10-Q 1 0001.txt FORM 10-Q DATED APRIL 30, 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended April 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission File number 000-25829 PORTAL SOFTWARE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 77-0369737 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 10200 South De Anza Boulevard Cupertino, California 95014 (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (408) 572-2000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- On May 31, 2000 161,596,355 shares of the Registrant's Common Stock, $0.001 par value, were outstanding. PORTAL SOFTWARE, INC. FORM 10-Q QUARTER ENDED APRIL 30, 2000 INDEX

Page ---- Part I: Financial Information Item 1: Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at January 31, 2000 and April 30, 2000 3 Condensed Consolidated Statements of Operations for the three months 4 ended April 30, 1999 and 2000 Condensed Consolidated Statements of Cash Flows 5 for the three months ended April 30, 1999 and 2000 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of 12 Financial Condition and Results of Operations Item 3: Quantitative and Qualitative Disclosures About Market Risk 25 Part II: Other Information Item 2: Changes in Securities and Use of Proceeds 27 Item 6: Exhibits and Reports on Form 8-K 28 Signature 29 Exhibit Index 30

2 ITEM 1: FINANCIAL STATEMENTS PORTAL SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)

January 31, April 30, ----------- --------- 2000 2000 ---- ---- (Unaudited) Assets Current assets: Cash and cash equivalents .................................................. $ 43,887 $ 41,595 Accounts receivable, net .................................................. 28,546 37,912 Short-term investments ..................................................... 152,090 153,923 Restricted short-term investments .......................................... 5,312 299 Prepaids and other current assets .......................................... 4,516 5,684 --------- --------- Total current assets ..................................................... 234,351 239,413 Property and equipment, net ................................................... 18,785 28,613 Restricted long-term investments .............................................. 5,856 6,452 Other assets .................................................................. 6,537 8,533 --------- --------- $ 265,529 $ 283,011 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable ........................................................... $ 7,655 $ 5,285 Accrued compensation ....................................................... 9,060 14,473 Other accrued liabilities .................................................. 5,282 7,716 Current portion of capital lease obligations ............................... 780 833 Deferred revenue ........................................................... 32,857 36,870 --------- --------- Total current liabilities ................................................ 55,634 65,177 Long-term portion of capital lease obligations ................................ 1,525 1,292 Commitments.................................................................... -- -- Stockholders' equity (net capital deficiency): Common stock, $0.001 par value ............................................ 159 161 Additional paid-in capital ................................................. 251,047 255,113 Accumulated other comprehensive loss........................................ (639) (791) Notes receivable from stockholders.......................................... (259) (135) Deferred stock compensation................................................. (6,379) (5,324) Accumulated deficit......................................................... (35,559) (32,482) --------- --------- Stockholders' equity...................................................... 208,370 216,542 --------- --------- $ 265,529 $ 283,011 ========= =========

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 PORTAL SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts; unaudited)

Three Months Ended April 30, ------------------ 1999 2000 ---- ---- Revenues: License fees ........................................................................... $ 9,064 $ 35,374 Services ............................................................................... 6,101 15,244 --------- --------- Total revenues ....................................................................... 15,165 50,618 --------- --------- Costs and expenses: Cost of license fees ................................................................... 185 637 Cost of services ....................................................................... 4,195 10,006 Research and development ............................................................... 4,285 11,376 Sales and marketing .................................................................... 7,329 20,303 General and administrative ............................................................. 2,235 6,605 Amortization of deferred stock compensation ............................................ 2,026 1,055 --------- --------- Total costs and expenses ............................................................. 20,255 49,982 --------- --------- Income (loss) from operations ............................................................. (5,090) 636 Interest and other income (expense), net .................................................. (28) 3,015 --------- --------- Income (loss) before income taxes ......................................................... (5,118) 3,651 Provision for income taxes................................................................. (416) (574) --------- --------- Net income (loss) ......................................................................... $ (5,534) $ 3,077 ========= ========= Basic net income (loss) per share ......................................................... $ (0.08) $ 0.02 ========= ========= Shares used in computing basic net income (loss) per share ................................ 67,086 154,582 ========= ========= Diluted net income (loss) per share ....................................................... $ (0.08) $ 0.02 ========= ========= Shares used in computing diluted net income (loss) per share .............................. 67,086 172,753 ========= =========

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 PORTAL SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands; unaudited)

Three Months Ended April 30, ---------------- 1999 2000 ---- ---- OPERATING ACTIVITIES: Net income (loss)......................................................................... $ (5,534) $ 3,077 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................................................... 371 1,502 Amortization of deferred stock compensation............................................. 2,026 1,055 Changes in operating assets and liabilities: Accounts receivable, net.............................................................. 290 (9,366) Prepaids and other current assets..................................................... (2,364) (3,681) Other assets.......................................................................... 459 (62) Accounts payable...................................................................... 1,554 (347) Accrued compensation.................................................................. 1,174 5,453 Other accrued liabilities............................................................. (986) 2,449 Deferred revenue...................................................................... 6,149 4,012 -------- -------- Net cash provided by operating activities........................................... 3,139 4,092 -------- -------- INVESTING ACTIVITIES: Purchases of short-term investments....................................................... -- (35,475) Maturity of short-term investments........................................................ -- 38,993 Purchases of long-term investments........................................................ -- (601) Maturity of long-term investments......................................................... -- 13 Purchases of property and equipment....................................................... (1,250) (12,218) Equity investments........................................................................ -- (1,000) -------- -------- Net cash used in investing activities............................................... (1,250) (10,288) -------- -------- FINANCING ACTIVITIES: Payments received on stockholder notes receivable......................................... -- 124 Repayment of long-term debt............................................................... (2,998) -- Proceeds from line of credit.............................................................. 1,000 -- Principal payments under capital lease obligations, net of proceeds....................... (123) (168) Proceeds from issuance of common stock, net of repurchases................................ 308 4,068 Proceeds from issuance of preferred stock................................................. 57 -- -------- -------- Net cash provided by (used in) financing activities................................. (1,756) 4,024 -------- -------- Effect of exchange rate on cash and cash equivalents...................................... -- (120) -------- -------- Net increase (decrease) in cash and cash equivalents........................................ 133 (2,292) Cash and cash equivalents at beginning of period............................................ 11,809 43,887 -------- -------- Cash and cash equivalents at end of period.................................................. $ 11,942 $ 41,595 ======== ========

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 PORTAL SOFTWARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) Significant Accounting Policies: Nature of Business and Basis of Presentation Portal Software, Inc. or Portal, formerly Portal Information Network, Inc., was incorporated in 1994 as a California corporation and reincorporated in Delaware in April 1999. Portal markets and supports real-time customer management and billing software, or CM&B software, for providers of Internet- based services. Portal's software is a comprehensive solution that is designed to meet the complex, mission-critical provisioning, accounting, reporting and marketing needs of providers of Internet-based services. Portal markets its products worldwide through a combination of a direct sales force and distribution partners. Substantially all of Portal's license revenues are derived from sales of its Infranet product. The accompanying unaudited condensed consolidated financial statements include the accounts of Portal and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The balance sheet at April 30, 2000 and the statement of operations and cash flows for the three months ended April 30, 1999 and 2000 are not audited. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of the results for and as of the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The condensed consolidated financial statement information as of January 31, 2000 is derived from audited financial statements as of that date. These financial statements should be read in conjunction with the financial statements and related notes included in Portal's Annual Report on Form 10-K for the year ended January 31, 2000 filed with the Securities and Exchange Commission on April 28, 2000. Revenue Recognition License revenues are comprised of fees for multi-year or perpetual licenses, which are primarily derived from contracts with corporate customers and resellers. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Portal obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. For electronic delivery, the software is considered to have been delivered when Portal has provided the customer with the access codes that allow for immediate possession of the software. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue on arrangements with customers who are not the ultimate users (primarily resellers) is not recognized until the product is delivered to the end user. Services revenues are primarily comprised of revenue from systems integration or other consulting fees, maintenance agreements and training. Arrangements that include software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When software services are considered essential, revenue under the arrangement is recognized using contract accounting. When software services are not considered essential, the revenue related to the software services is recognized as the services are performed. Maintenance agreements provide technical support and include the right to unspecified upgrades on an if-and- when-available basis. Maintenance revenue is deferred and recognized on a straight-line basis as services revenue over the life of the related agreement, which is typically one year. Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue. 6 In February 1998, Portal adopted Statement of Position 97-2 ("SOP 97-2"), as amended by SOP 98-4 and SOP 98-9, "Software Revenue Recognition." These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 98-9 amends SOP 97-2 and 98-4, extending the deferral of the application of certain provisions of SOP 97- 2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Portal does not expect the final adoption of SOP 98-9 to have a material impact on its future revenues or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition. Portal believes that its revenue recognition policies are compliant with SAB 101. Concentration of Credit Risk Portal sells its software and services to customers consisting mainly of North American, European and Asia-Pacific Internet service providers and enhanced service developers. Portal performs ongoing credit evaluations of its customers and does not require collateral. Portal maintains an allowance for potential credit losses and such losses have been within management's expectations. One customer accounted for more than 15% of total revenues during the quarter ended April 30, 1999 and no individual customer accounted for more than 10% of revenues during the quarter ended April 30, 2000. Segment Information Portal operates solely in one segment, the development and marketing of CM&B software. Portal's foreign offices consist of sales, marketing and support activities through its foreign subsidiaries and an overseas reseller network. Operating losses generated by the foreign operations of Portal and their corresponding identifiable assets were not material in any period presented. Portal's chief operating decision maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Portal does not assess the performance of its geographic regions on other measures of income or expense, such as depreciation and amortization, gross margin or net income. In addition, as Portal's assets are primarily located in its corporate office in the United States and not allocated to any specific region, Portal does not produce reports for, or measure the performance of its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues and gross margin. Portal's export revenue represented 31% and 37% of total revenues in the quarters ending April 30, 1999 and 2000. All of the export sales to date have been denominated in U.S. dollars and were derived from sales to Europe, Latin America and Asia-Pacific. Total export revenues for the quarters ending April 30, 1999 and 2000 were $3.9 million and $13.1 million to customers in Europe and $0.8 million and $5.8 million to customers in the Asia-Pacific and Latin American regions. Cash and Cash Equivalents Portal considers all highly liquid, low-risk debt instruments with an original maturity at the date of purchase of three months or less to be cash equivalents. Through April 30, 2000, Portal maintained cash and cash equivalents in money market accounts with major financial institutions for which the carrying amount approximated its fair value. Upon completion of the initial public offering in May 1999 and secondary stock offering in October 1999, Portal received additional cash that was available for investment. At April 30, 2000, cash equivalents and short-term investments consist primarily of commercial paper, corporate notes, money market funds and government securities. All short- term investments mature within 24 months. Portal classifies, at the date of acquisition, its cash equivalents and short-term investments as available-for-sale in accordance with the provisions of the FASB's Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115"). Securities are reported at fair market value, with the related unrealized gains and losses included within stockholders' equity. At April 30, 2000, unrealized 7 losses were $791,000 due primarily to the effects of increasing interest rates on longer-term securities. It is not expected that a significant amount of the unrealized loss will be realized. Debt and discount securities are adjusted for straight-line amortization of premiums and accretion of discounts to maturity, both of which are included in interest income. Realized gains and losses are recorded using the specific identification method. The following schedule summarizes the estimated fair value of Portal's cash, cash equivalents and short-term investments (in thousands):

January 31, April 30, ----------- --------- 2000 2000 ---- ---- (unaudited) Cash and cash equivalents: Cash ............................................................................ $ 11,570 $ 7,533 Money market funds............................................................... 12,142 16,232 Commercial paper................................................................. 14,977 16,932 U.S. Government securities....................................................... 5,198 898 -------- -------- $ 43,887 $ 41,595 ======== ========

Short-term investments at April 30, 2000 (in thousands, unaudited):

Gross Unrealized ---------------- Cost Gain Loss Fair Value ---- ---- ---- ---------- Corporate notes................................. $ 104,073 $ -- $ (632) $ 103,441 Municipal bonds................................. 50,921 -- (140) 50,781 Restricted investments.......................... (299) -- -- (299) ---------- --------- -------- --------- $ 154,695 $ -- $ (772) $ 153,923 ========== ========= ======== =========

The estimated fair value of cash, cash equivalents and short-term investments classified by date of maturity is as follows (in thousands):

January 31, April 30, ----------- --------- 2000 2000 ---- ---- (unaudited) Due within one year.............................................................. $ 125,467 $ 137,829 Due within two years............................................................. 75,822 57,988 Restricted short-term investments................................................ (5,312) (299) --------- --------- $ 195,977 $ 195,518 ========= =========

Restricted short-term investments at April 30, 2000 represent collateral for a $200,000 surety bond required by a customer contract which expires on October 31, 2000. On February 29, 2000, a $3 million letter of credit issued to Portal's landlord to guarantee payment of tenant improvements and a $750,000 surety bond required by a customer contract expired. The restricted short-term investments are not available to support current operations and, consequently, are classified as held-to-maturity. As a result, and in accordance with FAS 115, unrealized gains and losses are not recorded. At April 30, 2000, amortized cost approximated fair value. Restricted long-term investments represent collateral for two letters of credit issued in lieu of security deposits for two new facility leases and consist of corporate bonds maturing over a period of one to three years. The two letters of credit for $2,250,000 and $3,000,000 are renewable annually until they expire on December 31, 2010. The restricted long-term investments are classified as held-to-maturity and, consequently, unrealized gains and losses are not recorded. At April 30, 2000, amortized cost approximated fair value. Realized gains and losses from sales of each type of security were immaterial for all periods presented. 8 Other Assets Other assets consisted of the following:

January 31, April 30, 2000 2000 ---- ---- (in thousands) (Unaudited) Prepaid services - long term portion (see Note 3).............. $ 3,048 $ 4,989 Deposits and other............................................. 3,489 3,544 -------- -------- $ 6,537 $ 8,533 ======== ========

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Net Income (Loss) Per Common Share Basic net income (loss) per share and diluted net income (loss) per share are presented in conformity with the FASB's Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), for all periods presented. In accordance with FAS 128, basic and diluted net income (loss) per share have been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. The diluted calculation also includes common equivalent shares. For the quarter ended April 30, 1999, Portal has excluded all convertible preferred stock, warrants for convertible preferred stock, outstanding stock options, and shares subject to repurchase from the calculation of diluted loss per common share because all such securities were antidilutive. The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data; unaudited):

Three Months ended April 30, --------- 1999 2000 ---- ---- Basic: Net income (loss).................................................................. $ (5,534) $ 3,077 ========= ========= Weighted-average shares of common stock outstanding............................. 78,588 159,951 Less: Weighted-average shares subject to repurchase............................. (11,502) (5,369) --------- --------- Weighted-average shares used in computing basic net income (loss) per share........ 67,086 154,582 ========= ========= Basic net income (loss) per share.................................................. $ (0.08) $ 0.02 ========= ========= Diluted: Net income (loss).................................................................. $ (5,534) $ 3,077 ========= ========= Shares used above.............................................................. 67,086 154,582 Common equivalent shares....................................................... -- 18,171 --------- --------- Shares used in computing diluted net income (loss) per share....................... 67,086 172,753 ========= ========= Diluted net income (loss) per share................................................ $ (0.08) $ 0.02 ========= =========

9 Comprehensive Income (Loss) Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss), which includes certain changes in equity of the company that are excluded from net income (loss). Specifically, FAS 130 requires foreign currency translation adjustments and changes in the fair value of available-for-sale securities to be included in other accumulated comprehensive income (loss). Comprehensive income (loss) for the three months ended April 30, 1999 and 2000 is as follows:

Three months ended April 30, ---------------------------- 1999 2000 ---- ---- Net income (loss)................................................ $ (5,534) $ 3,077 Unrealized loss on marketable securities......................... --- (68) Change in cumulative translation adjustment...................... 1 (64) -------- -------- Comprehensive net income (loss).................................. $ (5,533) $ 2,945 ======== ========

(2) Line of Credit On April 15, 1999, Portal entered into a line of credit with a bank under which Portal may borrow up to $5 million. Amounts borrowed under this line of credit bear interest at a rate of the bank's prime rate plus 0.5% and mature on April 13, 2000. On April 22, 1999, Portal borrowed $1.0 million under the line of credit to repay the final installment of the term loan that matured in April 1999. The entire balance on the line of credit was repaid in May 1999. The line of credit expired in April 2000 and was not renewed. (3) Agreement with Andersen Consulting LLC On April 12, 1999, Portal agreed to enter into a strategic alliance with Andersen Consulting LLC under which Andersen Consulting LLC agreed to provide services to Portal and the parties agreed to expand their existing marketing alliance and work closely together to expand their customer service and marketing relationship. Under this arrangement, Andersen Consulting LLC agreed to purchase up to 800,000 shares of common stock from Portal in a private placement concurrent with Portal's initial public offering at the initial public offering price, less the underwriting discount. Under this agreement, Portal agreed to pay Andersen Consulting LLC for its services a minimum services fee in cash of $2.8 million and a cash settled put for 400,000 of the shares to be purchased by Andersen Consulting LLC. This put guaranteed a closing value of $6.0 million at the end of the first day of trading for 400,000 common shares sold to Andersen and required Portal to pay Andersen Consulting LLC in cash for any differences between the closing value of these shares and $6.0 million. Upon the date of the arrangement, Portal recorded the fair value of the put of approximately $3.8 million. The value of the put was determined using the Black-Scholes pricing model using a risk-free interest rate of 6.3%, an expected life of one month and a volatility factor of 100%. Upon completion of the initial public offering, the put option was settled. Based on the closing price of Portal's common stock at the end of the first day of trading, the net cash settlement of the put was computed at a value of zero. As a result, a gain upon remeasurement of the liability of $3.8 million was recorded as other income in the year ended January 31, 2000 and the initial fair value of the put, approximately $3.8 million, was classified as a prepaid service asset. Upon signing of the definitive agreement in March 2000, the services fee of $2.8 million was paid and capitalized. The entire prepaid service asset of $6.6 million was allocated between current and long-term assets as appropriate and will be amortized on a straight-line basis over the term of the agreement of approximately four and one half years. 10 (4) Income Taxes During the quarter ended April 30, 2000, Portal recognized tax expense of $0.6 million primarily related to tax on earnings generated from domestic and foreign operations. Due to Portal's positive earnings for the quarter, Portal reversed a portion of its valuation allowance against the previously established deferred tax assets for which realization is considered more likely than not. As of January 31, 2000, Portal's federal and state net operating loss carry-forwards, research and development tax credit carry-forwards and other credits totaled $7.2 million and $4.0 million, respectively. 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Portal Software, Inc. develops, markets and supports real-time customer management and billing software, known as CM&B software, for providers of Internet-based services. In late 1993, Portal began focusing on developing and marketing real-time CM&B software for the Internet. The first generally available version of the product, named Infranet, was shipped in May 1996. Beginning with fiscal year 1997, substantially all of Portal's revenues have come from the license of one product, Infranet, and from related services. Revenues consist of Infranet license, consulting, training, support and maintenance fees. License revenues are comprised of perpetual or multiyear license fees which are primarily derived from contracts with corporate customers and resellers. Portal believes that future license revenues will be generated from three sources: . license fees from new customers; . license fees for new products to existing customers; and . growth in the subscriber base of its existing customers, which will lead to increased revenue from subscriber-based licenses. Portal has generated a substantial portion of its historical Infranet revenues from approximately 239 customers through April 30, 2000. Portal has established a series of partnerships with systems integrators and hardware platform, software and service providers. Portal has derived, and anticipates that it will continue to derive, a substantial portion of its revenues from customers that have significant relationships with its market and platform partners. RESULTS OF OPERATIONS The following table sets forth the results of operations for the three months ended April 30, 1999 and 2000 expressed as a percentage of total revenues.

Three Months Ended April 30, --------------- 1999 2000 ---- ---- Revenues: License fees............................................ 59.8 % 69.9 % Services................................................ 40.2 30.1 ----- ----- Total revenues..................................... 100.0 100.0 ----- ----- Costs and expenses: Cost of license fees.................................... 1.2 1.2 Cost of services........................................ 27.7 19.8 Research and development................................ 28.3 22.5 Sales and marketing..................................... 48.3 40.1 General and administrative.............................. 14.7 13.0 Amortization of deferred stock compensation............. 13.4 2.1 ----- ----- Total costs and expenses........................... 133.6 98.7 ----- ----- Income (loss) from operations................................ (33.6) 1.3 Interest income (expense) and other income, net.............. (0.2) 5.9 ----- ----- Income (loss) before income taxes............................ (33.8) 7.2 Provision for income taxes................................... (2.7) (1.1) ----- ----- Net income (loss)............................................ (36.5) 6.1 ===== =====

12 Revenues Total revenues were $50.6 million in the quarter ended April 30, 2000, an increase of approximately $35.5 million or 234% over the comparable period in 1999. License fees revenues increased as a percentage of total revenues in the quarter ended April 30, 2000 compared to the quarter ended April 30, 1999 primarily because license fees revenue growth exceeded service revenue growth. One customer accounted for more than 15% of total revenues during the quarter ended April 30, 1999 and no individual customer accounted for more than 10% of revenues during the quarter ended April 30, 2000. No other customers accounted for more than 10% of total revenue for the quarters ended April 30, 2000 and 1999. License fees totaled $35.4 million in the quarter ended April 30, 2000, an increase of approximately $26.3 million or 290% over the comparable period ended April 30, 1999. The increase in license fees was primarily due to expanded marketing activities, growth in Portal's sales force and greater demand for and the acceptance of Infranet. Services revenues were $15.2 million in the quarter ended April 30, 2000, an increase of approximately $9.1 million or 150% over the comparable period ended April 30, 1999. The increase in services revenues resulted, in part, from the increase in support and maintenance service fees related to Portal's growing customer base, both in terms of new directly supported sites and additional users at existing sites, and the renewal of maintenance contracts. In addition, the increase in services revenues resulted from increased demand for Portal's consulting, maintenance and training services to meet the increasingly complex demands of Portal's customers.

Three Months Ended April 30, Percent --------------- (in thousands) 1999 2000 Change ---- ---- ------ Geographical Revenues: North America.................................................. $ 10.5 $ 31.7 202% Percentage of total revenues.............................. 69% 63% International Europe....................................................... 3.9 13.1 236% Percentage of total revenues.............................. 26% 26% Intercontinental............................................. 0.8 5.8 625% Percentage of total revenues.............................. 5% 11% ------ ------ --- Total international.......................................... 4.7 18.9 302% Percentage of total revenues.............................. 31% 37% ------ ------ --- Total revenues.................................................... $ 15.2 $ 50.6 234% ====== ====== ===

North American revenues, which are defined by Portal as revenues from the United States and Canada, were $31.7 million in the quarter ended April 30, 2000, an increase of approximately $21.2 million or 202%, over the comparable period ended April 30, 1999. The increase in North American revenues was primarily due to expanded marketing activities, greater acceptance of Infranet and growth in Portal's sales force in the North American market. International revenues for Europe and for Intercontinental, which is defined by Portal as Asia-Pacific, Japan and Latin America, totaled $18.9 million in the quarter ended April 30, 2000, an increase of approximately $14.2 million or 302% over the comparable period ended April 30, 1999. European revenues were $13.1 million in the quarter ended April 30, 2000, an increase of approximately $9.2 million or 236% over the comparable period ended April 30, 1999. Intercontinental revenues were $5.8 million in the quarter ended April 30, 2000, an increase of approximately $5.0 million or 625% over the comparable period ended April 30, 1999. The increase in international revenues was primarily due to growth in Portal's direct sales force and increased marketing efforts worldwide. International revenues represented 37% of total revenues in the quarter ended April 30, 2000, compared with approximately 31% in the comparable period ended April 30, 1999. In the quarter ended April 30, 2000, revenues from Europe were 26% of total revenues and revenues from Intercontinental were 11% of total revenues. 13 Expenses Cost of License Fees Cost of license fees consists of resellers' commission payments to systems integrators and third-party royalty obligations with respect to third-party technology included in Infranet. Cost of license fees was $0.6 million in the quarter ended April 30, 2000, an increase of approximately $0.5 million or 244% from the comparable period ended April 30, 1999. The increase in cost of license fees is primarily due to increased license revenue and resellers' commissions resulting from Portal expanding its base of systems integrator partners. Gross margin for license fees was approximately 98% in both the quarter ended April 30, 1999 and in the quarter ended April 30, 2000. For the three months ended April 30, 1999 and 2000, Portal did not incur any shipping, packaging or documentation costs, as its product was delivered electronically over the Internet. Cost of Services Cost of services primarily consists of maintenance, consulting and training expenses. Cost of services was $10.0 million in the quarter ended April 30, 2000, an increase of approximately $5.8 million or 139% over the comparable period ended April 30, 1999. The increase in cost of services is primarily due to an increase in the number of consulting and technical support personnel necessary to support both the expansion of Portal's installed base of customers and new implementations. Gross margin for services was approximately 34% in the quarter ended April 30, 2000 compared to approximately 31% in the comparable period ended April 30, 1999. Portal expects cost of services to increase substantially in the next few quarters as a result of increased demand for services. Research and Development Expenses Research and development expenses consist primarily of personnel and related costs for Portal's development and technical support efforts. Research and development expenses were $11.4 million in the quarter ended April 30, 2000, an increase of approximately $7.1 million or 165% over the comparable period ended April 30, 1999. The increase was primarily due to an increase in the number of research and development personnel necessary to support both expanded functionality of Infranet and increases in Portal's quality assurance, technical support and technical publications operations. Portal currently believes its investment in research and development will increase substantially during the remainder of the fiscal year as Portal hires additional research and development employees. Portal has not capitalized any software development costs to date. Sales and Marketing Expenses Sales and marketing expenses consist of personnel and related costs for Portal's direct sales force, marketing staff and marketing programs, including trade shows, advertising and costs associated with Portal's recruitment of new and maintenance of existing strategic partnerships. Sales and marketing expenses were $20.3 million in the quarter ended April 30, 2000, an increase of approximately $13.0 million or 177% over the comparable period ended April 30, 1999. The increase was due to a number of factors including an increase in the number of sales and marketing personnel, the opening of new sales offices in the United States, Europe and Asia-Pacific, and expenses incurred in connection with trade shows and additional marketing programs. Portal expects that sales and marketing expenses will increase substantially over the remainder of the fiscal year as Portal hires additional sales and marketing personnel, increases spending on advertising and marketing programs and establishes sales offices in additional domestic and international locations. 14 General and Administrative Expenses General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, legal, human resources and facilities as well as information system expenses not allocated to other departments. General and administrative expenses were $6.6 million in the quarter ended April 30, 2000, an increase of approximately $4.4 million or 196% over the comparable period ended April 30, 1999. The increase was primarily due to a higher number of general and administrative personnel and additional legal and accounting costs incurred in connection with business activities. Portal expects that general and administrative expenses will increase substantially over the current fiscal year as Portal hires additional general and administrative personnel, and continues to incur greater legal and accounting costs in connection with expanding business activities. Amortization of Deferred Stock Compensation Portal recorded deferred stock compensation of approximately $16.8 million in fiscal year 1999, representing the difference between the exercise prices of options granted to acquire certain shares of common stock during fiscal year 1999 and the deemed fair value for financial reporting purposes of Portal's common stock on their respective grant dates. Portal amortized deferred compensation expense of approximately $1.1 million during the quarter ended April 30, 2000. This compensation expense relates to options awarded to individuals in all operating expense categories. Total deferred compensation at April 30, 2000 of approximately $5.3 million is being amortized over the vesting periods of the options on a graded vesting method. Amortization of deferred compensation is estimated to be $3.7 million in fiscal year 2001, $1.9 million in fiscal year 2002 and $0.7 million in fiscal year 2003. Provision for Income Taxes The $0.6 million income tax provision shown for this period is primarily the result of tax on earnings generated from domestic and foreign operations. Due to Portal's positive earnings for the quarter, Portal reversed a portion of its valuation allowance against the previously established deferred tax assets for which realization is considered more likely than not. Under Statement of Financial Accounting Standards No. 109 (FAS 109), deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets are more likely than not. Based on the weight of available evidence, Portal has provided a valuation allowance against certain deferred tax assets. Portal will continue to evaluate the realizability of the deferred tax assets on a quarterly basis. Liquidity and Capital Resources Cash, cash equivalents and short-term investments (including restricted investments) totaled $195.8 million at April 30, 2000, compared to a balance of $201.3 million at January 31, 2000. Portal generated $4.1 million in cash from operations in the quarter ended April 30, 2000, an increase of $1.0 million over the $3.1 million generated in the quarter ended April 30, 1999. Net cash provided by operations in the quarter ended April 30, 2000 was primarily comprised of net income of $3.1 million, a $4.0 million increase in deferred revenue and an increase in accrued compensation of $5.5 million. Also, amortization of deferred stock compensation, which is included in the results of operations, but does not require the use of cash, amounted to $1.1 million for the quarter ended April 30, 2000. These increases were offset by a $9.4 million increase in accounts receivable and a $3.7 million increase in prepaids and other current assets. Portal has continued to make significant investments in equipment. During the quarter ended April 30, 2000, Portal purchased computer servers, workstations, networking equipment and other capital equipment amounting to approximately $12.2 million, primarily to further expand its product capability, and increase its internal network communication, product demonstration and service capability. None of the equipment was funded from Portal's equipment lease line facility. Portal has raised equity capital from outside investors to fund its operations. In fiscal 2000, Portal completed an initial public offering and concurrent private sales of stock to Cisco Systems, Inc. and Andersen 15 Consulting LLC that collectively raised $102.4 million. Portal also completed a follow-on offering in October 1999, which raised approximately $106.0 million, net of underwriting commissions and estimated expenses. During the same period, Portal raised an additional $6.6 million from sales of common stock issued from Portal's employee stock purchase plan and upon the exercise of stock options by employees and warrants by third parties, net of repurchases. During the quarter ended April 30, 2000, Portal raised an additional $4.1 million from sales of common stock issued from Portal's employee stock purchase plan and upon the exercise of stock options by employees, net of repurchases. Historically, Portal has also used debt and leases to partially finance its operations and capital purchases. Portal has a $3.0 million capital lease line facility with an equipment lessor, which it established in fiscal 1998. The lease line has a term of 48 months and bears interest at a rate of 8.5% per annum. The capital lease line facility comprised the entire amount of the debt obligations on Portal's balance sheet as of April 30, 2000. The capital lease line facility includes certain covenants requiring minimum liquidity, tangible net worth and profitability over time and becomes due immediately if Portal fails to meet these covenants. Portal is currently, and has always been, in compliance with these covenants. On April 12, 1999, Portal agreed to enter into a strategic alliance with Andersen Consulting LLC under which Andersen Consulting LLC agreed to provide services to Portal and the parties will expand their existing marketing alliance and work closely together to expand their customer service and marketing relationship. Under this agreement, Portal agreed to pay Andersen Consulting LLC for its services a minimum services fee in cash of $2.8 million and a cash settled put for 400,000 of the shares which were purchased by Andersen Consulting LLC in a private placement concurrent with Portal's initial public offering. This put guaranteed a closing value of $6.0 million at the end of the first day of trading. Because the closing value exceeded $6.0 million, Portal was not required to make any payment related to this put. The definitive agreement was entered into, and the $2.8 million payment was made in March 2000. The resulting intangible asset will be amortized over a period of approximately four and one half years, the term of the alliance, beginning in April 2000. Portal's capital requirements depend on numerous factors, including market acceptance of Portal's products, the resources Portal devotes to developing, marketing, selling and supporting its products, the timing and extent of establishing international operations, and other factors. Portal expects to devote substantial capital resources to hire and expand its sales, support, marketing and product development organizations, to expand marketing programs, to establish additional facilities worldwide and for other general corporate activities. Although Portal believes that its current cash balances and cash generated from operations will be sufficient to fund its operations for at least the next 12 months, Portal may require additional financing within this time frame. Additional funding, if needed, may not be available on terms acceptable to Portal, or at all. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. In June 1999, the FASB delayed implementation of FAS 133, so that implementation is now required for fiscal years beginning after June 15, 2000. As Portal does not currently engage in hedging activities, Portal expects that the adoption of FAS 133 will not have a material impact on its financial position or results of operations. Due to the delayed effective date, Portal will be required to implement FAS 133 for fiscal 2002. RISKS ASSOCIATED WITH PORTAL'S BUSINESS AND FUTURE OPERATING RESULTS Portal's future operating results may vary substantially from period to period. The price of our common stock will fluctuate in the future, and an investment in our common stock is subject to a variety of risks, including but not limited to the specific risks identified below. Inevitably, some investors in our securities will experience gains while others will experience losses depending on the prices at which they purchase and sell securities. Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this report. 16 This report contains forward-looking statements that are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in this "Risks Associated With Portal's Business and Future Operating Results" and elsewhere in this report. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this report. We undertake no obligation to update these statements or publicly release the results of any revisions to the forward-looking statements that we may make to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. It is difficult to predict our business because we have a limited history operating as a provider of CM&B software The results of operations for the quarter ended April 30, 2000 contained in this report are not necessarily indicative of results for fiscal year ending January 31, 2001 or any other future period. Moreover, Portal has a relatively brief operating history as a provider of CM&B software and had no meaningful license revenue until 1996. Therefore, Portal will experience the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets, including those discussed in this report. Our business strategy may not prove successful, and we may not successfully address these risks. We have not achieved sustained profitability In order to continue to be profitable, we must increase our revenues. We may not be able to increase or even maintain our revenues, and we may not achieve sufficient revenues or profitability in any future period. We incurred net losses of approximately $7.6 million for fiscal year 2000, $17.4 million for fiscal year 1999, $7.6 million for fiscal year 1998 and $2.3 million for fiscal year 1997. We had a slight net profit in the fourth quarter of fiscal year 2000 and we did achieve operating profitability in the quarter ending April 30, 2000. In addition, we expect to significantly increase our sales and marketing, product development and administrative expenses. As a result, we will need to generate significant revenues from sales of Infranet to achieve and maintain profitability. We expect that we will face increased competition that may make it more difficult to increase our revenues. Even if we are able to increase revenues, we may experience price competition which would lower our gross margins and our profitability. Another factor that will lower our gross margins is any increase in the percentage of our revenues that is derived from indirect channels and from services, both of which have lower margins. We cannot be certain that we can sustain or increase operating and net profitability on a quarterly or annual basis. Our quarterly operating results may fluctuate in future periods and we may fail to meet expectations Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, our operating results may be below one or more of the expectations of public market analysts and investors, and the price of our common stock may fall. Failure by technology companies to meet or exceed analyst expectations or any resulting change in analyst recommendations or ratings frequently results in substantial decreases in the market value of the stock of such companies. Factors that could cause quarterly fluctuations include: . variations in demand for our products and services; . the timing and execution of individual contracts, particularly large contracts that would materially affect our operating results in a given quarter; . the timing of sales of our products and services; 17 . our ability to develop and attain market acceptance of enhancements to Infranet and new products and services; . delays in introducing new products and services; . new product introductions by competitors; . changes in our pricing policies or the pricing policies of our competitors; . announcements of new versions of products that cause customers to postpone purchases of Portal's current products; . the mix of products and services sold; . the mix of sales channels through which our products and services are sold; . the mix of domestic and international sales; . costs related to acquisitions of technologies or businesses; . the timing of releases of new versions of third-party software and hardware products that work with our products; . our ability to attract, integrate, train, retain and motivate a substantial number of sales and marketing, research and development, technical support and other management personnel; . our ability to expand our operations; . the amount and timing of expenditures related to expansion of our operations; and . global economic conditions generally, as well as those specific to ISPs and other providers of Internet-based services. We have difficulty predicting the volume and timing of orders. For example, substantially all of our future revenues will come from licenses of Infranet and related services, and the market for this product is in its early stages of development and is therefore unpredictable. In any given quarter, our sales have involved, and we expect will continue to involve, large financial commitments from a relatively small number of customers. As a result, the cancellation or deferral of even a small number of large licenses of Infranet would reduce our revenues, which would adversely affect our quarterly financial performance. Also, we have often booked a large amount of our sales in the last month of the quarter and often in the last week of that month. Accordingly, delays in the closing of sales near the end of a quarter could cause quarterly revenue to fall substantially short of anticipated levels. We may also experience seasonality in our business. In many software companies, rate of growth of license fees revenues tends to decline between the fourth quarter of one year and the first quarter of the next year, due in part to the structure of sales compensation plans. If we experience such seasonality in the future, our rate of growth or absolute revenues could decline in the first quarter of a fiscal year compared to the preceding fourth quarter. In addition, the European operations of many companies experience some flatness in the summer months. Such seasonality may cause our results of operations to fluctuate or become more difficult to predict. We record as deferred revenue fees from contracts that do not meet our revenue recognition policy requirements. While a portion of our revenues each quarter is recognized from deferred revenue, our quarterly performance will depend primarily upon entering into new contracts to generate revenues for that quarter. New contracts that we enter into may not result in revenue in the quarter in which the contract was signed, and we may not be able to predict accurately when revenues from these contracts will be recognized. We plan to significantly increase our operating expenses to expand our sales and marketing operations, broaden our customer support capabilities, develop new distribution channels and fund greater levels of research and development. We determine our operating expenses largely on the basis of anticipated revenue trends and a high percentage of our expenses are fixed in the short term. As a result, a delay in generating or recognizing revenue could cause significant variations in our operating results from quarter-to-quarter and could result in substantial operating losses. 18 It is difficult to predict the timing of individual orders because Infranet has a long and variable sales cycle To date, the sales cycle for Infranet generally has been three to nine months or more. The long sales and implementation cycles for Infranet may cause license revenues and operating results to vary significantly from period to period. Along with systems integrators and our other distribution partners, we spend significant time educating and providing information to our prospective customers regarding the use and benefits of Infranet. Even after purchase, our customers tend to deploy Infranet slowly and deliberately, depending on the specific technical capabilities of the customer, the size of the deployment, the complexity of the customer's network environment, and the quantity of hardware and the degree of hardware configuration necessary to deploy Infranet. Our business depends on the commercial acceptance of Infranet, and it is uncertain to what extent the market will accept this product Our future growth depends on the commercial success of Infranet. Substantially all of our licensing revenues are derived from Infranet. Our business will be harmed if our target customers do not adopt and purchase Infranet. The market for Internet-based CM&B software is still in its early stages of development. Our future financial performance will also depend on the successful development, introduction and customer acceptance of new and enhanced versions of Infranet. We are not certain that our target customers will widely adopt and deploy Infranet as their CM&B solution. In the future we may not be successful in marketing Infranet or any new or enhanced products or services. Our future revenues will also depend on our customers licensing software for additional applications or for additional subscribers. Their failure to do so could harm our business. Significant technical challenges arise in our business because many of our customers purchase and implement Infranet in phases, deploy Infranet across a variety of computer hardware platforms and integrate it with a number of legacy systems, third-party software applications and programming tools. Implementation frequently involves participation by our professional services group, which has limited resources. Some customers may also require us to develop costly customized features or capabilities, which increase our costs and consume our limited customer service and support resources. Also, revenues we derive from our services business have a significantly lower margin than revenues derived from licensing Infranet. If new or existing customers have difficulty deploying our products or require significant amounts of our professional services support, our operating margins could be harmed. We must hire and retain qualified sales personnel to sell Infranet Our financial success and our ability to increase revenues in the future depend considerably upon the growth and productivity of our direct sales force that has historically generated a majority of Portal's license revenues. This productivity and growth will depend to a large degree on our success in recruiting, training and retaining additional direct salespeople. There is a shortage of direct sales personnel with the skills and expertise necessary to sell our products. Our business will be harmed if we fail to hire or retain qualified sales personnel, or if newly hired salespeople fail to develop the necessary sales skills or develop these skills more slowly than we anticipate. In addition, because we currently rely on indirect sales for a significant portion of our market opportunities, we may miss sales opportunities that are available through other sales distribution methods and other sources of leads, such as domestic and foreign resellers. In the future, we intend to augment our indirect sales distribution methods through additional third-party distribution arrangements. However, there is no guarantee that we will successfully augment these arrangements or that the expansion of indirect sales distribution methods will increase revenues. We may be at a serious competitive disadvantage if we fail to enhance these indirect sales channels. 19 We also use systems integrators and other strategic relationships to implement and sell Infranet We have entered into relationships with third-party systems integrators, as well as with hardware platform and software applications developers and service providers. We have derived, and anticipate that we will continue to derive, a significant portion of our revenues from customers that have significant relationships with our market and platform partners. We could lose sales opportunities if we fail to work effectively with these parties or fail to grow our base of market and platform partners. Many of these partners also work with competing software companies, and our success will depend on their willingness and ability to devote sufficient resources and efforts to marketing our products versus the products of others. We may not be able to enter into additional, or maintain our existing, strategic relationships on commercially reasonable terms, or at all. Our agreements with these parties typically are in the form of nonexclusive joint marketing or reseller agreements that may be terminated by either party without cause or penalty and with limited notice. Therefore, there is no guarantee that any single party will continue to market our products. If these relationships fail, we will have to devote substantially more resources to the distribution, sales and marketing, implementation and support of Infranet than we would otherwise, and our efforts may not be as effective as those of our partners, either of which would harm our business. Our quarterly revenue is generated from a limited number of customers and our customer base is concentrated and the loss of one or more of our customers could cause our business to suffer A substantial portion of our license and services revenues in any given quarter has been, and is expected to continue to be, generated from a limited number of customers with large financial commitments. For example, two customers accounted for a total of 27% of total revenues for the quarter ended October 31, 1999 and one customer accounted for 10% of total revenue during the year ended January 31, 2000. As a result, if a large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed. We have initially targeted large ISPs, including on-line divisions of telecommunications carriers and other providers of Internet-based services, including the wireless divisions of telecommunications carriers. Some of the industries we have targeted are consolidating, which could reduce the number of potential customers available to us. Our business will suffer dramatically if we fail to successfully manage our growth Our ability to successfully offer Infranet and new products and services in a rapidly evolving market requires an effective planning and management process. We continue to increase the scope of our operations domestically and internationally and have grown our headcount substantially. Our business will suffer dramatically if we fail to effectively manage this growth. On April 30, 2000, we had 793 employees, compared to a total of 634 employees on January 31, 2000. We expect to continue to hire new employees at a rapid pace. This growth has placed, and our anticipated future operations will continue to place, a significant strain on our management systems and resources and on our internal training capabilities. We expect that we will need to continue to improve our financial and managerial controls and reporting systems and procedures, and will need to continue to expand, train and manage our work force worldwide. Although we have recently occupied one new building for our headquarters in Cupertino, California and have entered into a lease for another adjacent building, we expect that we will also have to continue to expand our facilities in California and other locations, and we may face difficulties and significant expenses identifying and moving into suitable office space. Our significant international operations and our planned expansion of our international operations make us much more susceptible to risks from international operations For the quarters ended April 30, 1999 and 2000, we derived approximately 31% and 37% of our revenue, respectively, from sales outside North America. As a result, we face risks from doing business on an international basis, including, among others: . reduced protection for intellectual property rights in some countries; . licenses, tariffs and other trade barriers; . difficulties in staffing and managing foreign operations; 20 . longer sales and payment cycles; . greater difficulties in collecting accounts receivable; . political and economic instability; . seasonal reductions in business activity; . potentially adverse tax consequences; . compliance with a wide variety of complex foreign laws and treaties; and . variance and unexpected changes in local laws and regulations. We currently have offices in a number of foreign locations including Australia, Canada, China, France, Germany, Hong Kong, Japan, Malaysia, Singapore, Spain and the United Kingdom and plan to establish additional facilities in other parts of the world. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. We cannot be certain that our investments in establishing facilities in other countries will produce desired levels of revenue. In addition, we have sold Infranet internationally for only a few years and we have limited experience in developing localized versions of Infranet and marketing and distributing them internationally. Further, our international revenues are currently denominated in U.S. dollars. Therefore, a strengthening of the dollar versus other currencies could make our products less competitive in foreign markets or collection of receivables more difficult. We do not currently engage in currency hedging activities. To the extent that we are unable to successfully manage expansion of our business into international markets due to any of the foregoing factors, our business could be adversely affected. Our proprietary rights may be inadequately protected, and there is a risk of infringement Our success and ability to compete depend substantially upon our internally developed technology, which we protect through a combination of patent, copyright, trade secret and trademark law. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology or to develop products with the same functionality as our products. Policing unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Others may develop technologies that are similar or superior to our technology. Moreover, as the number of competitors in our industry segments grow and the functionality of products in different industry segments overlaps, we expect that our software products may in the future become subject to third-party infringement claims. Some of our competitors in the market for CM&B software may have filed or may intend to file patent applications covering aspects of their technology upon which they may claim our technology infringes. Any litigation, brought by us or by others, could be time-consuming and costly and could divert the attention of our technical and management personnel. In addition, litigation could cause product shipment delays or require us to develop non-infringing technology or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, or at all, and could have a material and adverse impact on our gross margins and profitability. If a successful claim of product infringement were made against us, our business could be significantly harmed. Our business will suffer if our software contains significant errors or our product development is delayed We face possible claims and higher costs as a result of the complexity of our products and the potential for undetected errors. Due to the "mission critical" nature of Infranet, undetected errors are of particular concern. Complex software, such as ours, always contains undetected errors. The implementations of Infranet that we accomplish through our services division and with our partners typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with an implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project and to provide these services at reduced or no cost. If our software 21 contains significant undetected errors or we fail to meet our customers' expectations or project milestones in a timely manner we could experience: . loss of or delay in revenues and loss of market share; . loss of customers; . failure to achieve market acceptance; . diversion of development resources; . injury to our reputation; . increased service and warranty costs; . legal actions by customers against us; and . increased insurance costs. Our licenses with customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages. In addition, our license agreements generally cap the amounts recoverable for damages to the amounts paid by the licensee to us for the product or service-giving rise to the damages. However, these contractual limitations on liability may not be enforceable in certain jurisdictions and under certain circumstances, particularly if the damages relate to a Year 2000 problem, and we may be subject to claims based on errors in our software or mistakes in performing our services including claims relating to damages to our customers' internal systems. A product liability claim, whether or not successful, could harm our business by increasing our costs, damaging our reputation and distracting our management. Despite investigation and testing by us and our partners, Infranet and the underlying systems and protocols running it may contain previously undetected errors or defects associated with Year 2000 or other date functions. Several customers, despite warnings regarding the use of non-Year 2000 certified versions of Infranet, have continued to use non-certified versions, and decline to upgrade to certified versions or implement maintenance fixes or bug releases made available to them. Portal integrates certain third party software into Infranet. These third party vendors may detect errors in their products after previously indicating that their products are Year 2000 compliant. Such revelations by our partners, have occurred in the past and may occur in the future; and these revelations have and could cause us to make changes in our products in response. In the past we have failed to release certain new products and upgrades on time. Future delays may result in: . customer dissatisfaction; . cancellation of orders and license agreements; . negative publicity; . loss of revenues; . slower market acceptance; or . legal action by customers against us. Our business may be harmed if we are unable to develop, license or acquire new products or enhancements to Infranet on a timely and cost-effective basis, or if the market does not accept these products or enhancements. We incorporate software licensed from third parties into Infranet and any significant interruption in the availability of these third-party software products or defects in these products could harm our business in the short-term Portions of Infranet incorporate software developed and maintained by third-party software vendors, such as operating systems, tools and database vendors. We expect that we may have to incorporate software from third 22 party vendors and developers to a larger degree in our future products. Any significant interruption in the availability of these third-party software products or defects in these products or future products could harm our sales unless and until we can secure another source. We may not be able to replace the functionality provided by the third-party software currently offered with our products if that software becomes obsolete, defective or incompatible with future versions of our products or is not adequately maintained or updated. The absence of, or any significant delay in, the replacement of that functionality could result in delayed or lost sales and increased costs and could harm our business in the short-term. Our future success will depend on our ability to manage technological change The market for CM&B software and services and Internet applications is characterized by: . rapid technological change; . frequent new product introductions; . changes in customer requirements; and . evolving industry standards. Future versions of hardware and software platforms embodying new technologies and the emergence of new industry standards could render our products obsolete. Our future success will depend upon our ability to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers. Infranet is designed to work on a variety of hardware and software platforms used by our customers. However, Infranet may not operate correctly on evolving versions of hardware and software platforms, programming languages, database environments, accounting and other systems that our customers use. We must constantly modify and improve our products to keep pace with changes made to these platforms and to back-office applications and other Internet-related applications. This may result in uncertainty relating to the timing and nature of new product announcements, introductions or modifications, which may harm our business. If we fail to modify or improve our products in response to evolving industry standards, our products could rapidly become obsolete, which would harm our business. The markets in which we sell our product are highly competitive and we may not be able to compete effectively We compete in markets that are new, intensely competitive, highly fragmented and rapidly changing. We face competition from providers of traditional CM&B software such as Amdocs (which has recently acquired Solect Technology) and the Kenan Systems division of Lucent; emerging providers of Internet-specific billing software, such as Belle Systems and Daleen Technologies, Inc.; and providers of Internet-based services that develop proprietary systems. We also compete with systems integrators and with internal MIS departments of larger telecommunications carriers. We are aware of numerous other major ISPs, software developers and smaller entrepreneurial companies that are focusing significant resources on developing and marketing products and services that will compete with Infranet. We anticipate continued growth and competition in the on-line services and telecommunications industries and the entrance of new competitors into the CM&B software market, and that the market for our products and services will remain intensely competitive. We expect that competition will increase in the near term and that our primary long-term competitors may have not yet entered the market. Many of our current and future competitors have significantly more personnel and greater financial, technical, marketing and other resources than we do. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Also, current and potential competitors have greater name recognition and more extensive customer bases that they can use to compete more effectively. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which could harm our business. 23 Our business substantially depends upon the continued growth of the Internet and Internet-based services We sell Infranet to organizations providing Internet-based services. Consequently, our future revenues and profits, if any, substantially depend upon the continued acceptance and use of the Internet as an effective medium of commerce and communication. Rapid growth in the use of the Internet and on-line services is a recent phenomenon and it may not continue. As a result, a broad base of regular Internet users may not develop, and the market may not accept recently introduced services and products that rely upon the Internet, such as Infranet. Future regulation of the Internet may slow its growth, resulting in decreased demand for our products and services and increased costs of doing business Due to the increasing popularity and use of the Internet, it is possible that state and federal regulators could adopt laws and regulations that may impose additional burdens on those companies conducting business on-line. The growth and development of the market for Internet-based services may prompt calls for more stringent consumer protection laws or for imposition of additional taxes. The adoption of any additional laws or regulations may decrease the expansion of the Internet or impose additional burdens on those companies conducting business on-line. A decline in the growth of the Internet could decrease demand for our products and services and increase our cost of doing business, or otherwise harm our business. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales tax, libel and personal privacy is uncertain and may take years to resolve. Our costs could increase and our growth could be harmed by any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and other on-line services. Our future success depends on our ability to attract and retain additional personnel, particularly qualified sales persons We intend to hire a significant number of additional sales, support, marketing, administrative and research and development personnel in fiscal year 2001 and beyond. Competition for these individuals is intense, and we may not be able to attract, assimilate or retain highly qualified personnel in the future. Our business cannot continue to grow if we cannot attract qualified personnel. We currently have a small customer service and support organization and will need to increase our staff to support new customers and the expanding needs of our existing customers. Hiring qualified customer service and support personnel, as well as sales, marketing, administrative and research and development personnel, is very competitive in our industry, particularly in the San Francisco Bay Area, where Portal is headquartered, due to the limited number of people available with the necessary technical skills and understanding of the Internet. We may experience greater difficulty attracting these personnel with equity incentives as a public company than we did as a privately held company. Our future success also depends upon the continued service of our executive officers and other key sales, marketing and support personnel in general, and on the services of John E. Little, our President and Chief Executive Officer, and David S. Labuda, our Chief Technology Officer, in particular. None of our officers or key employees is bound by an employment agreement for any specific term. Our relationships with these officers and key employees are at will. Acquisitions of companies or technologies may result in disruptions to our business and management due to difficulties in assimilating personnel and operations We may make acquisitions or investments in other companies, products or technologies in the future. If we make any acquisitions, we will be required to assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert management's attention from day-to-day operations, which could impair our relationships with our current employees, customers and strategic partners. The issuance of equity securities for any acquisition could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets. 24 The price of our common stock has been, and will be volatile The trading price of our common stock has fluctuated in the past and will fluctuate in the future. This future fluctuation could be a result of a number of factors, many of which are outside our control. Some of these factors include: . quarter-to-quarter variations in our operating results; . failure to meet the expectations of industry analysts; . changes in earnings estimates by analysts; . announcements and technological innovations or new products by us or our competitors; . increased price competition; . developments or disputes concerning intellectual property rights; and . general conditions in the Internet industry. In addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many Internet and computer software companies, including ours, and which have often been unrelated to the operating performance of these companies or our company. Decreases in the trading prices of stocks of technology companies are often precipitous. For example, the price of Portal's stock dropped rapidly during the first quarter of fiscal year 2001. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about Portal's risk management activities includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements for the reasons described under the caption "Management's Discussion And Analysis Of Financial Condition And Results Of Operations -- Risks Associated With Portal's Business And Future Operating Results." Short-Term Investment Portfolio We do not hold derivative financial instruments in our short-term investment portfolio. Our short-term investments consist of instruments that meet high quality standards consistent with our investment policy. This policy dictates that we diversify our holdings and limit our short-term investments to a maximum of $5 million to any one issuer. Our policy also dictates that all short-term investments mature in 24 months or less. The following summarizes Portal's short-term investments and the related weighted average yields, as of April 30, 2000 (in thousands, except interest rates):

Year ending April 30, --------------------------------------- 2001 2002 Thereafter Total ---- ---- ---------- ----- Cash Equivalents....................... $ 34,062 $ -- -- $ 34,062 Weighted Average Yield.............. 5.91% -- -- 5.91% Investments............................ 96,234 57,988 -- 154,222 Weighted Average Yield.............. 6.19% 6.62% -- 6.35% --------- --------- --------- --------- Total Portfolio........................ $ 130,296 $ 57,988 -- $ 188,284 Weighted Average Yield.............. 6.12% 6.62% -- 6.27%

25 Impact of Foreign Currency Rate Changes During fiscal year 2000, most local currencies of our international subsidiaries weakened against the U.S. dollar. Because we translate foreign currencies into U.S. dollars for reporting purposes, currency fluctuations can have an impact, though generally immaterial, on our results. Portal believes that its exposure to currency exchange fluctuation risk has been insignificant primarily due to the denomination of our sales transactions in U.S. dollars. For the quarter ended April 30, 2000, there was an immaterial currency exchange impact from our intercompany transactions. As of April 30, 2000, we did not engage in foreign currency hedging activities. As a global concern, Portal anticipates that its sales outside the United States will increasingly be denominated in other currencies. In such event, Portal will face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on Portal's financial position and results of operations. In order to reduce the effect of foreign currency fluctuations, Portal may hedge its exposure on certain transactional balances that are denominated in foreign currencies through the use of foreign currency forward exchange contracts. The success of such activity will depend upon the estimation of future transactions denominated in various currencies. To the extent that these estimates are overstated or understated during periods of currency volatility, Portal could experience unanticipated currency gains or losses. 26 PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (d) Use of Proceeds from Sales of Registered Securities. On May 11, 1999, Portal completed an initial public offering of its Common Stock, $0.001 par value. The managing underwriters in the offering were Goldman, Sachs & Co., Credit Suisse First Boston, BancBoston Robertson Stephens and Hambrecht & Quist (the "Underwriters"). The shares of Common Stock sold in the offering were registered under the Securities Act of 1933, as amended, on a Registration Statement on Form S-1 (the "Registration Statement") (Reg. No. 333- 72999) that was declared effective by the SEC on May 5, 1999. After deducting the underwriting discounts and offering expenses, Portal received net proceeds from the offering of approximately $58,642,000. None of Portal's net proceeds of the offering were paid directly or indirectly to any director, officer, general partner of Portal or their associates, persons owning 10% or more of any class of equity securities of Portal, or an affiliate of Portal. Of the net proceeds, Portal has used approximately $26,154,000 for capital expenditures. Additionally, a portion of the net proceeds were used to repay long-term debt and line of credit obligations of $5,122,000 and capital lease obligations of $541,000. The remainder of the net proceeds is expected to be used for general corporate purposes, including working capital, capital expenditures and product development. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies or product offerings; however, there are no current material agreements or commitments with respect to any such activities. The amounts actually expended for such purposes may vary significantly and will depend on a number of factors, including Portal's future revenues and cash generated by operations and the other factors described under "Factors That May Affect Future Results". Accordingly, Portal retains broad discretion in the allocation of the net proceeds of the offering. 27 Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K: None. 28 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. June 13, 2000 PORTAL SOFTWARE, INC. By /s/ JACK L. ACOSTA ------------------------------ Jack L. Acosta Vice President and Chief Financial Officer (Principal Financial Officer) 29 EXHIBIT INDEX TO PORTAL SOFTWARE, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2000 Exhibit Number Description -------------- ----------- 27 Financial Data Schedule 30