The Committee may amend, alter or discontinue the Plan or any portion thereof at any time, provided that no amendment, alteration or discontinuation shall be made (x) without the approval of the stockholders of the Company if such amendment, alteration or discontinuation would (except as is provided in Section 12) increase the total number of Shares reserved for purposes of the Plan or as otherwise required by applicable laws or regulations, or (y) without the consent of a Participant, such amendment, alteration or discontinuation would materially diminish any of the rights or obligations under any Option theretofore granted to such Participant under the Plan. (c) Notwithstanding clause (y) of Section 16(b), the Committee may amend or terminate the Plan, including with respect to any Offering Periods then in effect, without consent of the Participants in such manner as it deems necessary to permit the granting of Options meeting the requirements of the Code or other applicable laws or in the event the Board determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences for the Company. 7 (d) Notwithstanding clause (y) of Section 16(b), the Committee shall have the power to change the duration and timing of Offering Periods (both before and after any Offering Period has commenced) and Purchase Periods. In no event, however, will any such Offering Period be longer than 27 months. SECTION 17. Taxes. At the time the Shares are purchased, or at the time some or all of the Shares issued under the Plan are disposed of, the Participant must make adequate provision for the Company's federal, state or other tax withholding obligations, if any, which arise. At any time, the Company, may, but shall not be obligated to, withhold from the Participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Shares by the Participant. SECTION 18. Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of laws. SECTION 19. Effectiveness of the Plan. The Plan shall become effective as determined by the Board, subject to stockholder approval. 8 EX-10.9 12 f92629orexv10w9.txt EXHIBIT 10.9 Exhibit 10.9 [Form of Change of Control Agreement] [Date] [Name] [Title] Callidus Software Inc. 160 West Santa Clara Street, Suite 1400 San Jose, California 95113 Dear : This letter modifies any Stock Option Agreement ("Option Agreement") which you may now or hereafter have under the 1997 Stock Option Plan, as amended, of Callidus Software, Inc. (the "Company"). This letter provides for accelerated vesting of the options subject to the Option Agreement (the "Options") under the conditions described below. In the event that you are "Involuntarily Terminated," except for "Cause," at any time during the period commencing 90 days prior to a "Change of Control" of the Company and ending on the first anniversary of the "Change of Control" of the Company, you shall receive vesting of your Option, over and above the vesting provided for in your Option Agreement, equal to the greater of (i) 50% of the shares subject to the Option which otherwise would have remained unvested immediately following the Change of Control or (ii) that number of shares which otherwise would have vested under the Option Agreement through the first anniversary of the Change of Control, assuming that your employment with the Company would have continued through the date of such anniversary. For purposes of the above, "Change of Control" means: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) of the "beneficial ownership" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities (it being understood that securities owned by any person on the date hereof shall not be counted against such limit with respect to such person); or (ii) A change in the composition of the Board occurring within a rolling two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are members of the Board as of date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board); or (iii) A merger or consolidation of the company with any other entity other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity (including the parent corporation of such surviving entity)) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or a sale or disposition by the Company of all or substantially all the Company's assets. The term "Surviving Entity" shall refer to the Company in the case of a Change of Control event described in clause (i) or (ii) above, or the entity surviving the merger, consolidation or sale of substantially all of the assets and continuing with the assets or business of the Company in the case of a Change of Control event described in clause (iii) above. For purposes of the above, "Involuntarily Terminated" means any of the following: (i) Your actual termination by the Company; (ii) The failure of the Surviving Entity to provide you with principle duties related in nature and responsibility to the principle duties which you had at the Company immediately prior to the Change of Control (it being understood that equivalency of title or reporting relationship shall not be required); (iii) The Surviving Entity conditioning your continued employment on your performing your duties at a regular work place located more than 50 miles from your regular work place immediately prior to the Change of Control; (iv) The failure of the Surviving Entity to pay you a rate of cash compensation equivalent to your rate of compensation immediately prior to the Change of Control, measured by comparing base salary plus bonuses, commissions and similar incentives on an annualized basis (it being understood that a bonus, commission or similar incentive will be treated as equivalent to the prior year's bonus, commission or similar incentive so long as the dollar amounts and targets are equivalent, regardless of whether you actually achieve the same dollar amounts and targets as in the prior year); (v) The failure of the Surviving Entity to assume your Option on substantially the same terms as it exists immediately prior to the Change of Control, or an attempt by the Surviving Entity to modify the vesting schedule of the Option in a manner adverse to you. 2 For purposes of the above, "Cause" means: (i) your willful failure to substantially perform your principle duties or gross negligence in the performance of your duties; (ii) your conviction of or entry of a plea of guilty or nolo contendere to a felony or other crime causing material harm to the Company; or (iii) a willful act by you that constitutes gross misconduct; or (iv) an act of fraud or misappropriation of funds or property against the Company. The modification to the terms of the vesting schedule of your Option(s) as described in this letter has been approved by the Company's Board of Directors and is effective immediately. Sincerely, 3 EX-10.10 13 f92629orexv10w10.txt EXHIBIT 10.10 EXHIBIT 10.10 September [ ], 2003 [Name] [Title] Callidus Software Inc. 160 West Santa Clara Street, Suite 1400 San Jose, CA 95113 Dear [Name]: This letter modifies any Stock Option Agreement ("Option Agreement") you may now or hereafter have with respect to the common stock of Callidus Software, Inc. (the "Company") and any prior agreement between you and the Company regarding the Option Agreements. This letter provides for accelerated vesting of the options subject to the Option Agreements (the "Options") under the conditions described below. In the event of any "Change of Control" of the Company you shall receive 100% vesting of your Options as of the effective time of the Change of Control. For purposes of the above, "Change of Control" means: (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) of "beneficial ownership" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities (it being understood that securities owned by any person on the date hereof shall not be counted against such limit with respect to such person); or (ii) A change in the composition of the Board of Directors of the Company (the "Board") occurring within a rolling two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are members of the Board as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board); or (iii) A merger or consolidation involving the Company other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the Surviving Entity (including the parent corporation of such Surviving Entity)) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such Surviving Entity outstanding immediately after such merger or consolidation, or a sale or disposition by the Company of all or substantially all the Company's assets. The term "Surviving Entity" shall refer to the entity surviving the merger, consolidation or sale of substantially all of the assets and continuing with the assets or business of the Company in the case of a Change of Control event described in clause (iii) above. The modification to the terms of the vesting schedule of your Options as described in this letter has been approved by the Board and is effective immediately. Sincerely, Reed D. Taussig Chief Executive Officer Callidus Software Inc. 2 EX-10.11 14 f92629orexv10w11.txt EXHIBIT 10.11 EXHIBIT 10.11 CALLIDUS SOFTWARE INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("AGREEMENT") is effective as of ______________, by and between Callidus Software Inc., a Delaware corporation (the "COMPANY"), and _____________ ("INDEMNITEE"). WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and its related entities; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and the advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, in view of the considerations set forth above, the Company desires that Indemnitee shall be indemnified and advanced expenses by the Company as set forth herein; NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. (a) "CHANGE IN CONTROL" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 50% of the total voting power represented by the Company's then outstanding Voting Securities (as defined below), (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) "CLAIM" shall mean with respect to a Covered Event (as defined below): any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) References to the "COMPANY" shall include, in addition to Callidus Software Inc., any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Callidus Software Inc. (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with 2 respect to such constituent corporation if its separate existence had continued. (d) "COVERED EVENT" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. (e) "EXPENSES" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), actually and reasonably incurred, of any Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (f) "EXPENSE ADVANCE" shall mean a payment to Indemnitee pursuant to Section 3 of Expenses in advance of the settlement of or final judgment in any action, suit, proceeding or alternative dispute resolution mechanism, hearing, inquiry or investigation which constitutes a Claim. (g) "INDEPENDENT LEGAL COUNSEL" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (h) References to "OTHER ENTERPRISES" shall include employee benefit plans; references to "FINES" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "SERVING AT THE REQUEST OF THE COMPANY" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee 3 shall be deemed to have acted in a manner "NOT OPPOSED TO THE BEST INTERESTS OF THE COMPANY" as referred to in this Agreement. (i) "REVIEWING PARTY" shall mean, subject to the provisions of Section 2(d), any person or body appointed by the Board of Directors in accordance with applicable law to review the Company's obligations hereunder and under applicable law, which may include a member or members of the Company's Board of Directors, Independent Legal Counsel or any other person or body not a party to the particular Claim for which Indemnitee is seeking indemnification. (j) "SECTION" refers to a section of this Agreement unless otherwise indicated. (k) "VOTING SECURITIES" shall mean any securities of the Company that vote generally in the election of directors. 2. Indemnification. (a) Indemnification of Expenses. Subject to the provisions of Section 2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim (whether by reason of or arising in part out of a Covered Event), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. (b) Review of Indemnification Obligations. Notwithstanding the foregoing, in the event any Reviewing Party shall have determined (in a written opinion, in any case in which Independent Legal Counsel is the Reviewing Party) that Indemnitee is not entitled to be indemnified hereunder under applicable law, (i) the Company shall have no further obligation under Section 2(a) to make any payments to Indemnitee not made prior to such determination by such Reviewing Party nor to advance Expenses of Indemnitee under Section 3, and (ii) the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all Expenses theretofore paid in indemnifying Indemnitee; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee is entitled to be indemnified hereunder under applicable law, any determination made by any Reviewing Party that Indemnitee is not entitled to be indemnified hereunder under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expenses theretofore paid in indemnifying Indemnitee until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have 4 been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expenses shall be unsecured and no interest shall be charged thereon. (c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If any Reviewing Party determines that Indemnitee substantively is not entitled to be indemnified hereunder in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by such Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and, subject to the provisions of Section 15, the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by any Reviewing Party shall be conclusive and binding on the Company and Indemnitee. (d) Selection of Reviewing Party; Change in Control. If there has not been a Change in Control, any Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), any Reviewing Party with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnification of Expenses under this Agreement or any other agreement or under the Company's certificate of incorporation or bylaws as now or hereafter in effect, or under any other applicable law, if desired by Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be entitled to be indemnified hereunder under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other Indemnitees. (e) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 10 hereof, to the 5 extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expense Advances. (a) Obligation to Make Expense Advances. Subject to Section 2(b), the Company shall make Expense Advances to Indemnitee upon receipt of a written undertaking by or on behalf of the Indemnitee to repay such amounts if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified therefor by the Company. (b) Form of Undertaking. Any written undertaking by the Indemnitee to repay any Expense Advances hereunder shall be unsecured and no interest shall be charged thereon. (c) Determination of Reasonable Expense Advances. The parties agree that for the purposes of any Expense Advance for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such Expense Advance that are certified by affidavit of Indemnitee's counsel as being reasonable shall be presumed conclusively to be reasonable. 4. Procedures for Indemnification and Expense Advances. (a) Timing of Payments. All payments of Expenses (including without limitation Expense Advances) by the Company to the Indemnitee pursuant to this Agreement shall be made to the fullest extent permitted by law as soon as practicable after written demand by Indemnitee therefor is presented to the Company, but in no event later than forty-five (45) business days after such written demand by Indemnitee is presented to the Company, except in the case of Expense Advances, which shall be made no later than twenty (20) business days after such written demand by Indemnitee is presented to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified or Indemnitee's right to receive Expense Advances under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 6 (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by this Agreement or applicable law. In addition, neither the failure of any Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by any Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under this Agreement or applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by any Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to provide indemnification for or make any Expense Advances with respect to the Expenses of any Claim, the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees or expenses of separate counsel subsequently employed by or on behalf of Indemnitee with respect to the same Claim; provided, however, that (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee at the Company's expense has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of 7 interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be Expenses for which Indemnitee may receive indemnification or Expense Advances hereunder. 5. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's certificate of incorporation, the Company's bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 10(a) hereof. (b) Nonexclusivity. The indemnification and the payment of Expense Advances provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's certificate of incorporation, its bylaws, any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification and the payment of Expense Advances provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though subsequent thereto Indemnitee may have ceased to serve in such capacity. 6. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's certificate of incorporation, bylaws or otherwise) of the amounts otherwise payable hereunder. 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 8 8. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 9. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 10. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses resulting from acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law; provided, however, that notwithstanding any limitation set forth in this Section 10(a) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled in accordance with Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has engaged in acts, omissions or transactions for which Indemnitee is prohibited from receiving indemnification under this Agreement or applicable law. (b) Claims Initiated by Indemnitee. To indemnify or make Expense Advances to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, counterclaim or cross claim, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's certificate of incorporation or bylaws now or hereafter in effect relating to Claims for Covered Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law (relating to indemnification of officers, directors, 9 employees and agents; and insurance), regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be. (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by the Indemnitee with respect to any action instituted (i) by Indemnitee to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material assertions made by the Indemnitee as a basis for such action was not made in good faith or was frivolous, or (ii) by or in the name of the Company to enforce or interpret this Agreement, if a court having jurisdiction over such action determines as provided in Section 13 that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous. (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute; provided, however, that notwithstanding any limitation set forth in this Section 10(d) regarding the Company's obligation to provide indemnification, Indemnitee shall be entitled in accordance with Section 3 to receive Expense Advances hereunder with respect to any such Claim unless and until a court having jurisdiction over the Claim shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has violated said statute. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (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), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 10 13. Expenses Incurred in Action Relating to Enforcement or Interpretation. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee with respect to such action (including without limitation attorneys' fees), regardless of whether Indemnitee is ultimately successful in such action, unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled in accordance with Section 3 to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be indemnified for all Expenses incurred by Indemnitee in defense of such action (including without limitation costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action a court having jurisdiction over such action makes a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that each of the material defenses asserted by Indemnitee in such action was made in bad faith or was frivolous; provided, however, that until such final judicial determination is made, Indemnitee shall be entitled in accordance with Section 3 to receive payment of Expense Advances hereunder with respect to such action. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 11 Furthermore, to the fullest extent possible, the provisions of this Agreement (including without limitation each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement, and all rights, remedies, liabilities, powers and duties of the parties to this Agreement, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. 12 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. CALLIDUS SOFTWARE INC. By: _____________________________________________ Name: ___________________________________________ Title: __________________________________________ Address: CALLIDUS SOFTWARE INC. 160 West Santa Clara Street Suite 1500 San Jose, CA 95113 AGREED TO AND ACCEPTED BY: INDEMNITEE ________________________________ (signature) Name: Address: 13 EX-10.12 15 f92629orexv10w12.txt EXHIBIT 10.12 EXHIBIT 10.12 [CALLIDUS SOFTWARE LETTERHEAD] November 15, 2001 Mr. Robert Warfield 3470 Merrill Rd Aptos, California 95003 Dear Bob: I am pleased to offer you the position of Vice President Engineering reporting to me on or before December 1, 2001. Your starting salary will be $16,667 per month, subject to periodic review. Additionally, you will participate in an incentive compensation plan based upon the attainment of certain goals and objectives to be established by the Company. Your target incentive earnings under this plan will be $40,000.00 per year. As a further incentive, I will recommend to the Board of Directors that you be granted an option to purchase 430,000 shares of Callidus Software, Inc. common stock at $0.50 (fifty cents) per share subject to the vesting schedule and terms and conditions of the Company's stock plan. Additionally, I will recommend to the Board of Directors that you be granted an additional 220,000 options at such time as the company files for an Initial Public Offer or is purchased by a qualified buyer for price equal to or greater than $6.67 per share. Twenty-five percent (25%) of the second grant shares shall immediately vest upon an IPO or purchase event and the remainder of the shares shall vest over a three-year period. The company will extend to you a loan to purchase the shares as of the date of grant per the terms and conditions as generally offered to other members of the executive staff of Callidus Software. In the event that the majority interest of the company is acquired you will be provided accelerated stock vesting terms equal to 50% of your then unvested stock options. The specific terms and conditions of this provision will be provided to you under a separate agreement. Benefits, Payroll, and other human resource management services are provided through the TriNet Employer Group, Inc. TriNet is an employer service organization contracted by Callidus Software to perform selected employer responsibilities on our behalf. As a result of the Company's arrangement with TriNet, TriNet will be considered your employer of record for payroll, benefits, and other functions involving employer related administration. You will also become eligible to participate in the Callidus Software, Inc. 401(k) Plan effective on the first day of the month following your employment start date. As part of your new employee orientation, you will receive an Employee Handbook. The Company is an "at will" employer, which means that the employment relationship may be terminated at any time by either the Company or by you, with or without notice and with or without cause. By signing below, you acknowledge that your employment at Callidus is for an unspecified duration, and neither this letter, nor your acceptance thereof, constitutes a contract of employment. In lieu of your position Callidus agrees to extend to you six months of severance pay equal to your base salary plus benefits in the event you are terminated for reasons other than cause. You will be provided 15 days of annual vacation as well as all other benefits normally provided by Callidus Software. In accordance with the Company's standard policy, this offer is contingent upon your completing and executing an Employment, Confidential Information and Invention Assignment Agreement. Bob, on behalf of the board of directors of Callidus, we very much look forward to your acceptance of this offer. I have enclosed two executed copies of this offer letter. As evidence of your acceptance, please sign both copies and return one original to me no later than November ______. Sincerely, /s/ Reed D. Taussig - ------------------- Reed D. Taussig President and CEO Agreed and Accepted: /s/ Robert Warfield Date: 11/15/01 --------------------- 2 EX-10.13 16 f92629orexv10w13.txt EXHIBIT 10.13 EXHIBIT 10.13 [CALLIDUS SOFTWARE LETTERHEAD] May 10, 2003 Mr. Bertram W. Rankin 340 Arboleda Drive Los Altos, California 94024 Dear Bert: I am pleased to offer you the position of Senior Vice President Worldwide Marketing reporting to me effective on or before June 2, 2003. Your target compensation as Vice President Worldwide Marketing shall be $270,000 per year. For the year ending December 31, 2003 your compensation as Vice President Worldwide Marketing shall be pro-rated to reflect your start date. Your 2003 compensation plan shall consist of a base salary of $16,667 per month, a quarterly bonus of up to $10,000, calculated against specific departmental objectives and effective for the quarters ending September 30, 2003 and December 31, 2003, and an annual bonus of $15,000 based on the terms and conditions of the 2003 Executive Bonus Plan as stipulated by the Compensation Committee of the Callidus Board of Directors. In order to be eligible for the executive bonus the company must achieve at least 80% of the board approved FY/03 year end cash plan or EBITDA plan. The bonus calculation shall be a pro-rata calculation using either the percentage of achievement of the year end cash plan or EBITDA plan, whichever is higher. The calculation of the bonus shall be as follows: Annual Pro-rated Financial Bonus = ($15,000) (%* Cash Flow) or (%*EBITDA) whichever is higher. This bonus shall be capped at 125% of the target payout ($18,750). For the quarter ending September 30, 2003 Callidus Software will guarantee your quarterly bonus. In lieu of your position Callidus agrees to extend to you six months of severance pay equal to your base salary plus benefits in the event you are terminated for reasons other than cause. As a further incentive I will recommend to the Board of Directors that you be granted an option to purchase 300,000 shares of Callidus Software, Inc. common stock subject to the vesting schedule and terms and conditions of the Company's stock plan. In the event the company is acquired the Company will agree to forward vest 50% of your outstanding options granted to you at that time. The Company is an "at will" employer, which means that the employment relationship may be terminated at any time by either the Company or by you, with or without notice and with or without cause. By signing below, you acknowledge that your employment at Callidus is for an unspecified duration, and neither this letter, nor your acceptance thereof, constitutes a contract of employment. In accordance with Callidus' standard policy, this offer is contingent upon your completing and executing an Employment, Confidential Information and Invention Assignment Agreement ("Invention Agreement") and upon your providing the Company with the legally required proof of your identity. The Company also requires proof of eligibility to work in the United States. Bert, on behalf of myself, the management team and the board of directors of Callidus Software we very much look forward to your acceptance of this offer. I have enclosed two executed copies of this offer letter. As evidence of your acceptance, please sign both copies and return one original to me no later than Tuesday May 13, 2003. Sincerely, /s/Reed D. Taussig - ------------------ Reed D. Taussig President and CEO Agreed and Accepted: /s/ Bert Rankin Date: 5/11/03 ----------------- 2 EX-10.14 17 f92629orexv10w14.txt EXHIBIT 10.14 EXHIBIT 10.14 [CALLIDUS SOFTWARE LETTERHEAD] August 30, 2002 Mr. Ron J. Fior 341 Arlington Road Redwood City, California 94062 Dear Ron: I am pleased to offer you the position of Vice President Finance and Chief Financial Officer reporting to me on or before September 16, 2002. Your starting salary will be $16,667 per month, subject to periodic review. Additionally, you will participate in an incentive compensation plan based upon the attainment of certain goals and objectives to be established by the Company. Your target incentive earnings under this plan will be $50,000 per year which for the year ending December 31, 2002 will consist of quarterly bonuses of $10,000 per quarter and a $10,000 annual bonus. During the quarter ending December 31, 2002 the Company agrees to pay you the full $10,000 quarterly bonus in recognition of your service during that quarter. As a further incentive I will recommend to, the Board of Directors that you be granted an option to purchase 275,000 shares of Callidus Software, Inc. common stock subject to the vesting schedule and terms and conditions of the Company's stock plan with the added modification that the Company agrees to waive the provisions of a first year cliff vesting on the initial grant and agrees that all shares of the initial grant shall vest on a 1/48th basis effective the date of the grant. In the event the company is acquired the Company will agree to forward vest 50% of your outstanding options granted to you at that time. Additionally, the company will extend to you a loan to purchase the shares as of the date of grant per the terms and conditions as generally offered to other members of the executive staff of Callidus Software. In lieu of your position Callidus agrees to extend to you six months of severance pay equal to your base salary plus benefits in the event you are terminated for reasons other than cause. You will be provided 15 days of annual vacation as well as all other benefits normally provided by Callidus Software. The Company is an "at will" employer, which means that the employment relationship may be terminated at any time by either the Company or by you, with or without notice and with or without cause. By signing below, you acknowledge that your employment at Callidus is for an unspecified duration, and neither this letter, nor your acceptance thereof, constitutes a contract of employment. In accordance with Callidus' standard policy, this offer is contingent upon your completing and executing the agreement regarding Employment, Confidential Information, Invention Assignment and Arbitration Agreement ("Invention Agreement") and upon your providing the Company with the legally required proof of your identity. Ron, on behalf of myself, the management team and the board of directors of Callidus Software, we very much look forward to your acceptance of this offer. I have enclosed two executed copies of this offer letter. As evidence of your acceptance, please sign both copies and return one original to me no later than Tuesday September 3, 2002. Very truly yours, /s/ Reed D. Taussig - ------------------- Reed D. Taussig President and CEO Accepted: /s/ Ron Fior ------------ Ron Fior Date: Sept 16, 2002 2 EX-10.15 18 f92629orexv10w15.txt EXHIBIT 10.15 Exhibit 10.15 NOTE $37,500.00 San Jose, California December 31, 1998 FOR VALUE RECEIVED, Daniel P. Welch promises to pay to Callidus Software Inc., a Delaware corporation (the "Company"), or order, the principal sum of thirty seven thousand five hundred dollars ($37,500.00), together with interest on the unpaid principal hereof from the date hereof at the rate of four and fifty-two one hundredths percent (4.52%) per annum, compounded annually. Principal and interest shall be due and payable on December 31, 2003. Payment of principal and interest shall be made in lawful money of the United States of America. Payment will be applied first towards unpaid interest and then towards unpaid principal. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Amended and Restated Stock Option Agreement -- Early Exercise, dated as of December 18, 1998. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. The holder of this Note hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. In the event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, or the undersigned shall be in default under the terms of the Security Agreement attached hereto as Exhibit A, this Note shall be automatically accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. /s/ Daniel Welch ---------------- EXHIBIT A SECURITY AGREEMENT This Security Agreement is made as of December 31, 1998 between Callidus Software Inc., a Delaware corporation ("Pledgee"), and Daniel P. Welch ("Pledgor"). Recitals Pursuant to Pledgor's election to exercise his option to purchase shares of the Pledgee's Common Stock under the Amended and Restated Stock Option Agreement--Early Exercise dated December 18, 1998 (the "Option Agreement"), between Pledgor and Pledgee under Pledgee's 1997 Stock Option Plan, and Pledgor's election under the terms of the Option Agreement to pay for such shares in part with his promissory note (the "Note"), Pledgor has purchased 150,000 shares of Pledgee's Common Stock (the "Shares") at a price of $0.25 per share, for a total purchase price of $37,500.00, of which $37,500.00 was in the form of the Note. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as, the "Collateral") represented by certificate number ______, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. c. Margin Regulations. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Shares, such rights and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; b. Pledgor fails to perform any of the covenants set forth in the Option Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee; or c. Pledgor ceases to be an employee, director or consultant of the Company. In the case of an event of Default, as set forth above, the principal and all accrued interest under the Note shall become immediately due and payable in full. Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of the Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" /s/ Daniel Welch ---------------- Signature Daniel P. Welch --------------- Print Name Address: 13 San Joaquin Court Novato, CA 94947 "PLEDGEE" Callidus Software Inc., a Delaware corporation /s/ Michael Tidd ---------------- Signature Michael Tidd ------------ Print Name VP Finance + CFO ---------------- Title "PLEDGEHOLDER" /s/ Andrew Swett ---------------- Secretary of Callidus Software Inc. EX-10.16 19 f92629orexv10w16.txt EXHIBIT 10.16 Exhibit 10.16 NOTE $50,000.00 San Jose, California December 31, 1998 FOR VALUE RECEIVED, Michael C. Tidd promises to pay to Callidus Software Inc., a Delaware corporation (the "Company"), or order, the principal sum of fifty thousand dollars ($50,000.00), together with interest on the unpaid principal hereof from the date hereof at the rate of four and fifty-two one hundredths percent (4.52%) per annum, compounded annually. Principal and interest shall be due and payable on December 31, 2003. Payment of principal and interest shall be made in lawful money of the United States of America. Payment will be applied first towards unpaid interest and then towards unpaid principal. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is subject to the terms of the Amended and Restated Stock Option Agreement--Early Exercise, dated as of December 18, 1998. This Note is secured in part by a pledge of the Company's Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. The holder of this Note hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. In the event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, or the undersigned shall be in default under the terms of the Security Agreement attached hereto as Exhibit A, this Note shall be automatically accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. /s/ MICHAEL TIDD ---------------- EXHIBIT A SECURITY AGREEMENT This Security Agreement is made as of December 31, 1998 between Callidus Software Inc., a Delaware corporation ("Pledgee"), and Michael C. Tidd ("Pledgor"). Recitals Pursuant to Pledgor's election to exercise his option to purchase shares of the Pledgee's Common Stock under the Amended and Restated Stock Option Agreement--Early Exercise dated December 18. 1998 (the "Option Agreement"), between Pledgor and Pledgee under Pledgee's 1997 Stock Option Plan, and Pledgor's election under the terms of the Option Agreement to pay for such shares in part with his promissory note (the "Note"), Pledgor has purchased 200,000 shares of Pledgee's Common Stock (the "Shares") at a price of $0.25 per share, for a total purchase price of $50,000.00, of which $50,000.00 was in the form of the Note. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the "Collateral") represented by certificate number ____, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. c. Margin Regulations. In the event that Pledgee's Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Options and Rights. In the event that, during the term of this pledge, subscription options or other rights or options shall be issued in connection with the pledged Shares, such rights and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; b. Pledgor fails to perform any of the covenants set forth in the Option Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee; or c. Pledgor ceases to be an employee, director or consultant of the Company. In the case of an event of Default, as set forth above, the principal and all accrued interest under the Note shall become immediately due and payable in full. Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The within pledge of the Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" /s/ MICHAEL TIDD ---------------- Signature Michael C. Tidd --------------- Print Name Address: 19536 Bainter Way Los Gatos, CA 95030 "PLEDGEE" Callidus Software Inc., a Delaware corporation /s/ REED TAUSSIG ---------------- Signature Reed Taussig ------------ Print Name President + CEO --------------- Title "PLEDGEHOLDER" /s/ Andrew Swett ---------------- Secretary of Callidus Software Inc. EX-10.17 20 f92629orexv10w17.txt EXHIBIT 10.17 EXHIBIT 10.17 NOTE $47,718.00 San Jose, California January 7, 1998 FOR VALUE RECEIVED, Reed Taussig promises to pay to TallyUp Software Inc., a Delaware corporation (the "Company"), or order, the principal sum of forty-seven thousand seven hundred eighteen dollars ($47,718.00), together with interest on the unpaid principal hereof from the date hereof at the rate of six and thirteen one-hundredths percent (6.13%) per annum, compounded annually. Principal and interest shall be due and payable on January 7, 2008 or immediately prior to such earlier time as the undersigned sells or otherwise transfers all of the shares of Common Stock (the "Shares") purchased by the undersigned pursuant to that certain Amended and Restated Stock Option Agreement - -- Early Exercise by and between the Company and the undersigned dated January 7, 1998 (the "Option Agreement"). In the event the undersigned sells or otherwise transfers some, but less than all, of the Shares subject to pledge contained in the Security Agreement by and between the Company and the undersigned of even date herewith (the "Security Agreement"), then principal and interest, in an amount equal to the product of (i) the quotient obtained by dividing the number of such Shares sold or otherwise transferred by the undersigned by the total number of Shares then subject to the pledge contained in the Security Agreement and (ii) the total amount of principal and interest then outstanding under this Note, shall be due and payable immediately prior to such sale or transfer. The foregoing provisions relating to sales and transfers shall not apply to any transfers not involving a change of beneficial ownership (including without limitation transfers to trusts for the benefit of the undersigned or the undersigned and members of his family), provided that all of the restrictions and terms contained in the Option Agreement, including related agreements, and the Security Agreement shall continue to apply to such Shares. Payments of principal and interest shall be made in lawful money of the United States of America. The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder. This Note is secured in part by a pledge of certain assets of the undersigned under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof. The holder of this Note shall have full recourse against the undersigned, and shall not be required to proceed against the collateral securing this Note in the event of default. Should any action be instituted for the collection of this Note, the reasonable costs and attorneys' fees therein of the holder shall be paid by the undersigned. /s/ Reed Taussig ---------------- Reed Taussig Print Name SECURITY AGREEMENT This Security Agreement is made as of January 7, 1998 between TallyUp Software Inc., a Delaware corporation ("Pledgee"), and Reed Taussig ("Pledgor"). Recitals Pursuant to Pledgor's election to exercise his option to purchase shares of the Pledgee's Common Stock under the Amended and Restated Stock Option Agreement -- Early Exercise dated January 7, 1998 (the "Option Agreement"), between Pledgor and Pledgee under Pledgee's 1997 Stock Option Plan, and Pledgor's election under the terms of the Option Agreement to pay for such shares in part with his promissory note (the "Note"), Pledgor has purchased 482,000 shares of Pledgee's Common Stock (the "Shares") at a price of $0.10 per share, for a total purchase price of $48,200, of which $47,718 was in the form of the Note. The Note and the obligations thereunder are as set forth in Exhibit A. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges Sunrise Professional (SIC), 680 Sunrise Ave. Roseville, CA (the "Collateral") as security for Pledgor's obligations under the Note, subject to the terms and conditions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: a. Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. b. Encumbrances. The fair market value of the Collateral exceeds the sum of (i) the obligations under the Note and (ii) the sum of all other obligations against which the Collateral is pledged or otherwise encumbered (the sum of (i) and (ii) together are the "Total Encumbrances"). Pledgor may further encumber the Collateral so long as the Total Encumbrances do not exceed the fair market value of the Collateral on the date that any such additional encumbrance is incurred. Pledgor acknowledges that the holding period pursuant to Rule 144 under the Securities Act of 1933, as amended, will be tolled for any such period as the Total Encumbrances exceed the fair market value of the Collateral. 3. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: a. Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or b. Pledgor fails to perform any of the covenants set forth in the Option Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 4. Release of Collateral. There shall be released from this pledge a portion of the Collateral upon payments of the principal of the Note. The portion of the Collateral which shall be released shall be that portion which bears the same proportion to the initial Collateral pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 5. Withdrawal or Substitution of Collateral. Except as permitted in Section 2b hereof, Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 6. Term. The pledge of Collateral contained herein shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged Collateral shall be released from this pledge, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 4 above. 7. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 8. Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. 9. Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 10. Governing Law. This Security Agreement shall be interpreted and governed under the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGOR" By: /s/ Reed Taussig ---------------- Reed Taussig Print Name Address: 461 Van Buren Street Los Altos, CA 94022 "PLEDGEE" TALLYUP SOFTWARE INC., a Delaware corporation By: /s/ Andrew Swett ---------------- Title: Secretary EX-10.18 21 f92629orexv10w18.txt EXHIBIT 10.18 Exhibit 10.18 CALLIDUS SOFTWARE INC. NON-PLAN STOCK OPTION AGREEMENT This Non-Plan Stock Option Agreement is entered into as of APRIL 2, 2002 ("Date of Grant"), between Callidus Software Inc., a Delaware Corporation (the "Company") and REED TAUSSIG (the "Optionee"). 1. Option Grant. The Company hereby grants to Optionee an Option (the "Option") to purchase 250,000 shares of common stock, par value $0.001, of the Company ("Shares") at an exercise price of $0.50 per share, on the terms and subject to the conditions set forth in this Option Agreement. 2. Option Exercise. (a) Right to Exercise. To the extent the Option has become vested in accordance with paragraph (b) below, the Option may be exercised at any time during the term of the Option as set forth in Section 7. In the event of termination of Optionee's employment with the Company, the exercisability of the Option shall be governed by Section 7 of this Option Agreement. (b) Vesting. The Shares subject to the Option shall become vested and exercisable in accordance with the following schedule, subject to Optionee's continuing employment with the Company or any of the Company's subsidiaries: (i) 100% of the Shares subject to the Option shall become vested and exercisable on the seventh anniversary of the Date of Grant (the "Fully Vested Date"). (ii) Notwithstanding Section 2(b)(i) above, upon the occurrence of an Acceleration Event (as defined below), one-forth (1/4th) of the Shares subject to the Option shall become vested and exercisable upon the date of the Acceleration Event, and one-thirty-sixth (1/36th) of the Shares subject to the Option shall vest each month thereafter, An "Acceleration Event" is defined as an Initial Public Offering of equity securities ("IPO") or upon a sale of the Company with a minimum valuation of $6.67 per share. (c) Method of Exercise. During the term of the Option, Optionee (or his representative, devisee or heir, as applicable) may exercise any vested portion of the Option by delivering to the Company written notice in the form attached hereto as Exhibit A together with payment of the exercise price. Such written notice shall be signed by Optionee and shall be delivered in person or by certified mail to the Company. The Option may not be exercised for a fraction of a Share. Optionee shall not be entitled to any rights as a stockholder of the Company in respect of any Shares covered by the Option until such Shares shall have been paid for in full and issued to Optionee. 3. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of the Option have not been registered under the Securities Act of 1933 ("Securities Act"), as amended, at the time the Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of the Option, deliver to the Company his Investment Representation Statement in the form attached hereto as Exhibit B. 4. Definition of Fair Market Value. "Fair Market Value" means, as of any date, the value of the common stock of the Company as determined in good faith by the Board of Directors of the Company (the "Board"), provided, however, that if on such date the common stock of the Company is listed on a national stock exchange or quotation system, then the fair market value of the common stock of the Company shall be the closing sales price for the last market trading day prior to such date, as reported in The Wall Street Journal or such other source as the Board deems reliable. 5. Method of Payment. Payment of the exercise price shall be made by any of the following methods, or a combination thereof: (a) cash; (b) check; or (c) surrender of other shares of common stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by Optionee for more than six (6) months (or such other period required to avoid a charge to the Company's earnings) on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the exercise price of the Shares as to which the Option is being exercised. 6. Restrictions on Exercise. No Shares shall be issued pursuant to the exercise of an Option unless both the exercise of the Option and issuance of Shares comply with all relevant provisions of applicable federal and state securities and other laws and regulations and the requirements of any stock exchange upon which the Shares may then be listed. As a condition to the exercise of the Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Term of Option. The Option shall terminate on the tenth anniversary of the Date of Grant, unless terminated earlier in accordance with the provisions of Section 8 or in the following circumstances: (a) Termination. In the event of termination of Optionee's employment with the Company, other than upon Optionee's death or total and permanent disability (as defined by Section 22(e)(3) of the Code ("Disability")), Optionee may, but only within three (3) months following the date of such termination, exercise the Option to the extent it is vested on the date of such termination. To the extent that Option was not vested on the date of such termination, or if Optionee does not exercise the Option to the extent so vested within such three-month period, the Option shall terminate. (b) Disability of Optionee. Notwithstanding the provisions hereof, in the event of termination of Optionee's employment with the Company as a result of his Disability, 2 Optionee may, but only within twelve (12) months following the date of such termination, exercise the Option to the extent otherwise so entitled on the date of such termination. To the extent that Optionee was not entitled to exercise the Option on the date of such termination, or if Optionee does not exercise the Option to the extent so entitled within such 12-month period, the Option shall terminate. (c) Death of Optionee. Notwithstanding the provisions hereof, in the event of termination of Optionee's employment with the Company as a result of the death of Optionee, the Option may be exercised at any time within twelve (12) months following the date of death, by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent Optionee could have exercised the Option at the date of death. To the extent that Optionee was not entitled to exercise the Option on the date of death, or if the Option is not exercised to the extent exercisable within such 12-month period, the Option shall terminate. 8. Changes in Capitalization or Change of Control. (a) Changes in Capitalization. The number of Shares of common stock covered by the Option, as well as the price per share of common stock covered by the Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock, or any other increase or decrease in the number of issued Shares of common stock effected without receipt of consideration by the Company in a manner deemed equitable by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares of common stock subject to the Option. (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company. Optionee shall have the right to exercise the Option until fifteen (15) days prior to such transaction as to all of the Shares covered thereby. To the extent it has not been previously exercised, the Option will terminate immediately prior to the consummation of such proposed action. (c) Change of Control. In the event of a Change of Control, the Option may be continued by the Company or may be assumed, or an equivalent option may be substituted, and the Option terminated, by the successor corporation or a parent or subsidiary of such successor corporation. Any portion of the Option (including any portion which has become vested and exercisable upon such Change of Control as a result of Section 2(b) hereof) that is not continued or assumed by the Company or its successor, as applicable, shall be exercisable for a period of time determined by the Board and to the extent not exercised at the end of such period, shall terminate immediately on such Change of Control. For the purposes hereof, "Change of Control" means: 3 (i) The acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934) of the "beneficial ownership" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities (it being understood that securities owned by any person on the date hereof shall not be counted against such limit with respect to such person); or (ii) change in the composition of the Board occurring within a rolling two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are members of the Board as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual not otherwise an Incumbent Director whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board); or (iii) A merger or consolidation of the Company with any other entity other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity (including the parent corporation of such surviving entity)) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or a sale or disposition by the Company of all or substantially all of the Company's assets. 9. Lock-up Agreement. Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of any registration statement of the Company filed under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 10. Non-Transferability of Option. The Option may not be transferred in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Option shall be binding upon the executors, administrators, heirs, successors and assigns of Optionee. 4 11. At-Will Employment. The Option does not confer on Optionee any right to continue in the employ of the Company or any Subsidiary or interfere in any way with the right of the Company or any Subsidiary to determine the terms of Optionee's employment. 12. Tax Consequences. (a) The Option is a nonstatutory stock option. Optionee understands that he may incur federal and state income tax liability upon the exercise of the Option and upon the subsequent disposition of the Shares. Optionee represents that he has consulted with a tax advisor in connection with the purchase or disposition of the shares and that he is not relying on the Company for tax advice. (b) By exercising the Option, Optionee agrees that, as a condition to any exercise of the Option, the Company may require Optionee to enter into an arrangement providing for the payment by Optionee to the Company of any tax withholding obligation of the Company arising thereby. At any time Optionee exercises the Option, in whole or in part, or at any time as requested by the Company, Optionee hereby authorizes withholding from payroll and any other amounts payable to Optionee, any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company, if any, which arise in connection with the Option. 13. Delegation. Optionee acknowledges that any powers, rights or responsibilities of the Board set forth herein may be delegated to and exercised by any subcommittee thereof. 14. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 15. Successors and Assigns. The Company may assign any of its rights under this Option Agreement to single or multiple assignees, and this Option Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Option Agreement shall be binding upon Optionee and his executors, administrators, successors and assigns. 16. Entire Agreement. This Option Agreement contains the entire understanding of the parties hereto in respect of the subject matter contained herein. This Option Agreement supersedes all prior agreements and understandings between the parties hereto with respect to the subject matter hereof. 17. Governing Law. This Option Agreement shall be governed by and construed in accordance with the laws of the State of California, without application of the conflict of laws principles thereof. 18. Counterparts. This Option Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 5 Optionee hereby accepts the Option subject to all of the terms and provisions of this Option Agreement. Optionee has reviewed this Option Agreement in its entirety, has had an opportunity to obtain the advice of counsel prior to executing the Option and fully understands all provisions of this Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. CALLIDUS SOFTWARE INC. OPTIONEE a Delaware Corporation /s/ Reed Taussig ---------------------------------- Print Name: Reed D. Taussig By: /s/ RON FIOR ------------------------------ Residence Address: Name: Ron Fior 731 Linden Avenue Title: VP Finance and CFO ---------------------------------- Los Altos, CA 94022 Address: ---------------------------------- 160 West Santa Clara Avenue San Jose, CA 95113 6 EX-10.19 22 f92629orexv10w19.txt EXHIBIT 10.19 Exhibit 10.19 CALLIDUS SOFTWARE INC. 1997 STOCK OPTION PLAN STOCK OPTION AGREEMENT --EARLY EXERCISE Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. I. NOTICE OF STOCK OPTION GRANT Robert Warfield 3470 Merrill Road Aptos, CA 95003 You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number 1179 Date of Grant May 20, 2003 Vesting Commencement Date May 20, 2003 Exercise Price per Share $.60 Total Number of Shares Granted 220,000 Total Exercise Price $132,000.00 Type of Option X Incentive Stock Option ___ Nonstatutory Stock Option Term/Expiration Date May 20, 2013 Exercise and Vesting Schedule: This Option is exercisable immediately, in whole or in part, and shall vest according to the following vesting schedule: 1/48 of the Shares subject to the Option shall vest each month after the Vesting Commencement Date. Such shares subject to the Option shall continue to vest so long as the Optionee remains an employee of the Company. Upon an IPO or if the Company is purchased by a qualified buyer for a price equal to or greater than $6.67 per share, twenty-five percent (25%) of the total original shares (55,000) shall immediately vest and the remainder of the shares shall vest over a three-year period. Termination Period: You may exercise this Option for three months after you cease to be a Service Provider. Upon your death or disability, this Option may be exercised for such longer period as provided in the Plan. In no event may you exercise this Option after the Term/Expiration Date as provided above. II. AGREEMENT 1. Grant of Option. The Plan Administrator of the Company hereby grants to the Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option") to purchase the number of Shares set forth in the Notice of Grant, at the exercise price per Share set forth in the Notice of Grant (the "Exercise Price"), and subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 14(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and this Option Agreement, the terms and conditions of the Plan shall prevail. If designated in the Notice of Grant as an Incentive Stock Option ("ISO"), this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of Code Section 422(d), this Option shall be treated as a Nonstatutory Stock Option ("NSO"). 2. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: (a) Right to Exercise. (i) Subject to subsections 2(a)(ii) and 2(a)(iii) below, this Option shall be exercisable cumulatively according to the vesting schedule set forth in the Notice of Grant. Alternatively, at the election of the Optionee, this 2 option may be exercised in whole or in part at any time as to Shares which have not yet vested. For purposes of this Stock Option Agreement, Shares subject to the Option shall vest based on continued employment of Optionee with the Company. Vested Shares shall not be subject to the Company's repurchase right (as set forth in the Restricted Stock Purchase Agreement, attached hereto as Exhibit C-l). (ii) As a condition to exercising this Option for unvested Shares, the Optionee shall execute the Restricted Stock Purchase Agreement. (iii) This Option may not be exercised for a fraction of a Share. (b) Method of Exercise. This Option shall be exercisable by delivery of an exercise notice in the form attached as Exhibit A (the "Exercise Notice") which shall state the election to exercise the Option, the number of Shares with respect to which the Option is being exercised, and such other representations and agreements as may be required by the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by the aggregate Exercise Price. No Shares shall be issued pursuant to the exercise of an Option unless such issuance and such exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. Optionee's Representations. In the event the Shares have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, the Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his or her Investment Representation Statement in the form attached hereto as Exhibit B. 4. Lock-Up Period. Optionee hereby agrees that, if so requested by the Company or any representative of the underwriters (the "Managing Underwriter") in connection with any registration of the offering of any securities of the Company under the Securities Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period (or such other period as may be requested in writing by the Managing Underwriter and agreed to in writing by the Company) (the "Market Standoff Period") following the effective date of a registration statement of the Company filed under the Securities Act. Such restriction shall apply only to the first registration statement of the Company to become effective under the Securities 3 Act that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Market Standoff Period. 5. Method of Payment. Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; (c) consideration received by the Company under a formal cashless exercise program adopted by the Company in connection with the Plan; or (d) surrender of other Shares which, (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; (e) promissory note; or (f) any combination of the foregoing. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any Applicable Law. 7. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 8. Term of Option. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 9. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY 4 INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of ISO. If this Option qualifies as an ISO, there will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (b) Exercise of ISO Following Disability. If the Optionee ceases to be an Employee as a result of a disability that is not a total and permanent disability as defined in Section 22(e)(3) of the Code, to the extent permitted on the date of termination, the Optionee must exercise an ISO within three months of such termination for the ISO to be qualified as an ISO. (c) Exercise of Nonstatutory Stock Option. There may be a regular federal income tax liability upon the exercise of a Nonstatutory Stock Option. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Shares on the date of exercise over the Exercise Price. If Optionee is an Employee or a former Employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. (d) Disposition of Shares. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an ISO are disposed of within one year after exercise or two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (i) the Fair Market Value of the Shares on the date of exercise, or (ii) the sale price of the Shares. Any additional gain will be taxed as capital gain, short-term depending on the period that the ISO Shares were held. (e) Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise 5 disposes of any of the Shares acquired pursuant to the ISO on or before the later of (i) the date two years after the Date of Grant, or (ii) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. (f) Section 83(b) Election for Unvested Shares Purchased Pursuant to Options. With respect to the exercise of an Option for unvested Shares, an election may be filed by the Optionee with the Internal Revenue Service, within 30 days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase. In the case of a Nonstatutory Stock Option, this will result in a recognition of taxable income to the Optionee on the date of exercise, measured by the excess, if any, of the fair market value of the Shares, at the time the Option is exercised over the purchase price for the Shares. Absent such an election, taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. In the case of an Incentive Stock Option, such an election will result in a recognition of income to the Optionee for alternative minimum tax purposes on the date of exercise, measured by the excess, if any, of the fair market value of the Shares, at the time the option is exercised, over the purchase price for the Shares. Absent such an election, alternative minimum taxable income will be measured and recognized by Optionee at the time or times on which the Company's Repurchase Option lapses. Optionee is strongly encouraged to seek the advice of his or her own tax consultants in connection with the purchase of the Shares and the advisability of filing of the Election under Section 83(b) of the Code. A form of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference. OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S BEHALF. 10. Entire Agreement; Governing Law. The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee's interest except by means of a writing signed by the Company and Optionee. This agreement is governed by the internal substantive laws but not the choice of law rules of the State of California. 6 11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Optionee further agrees to notify the Company upon any change in the residence address indicated below. OPTIONEE: CALLIDUS SOFTWARE INC. /s/ ROBERT WARFIELD /s/ REED TAUSSIG - ------------------- ---------------- Signature By Reed Taussig Robert Warfield President and CEO - --------------- ----------------- Print Name Title Residence Address: Address: - ----------------- ------- 3470 Merrill Road 160 West Santa Clara Street, Suite 1500 Aptos, CA 95003 San Jose, CA 95113 6-13-03 ------- Date Received 7 EX-21.1 23 f92629orexv21w1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF CALLIDUS SOFTWARE INC. Callidus Software Ltd. United Kingdom Callidus Software GmbH Germany Callidus Software Pty. Limited Australia EX-23.1 24 f92629orexv23w1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Callidus Software Inc.: We consent to the use of our report dated September 22, 2003 with respect to the consolidated balance sheets of Callidus Software Inc. and subsidiaries (the Company) as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive loss and cash flows for each of the years in the three-year period ended December 31, 2002, included herein and to the reference to our firm under the heading "Experts" in the prospectus. Our report dated September 22, 2003 contains an explanatory paragraph that refers to the Company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. /s/ KPMG LLP Mountain View, California September 22, 2003 GRAPHIC 26 f92629orf9262900.gif GRAPHIC begin 644 f92629orf9262900.gif M1TE&.#EAL@!>`/?_````````,P``9@``F0``S```_P`S```S,P`S9@`SF0`S MS``S_P!F``!F,P!F9@!FF0!FS`!F_P"9``"9,P"99@"9F0"9S`"9_P#,``#, M,P#,9@#,F0#,S`#,_P#_``#_,P#_9@#_F0#_S`#__S,``#,`,S,`9C,`F3,` MS#,`_S,S`#,S,S,S9C,SF3,SS#,S_S-F`#-F,S-F9C-FF3-FS#-F_S.9`#.9 M,S.99C.9F3.9S#.9_S/,`#/,,S/,9C/,F3/,S#/,_S/_`#/_,S/_9C/_F3/_ MS#/__V8``&8`,V8`9F8`F68`S&8`_V8S`&8S,V8S9F8SF68SS&8S_V9F`&9F M,V9F9F9FF69FS&9F_V:9`&:9,V:99F:9F6:9S&:9_V;,`&;,,V;,9F;,F6;, MS&;,_V;_`&;_,V;_9F;_F6;_S&;__YD``)D`,YD`9ID`F9D`S)D`_YDS`)DS M,YDS9IDSF9DSS)DS_YEF`)EF,YEF9IEFF9EFS)EF_YF9`)F9,YF99IF9F9F9 MS)F9_YG,`)G,,YG,9IG,F9G,S)G,_YG_`)G_,YG_9IG_F9G_S)G__\P``,P` M,\P`9LP`F```(_P"O"1Q(L*#!@P@)LB+#L*%# MAJP22IQ(L:+%BQ@S:MQ8<&$.!R!#BAP9,@>9B!Q3JES)LN5%,A])RIPITJ3+ MFSASZNP8DZ;/GSE0[AQ*M"A",C^3*@5)QJC3ISB1+IV:M"G4JU@MLJ)*TJ'0 M:PY[ROR:M6Q65F*GGM3(4&90LW"A2J5J=>7"KG'S#DT+E&Q+M#7U"OY+]2U1 MP"']#EY,<>M2PTX1.U#,N')'M64=3[;,V2#?F3GRQJS;V?+:/'!UM-L/*_^5SAAR>)S=0[(^3OZ\UJ38WK]!?@>4`(66-%I,Y$GB""M:-2@@44M6)%2%+6"10L89BC(18)@85$K&5X4 MHH@8;FA0ABA*2-&%+9A8D(8)68ABBPGIAY=$+,Y(HT4E5B3(B!4!&62/)^J8 MH8<2P5CDC@;E.".2!B$HDT0R&HFA13GZ*.1$6W))Y(M69OC@04J"R21!(![I M))0$49B0DPP2Y"*5*5+TXY4\XIGGF0.5V2&*8YHY9Y]?$I3CF"P&.E!5"=V) MH:(7.=F"G5TF5*FEA1+*IZ.3DIFI0&42%.HU6$`*5E*Q`[_ M.2BHGSHZZS6CTLJGKK<>)"5),>8**Q:.FCK0JWMB).RRE3*[*ZYB5O1?HY=J M^2BT+;!I$+)#QMKMK<)R*VJKX:)([$2,(B0N1FGN6"RU>E)4K:?/"MLNI,[V M*NFS`J5[T+J1AIDMO-YZ6;#!X+:*[:SYOFFDJ?YN.V^P`K=@+,"8'IPDN:VV M2V_"_!ZKHZ(VCB31NQE5C*&V(L=KL+(FF5![?;:BJ+K+AW21.V& MC'6T!W4M,=`9/TWTV2NKB_9`6QN4)MP%BPW2BC/._SFKV@X#;>N"A"^(;XF% M%WZUU=U+8=)KY6F.FMDKWB/G/K#42;%LZ2#MO*CT7:O'*CQB1=N:O.) 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Delaware	7371	77-0438629
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)






	Proposed Maximum
Title Of Each Class	Aggregate Offering	Amount Of
Of Securities To Be Registered	Price(1)	Registration Fee


Common Stock, par value $0.001 per share	$75,000,000	$6,075


	Per Share	Total

Public Offering Price	$	$
Underwriting Discount	$	$
Proceeds to Callidus Software (before expenses)	$	$


Common stock offered		shares

Common stock to be outstanding after this offering		shares

Use of proceeds		We anticipate that we will use the net proceeds of this offering for general corporate purposes, including working capital, capital expenditures and potential acquisitions of complementary businesses, products and technologies.

Dividend policy		We have never declared or paid any cash dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

Proposed Nasdaq National Market symbol		CALD

Risk factors		See “Risk Factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in our common stock.



																		Six Months
			Year Ended December 31,															Ended June 30,

			1998			1999			2000			2001			2002			2002			2003


																		(unaudited)
Consolidated Statement of Operations Data:
Revenues:
	License revenues		$	—		$	1,334		$	8,879		$	6,860		$	9,820		$	5,224		$	16,603
	Maintenance and service revenues			9			4,756			13,302			16,033			16,766			6,917			13,175

		Total revenues		9			6,090			22,181			22,893			26,586			12,141			29,778
Gross profit				9			(1,196	)		10,158			9,140			11,560			5,448			18,497
Operating expenses:
	Sales and marketing			3,349			8,684			16,115			12,003			13,527			6,062			8,764
	Research and development			2,354			4,852			9,701			10,659			11,118			5,227			5,266
	General and administrative			974			2,668			5,048			4,859			5,053			2,174			2,525
	Stock-based compensation(1)			1,064			3,229			4,312			1,878			424			280			2,027

		Total operating expenses		7,741			19,433			35,176			29,399			30,122			13,743			18,582

Loss from operations				(7,732	)		(20,629	)		(25,018	)		(20,259	)		(18,562	)		(8,295	)		(85	)
Net loss			$	(7,575	)	$	(20,536	)	$	(25,428	)	$	(20,844	)	$	(19,130	)	$	(8,576	)	$	(255	)

Basic and diluted net loss per share			$	(35.07	)	$	(28.72	)	$	(23.83	)	$	(17.24	)	$	(13.98	)	$	(6.35	)	$	(0.18	)

Weighted-average shares used in computing basic and diluted net loss per share				216			715			1,067			1,286			1,368			1,350			1,422


Francis S. Currie, Esq. Davis Polk & Wardwell 1600 El Camino Real Menlo Park, California 94025 (650) 752-2000		John D. Wilson, Esq. Shearman & Sterling LLP 1080 Marsh Road Menlo Park, California 94025 (650) 838-3600


SUMMARY
RISK FACTORS
FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 3.1
EXHIBIT 3.2
EXHIBIT 4.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 10.13
EXHIBIT 10.14
EXHIBIT 10.15
EXHIBIT 10.16
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 21.1
EXHIBIT 23.1


	Page

Summary		1
Risk Factors		5
Forward-Looking Statements		17
Use of Proceeds		18
Dividend Policy		18
Capitalization		19
Dilution		20
Selected Consolidated Financial Data		21
Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Business		40
Management		51
Certain Relationships and Related Party Transactions		63
Principal Stockholders		68
Description of Capital Stock		71
Shares Eligible for Future Sale		74
Underwriting		77
Material U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock		80
Legal Matters		81
Experts		81
Where You Can Find More Information		81
Index to Consolidated Financial Statements		F-1



	As of June 30, 2003

	Actual		As Adjusted


	(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	13,289
Working capital		3,547
Total assets		27,961
Total liabilities		23,467
Total stockholders’ equity		4,494


Assumed initial public offering price per share			$
	Pro forma net tangible book value per share as of June 30, 2003	$
	Increase in pro forma net tangible book value per share attributable to new investors

Pro forma net tangible book value per share after this offering

Dilution per share to new investors			$



	As of December 31,
												As of June 30,
	1998		1999		2000			2001		2002		2003

												(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	2,909	$	14,877	$	3,272		$	12,034	$	12,833	$	13,289
Working capital		2,213		10,363		(12,116	)		6,971		650		3,547
Total assets		4,257		22,508		15,625			19,664		20,695		27,961
Long-term debt, less current portion		17		1,570		2,308			439		986		838
Total liabilities		904		10,084		23,904			8,974		18,602		23,467
Total stockholders’ equity (deficit)		3,353		12,424		(8,279	)		10,690		2,093		4,494


	*Allowance for Doubtful Accounts and Sales Return Reserve*



			Year Ended									Six Months
			December 31,									Ended June 30,

			2000			2001			2002			2002			2003


												(unaudited)
Revenues:
	License revenues			40	%		30	%		37	%		43	%		56	%
	Maintenance and service revenues			60			70			63			57			44

		Total revenues		100			100			100			100			100
Cost of revenues (as a percent of related revenues)
	License revenues			9			9			8			7			6
	Maintenance and service revenues			84			82			85			91			78

		Total cost of revenues		54			60			57			55			38

Gross profit				46			40			43			45			62



		Three Months Ended

		Mar 31,			Jun 30,			Sept 30,			Dec 31,			Mar 31,			Jun 30,			Sept 30,			Dec 31,			Mar 31,			Jun 30,
		2001			2001			2001			2001			2002			2002			2002			2002			2003			2003


		(unaudited)
		(in thousands)
Revenues:
	License revenues	$	3,575		$	1,655		$	1,285		$	345		$	2,716		$	2,508		$	1,571		$	3,025		$	7,708		$	8,895
	Maintenance and service revenues		4,192			4,672			4,015			3,154			3,127			3,790			4,789			5,060			5,427			7,748

Total revenue			7,767			6,327			5,300			3,499			5,843			6,298			6,360			8,085			13,135			16,643
Cost of revenues:
	License revenues		340			148			108			54			179			187			152			296			498			513
	Maintenance and service revenues		3,647			3,848			2,947			2,661			3,069			3,258			3,807			4,078			4,271			5,999

Total cost of revenues			3,987			3,996			3,055			2,715			3,248			3,445			3,959			4,374			4,769			6,512

Gross profit			3,780			2,331			2,245			784			2,595			2,853			2,401			3,711			8,366			10,131
Operating expenses:
	Sales and marketing		3,672			3,488			2,476			2,367			3,006			3,056			3,179			4,286			3,554			5,210
	Research and development		3,077			3,045			2,331			2,206			2,462			2,765			3,376			2,515			2,703			2,563
	General and administrative		1,229			1,218			922			1,490			801			1,373			1,323			1,556			1,282			1,243
	Stock-based compensation		712			513			393			260			159			121			86			58			1,755			272

Total operating expenses			8,690			8,264			6,122			6,323			6,429			7,316			7,964			8,415			9,294			9,288

Income (loss) from operations			(4,910	)		(5,933	)		(3,877	)		(5,539	)		(3,833	)		(4,462	)		(5,563	)		(4,704	)		(928	)		843
Interest expense and other income, net			(361	)		13			(152	)		(85	)		(85	)		(73	)		(118	)		(169	)		(76	)		(94	)

Income (loss) before cumulative effect of change in accounting principle			(5,271	)		(5,920	)		(4,029	)		(5,624	)		(3,918	)		(4,535	)		(5,681	)		(4,873	)		(1,004	)		749
Cumulative effect of change in accounting principle			—			—			—			—			(123	)		—			—			—			—			—

Net income (loss)		$	(5,271	)	$	(5,920	)	$	(4,029	)	$	(5,624	)	$	(4,041	)	$	(4,535	)	$	(5,681	)	$	(4,873	)	$	(1,004	)	$	749


								Amount
		Original				Outstanding		Available
		Commitment		Amount		Principal		for Future		Interest
		Amount		Drawn		Amount		Borrowing		Rate


		(in thousands)
Silicon Valley Bank line of credit		$	7,000	$	5,500	$	5,500	$	1,500		6.25	%
Silicon Valley Bank Term Loan #1			1,500		1,500		1,125		—		6.50	%
Silicon Valley Bank Term Loan #2			1,000		289		289		711		7.75	%
Equipment Loan			2,500		1,108		308		—		12.64	%

	Total	$	12,000	$	8,397	$	7,222	$	2,211


	Lehman Brothers


	U.S. Bancorp Piper Jaffray


	*Strategy*


	Remaining										2008 and
	2003		2004		2005		2006		2007		Thereafter		Total


	(in thousands)
Operating leases	$	752	$	1,762	$	1,617	$	1,400	$	1,534	$	4,161	$	11,226
Term and equipment loans		496		707		471		48		—		—		1,722
Bank line of credit		5,500		—		—		—		—		—		5,500

Total contractual cash obligations	$	6,748	$	2,469	$	2,088	$	1,448	$	1,534	$	4,161	$	18,448


				Director or
				Executive
				Officer
Name	Age		Position	Since

Reed D. Taussig		49	President; Chief Executive Officer; Chairman of the Board of Directors		1997
Christopher W. Cabrera		36	Vice President, Worldwide Sales and Business Development		2000
Ronald J. Fior		46	Vice President, Finance; Chief Financial Officer		2002
Bertram W. Rankin		45	Senior Vice President, Worldwide Marketing		2003
Robert W. Warfield		42	Senior Vice President, Research and Development; Chief Technology Officer		2001
Daniel P. Welch		46	Vice President, Worldwide Client Services		1998
Michael A. Braun		53	Director		2000
George James		66	Director		1999
Terry L. Opdendyk		55	Director		2002
R. David Spreng		42	Director		2003


	Number
	of Shares
	Subject to		Date of		Exercise		Vesting
Name	Options		Grant		Price		Schedule

Michael A. Braun		15,000		1-11-00	$	10.00		1
		14,640		3-13-01		0.83		2
		4,620		4-10-01		0.83		2
		15,000		8-6-02		0.83		1
		10,740		12-23-02		0.83		2
		48,000		8-26-03		4.17		1
George James		15,000		5-11-99		3.17		1
		14,640		3-13-01		0.83		2
		1,200		4-10-01		0.83		2
		15,000		8-6-02		0.83		1
		14,160		12-23-02		0.83		2
		48,000		8-26-03		4.17		1
Terry L. Opdendyk		48,000		8-26-03		4.17		1
R. David Spreng		48,000		8-26-03		4.17		1


					Long-Term
					Compensation

					Awards

	Annual Compensation				Securities
					Underlying
Name and Principal Position	Salary		Bonus		Options

Reed D. Taussig President; Chief Executive Officer; Chairman of the Board	$	222,188	$	25,000		300,000
Christopher W. Cabrera Vice President, Worldwide Sales and Business Development		197,500		98,855		75,000
Ronald J. Fior(1) Vice President, Finance; Chief Financial Officer		58,333		10,000		210,000
Michael C. Tidd(2) Former Chief Financial Officer; Vice President, Client Services		197,500		25,000		15,000
Robert W. Warfield Senior Vice President, Research and Development and Chief Technology Officer		200,000		27,500		45,000
Daniel P. Welch Vice President, Worldwide Client Services		197,500		60,751		45,000



	Individual Grant									Potential Realizable
										Value at Assumed
	Number of		Percent of							Annual Rates of Stock
	Securities		Total Options							Price Appreciation for
	Underlying		Granted to			Exercise or				Option Term
	Options Granted		Employees in			Base Price		Expiration
Name	(#)		2002			($/Sh)		Date		5% ($)		10% ($)

Reed D. Taussig		150,000		10.48	%	$	0.83		12-22-12	$	78,297	$	198,421
		150,000		10.48			0.83		4-2-12		78,297		198,421
Christopher W. Cabrera		75,000		5.24			0.83		12-22-12		39,149		99,210
Ronald J. Fior		45,000		3.14			0.83		12-22-12		23,489		59,526
		165,000		11.53			0.83		10-14-12		86,127		218,263
Michael C. Tidd		15,000		1.05			0.83		12-22-12		7,830		19,842
Robert W. Warfield		45,000		3.14			0.83		12-22-12		23,489		59,526
Daniel P. Welch		45,000		3.14			0.83		12-22-12		23,489		59,526



	Number of Securities
	Underlying Unexercised				Value of Unexercised
	Options at				In-the-Money Options at
	December 31, 2002				December 31, 2002

Name	Exercisable		Unexercisable		Exercisable		Unexercisable

Reed D. Taussig		340,800		300,000		—		—
Christopher W. Cabrera		131,072		83,937		—		—
Ronald J. Fior		165,000		45,000		—		—
Michael C. Tidd		109,800		15,000		—		—
Robert W. Warfield		258,000		45,000		—		—
Daniel P. Welch		124,800		45,000		—		—


Investor Name	Amount Invested

Crosspoint Venture Partners(1)	$	1,000,000
INVESCO Private Capital, Inc.(2)		500,000
Crescendo Ventures(3)		220,000
ONSET Ventures(4)		180,000

	$	1,900,000


	Shares of Common
	Stock Issuable		Value of Shares
	Upon Conversion of		of Common
	Series G Preferred		Stock
Investor Name	Stock		Issuable

Crosspoint Venture Partners(1)		2,361,753
INVESCO Private Capital, Inc.(2)		986,245
Crescendo Ventures(3)		731,999
ONSET Ventures(4)		719,999
Ronald J. Fior		15,000
Robert W. Warfield		60,000
Christopher W. Cabrera		30,000
Daniel P. Welch		15,000

		4,919,996



						Percent of
	Shares Beneficially					Shares Outstanding
	Owned Before					After
	the Offering					the Offering


Name and Address of Beneficial Owner	Number		Percent

Reed D. Taussig(6)		643,899		3.62	%
Christopher W. Cabrera(7)		178,696		1.02
Ronald J. Fior(8)		187,500		1.07
Michael C. Tidd(9)		232,299		1.32
Robert W. Warfield(10)		457,500		2.57
Daniel P. Welch(11)		192,300		1.10
Michael A. Braun(12)		51,049		*
George James(13)		59,524		*
Terry L. Opdendyk(14)		2,983,169		16.98
R. David Spreng(15)		2,350,128		13.47
All directors and executive officers as a group (11 persons)(16)		7,516,064		39.17


Number of Shares		Date

		On the date of this prospectus
		At various times after 180 days from the date of this prospectus (subject, in some cases, to volume limitations and applicable holding periods)


		Number
Underwriter		of shares

Citigroup Global Markets Inc.
Lehman Brothers Inc.
U.S. Bancorp Piper Jaffray Inc.

	Total



	Paid by Callidus

	No Exercise	Full Exercise

Per Share	$	$
Total	$	$


	Page

Independent Auditors’ Report		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7



												Six Months Ended
			Year Ended December 31,									June 30,

			2000			2001			2002			2002			2003


												(unaudited)

			(in thousands, except per share data)
Revenues:
	License revenues		$	8,879		$	6,860		$	9,820		$	5,224		$	16,603
	Maintenance and service revenues			13,302			16,033			16,766			6,917			13,175

		Total revenues		22,181			22,893			26,586			12,141			29,778
Cost of revenues:
	License revenues			840			650			814			366			1,011
	Maintenance and service revenues			11,183			13,103			14,212			6,327			10,270

		Total cost of revenues		12,023			13,753			15,026			6,693			11,281
Gross profit				10,158			9,140			11,560			5,448			18,497
Operating expenses:
	Sales and marketing			16,115			12,003			13,527			6,062			8,764
	Research and development			9,701			10,659			11,118			5,227			5,266
	General and administrative			5,048			4,859			5,053			2,174			2,525
	Stock-based compensation(1)			4,312			1,878			424			280			2,027

		Total operating expenses		35,176			29,399			30,122			13,743			18,582

Loss from operations				(25,018	)		(20,259	)		(18,562	)		(8,295	)		(85	)
Interest expense				(793	)		(916	)		(582	)		(263	)		(217	)
Other income, net				383			331			137			105			47

Loss before cumulative effect of change in accounting principle				(25,428	)		(20,844	)		(19,007	)		(8,453	)		(255	)
Cumulative effect of change in accounting principle				—			—			(123	)		(123	)		—

Net loss			$	(25,428	)	$	(20,844	)	$	(19,130	)	$	(8,576	)	$	(255	)

Basic and diluted net loss per share			$	(23.83	)	$	(17.24	)	$	(13.98	)	$	(6.35	)	$	(0.18	)

Weighted-average shares used in computing basic and diluted net loss per share				1,067			1,286			1,368			1,350			1,422


(1) Stock-based compensation consists of:
Cost of maintenance and service revenues			$	619		$	309		$	95		$	63		$	534
Sales and marketing				2,185			726			73			52			815
Research and development				767			399			119			77			460
General and administrative				741			444			137			88			218

	Total stock-based compensation		$	4,312		$	1,878		$	424		$	280		$	2,027



	Convertible																		Accumulated						Total
	preferred stock				Common stock					Additional			Deferred			Notes			other						stockholders’
										paid-in			stock-based			receivable from			comprehensive			Accumulated			equity			Comprehensive
	Shares		Amount		Shares			Amount		capital			compensation			stockholders			income (loss)			deficit			(deficit)			loss


	(in thousands)
Balances as of December 31, 1999		11,713	$	12		1,462		$	2	$	49,361		$	(6,946	)	$	(826	)	$	—		$	(29,179	)	$	12,424
Exercise of stock options and restricted stock purchase agreements for cash and notes receivable		—		—		142			—		492			—			(300	)		—			—			192
Repayment on notes receivable and repurchase of restricted stock		—		—		(122	)		—		(290	)		—			291			—			—			1
Deferred stock-based compensation		—		—		—			—		1,709			(1,709	)		—			—			—			—
Cancellation of unvested stock options		—		—		—			—		(1,312	)		363			—			—			—			(949	)
Amortization of stock-based compensation		—		—		—			—		—			5,261			—			—			—			5,261
Issuance of stock options and warrants to nonemployees		—		—		—			—		233			—			—			—			—			233
Cumulative translation adjustment		—		—		—			—		—			—			—			(13	)		—			(13	)	$	(13	)
Net loss		—		—		—			—		—			—			—			—			(25,428	)		(25,428	)		(25,428	)

Balances as of December 31, 2000		11,713		12		1,482			2		50,193			(3,031	)		(835	)		(13	)		(54,607	)		(8,279	)	$	(25,441	)

Issuance of Series F preferred stock, net of issuance costs of $451		7,595		7		—			—		29,397			—			—			—			—			29,404
Conversion of notes and accrued interest to Series F preferred stock and common stock warrants		2,121		2		—			—		8,230			—			—			—			—			8,232
Exercise of stock options		—		—		17			—		27			—			—			—			—			27
Repayment on notes receivable and repurchase of restricted stock		—		—		(146	)		—		(558	)		—			597			—			—			39
Cancellation of unvested stock options		—		—		—			—		(532	)		266			—			—			—			(266	)
Amortization of stock-based compensation		—		—		—			—		—			2,144			—			—			—			2,144
Issuance of stock options and warrants to nonemployees		—		—		—			—		259			—			—			—			—			259
Cumulative translation adjustment		—		—		—			—		—			—			—			(26	)		—			(26	)	$	(26	)
Net loss		—		—		—			—		—			—			—			—			(20,844	)		(20,844	)		(20,844	)

Balances as of December 31, 2001		21,429		21		1,353			2		87,016			(621	)		(238	)		(39	)		(75,451	)		10,690		$	(20,870	)

Issuance of Series F preferred stock, net of issuance costs of $42		497		1		—			—		1,907			—			—			—			—			1,908
Issuance of Series G preferred stock, net of issuance costs of $65		7,095		7		—			—		7,023			—			—			—			—			7,030
Conversion of notes and accrued interest to Series G preferred stock		905		1		—			—		904			—			—			—			—			905
Exercise of stock options		—		—		47			—		29			—			—			—			—			29
Cancellation of unvested stock options		—		—		—			—		(107	)		23			—			—			—			(84	)
Amortization of stock-based compensation		—		—		—			—		—			508			—			—			—			508
Issuance of stock options and warrants to nonemployees		—		—		—			—		163			—			—			—			—			163
Cumulative translation adjustment		—		—		—			—		—			—			—			74			—			74		$	74
Net loss		—		—		—			—		—			—			—			—			(19,130	)		(19,130	)		(19,130	)

Balances as of December 31, 2002		29,926		30		1,400			2		96,935			(90	)		(238	)		35			(94,581	)		2,093		$	(19,056	)

Issuance of Series G preferred stock		453		—		—			—		2,040			—			—			—			—			2,040
Exercise of stock options		—		—		88			—		75			—			—			—			—			75
Deferred stock-based compensation		—		—		—			—		4,518			(4,518	)		—			—			—			—
Cancellation of unvested stock options		—		—		—			—		(2	)		—			—			—			—			(2	)
Amortization of stock-based compensation		—		—		—			—		—			440			—			—			—			440
Issuance of stock options and warrants to nonemployees		—		—		—			—		77			—			—			—			—			77
Cumulative translation adjustment		—		—		—			—		—			—			—			26			—			26		$	26
Net loss		—		—		—			—		—			—			—			—			(255	)		(255	)		(255	)

Balances as of June 30, 2003 (unaudited)		30,379	$	30		1,488		$	2	$	103,643		$	(4,168	)	$	(238	)	$	61		$	(94,836	)	$	4,494		$	(229	)


	*Proposed Initial Public Offering and Pro Forma Information*


	*Financial Instruments and Concentration of Credit Risk*


	Balance at							Balance at
	Beginning of							End of
Allowance for Doubtful Accounts	Period		Provision			Write-offs		Period

Year ended December 31, 2000	$	70	$	12		$	—	$	82
Year ended December 31, 2001		82		(35	)		—		47
Year ended December 31, 2002		47		107			25		129
Six months ended June 30, 2003 (unaudited)		129		(26	)		—		103


	Balance at				Remediation		Balance at
	Beginning of				Service		End of
Sales Return Reserve	Period		Provision		Claims		Period

Year ended December 31, 2000	$	—	$	—	$	—	$	—
Year ended December 31, 2001		—		—		—		—
Year ended December 31, 2002		—		304		152		152
Six months ended June 30, 2003 (unaudited)		152		165		85		232



	As of December 31,				As of
					June 30,
	2001		2002		2003

					(unaudited)
Equipment	$	3,569	$	3,946	$	4,130
Software		2,563		2,698		1,069
Furniture and fixtures		974		1,065		2,919
Leasehold improvements		582		624		639

		7,688		8,333		8,757
Less accumulated depreciation and amortization		4,309		6,317		7,157

Property and equipment, net	$	3,379	$	2,016	$	1,600