<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1999
REGISTRATION NO. 333-80553
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
SILVERSTREAM SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 04-3318325
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
-------------------------
ONE BURLINGTON WOODS, SUITE 200
BURLINGTON, MASSACHUSETTS 01803
(781) 238-5400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
DAVID A. LITWACK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SILVERSTREAM SOFTWARE, INC.
ONE BURLINGTON WOODS, SUITE 200
BURLINGTON, MA 01803
(781) 238-5400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK G. BORDEN, ESQ. JOHN A. MELTAUS, ESQ.
JOHN H. CHORY, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
HALE AND DORR LLP 125 HIGH STREET
60 STATE STREET BOSTON, MASSACHUSETTS 02110
BOSTON, MASSACHUSETTS 02109 TELEPHONE: (617) 248-7000
TELEPHONE: (617) 526-6000 TELECOPY: (617) 248-7100
TELECOPY: (617) 526-5000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value per
share................................. 3,450,000 shares $15.00 $51,750,000 $14,386.50
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 450,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.
(3) The Registrant previously paid $11,189.50 in connection with original filing
on June 11, 1999.
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.
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- --------------------------------------------------------------------------------
<PAGE> 2
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.
PROSPECTUS (Subject to Completion)
Issued August 3, 1999
3,000,000 Shares
[LOGO][LOGO]
COMMON STOCK
------------------------
SILVERSTREAM SOFTWARE, INC. IS OFFERING 3,000,000 SHARES OF COMMON STOCK. THIS
IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR
SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$13.00 AND $15.00 PER SHARE.
------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "SSSW."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SILVERSTREAM
-------- ------------- ------------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
SilverStream has granted the underwriters the right to purchase up to an
additional 450,000 shares of common stock to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BANCBOSTON ROBERTSON STEPHENS
SG COWEN
, 1999
<PAGE> 3
[Narrative description of graphic material omitted in electronically filed
document:
The following text is at the top of the page and spans the front cover foldout:
SILVERSTREAM: ENABLING POWERFUL BUSINESS APPLICATIONS FOR THE WEB.
The following text appears on the inside front cover foldout:
Organizations around the world are focusing on how the Web will impact their
businesses, and are starting to develop A NEW GENERATION OF WEB-BASED
APPLICATIONS that allow them to take advantage of the power of the Web.
Application servers are the platform that allow organizations to deliver
this new generation of applications.
The inside front cover contains a graphic that consists of a large disk entitled
"Web." On the left side of the large disk are several groups of human figures
labeled "customers," "suppliers," "employees," "consumers" and "partners." Above
the human figures is the following text: Application servers allow organizations
to reach a much broader audience. On the right side of the disk are several
three-dimensional cylinders under the heading "Data Sources."
In the center of the large disk are two smaller disks, stacked one on top of the
other. The bottom disk is entitled "Customer-Written Applications" and includes
several icons labeled "E-commerce," "Transaction Processing," "Decision
Support," "Demand & Supply Chain Management," "Customer Support" and "Enterprise
Portals." To the right of the text Customer-Written Applications is the
following text: Organizations are building far-reaching strategic applications
with the Silverstream Application Server.
The top disk is entitled "SilverStream Application Server" and contains a
detailed graphic outlining the fundamental components of the SilverStream
Application Server architecture:
1. At the bottom is a horizontal three-dimensional rectangle entitled
"Enterprise Deployment Services," which rectangle includes four boxes
entitled "Scalability," "Reliability," "Security" and "Manageability."
2. On top of the rectangle are three vertical three-dimensional rectangles:
a. The vertical rectangle on the left is entitled "Presentation Layer,"
and includes two boxes entitled "HTML" and "Java"
b. The vertical rectangle in the middle is entitled "Business Logic
Layer"
c. The vertical rectangle on the right is entitled "Data Access Layer"
3. Above the three rectangles and connected to each by thin lines is a
horizontal three-dimensional rectangle entitled "Development Tools."
The following text appears below the graphic:
Application Servers integrate data from existing applications:
- relational databases
- enterprise resource planning systems
- legacy mainframe systems
- document management systems
- external data sources
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 6
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS.......................... 14
USE OF PROCEEDS....................... 15
DIVIDEND POLICY....................... 15
CAPITALIZATION........................ 16
DILUTION.............................. 17
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 20
BUSINESS.............................. 31
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MANAGEMENT............................ 45
CERTAIN TRANSACTIONS.................. 49
PRINCIPAL STOCKHOLDERS................ 51
DESCRIPTION OF CAPITAL STOCK.......... 53
SHARES ELIGIBLE FOR FUTURE SALE....... 55
UNDERWRITERS.......................... 57
LEGAL MATTERS......................... 59
EXPERTS............................... 59
WHERE YOU CAN FIND MORE INFORMATION... 59
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT BUY, SELL OR TRADE THE 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.
2
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding SilverStream and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this prospectus.
SILVERSTREAM SOFTWARE, INC.
SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. The advantages of Web-based
technology are driving the creation of a new generation of business-
transforming software programs. These powerful Web-based programs, or Web
applications, link a broad universe of customers, vendors, employees and
partners with multiple, diverse data sources. We believe our products and
services help our customers to rapidly develop Web applications that are
reliable, secure and able to handle increasing and variable volumes of user
traffic, commonly known as being scalable. Using our products and services,
organizations can create and deploy robust Web applications in diverse areas
such as e-commerce, employee self-service, supply chain management and customer
service.
Organizations are using Web applications to conduct "e-business," which
encompasses business-to-business, business-to-employee and business-to-consumer
transactions. These organizations recognize that if they are able to offer
easy-to-access, compelling, real-time applications as a means of transacting
business and interacting with business partners and customers, they can create
closer and more enduring business relationships, new efficiencies and
significant competitive and strategic advantages. To date, organizations have
been required to use many different development tools, programming languages and
technologies, often from different vendors, and have had to rely on custom
programming and complex integration activities to develop their Web
applications. These applications have often been difficult and expensive to
create, deploy and manage. In order to compete in this dynamic e-business
environment, organizations need expandable, reliable and secure solutions that
shorten the development time for powerful new Web applications.
SilverStream's products and services are designed to help our customers
meet the new challenges posed by Web-based technology and applications. Our
products consist of an application server, an integrated set of development
tools and enterprise data connectors. Our Application Server is a software
product that provides access to various forms of electronic information and
communicates, usually in the form of a Web application, with the computers of
users accessing the information. Our enterprise data connectors provide access
to various kinds of third-party data sources. We believe our products reduce the
complexity of developing Web applications and enable customers to extend the
reach of these applications, access multiple information sources and simplify
administration. We also offer comprehensive consulting, education and technical
support services to help ensure the successful development and implementation of
Web applications by our customers.
We market our products and services globally through our direct sales force
and a network of independent software vendors, value-added resellers and
consulting partners. To date, we have licensed the SilverStream Application
Server to over 500 customers in a wide variety of industries, including
communication, financial services, government, manufacturing, oil and gas,
pharmaceutical, technology and transportation.
We are a Delaware corporation. Our principal executive offices are located
at One Burlington Woods, Suite 200, Burlington, Massachusetts 01803 and our
telephone number is (781) 238-5400. Our World Wide Web site address is
www.silverstream.com. The information in the Web site is not incorporated by
reference into this prospectus.
SilverStream(R) is our registered trademark and SilverStream Application
Server and the SilverStream logo are our trademarks. This prospectus also
contains trademarks and trade names of other companies.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................ 3,000,000 shares
Common stock to be outstanding after this
offering.................................. 16,979,416 shares
Use of proceeds............................. For general corporate purposes, including
working capital and capital expenditures.
For more detailed information, see "Use of
Proceeds" on page 15.
Proposed Nasdaq National Market symbol...... SSSW
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------- ------------------------
1996 1997 1998 1998 1999
-------------- -------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software license................. $ -- $ 249 $ 5,983 $ 1,527 $ 5,515
Services......................... -- -- 825 217 2,267
-------- -------- ---------- ---------- -----------
Total revenue...................... -- 249 6,808 1,744 7,782
Cost of revenue:
Software license................. -- 90 767 234 685
Services......................... -- 282 1,414 519 3,167
-------- -------- ---------- ---------- -----------
Total cost of revenue.............. -- 372 2,181 753 3,852
-------- -------- ---------- ---------- -----------
Gross profit (loss)................ -- (123) 4,627 991 3,930
Total operating expenses........... 1,005 8,437 17,987 7,844 13,450
-------- -------- ---------- ---------- -----------
Loss from operations............... (1,005) (8,560) (13,360) (6,853) (9,520)
-------- -------- ---------- ---------- -----------
Net loss........................... $ (952) $ (8,335) $ (12,885) $ (6,601) $ (9,342)
======== ======== ========== ========== ===========
Basic and diluted net loss per
share............................ $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Weighted-average common shares used
in computing basic and diluted
net loss per share............... 185,686 785,548 2,632,496 2,334,575 3,551,349
Pro forma basic and diluted net
loss per share................... $ (1.33) $ (.83)
Weighted-average common shares used
in computing pro forma basic and
diluted net loss per share....... 9,691,693 11,618,248
</TABLE>
Weighted-average common shares shown above exclude unvested shares of
common stock subject to repurchase rights, which totalled 2,489,984 and
1,679,106 for the year ended December 31, 1998 and the six months ended June 30,
1999, respectively. Shares used in computing pro forma basic and diluted net
loss per share above include the 8,659,208 shares of common stock issuable upon
conversion of our outstanding preferred stock upon the closing of this offering.
The pro forma as adjusted column in the consolidated balance sheet data
below gives effect to the conversion of our outstanding preferred stock into
common stock on a one-for-one basis upon the closing of this offering and the
sale of the 3,000,000 shares of common stock in this offering at an assumed
initial public offering price of $14.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $10,778 $48,838
Working capital............................................. 10,439 48,499
Total assets................................................ 20,895 58,955
Long-term debt, less current portion........................ 682 682
Redeemable convertible preferred stock...................... 11,638 --
Total stockholders' equity.................................. 1,456 51,154
</TABLE>
4
<PAGE> 7
Except as set forth in the Consolidated Financial Statements and Notes
thereto or as otherwise indicated, all information in this prospectus:
- Assumes no exercise of the underwriters' over-allotment option;
- Reflects the conversion of all outstanding shares of our convertible
preferred stock into shares of common stock on a one-for-one basis; and
- Reflects the filing, as of the closing of the offering, of our second
amended and restated certificate of incorporation and the adoption of our
amended and restated by-laws implementing provisions described below
under "Description of Capital Stock -- Delaware Law and Our Charter and
By-Law Provisions; Anti-Takeover Effects" on page 53.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted.
5
<PAGE> 8
RISK FACTORS
You should consider carefully the risks described below before you decide
to buy our common stock. The risks and uncertainties described below are not the
only ones facing us. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In such case,
the trading price of our common stock could fall, and you may lose all or part
of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE INCURRED SUBSTANTIAL LOSSES, WE EXPECT CONTINUED LOSSES AND CONTINUED
LOSSES WILL HARM OUR BUSINESS.
We have never been profitable. Our failure to significantly increase our
revenue would seriously harm our business and operating results. We have
experienced operating losses in each quarterly and annual period since inception
and we expect to incur significant losses in the future. We incurred net losses
of $952,000 for the period ended December 31, 1996, $8.3 million for the year
ended December 31, 1997, $12.9 million for the year ended December 31, 1998 and
$9.3 million for the six months ended June 30, 1999. As of June 30, 1999, we had
an accumulated deficit of $31.5 million. We expect to significantly increase our
research and development, sales and marketing and general and administrative
expenses in future periods. As a result, we will need to significantly increase
our quarterly revenue to achieve and maintain profitability. If our revenue
grows more slowly than we anticipate or if our operating expenses increase more
than we expect or cannot be reduced in the event of lower revenue, our business
will be materially and adversely affected.
WE EXPECT TO DEPEND ON OUR APPLICATION SERVER AND RELATED SERVICES FOR
SUBSTANTIALLY ALL OF OUR REVENUE FOR THE FORESEEABLE FUTURE AND IF OUR
APPLICATION SERVER DOES NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS
AND RESULTS OF OPERATIONS WILL SUFFER.
We expect to continue to derive substantially all of our revenue from our
SilverStream Application Server and related products and services. Failure to
achieve broad market acceptance of the SilverStream Application Server, or a
decline in the price of, or demand for, our Application Server and related
products and services would seriously harm our business and operating results.
We cannot predict the level of market acceptance that will be achieved or
maintained by our products and services.
OUR BUSINESS WILL SUFFER IF WE DO NOT SUCCESSFULLY INTRODUCE ENHANCEMENTS TO
OUR APPLICATION SERVER.
Our future financial performance will depend significantly on revenue from
future enhancements to the SilverStream Application Server that we are currently
developing and plan to develop. Any delay or difficulties in completing these
enhancements would seriously harm our business and operating results. We are
currently developing Version 3.0 of our Application Server, which we expect will
include functionality that we do not currently have, including improvements to
the programming environment as well as support for computing standards, such as
Enterprise JavaBeans and Java2, and third-party development tools. Version 3.0
will require significant additional development and we cannot predict the time
required to complete development and testing or the date of commercial release.
In addition, we cannot be certain that enhanced versions of the SilverStream
Application Server will meet customer performance needs or expectations when
shipped or that new versions will be free of significant software defects or
bugs.
WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME AND YOUR BASIS FOR
EVALUATING US IS LIMITED.
We began commercial shipments of our first software products in November
1997. You must consider the risks, expenses and uncertainties that an early
stage company like ours faces, particularly in the new and rapidly evolving
Internet market. Because we have only recently commenced commercial sales, our
past results and rates of growth may not be meaningful and you should not rely
on them as an indication of our future performance.
6
<PAGE> 9
OUR LIMITED OPERATING HISTORY MAKES FORECASTING DIFFICULT AND THE FAILURE TO
MEET EXPECTATIONS COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
As a result of our limited operating history, it is difficult to forecast
accurately our revenues, and we have limited meaningful historical financial
data upon which to base planned operating expenses. If we do not achieve our
expected revenues, our operating results will be below our expectations and the
expectations of investors and market analysts, which could cause the price of
our common stock to decline. Specifically, we were founded in May 1996, and
began shipping our first products, the SilverStream Application Server 1.0 and
related software development tools, in November 1997. Our operating expenses are
largely based on anticipated revenue trends and a high percentage of our
expenses are and will continue to be fixed in the short-term. The revenue and
income potential of our products and business are unproven and the market that
we are addressing is rapidly evolving.
THE MARKET FOR OUR PRODUCTS IS EMERGING AND OUR BUSINESS WILL SUFFER IF IT
DOES NOT DEVELOP AS WE EXPECT.
The market for Web application server software has only recently begun to
develop, is rapidly evolving and will likely have an increasing number of
competitors. We cannot be certain that a viable market for our products will
emerge or be sustainable. If the application server market fails to develop, or
develops more slowly than expected, our business and operating results would be
seriously harmed.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY ADVERSELY AFFECT
THE TRADING PRICE OF OUR COMMON STOCK.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future, making it difficult to predict
future performance. These variations result from a number of factors, many of
which are outside of our control. Because of this difficulty in predicting
future performance, our operating results will likely fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock.
Although we have limited historical financial data, we believe that our
quarterly operating results may experience seasonal fluctuations. For instance,
quarterly results may fluctuate based on our clients' calendar year budgeting
cycles, deferral of customer orders in anticipation of product enhancements or
new products, slow summer purchasing patterns in Europe and our compensation
policies that tend to compensate sales personnel, typically in the latter half
of the year, for achieving annual quotas.
WE DEPEND ON INCREASED BUSINESS FROM OUR CURRENT AND NEW CUSTOMERS AND IF WE
FAIL TO GROW OUR CUSTOMER BASE OR GENERATE REPEAT BUSINESS, OUR OPERATING
RESULTS COULD BE HARMED.
If we fail to grow our customer base or generate repeat and expanded
business from our current and new customers, our business and operating results
would be seriously harmed. Most of our customers initially make a limited
purchase of our products and services for pilot programs. Many of these
customers may not choose to purchase additional licenses to expand their use of
our products. Many of these customers have not yet developed or deployed initial
applications based on our products. If these customers do not successfully
develop and deploy such initial applications, they may not choose to purchase
deployment licenses or additional development licenses. Our business model
depends on the expanded use of our products within our customers' organizations.
In addition, as we introduce new versions of our products or new products,
our current customers may not require the functionality of our new products and
may not ultimately license these products. Because the total amount of
maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively impact our future services
revenue. In addition, if customers elect not to renew their maintenance
agreements, our services revenue could be significantly adversely affected.
7
<PAGE> 10
OUR MARKETS ARE HIGHLY COMPETITIVE AND OUR FAILURE TO COMPETE SUCCESSFULLY
WILL LIMIT OUR ABILITY TO RETAIN AND INCREASE OUR MARKET SHARE.
Our markets are new, rapidly evolving and highly competitive, and we expect
this competition to persist and intensify in the future. Our failure to maintain
and enhance our competitive position will limit our ability to retain and
increase our market share resulting in serious harm to our business and
operating results.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do. Many of
these companies have more extensive customer bases, broader customer
relationships and broader industry alliances that they could leverage, including
relationships with many of our current and potential customers. These companies
also have significantly more established customer support and professional
services organizations. In addition, these companies may adopt aggressive
pricing policies, may bundle their competitive products with broader product
offerings or may introduce new products and enhancements. See
"Business--Competition" on page 42 for more information about our competition.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY RESULTS.
A customer's decision to purchase our products typically involves a
significant decision by the prospective customer's senior information technology
managers, as the customer applications to be built and deployed using our
products are generally critical to the customer's business. In addition, we
generally need to educate potential customers on the use and benefits of an
application server and on the performance features of the SilverStream
Application Server. Our long sales cycle makes it difficult to predict the
quarter in which sales may occur. The sale of our products is also subject to
delays from the lengthy budgeting, approval and competitive evaluation processes
that typically accompany significant information technology purchasing
decisions. For example, customers frequently begin by evaluating our products on
a limited basis and devote time and resources to testing our products before
they decide whether or not to purchase a license for deployment. Customers may
also defer orders as a result of anticipated releases of new products or
enhancements by us or our competitors.
FAILURE TO DEVELOP AND EXPAND OUR SALES AND MARKETING CAPABILITIES WOULD HARM
OUR BUSINESS.
We need to expand our sales and marketing operations in order to increase
market awareness of our products, market the SilverStream Application Server to
a greater number of organizations and generate increased revenue. However,
competition for qualified sales personnel is intense and we may not be able to
hire enough qualified individuals in the future. If we are unable to attract or
retain such qualified sales personnel, our business and operating results would
be seriously harmed. Our products and services require a sophisticated sales
effort targeted at senior information technology management of our prospective
customers. New hires require extensive training and typically require at least
six months to achieve full productivity. We have limited experience managing a
large, expanding and geographically dispersed direct sales force. In addition,
we have limited experience marketing our products broadly to a large number of
potential customers.
FAILURE TO MAINTAIN EXISTING, OR INCREASE THE NUMBER OF, THIRD-PARTY
DISTRIBUTION RELATIONSHIPS MAY LIMIT OUR ABILITY TO PENETRATE THE MARKET.
We have a limited number of third-party distribution agreements and we may
not be able to increase the number of our distribution relationships or maintain
our existing relationships. Our failure to increase the number of our
distribution relationships or maintain our existing relationships may limit our
ability to penetrate the market. Our current agreements with our distribution
partners do not prevent these companies from selling products of other
companies, including products that may compete with our products, and do not
generally require these partners to purchase minimum quantities of our products.
These distributors could give higher priority to the products of other companies
or to their own products, than they give to our products. As a result, the loss
of, or a significant reduction in sales volume to our
8
<PAGE> 11
current or future distribution partners could seriously harm our revenue and
operating results. In addition, a significant increase in sales through these
channels could also negatively impact our gross margins, as sales through these
channels generally have lower revenue per unit than direct sales.
FAILURE TO EXPAND OUR SERVICES OFFERINGS WOULD HARM OUR BUSINESS.
We believe that growth in our product sales depends on our ability to
provide our customers with comprehensive services, including application
engineering, implementation, training and support, and to educate third-party
resellers, instructors and consultants on how to provide similar services. If we
fail to attract, train and retain the skilled persons who deliver these
services, our business and operating results would be harmed. We plan to
increase the number of our services personnel to meet these needs. However,
competition for qualified service personnel is intense and we may not be able to
attract, train or retain the number of highly qualified service personnel that
our business needs.
We expect our services revenue to increase in dollar amount as we continue
to provide consulting, education and technical support services that complement
our products and as our installed base of customers grows. To date, our cost of
services revenue has been significantly higher than our services revenue, and we
expect to continue to incur losses from our services business in the future.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.
To be successful, we believe we must expand our international operations.
Therefore, we expect to commit significant resources to expand our international
sales and marketing activities. However, we may not be able to maintain or
increase market demand for our products which may harm our business. We are
increasingly subject to a number of risks associated with international business
activities which may increase our costs, lengthen our sales cycle and require
significant management attention. These risks generally include:
- Increased expenses associated with customizing products for foreign
countries;
- General economic conditions in our international markets;
- Currency exchange rate fluctuations;
- Unexpected changes in regulatory requirements resulting in unanticipated
costs and delays;
- Tariffs, export controls and other trade barriers;
- Longer accounts receivable payment cycles and difficulties in collecting
accounts receivable;
- Potentially adverse tax consequences, including restrictions on the
repatriation of earnings; and
- The risks related to the recent global economic turbulence and adverse
economic circumstances in Asia.
OUR FUTURE SUCCESS DEPENDS ON CONTINUED USE OF THE INTERNET AND GROWTH OF
ELECTRONIC BUSINESS.
Our future success depends heavily on the acceptance and wide use of the
Internet for electronic business. If electronic business does not continue to
grow or grows more slowly than expected, demand for our products and services
will be reduced. Consumers and businesses may reject the Internet as a viable
commercial medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies, insufficient
commercial support or privacy concerns. The Internet's infrastructure may not be
able to support the demands placed on it by increased usage. In addition, delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or increased governmental regulation,
could cause the Internet to lose its viability as a commercial medium. Even if
the required infrastructure, standards, protocols and complementary products,
services or facilities are developed, we may incur substantial expenses adapting
our solutions to changing or emerging technologies.
9
<PAGE> 12
IF WE FAIL TO RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE.
The markets for our products and services are marked by rapid technological
change, frequent new product introductions and enhancements, uncertain product
life cycles, changes in customer demands and evolving industry standards. New
products based on new technologies or new industry standards may quickly render
an existing product obsolete and unmarketable. Any delays in our ability to
develop and release enhanced or new products could seriously harm our business
and operating results. Our technology is complex, and new products and product
enhancements can require long development and testing periods. Our failure to
conform to prevailing standards could have a negative effect on our business and
operating results.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE OUR
MANAGEMENT AND OPERATIONAL SYSTEMS ON A TIMELY BASIS.
We have expanded our operations rapidly since inception. We intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. To be successful, we will need to
implement additional management information systems, improve our operating,
administrative, financial and accounting systems, procedures and controls, train
new employees and maintain close coordination among our executive, engineering,
professional services, accounting, finance, marketing, sales and operations
organizations. In addition, our growth has resulted, and any future growth will
result, in increased responsibilities for management personnel.
In addition, our principal executive office lease is due to expire in July
2000. We may move our headquarters to new office space or expand into additional
office space. We cannot be certain that office space will be available on
reasonable terms. We would likely experience significant costs, and we could
experience a disruption in the development or marketing of our products, in
connection with an expansion or move.
FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL WOULD HARM OUR BUSINESS.
Our success depends largely on the skills, experience and performance of
the members of our senior management and other key personnel, including our
Chairman, David Skok, and our President and Chief Executive Officer, David
Litwack. If we lose one or more of the members of our senior management or other
key employees, our business and operating results could be seriously harmed. In
addition, our future success will depend largely on our ability to continue
attracting, training, motivating and retaining highly skilled personnel. None of
our senior management or other key personnel is bound by an employment
agreement. Like other software companies in the Boston, Massachusetts area, we
face intense competition for qualified personnel including software engineering,
service and support, and sales and marketing personnel.
WE INCLUDE THIRD-PARTY SOFTWARE AND TECHNOLOGY IN OUR PRODUCTS AND OUR
BUSINESS WOULD BE HARMED IF WE WERE NOT ABLE TO CONTINUE USING THIS THIRD-PARTY
SOFTWARE AND TECHNOLOGY.
Our products integrate third-party text search, object middleware,
compiler, encryption, transaction processing and monitoring, Java virtual
machine and database technology and products. There are inherent limitations in
the use and capabilities of much of the technology that we license from third
parties. Our business would be seriously harmed if the providers from whom we
license software and technology ceased to deliver and support reliable products,
enhance their current products in a timely fashion or respond to emerging
industry standards. In addition, the third-party software may not continue to be
available to us on commercially reasonable terms or at all. For example, we
license some of the components of our products from limited or sole source
suppliers, including encryption technology which we license from RSA Data
Security. Many of these licenses are subject to periodic renewal. The loss of,
or inability to maintain or obtain this software for any reason could result in
significant shipment delays or reductions.
10
<PAGE> 13
Furthermore, we might be forced to limit the features available in our current
or future product offerings. Either alternative could seriously harm our
business and operating results.
Almost all of our products are written in Java and require a Java virtual
machine made available by Sun Microsystems in order to operate. Sun may not
continue to make the Java virtual machines available at commercially reasonable
terms or at all. Furthermore, if Sun were to make significant changes to the
Java language or its Java virtual machines, or fail to correct defects and
limitations in these products, our ability to continue to improve and ship our
products could be impaired. In the future, our customers may also require the
ability to deploy our products on platforms for which technically acceptable
Java implementations either do not exist or are not available on commercially
reasonable terms.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN LOST
REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OR PRODUCT LIABILITY CLAIMS WITH
SUBSTANTIAL LITIGATION COSTS.
Complex software products like ours can contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Defects or errors in current or future products, including the planned
SilverStream Application Server Version 3.0, could result in lost revenue or a
delay in market acceptance, which would seriously harm our business and
operating results. We have in the past discovered software errors in our new
releases and new products after their introduction and expect that this will
continue. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects,
including Year 2000 errors.
As many of our customers use our products for business-critical
applications, errors, defects or other performance problems could result in
financial or other damage to our customers and could significantly impair their
operations. Our customers could seek damages for losses related to any of these
issues. A product liability claim brought against us, even if not successful,
would likely be time consuming and costly to defend and could adversely affect
our marketing efforts.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE USE ARE NOT YEAR
2000 COMPLIANT OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR PURCHASING
PATTERNS AS A RESULT OF THE YEAR 2000.
We are in the process of assessing any Year 2000 issues with the computer,
communications and software systems that we use to deliver our products and to
manage our internal operations. We have not finalized our assessment or
formulated a final plan or budget to remedy our Year 2000 issues. If our systems
do not operate properly with respect to date calculations involving the Year
2000 and subsequent dates, we could incur unanticipated expenses to remedy any
problems, which could seriously harm our business. We may also experience
reduced sales of our products as current or potential customers reduce their
budgets for enterprise software and Internet products due to increased
expenditures on their own Year 2000 compliance efforts.
The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information technology
systems nevertheless could be substantially impaired or cease to operate due to
Year 2000 problems. Additionally, we rely on information technology supplied by
third parties, and our other business partners, including third-party
distributors and consultants, also are heavily dependent on information
technology systems and on their own and third-party vendor systems. Year 2000
problems experienced by us or any of these third parties could materially
adversely affect our business. Prior versions of our products may contain
technology from third parties that is not Year 2000 compliant. Additionally, the
Internet could face serious disruptions arising from the Year 2000 problem.
Many of our customers and potential customers have implemented policies
that prohibit or strongly discourage making changes or additions to their
internal computer systems until after January 1, 2000. We will experience fewer
sales if potential customers delay the purchase and implementation of our
products until after January 1, 2000. Purchasing decisions may be delayed as
potential customers stabilize their internal computer systems or divert their
information technology budgets to address Year 2000 issues. If
11
<PAGE> 14
our potential customers delay purchasing or implementing our products in
preparation for the Year 2000 problem, our business would be seriously harmed.
Given the pervasive nature of the Year 2000 problem, we cannot guarantee
that disruptions in other industries and market segments will not adversely
affect our business. Moreover, our costs related to Year 2000 compliance, which
thus far have not been material, could ultimately be significant. In the event
that we experience disruptions as a result of the Year 2000 problem, our
business could be seriously harmed. Our efforts to address Year 2000 issues are
described in more detail in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance" on page 28.
OUR BUSINESS MAY SUFFER IF WE CANNOT PROTECT OUR INTELLECTUAL PROPERTY.
We have no patents, and none may be issued from our existing patent
applications. We rely on a combination of contractual provisions,
confidentiality procedures, and patent, trademark, trade secret and copyright
laws to protect the proprietary aspects of our technology. These legal
protections afford only limited protection and competitors may gain access to
our intellectual property which may result in the loss of our customers. In
addition, despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use our
proprietary information. Litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets and to determine the validity and
scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of resources with no assurance of success and
could seriously harm our business and operating results. In addition, we sell
our products internationally, and the laws of many countries do not protect our
proprietary rights as well as the laws of the United States. Our future patents,
if any, may be successfully challenged or may not provide us with any
competitive advantages.
We obtain a major portion of our software license revenue from licensing
our products under standardized "shrink wrap" agreements that our customers do
not sign. If any of these agreements were deemed unenforceable, those customers
may seek to use and copy our technology without appropriate limitations.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM
INFRINGEMENT OR A CLAIM OF INFRINGEMENT.
Other companies, including our competitors, may obtain patents or other
proprietary rights that would prevent, limit or interfere with our ability to
make, use or sell our products. As a result, we may be found to infringe on the
proprietary rights of others. In the event of a successful claim of infringement
against us and our failure or inability to license the infringed technology, our
business and operating results would be significantly harmed. Companies in the
software market and the Internet market are increasingly bringing suits alleging
infringement of their proprietary rights, particularly patent rights. We have
been subject to such claims in the past. Any litigation or claims, whether or
not valid, could result in substantial costs and diversion of resources with no
assurance of success. Intellectual property litigation or claims could force us
to do one or more of the following:
- Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- Obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms; and
- Redesign products or services.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND CONSEQUENTLY HARM OUR
FINANCIAL CONDITION.
In order to remain competitive, we may find it necessary to acquire
additional businesses, products or technologies. If we identify an appropriate
acquisition candidate, we may not be able to negotiate the terms of the
acquisition successfully, finance the acquisition, or integrate the acquired
business, products or
12
<PAGE> 15
technologies into our existing business and operations. Further, completing a
potential acquisition and integrating an acquired business will cause
significant diversions of management time and resources. If we consummate one or
more significant acquisitions in which the consideration consists of stock or
other securities, your equity could be significantly diluted. 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 from this offering, to consummate an
acquisition. Acquisition financing may not be available on favorable terms, or
at all. In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which would seriously harm our operating results.
RISKS RELATED TO THIS OFFERING
WE MAY NEED ADDITIONAL FINANCING WHICH COULD BE DIFFICULT TO OBTAIN.
We expect the net proceeds from this offering, together with cash generated
from operations 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. Further, if we issue
additional equity securities, stockholders may experience additional dilution or
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of common stock. If we cannot raise funds on
acceptable terms, if and when needed, we may not be able to develop or enhance
our products and services, take advantage of future opportunities, grow our
business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business.
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. You may be unable to sell your shares of common stock at or
above the initial public offering price, which may result in substantial losses
to you. The market price of the common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- Variations in our quarterly operating results;
- Changes in securities analysts' estimates of our financial performance;
- Changes in market valuations of similar companies;
- Announcements by us or our competitors of new or enhanced products or
significant contracts, acquisitions or strategic partnerships;
- Additions or departures of key personnel; and
- Future sales of our common stock or other securities.
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK PRICE VOLATILITY.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
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<PAGE> 16
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY SHARES BECOMING AVAILABLE FOR
SALE.
Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. For a more detailed description, see "Shares Eligible for
Future Sale" on page 55.
PURCHASERS IN THIS OFFERING WILL INCUR IMMEDIATE, SUBSTANTIAL DILUTION.
We expect that the initial public offering price of our common stock will
be substantially higher than the book value per share of the outstanding common
stock. As a result, investors purchasing common stock in this offering will
incur immediate and substantial dilution. In the past, we issued options to
acquire common stock at prices significantly below the initial public offering
price. To the extent these outstanding options are ultimately exercised, there
will be further dilution to investors in this offering.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY.
Provisions of our certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For more
information regarding these provisions, see "Description of Capital Stock --
Delaware Law and Our Charter and By-Law Provisions; Anti-Takeover Effects" on
page 53.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER SILVERSTREAM AFTER
THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.
Upon completion of this offering, our executive officers, directors and
principal stockholders will beneficially own, in the aggregate, approximately
55.5% of our outstanding common stock. As a result, these stockholders will be
able to exercise control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This could have the effect of delaying or preventing a change of
control of SilverStream.
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING AND THE
FAILURE OF MANAGEMENT TO APPLY SUCH FUNDS EFFECTIVELY COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this offering,
in our operations or external investments, to yield a favorable return.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will" and "would" or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future results
of operations or of our financial position or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you should be
aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could have a material adverse effect on our
business, results of operations and financial position.
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<PAGE> 17
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,000,000 shares of
common stock will be approximately $38.1 million, assuming an initial public
offering price of $14.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us. If the
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $43.9 million.
The principal purposes of this offering are to establish a public market
for our common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.
We expect to use the net proceeds for working capital, capital expenditures
and general corporate purposes, including approximately $8.0 million for
expansion of sales and marketing operations, $4.0 million for research and
development activities, $5.0 million for expansion of professional services,
$1.0 million for expansion of facilities and $1.0 million for improvements to
operational and financial systems. The amount and timing of these expenditures
will vary depending on a number of factors, including the amount of cash
generated by our operations, competitive and technological developments, future
changes in our business objectives, and the rate of growth, if any, of our
business. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
have no specific acquisitions planned. Pending these uses, we plan to invest the
net proceeds in short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business. Our existing equipment line of credit and term
loans prohibit the payment of dividends without the consent of the lender.
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<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. The
pro forma information gives effect to the conversion of all of our outstanding
preferred stock into common stock on a one-for-one basis upon the closing of
this offering and assumes the filing of our second amended and restated
certificate of incorporation after the closing of this offering authorizing
2,000,000 shares of preferred stock and 100,000,000 shares of common stock. The
pro forma as adjusted information gives effect to the foregoing as well as the
issuance and sale of the 3,000,000 shares of common stock in this offering at an
assumed initial public offering price of $14.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by us. The outstanding share information excludes 1,401,192 shares of
common stock issuable on exercise of outstanding options as of June 30, 1999
with a weighted average exercise price of $3.53 per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt, less current portion...................... $ 682 $ 682 $ 682
Redeemable convertible preferred stock, $.001 par value,
5,283,050 shares authorized, 5,183,988 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted........ 11,638 -- --
Stockholders' equity:
Convertible preferred stock, $.001 par value, 3,600,000
shares authorized, 3,475,220 shares issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted........ 31,584 -- --
Preferred stock, $.001 par value, no shares authorized,
issued and outstanding, actual; 2,000,000 shares
authorized, pro forma and pro forma as adjusted, no
shares issued and outstanding, pro forma and pro forma
as adjusted............................................. -- -- --
Common stock, $.001 par value; 21,000,000 shares
authorized, 5,320,208 shares issued and outstanding,
actual; 100,000,000 shares authorized, pro forma and pro
forma as adjusted, 13,979,416 shares issued and
outstanding, pro forma, 16,979,416 shares issued and
outstanding, pro forma as adjusted...................... 6 15 17
Additional paid-in capital................................ 3,405 46,618 84,676
Deferred compensation..................................... (1,848) (1,848) (1,848)
Accumulated deficit....................................... (31,514) (31,514) (31,514)
Other comprehensive loss.................................. (73) (73) (73)
Notes receivable from stockholders........................ (104) (104) (104)
-------- -------- --------
Total stockholders' equity...................... 1,456 13,094 51,154
-------- -------- --------
Total capitalization............................ $ 13,776 $ 13,776 $ 51,836
======== ======== ========
</TABLE>
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<PAGE> 19
DILUTION
SilverStream's pro forma net tangible book value as of June 30, 1999, after
giving effect to the conversion of all outstanding shares of convertible
preferred stock into common stock on a one-for-one basis upon the closing of
this offering, was approximately $11.8 million, or $.84 per share of common
stock. Pro forma net tangible book value per share represents our total assets
less total liabilities and intangibles, divided by the 13,979,416 shares of
common stock outstanding after giving effect to the conversion of all
outstanding shares of convertible preferred stock into common stock on a
one-for-one basis. Net tangible book value dilution per share to new investors
is the difference between the amount per share paid by purchasers of common
stock in this offering and the pro forma net tangible book value per share
immediately following this offering. After giving effect to the issuance and
sale of the 3,000,000 shares of common stock in this offering, at an assumed
offering price of $14.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us,
SilverStream's pro forma net tangible book value as of June 30, 1999 would have
been $49.9 million, or $2.94 per share. This represents an immediate increase in
pro forma net tangible book value to existing stockholders of $2.10 per share.
The assumed offering price of $14.00 per share, which is what new investors are
expected to pay for shares of common stock in this offering, substantially
exceeds $2.94 per share, which is the per share value of our total assets less
total liabilities and intangibles after this offering. Accordingly, new
investors who purchase common stock in this offering will suffer an immediate
dilution of their investment of $11.06 per share. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $ .84
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 2.10
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.94
------
Dilution per share to new investors......................... $11.06
======
</TABLE>
The following table summarizes on a pro forma basis, giving effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock on a one-for-one basis upon the closing of this offering, as of June 30,
1999, the difference between the number of shares of common stock purchased from
SilverStream, the total consideration paid to SilverStream, and the average
price per share paid by existing stockholders and by new investors. In
accordance with the following table, new investors will contribute 48.7% of the
total consideration for, and own 17.7% of the outstanding shares of, the common
stock of SilverStream. The calculation below is based on an assumed offering
price of $14.00 per share, before deduction of estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 13,979,416 82.3% $44,316,224 51.3% $ 3.17
New investors......................... 3,000,000 17.7 42,000,000 48.7 14.00
---------- ----- ----------- ------
Total....................... 16,979,416 100.0% $86,316,224 100.0%
========== ===== =========== ======
</TABLE>
The table above assumes no exercise of stock options outstanding at June
30, 1999. As of June 30, 1999, there were options outstanding to purchase
1,401,192 shares of common stock with a weighted average exercise price of $3.53
per share. To the extent all of such outstanding options had been exercised as
of June 30, 1999, pro forma net tangible book value per share after this
offering would be $2.98 and total dilution per share to new investors would be
$11.02.
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 3,450,000 shares, or 19.8% of
the total number of shares of common stock outstanding after this offering.
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<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data for the period ended December 31, 1996 and the years ended
December 31, 1997 and 1998 and the consolidated balance sheet data as of
December 31, 1997 and 1998 are derived from our Consolidated Financial
Statements that have been audited by Ernst & Young LLP, independent auditors,
and are included elsewhere in this prospectus. The consolidated balance sheet
data as of December 31, 1996 are derived from our audited consolidated financial
statements, and the consolidated balance sheet data as of June 30, 1998 are
derived from our unaudited consolidated financial statements not included in
this prospectus. The consolidated financial data as of June 30, 1999 and for the
six-month periods ended June 30, 1998 and 1999 are derived from our unaudited
Consolidated Financial Statements included elsewhere in this prospectus and
include all adjustments, consisting only of normal, recurring adjustments, that
SilverStream considers necessary for a fair presentation of our consolidated
financial position and our consolidated results of operations for those periods.
Operating results for the six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------- -----------------------
1996 1997 1998 1998 1999
-------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Software license.................. $ -- $ 249 $ 5,983 $ 1,527 $ 5,515
Services.......................... -- -- 825 217 2,267
---------- ---------- ---------- ---------- ----------
Total revenue............. -- 249 6,808 1,744 7,782
Cost of revenue:
Software license.................. -- 90 767 234 685
Services.......................... -- 282 1,414 519 3,167
---------- ---------- ---------- ---------- ----------
Total cost of revenue..... -- 372 2,181 753 3,852
---------- ---------- ---------- ---------- ----------
Gross profit (loss)................. -- (123) 4,627 991 3,930
Operating expenses:
Sales and marketing............... 35 3,854 10,776 4,422 8,258
Research and development.......... 850 2,622 5,070 2,429 3,342
General and administrative........ 120 1,961 2,141 993 1,660
Compensation charge for issuance
of stock options............... -- -- -- -- 190
---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 1,005 8,437 17,987 7,844 13,450
---------- ---------- ---------- ---------- ----------
Loss from operations................ (1,005) (8,560) (13,360) (6,853) (9,520)
Other income, net................... 53 225 475 252 178
---------- ---------- ---------- ---------- ----------
Net loss............................ $ (952) $ (8,335) $ (12,885) $ (6,601) $ (9,342)
========== ========== ========== ========== ==========
Basic and diluted net loss per
share............................. $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Weighted-average common shares used
in computing basic and diluted net
loss per share.................... 185,686 785,548 2,632,496 2,334,575 3,551,349
Pro forma basic and diluted net loss
per share......................... $ (1.33) $ (.83)
Weighted-average common shares used
in computing pro forma basic and
diluted net loss per share........ 9,691,693 11,618,248
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------- ------------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................. $2,734 $16,649 $ 1,199 $ 4,717 $10,778
Working capital........................... 2,591 16,349 5,119 11,507 10,439
Total assets.............................. 3,056 18,956 10,014 15,406 20,895
Long-term debt, less current portion...... 189 295 325 511 682
Redeemable convertible preferred stock.... 3,658 11,638 11,638 11,638 11,638
Total stockholders' equity (deficit)...... (947) 5,944 (5,048) 1,045 1,456
</TABLE>
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in such
forward-looking statements.
OVERVIEW
SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. From our incorporation in
May 1996 through December 1997, we were considered a development stage
enterprise and our activities were primarily focused on raising capital,
conducting research and development, and establishing markets and distribution
channels for our products. In November 1997, we began commercial shipment of the
initial version of our Application Server. Today, we have licensed the
SilverStream Application Server to more than 500 customers around the world.
We derive our revenue from the sale of software product licenses and from
professional consulting, education and technical support services. We plan to
generate future revenue from both new and existing customers. As existing
customers create new software applications based on the SilverStream Application
Server, they may require more application servers to run these applications. We
plan to widen our customer base by selling licenses and services to new
customers. We anticipate that we will continue to sell annual update assurance
and support agreements to most customers. We recognize our software license
revenue in accordance with Statement of Position 97-2, "Software Revenue
Recognition." Statement of Position 97-2 generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. We generally
recognize revenue allocated to software licenses upon delivery of the software
products, provided that we have no remaining significant obligations with regard
to implementation, the license fee is fixed or determinable and collection of
the fee is probable. However, when we sell software product licenses to a
reseller, revenue is not recognized until the product is shipped to the
customer. This is because the reseller is functioning as a distributor and may
order products without a specific customer. Our customers often contract for
update assurance which provides them with new releases of software for a period
of typically one year. These agreements are separately negotiated and priced. We
recognize update assurance revenue ratably over this 12-month period. We license
our software to independent software vendors who use our products to create
their own software products for resale. Independent software vendors pay us a
prepayment at the beginning of their contract. We recognize this revenue ratably
over the period of the contract, typically one year, as the only undelivered
element under these agreements is service, for which no pattern of performance
is discernable. We also earn partner fees, which are deferred and recognized on
a straight-line basis as an offset to operating expenses over the life of the
agreement, typically one year. We consider such fees to be reimbursement for
costs incurred in connection with our partner program. We recognize revenue from
the sale of technical support services ratably over the maintenance term and
revenue from the sale of consulting and education services as the services are
performed.
We record cash receipts from customers and billed amounts due from
customers in excess of recognized revenue as deferred revenue. The timing and
amount of cash receipts from customers can vary significantly depending on
specific contract terms and can therefore have a significant impact on the
amount of deferred revenue in any given period.
Our cost of software license revenue includes royalties due to third
parties for technology included in our products, the cost of manuals and product
documentation, media used to deliver our products, shipping and fulfillment
costs and the costs associated with license revenues from independent software
vendors. Our cost of services revenue includes salaries and related expenses for
our consulting, education and technical support services organizations, costs of
third parties contracted to provide consulting services to customers and an
allocation of our facilities, communications and depreciation expenses.
20
<PAGE> 23
Our operating expenses are classified into four general categories: sales
and marketing, research and development, general and administrative and
compensation charge for issuance of stock options. Sales and marketing expenses
consist primarily of salaries and other related costs for sales and marketing
personnel, sales commissions, travel, public relations and marketing materials
and tradeshows. Research and development expenses consist primarily of personnel
costs to support product development. General and administrative expenses
consist primarily of salaries and other related costs for operations and finance
employees, legal and accounting services and facilities-related expenses.
Compensation charge for the issuance of stock options represents the difference
between the exercise price of options granted and the estimated fair market
value of the underlying common stock on the date of the grant.
We will amortize deferred compensation of approximately $2.0 million in the
aggregate relating to options granted in the six months ended June 30, 1999 that
will vest over the next five years, and which will be charged to operations
ratably over that period.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and professional services departments, and to establish an
administrative organization. As a result, we have incurred net losses in each
fiscal quarter since inception and had an accumulated deficit of $22.2 million
as of December 31, 1998 and $31.5 million as of June 30, 1999. We anticipate
that our operating expenses will increase substantially in future quarters as we
increase sales and marketing operations, expand distribution channels, increase
research and development, broaden professional services, expand facilities and
support, and improve operational and financial systems. Accordingly, we expect
to incur additional losses for the foreseeable future. In addition, our limited
operating history makes it difficult for us to predict future operating results
and, accordingly, there can be no assurance that we will achieve or sustain
revenue growth or profitability.
RESULTS OF OPERATIONS
The following table presents selected consolidated financial data for the
periods indicated as a percentage of total revenue. Data for the period from
inception through December 31, 1996 is not presented because we had no revenue
during that period.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software license................................ 100.0% 87.9% 87.5% 70.9%
Services........................................ 0.0 12.1 12.5 29.1
-------- -------- -------- --------
Total revenue........................... 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Cost of revenue:
Software license................................ 36.2 11.2 13.4 8.8
Services........................................ 113.4 20.8 29.8 40.7
-------- -------- -------- --------
Total cost of revenue................... 149.6 32.0 43.2 49.5
-------- -------- -------- --------
Gross profit (loss)............................... (49.6) 68.0 56.8 50.5
Operating expenses:
Sales and marketing............................. 1,550.7 158.3 253.5 106.1
Research and development........................ 1,055.1 74.5 139.3 43.0
General and administrative...................... 789.1 31.4 57.0 21.3
Compensation charge for issuance of stock
options...................................... 0.0 0.0 0.0 2.4
-------- -------- -------- --------
Total operating expenses................ 3,394.9 264.2 449.8 172.8
-------- -------- -------- --------
Loss from operations.............................. (3,444.5) (196.2) (393.0) (122.3)
Other income, net................................. 90.7 6.9 14.5 2.3
-------- -------- -------- --------
Net loss.......................................... (3,353.8)% (189.3)% (378.5)% (120.0)%
======== ======== ======== ========
</TABLE>
21
<PAGE> 24
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUE
Total revenue increased by approximately $6.1 million from $1.7 million in
the six months ended June 30, 1998 to $7.8 million in the six months ended June
30, 1999. This increase was attributable to an increase in our customer base
resulting in substantial growth in software license and services revenue.
Revenue from international sales increased by approximately $1.9 million from
$721,000, or 41% of total revenue, in the six months ended June 30, 1998 to $2.6
million, or 33% of total revenue, in the six months ended June 30, 1999
primarily due to increased selling and related activities in Germany, Belgium,
The Netherlands, Singapore, Hong Kong and Taiwan.
Software License. Software license revenue increased by approximately $4.0
million from $1.5 million in the six months ended June 30, 1998 to $5.5 million
in the six months ended June 30, 1999. This increase is attributable to
increased unit sales of our products following the release of Version 2.0 in
October 1998 and higher prices realized for our products in 1999 as compared to
1998.
Services. Services revenue increased by approximately $2.1 million from
$217,000 in the six months ended June 30, 1998 to $2.3 million in the six months
ended June 30, 1999. Approximately 64% of this increase is attributable to the
creation and expansion of our professional consulting organization and the
provision of a wider range of consulting services to customers and the remainder
is primarily due to an increase in the number of our customers and support
contracts.
We believe that growth in our software license sales depends on our ability
to provide our customers with support, education, and consulting services and to
educate third-party consulting partners on how to use our products. As a result,
we intend to expand our services organizations in 1999 and we believe that
services revenue will continue to increase as a percentage of total revenue. We
expect that revenue from professional consulting services will increase in the
future to the extent that additional customers license our products and as we
expand both our capacity for the delivery of these services as well as the scope
of our services offerings. We expect that services revenue from support
agreements will increase in the future as a result of new and existing license
agreements.
COST OF REVENUE
Software License. Cost of software license revenue increased by
approximately $451,000 from $234,000 in the six months ended June 30, 1998 to
$685,000 in the six months ended June 30, 1999. Of this increase, approximately
85% is attributable to increased product, shipping and third party royalty costs
from a larger volume of sales orders and the remainder is primarily attributable
to costs associated with our independent software vendors. Cost of software
license revenue decreased as a percentage of software license revenue from 15%
to 12% for the six months ended June 30, 1998 as compared to the six months
ended June 30, 1999. This decrease reflects increased efficiencies associated
with larger sales volumes. We expect software license costs to increase in the
future due to additional customers licensing our products and the licensing of
additional third-party technology that we may choose to embed in our product
offerings.
Services. Cost of services revenue increased by approximately $2.7 million
from $519,000 in the six months ended June 30, 1998 to $3.2 million in the six
months ended June 30, 1999. Of this increase in cost of services revenue,
approximately 61% is due to an increase in the number of our education and
technical support personnel and the remainder is primarily attributable to the
creation and rapid expansion of our consulting services business in late 1998.
To date, our services costs have been higher than our services revenue, and we
expect that trend to continue for the next several quarters as we continue to
expand all of our services organizations in order to meet anticipated demand for
services. We expect services costs to increase in the future to the extent that
we continue to generate new customers and associated software license and
services revenue. Services costs as a percentage of services revenue can be
expected to vary significantly from period to period depending on the mix of
services we provide, whether such services are provided by us or third-party
contractors, and overall utilization rates. Approximately
22
<PAGE> 25
24% of our services revenue for the six months ended June 30, 1999 was derived
from third-party subcontractors providing consulting, educational and technical
support services on our behalf. We derived no services revenue from third-party
subcontractors for the six months ended June 30, 1998.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased by
approximately $3.9 million from $4.4 million in the six months ended June 30,
1998 to $8.3 million in the six months ended June 30, 1999. Of this increase in
sales and marketing expenses, approximately 54% is attributable to increases in
the number of sales employees in North America, and approximately 42% is
attributed to expanded international sales operations. We believe these expenses
will increase significantly in future periods as we expect to continue to expand
our sales and marketing efforts. We also anticipate that sales and marketing
expenses may fluctuate as a percentage of a total revenue from period to period
as new sales personnel are hired and begin to achieve productivity.
Research and Development. Research and development expenses increased by
approximately $900,000 from $2.4 million in the six months ended June 30, 1998
to $3.3 million in the six months ended June 30, 1999. The increase in research
and development expenses is primarily attributable to increases in the number of
research and development personnel to support SilverStream's product development
activities. We believe that continued investment in research and development is
critical to attaining our strategic objectives, and, as a result, we expect
research and development expenses to increase significantly in future periods.
To date, all software development costs have been expensed in the period
incurred.
General and Administrative. General and administrative expenses increased
by approximately $707,000 from $993,000 in the six months ended June 30, 1998 to
$1.7 million in the six months ended June 30, 1999. Of this increase,
approximately 61% is attributable to a growing number of administrative
employees and approximately 23% is attributable to an increase in the bad debt
reserve as our revenue and accounts receivable grew. We believe general and
administrative expenses will increase, as we expect to add personnel to support
our expanding operations, incur additional costs related to the growth of our
business, and assume the responsibilities of a public company.
Compensation Charge for Issuance of Stock Options. We incurred a charge of
$190,000 for the six months ended June 30, 1999 related to the issuance of stock
options with exercise prices below fair market value on the date of grant.
Additional unvested outstanding options will continue to vest over the next five
years, which will result in additional compensation expense of approximately
$1,848,000 in the aggregate in periods subsequent to June 30, 1999 which will be
charged to operations ratably over the next five years.
OTHER INCOME, NET
Other income, net decreased from $252,000 in the six months ended June 30,
1998 to $178,000 in the six months ended June 30, 1999. This decrease is
attributable to a decrease in interest income during the six months ended June
30, 1999 over the same period in the previous year. The interest expense results
from capital equipment loans used to purchase computer equipment.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUE
Total revenue increased by approximately $6.6 million from $249,000 in 1997
to $6.8 million in 1998 due to the release of our initial products in November
1997 and the ensuing increase in our customer base. Revenue from international
sales increased by approximately $1.7 million from $68,000, or 27% of total
revenue, in 1997 to $1.8 million, or 27% of total revenue, in 1998 due to the
same factors. We had no revenue during the period from inception until December
31, 1996.
Software License. Software license revenue increased by approximately $5.7
million from $249,000 in 1997 to $6.0 million in 1998. We first began shipping
our products in November 1997. The increase in software license revenue was due
primarily to an increase in the number of customers resulting from a full year
of selling in 1998 and the release of Version 2.0 of our products in October
1998.
23
<PAGE> 26
Services. We had no services revenue in 1997 and services revenue of
$825,000 in 1998. Approximately 71% of our services revenue in 1998 resulted
from education and support services delivered to an increasing customer base and
the remainder resulted primarily from the sale of professional consulting
services.
COST OF REVENUE
Software License. Cost of software license revenue increased by
approximately $677,000 from $90,000 in 1997 to $767,000 in 1998. The increase is
attributable to increases in software license revenue and the royalties we pay
on third-party software incorporated into Version 2.0 of our products which
began shipping in October 1998.
Services. Cost of services revenue increased by approximately $1.1 million
from $282,000 in 1997 to $1.4 million in 1998. Of this increase, approximately
68% was due to an increase in our support organization and the balance was
primarily due to the creation of our professional consulting services
organization in 1998.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses in 1996 amounted to
$35,000 and increased by approximately $6.9 million from $3.9 million in 1997 to
$10.8 million in 1998. The increase in these periods was due to increases in
sales and marketing personnel and marketing program expenditures. During 1998,
we expanded international sales and marketing operations in Germany, Belgium,
The Netherlands, Hong Kong, Singapore and Taiwan and we increased the number of
personnel and offices in North America.
Research and Development. Research and development expenses in 1996
amounted to $850,000 and increased by approximately $2.4 million from $2.6
million in 1997 to $5.1 million in 1998. The increase in these periods was
primarily due to the hiring of more engineering personnel.
General and Administrative. General and administrative expenses in 1996
amounted to $120,000 and increased by approximately $180,000 from $2.0 million
in 1997 to $2.1 million in 1998. The increase in these periods was primarily due
to the hiring of more personnel.
OTHER INCOME, NET
Other income, net in 1996 amounted to $53,000 and increased by
approximately $250,000 from $225,000 in 1997 to $475,000 in 1998. The increase
was due primarily to an increase in interest income earned from cash balances on
hand in 1998 compared to 1997. Proceeds from the private sale of equity
securities in 1997 and 1998 caused cash and short-term investment balances in
1998 to be higher than those in 1997.
24
<PAGE> 27
QUARTERLY RESULTS
The following table presents our unaudited quarterly operating results for
each of the seven quarters ended June 30, 1999 both in absolute dollars and as a
percentage of our total revenue for each quarter. This information has been
derived from our unaudited consolidated financial statements. The unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements contained in this prospectus and
include all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of such information. You should
read this information in conjunction with our Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus. You should not draw
any conclusions about our future results from the results of operations for any
quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1998 1998 1998 1998 1999 1999
--------- --------- --------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
Software license............... $ 249 $ 579 $ 948 $ 1,916 $ 2,539 $ 2,607 $ 2,908
Services....................... -- 104 113 115 494 867 1,400
------- ------- ------- ------- ------- ------- -------
Total revenue........... 249 683 1,061 2,031 3,033 3,474 4,308
Cost of revenue:
Software license............... 90 118 116 158 375 303 383
Services....................... 282 252 267 361 534 1,330 1,836
------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 372 370 383 519 909 1,633 2,219
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).............. (123) 313 678 1,512 2,124 1,841 2,089
Operating expenses:
Sales and marketing............ 1,283 2,305 2,116 2,658 3,696 3,988 4,270
Research and development....... 647 1,240 1,190 1,336 1,304 1,503 1,839
General and administrative..... 1,123 532 462 489 659 697 963
Compensation charge for
issuance of stock options.... -- -- -- -- -- 15 175
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,053 4,077 3,768 4,483 5,659 6,203 7,247
------- ------- ------- ------- ------- ------- -------
Loss from operations............. (3,176) (3,764) (3,090) (2,971) (3,535) (4,362) (5,158)
Other income, net................ 216 97 155 143 80 40 138
------- ------- ------- ------- ------- ------- -------
Net loss......................... $(2,960) $(3,667) $(2,935) $(2,828) $(3,455) $(4,322) $(5,020)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
Software license............... 100% 85% 89% 94% 84% 75% 68%
Services....................... -- 15 11 6 16 25 32
------- ------- ------- ------- ------- ------- -------
Total revenue........... 100 100 100 100 100 100 100
Cost of revenue:
Software license............... 36 17 11 7 12 9 9
Services....................... 113 37 25 18 18 38 42
------- ------- ------- ------- ------- ------- -------
Total cost of revenue... 149 54 36 25 30 47 51
------- ------- ------- ------- ------- ------- -------
Gross profit (loss).............. (49) 46 64 75 70 53 49
Operating expenses:
Sales and marketing............ 516 337 200 132 122 115 99
Research and development....... 260 182 112 65 43 43 43
General and administrative..... 451 78 43 24 22 20 22
Compensation charge for
issuance of stock options.... -- -- -- -- -- -- 4
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,227 597 355 221 187 178 168
------- ------- ------- ------- ------- ------- -------
Loss from operations............. (1,276) (551) (291) (146) (117) (125) (119)
Other income, net................ 87 14 15 7 3 1 3
------- ------- ------- ------- ------- ------- -------
Net loss......................... (1,189)% (537)% (276)% (139)% (114)% (124)% (116)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE> 28
Our total revenue has increased in each quarter following the commercial
release of our products in November 1997. The increase in each quarter is due to
the increase in the number of our customers resulting from increased market
awareness and acceptance of our software, expansion of our sales organization
and increased services revenue reflecting the growth in the installed base of
product licenses. Growth in software license revenue accelerated in the last two
quarters of 1998 as we increased our direct sales force in North America and
expanded direct European operations in Germany, Belgium and The Netherlands.
Services revenue increased in the fourth quarter of 1998 and the first two
quarters of 1999 following the release of Version 2.0 of our Application Server
and the expansion of our professional consulting services organization and our
services offerings.
Cost of software license revenue has increased in conjunction with our
increases in software license revenue. Software license costs were higher in the
quarter ended March 31, 1998 due to the increased number of releases following
the release of Version 1.0 of our Application Server in November 1997 and in the
quarter ended December 31, 1998 following the release of Version 2.0 in October
1998.
Cost of services revenue has increased as we have increased the size of our
support, education and professional consulting organizations. Cost of services
revenue increased during the quarters ended December 31, 1998, March 31, 1999
and June 30, 1999 due to increased usage of third-party consultants as well as
salaries and related costs for increased professional services personnel as a
result of the expansion of our professional consulting services organization.
Operating expenses have generally increased in absolute dollars each
quarter as we have increased staffing in sales and marketing, product
development and general and administrative functions. Sales and marketing
expenses increased in the quarters ended September 30, 1998 and December 31,
1998 due to an increase in the number of direct sales staff in North America and
the expansion of sales operations in Germany, Belgium and The Netherlands. Sales
and marketing expenses further increased in the quarter ended December 31, 1998
with the expansion of sales operations in Hong Kong, Singapore and Taiwan. Sales
and marketing expenses increased in the quarters ended March 31, 1999 and June
30, 1999 due to increases in salaries, the number of direct sales personnel and
sales commissions and incentives paid in the quarter. Research and development
expenses increased in the quarters ended March 31, 1999 and June 30, 1999 due to
an increase in personnel and the creation of a performance and tuning laboratory
which resulted in increased depreciation and equipment lease costs.
General and administrative expenses decreased during the quarter ended
March 31, 1998 as employees were assigned to other departments as marketing,
sales and research and development activities increased. General and
administrative expenses decreased further in the quarter ended June 30, 1998 due
to a decrease in the provision for doubtful accounts and decreases in travel
expenses. General and administrative expenses increased in the quarter ended
December 31, 1998 due to increases in personnel and contracting fees and an
increase in the provision for doubtful accounts.
Subsequent to the completion of SilverStream's equity financing in late
1997, other income, net generally decreased as cash balances declined until the
quarter following an additional equity financing in March 1999. Interest expense
has generally decreased since the quarter ended June 30, 1998 as equipment term
loans were paid down. In the quarter ended June 30, 1999, interest expense has
increased along with an increase in equipment loan borrowings.
As a result of our limited operating history, we cannot forecast operating
expenses based on historical results. Accordingly, we base our expenses in part
on future revenue projections. Most of these expenses are fixed in the short
term, and we may not be able to quickly reduce spending if revenue is lower than
we have projected. Our ability to forecast accurately our quarterly revenue is
limited due to the long sales and deployment cycle of our software products,
which makes it difficult to predict the quarter in which license sales will
occur, and the early nature of the market for application servers. If our
revenue does not meet projections, our business, operating results and financial
condition could be materially adversely affected and net losses in a given
quarter would be even greater than expected.
We plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden professional services, expand our facilities and
support and improve operational and financial systems. If our revenue does not
26
<PAGE> 29
increase along with these expenses, our business, operating results and
financial condition could be materially adversely affected and net losses in a
given quarter would be even greater than expected.
Although we have a limited operating history, we believe that quarterly
operating results may experience seasonal fluctuations. For instance, quarterly
results may fluctuate based on customer calendar year budgeting cycles and slow
summer purchasing patterns in Europe.
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As of December 31, 1998, we had net operating losses and research and
development carryforwards of approximately $22.3 million and $350,000,
respectively. The net operating loss and credit carryforwards will expire at
various dates, beginning 2012, if not utilized. Under the provisions of the
Internal Revenue Code, substantial changes in our ownership may limit the amount
of net operating loss carry-forwards that could be utilized annually in the
future to offset taxable income. A valuation allowance has been established in
our financial statements to reflect the uncertainty of future taxable income
required to utilize available tax loss carryforwards and other deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through the
private sale of our equity securities, resulting in net proceeds of
approximately $41.0 million. We have also funded our operations through
equipment financings. As of December 31, 1998, we had $4.5 million in cash, cash
equivalents and marketable securities, and $5.1 million in working capital. As
of June 30, 1999, we had $11.0 million in cash, cash equivalents and marketable
securities, and $10.4 million in working capital. We have three term loans for
amounts borrowed to finance equipment. These term loans are from the same bank
and bear interest at the bank's prime rate plus 0.5%. At June 30, 1999, we had a
total of approximately $511,000 outstanding under these term loans. We also have
a $750,000 equipment line of credit with a bank that bears interest at the
bank's prime rate plus 0.5%. At June 30, 1999, approximately $673,000 was
outstanding under this line of credit. Borrowings under these term loans and the
line of credit are secured by substantially all of our tangible assets.
Net cash used in operating activities was $8.0 million in 1997, $13.0
million in 1998 and $8.2 million in the six months ended June 30, 1999. Net cash
flows from operating activities in each period reflect increasing net losses
and, to a lesser extent, accounts receivable offset in part by increases in
accounts payable, accrued expenses and deferred revenue.
Net cash used in investing activities was $1.6 million in 1997 and $4.3
million in 1998 and net cash provided by investing activities was $2.0 million
in the six months ended June 30, 1999. Investing activities reflects purchases
of property and equipment in each period, purchases of short-term investments in
1998, and proceeds from the sale of short-term investments in the six months
ended June 30, 1999.
Net cash provided by financing activities was $23.4 million in 1997, $1.9
million in 1998 and $15.9 million in the six months ended June 30, 1999. Cash
provided by financing activities includes proceeds from the issuance of
preferred and common stock, offset by the payments on long-term debt in each
period, as well as proceeds from equipment financings in 1997, 1998 and the six
months ended June 30, 1999.
Capital expenditures were $1.6 million in 1997, $1.0 million in 1998 and
$1.1 million in the six months ended June 30, 1999. Our capital expenditures
consisted of purchases of operating resources to manage our operations,
including computer hardware and software, office furniture and equipment and
leasehold improvements. Purchases of computer equipment represent the largest
component of our capital expenditures. We expect this trend to continue as we
increase the number of employees, increase the size of our development and
quality assurance testing facilities and improve and expand our information
systems. We expect that our capital expenditures will continue to increase in
the future. Since inception, we have generally funded capital expenditures
either through the use of working capital or with equipment bank loans.
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<PAGE> 30
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that such operating expenses, as well as planned capital expenditures
and the expansion of our professional services organization, will constitute a
material use of our cash resources. In addition, we may utilize cash resources
to fund acquisitions of, or investments in, complementary businesses,
technologies or product lines. We believe that the net proceeds from the sale of
the common stock in this offering, together with funds generated from
operations, will be sufficient to meet our working capital requirements for at
least the next 12 months. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event additional financing is
required, we may not be able to raise it on acceptable terms or at all.
YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000. This could result in failures or
the creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- Function according to the product documentation provided for this date
change, without changes in operation, assuming correct configuration;
- Where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined and predetermined
manner;
- Store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century; and
- Recognize year 2000 as a leap year.
The risks posed by Year 2000 issues could adversely affect our business in
a number of significant ways. Although we believe that our internally developed
systems and technology are Year 2000 compliant, our information and
non-information technology systems nevertheless could be substantially impaired
or cease to operate due to Year 2000 problems. Additionally, we rely on
information technology supplied by third parties and the resellers of our
products are heavily dependent on information technology systems and on their
own and third-party vendor systems. Year 2000 problems experienced by us or any
of these third parties could materially adversely affect our business.
We have conducted a Year 2000 readiness review for the current versions of
our products. This review included assessment, validation, testing and, where
necessary, remediation, upgrading and replacement of product versions, as well
as contingency planning. We continue to respond to customer questions about
prior versions of our products on a case-by-case basis.
Based on our review, we believe the current versions of our products are
Year 2000 compliant, when configured and used in accordance with the related
documentation, so long as the underlying operating system of the host machine
and any other software used with or in the host machine or with our products are
also Year 2000 compliant. We do not believe that versions of our products prior
to Version 2.5 are Year 2000 compliant, and we encourage users of these versions
to upgrade to the latest version. We do not provide software patches or remedial
software programs for versions of our products prior to Version 2.5. Our
customers who have update assurance agreements with us each have the right to
receive the latest version of our product. Our customers who do not have update
assurance agreements with us may purchase the latest version of our product from
us.
We have not separately tested software obtained from third parties that is
incorporated into our products. We have tested this third-party software as
incorporated in our products as part of our product
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review. We are also seeking assurances from these third parties that this
software is Year 2000 compliant. While we believe that this third-party software
incorporated in the current versions of our products is Year 2000 compliant, we
have not been able to obtain assurances from all vendors. We plan to upgrade or
replace by year end any third-party software incorporated in our products for
which we cannot obtain adequate assurances of Year 2000 compliance from the
vendors. If we are unable to upgrade or replace this software by year end, our
products or portions of our products could fail to operate correctly. As a
result, our business and results of operations could be materially adversely
affected.
Despite testing by us and by current and potential clients, and assurances
from developers of products incorporated into our products, our products may
contain undetected errors or defects associated with Year 2000 date functions. A
third-party assurance consists of a letter to us, or a public notice, from the
third party asserting Year 2000 compliance. Errors or defects in our products
could result in delay or loss of revenue, diversion of development resources,
damage to our reputation, increased service and warranty costs, or liability to
our customers, any of which could materially adversely affect our business,
operating results, or financial condition. Some commentators have predicted
significant litigation regarding Year 2000 compliance issues. Because of the
unprecedented nature of such litigation, it is uncertain whether or to what
extent we may be affected by it.
We have initiated an assessment of our material internal information
technology systems, including both our own software products and third-party
software and hardware technology, including our accounting system, customer
service and support system and phone system. We have also initiated an
assessment of our non-information technology systems. We expect to complete
testing of our information and non-information technology systems in 1999. To
the extent that we are not able to test the technology provided by third-party
vendors, we are seeking assurances from these vendors that their systems are
Year 2000 compliant. We are not currently aware of any material operational
issues associated with preparing our internal information technology and
non-information technology systems for the Year 2000. However, we may experience
material unanticipated problems and costs caused by undetected errors or defects
in the technology used in our internal information technology and
non-information technology systems.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for
purchases of our products and services, or delay those purchases. As a result,
our business, results of operations or financial condition could be materially
adversely affected.
Costs related to the Year 2000 issue have been immaterial to date and we
expect total future costs to remain below $350,000, of which $100,000 has been
accrued as of June 30, 1999. We have funded our Year 2000 plan from operating
cash flows and have not separately accounted for these costs in the past. To
date, these costs have not been material. We will incur additional costs related
to the Year 2000 plan for administrative personnel to manage the project,
outside contractor assistance, technical support for our products, product
engineering and customer satisfaction. We may experience material problems and
costs with Year 2000 compliance that could adversely affect our business,
results of operations and financial condition.
While we have almost completed the process, we have not yet fully developed
a contingency plan to address all situations that may result if we are unable to
achieve Year 2000 readiness of our critical operations. We expect to complete
this contingency plan later this year. The cost of implementing such a plan may
be material. Finally, we are also subject to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failure interruptions. If any of our operations
experience Year 2000 problems and we either do not have a contingency plan or
our contingency plan is inadequate to address the problems, then our business,
results of operations or financial condition could be materially adversely
affected.
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CONVERSION TO EURO
Eleven of the 15 common member countries of the European Union have agreed
to adopt the Euro as their legal currency. We have arranged for the necessary
modifications of our internal information technology and other systems to
accommodate Euro-denominated transactions. We expect to be able to process
Euro-denominated transactions later this year. In addition, our products support
the Euro currency symbol. We are also assessing the business implications of the
conversion to the Euro, including long-term competitive implications and the
effect of market risk with respect to financial instruments. Based on the
foregoing, we do not believe the Euro will have a significant effect on our
business, financial position, cash flows or results of operations. We will
continue to assess the impact of Euro conversion issues as the applicable
accounting, tax, legal and regulatory guidance evolves.
MARKET RISK
SilverStream does not currently use derivative financial instruments. We
generally place our marketable security investments in high credit quality
instruments, primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of ten years or less. We do not expect any material loss from our
marketable security investments and therefore believe that our potential
interest rate exposure is not material.
Internationally, SilverStream invoices customers primarily in local
currency. We are exposed to foreign exchange rate fluctuations from when
customers are invoiced in local currency until collection occurs. We do not
currently enter into foreign currency hedge transactions. Through June 30, 1999,
foreign currency fluctuations have not had a material impact on our financial
position or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance for accounting for costs of software products developed or
purchased for internal use, including when costs should be capitalized. The
adoption of this standard did not have a material effect on our financial
condition or results of operations.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. The adoption of
this standard did not have a material effect on our financial condition or
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We are presently analyzing the impact, if any, that the adoption of SFAS No. 133
will have on our financial condition or results of operations.
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BUSINESS
OVERVIEW
SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. The advantages of Web-based
technology are driving the creation of a new generation of business-transforming
software programs. These powerful Web-based programs, or Web applications, link
a broad universe of customers, vendors, employees and partners with multiple,
diverse data sources. In addition, organizations can design their applications
to include the rules that govern the operation of these applications in a manner
consistent with their business policies. These rules are known as business
logic. We believe our products and services help our customers to rapidly
develop Web applications that are scalable, reliable and secure. Using our
products and services, organizations can create and deploy robust Web
applications in diverse areas such as e-commerce, employee self-service, supply
chain management and customer service.
Our products consist of an application server, an integrated set of
development tools and enterprise data connectors. An application server is a
software product that provides access to various forms of electronic information
and communicates, usually in the form of a Web application, with the computers
of users accessing the information. The SilverStream Application Server tightly
integrates data sources, business logic and presentation of content to the user.
Using our Application Server, our customers can seamlessly access information
and data from diverse sources. Our products allow the business logic to be
maintained centrally and therefore easily changed and instantly implemented. The
SilverStream Application Server maintains the presentation, or look and feel, of
the application centrally and presents content to the user locally, without the
need to install application software on the user's remote computer. We believe
our development tools shorten the development time and simplify the development
process required to build complex Web applications. Our enterprise data
connectors facilitate access to data sources associated with some third-party
business applications, such as inventory or employee information systems. We
also offer comprehensive application engineering, implementation, training and
support services to help ensure the successful development and implementation of
Web applications by our customers.
We market our products and services globally through our direct sales force
and a network of independent software vendors, value-added resellers and
consulting partners. To date, we have licensed the SilverStream Application
Server to over 500 customers in a wide variety of industries, including
communication, financial services, government, manufacturing, oil and gas,
pharmaceutical, technology and transportation.
INDUSTRY BACKGROUND
During the last 40 years, computer-based business applications have evolved
through three fundamental architectures: mainframe, client/server, and, now,
Web-based computing. The introduction of each of these architectures has created
opportunities to develop new applications for businesses. Business application
computing began with the mainframe, which enabled centralized control of these
applications, but gave limited access to users. The development of personal
computers and the widespread adoption of local area networks provided the
foundation for client/server computing, which gave more users greater access to
information and applications, but sacrificed centralized control.
Web-based computing combines the benefits of prior computing architectures
with far greater accessibility for networked, mobile and remote users. Today,
organizations are extending their enterprises by using the Internet to connect
their customers, vendors, employees and partners. To link their constituencies
across these extended enterprises, organizations are creating Web applications
that enable the dynamic delivery of information and transactional capabilities.
The increasing use of Web-based computing by organizations reflects the ability
of these powerful Web applications to fundamentally transform the way these
organizations operate. Application servers enable organizations to create,
deploy and manage these Web applications. Based on information provided to
SilverStream, we believe that the market for application server software will
grow from $412 million in 1998 to $2.2 billion by 2002.
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Organizations often employ Web applications to conduct "e-business," which
refers to business-to-business, business-to-employee and business-to-consumer
transactions and communications conducted through the use of Internet
technology. These organizations recognize that if they are able to offer
easy-to-access, compelling, real-time applications as a means of transacting
business, they can create closer and more enduring business relationships, new
efficiencies and significant competitive and strategic advantages. As a result
of these benefits, the e-business market is large and growing rapidly. Based on
information provided to SilverStream, we believe that Internet-based
business-to-business trade, the subset of e-business that encompasses the trade
of goods and services in which the final order is placed over the Internet, will
grow from $43 billion in 1998 to over $1 trillion by 2003.
In order to compete in this dynamic e-business environment, organizations
need comprehensive, integrated solutions that enable the creation of powerful
Web-based applications, shorten the development time for initial deployment and
allow rapid updates and changes. To capitalize on the new opportunities afforded
by Web applications, organizations must overcome several challenges:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
CHALLENGE CUSTOMER NEED
- --------------------------------------------------------------------------------------------------------
Data stored in multiple diverse data - Ability to aggregate and manipulate data from
sources multiple diverse sources
- Ability to present seamless, easy-to-use interface
to data
Heterogeneous, incompatible legacy - Web development programs based on generally
software applications and computer accepted industry standards
platforms - Interoperability of Web applications among legacy
applications and platforms
- Preservation of investment in pre-existing, or
legacy, resources
Availability of business-critical Web - Rapid response time for users
applications - Secure, controlled access
- Reliable performance and up time
Accessibility by unknown and unpredictable - Scalability
user community - Compatibility with various popular user interfaces
Ability to manage and update Web - Centralized business logic
applications - Centralized command and control functionality
Development time in an environment with - Integrated, powerful and easy-to-use development
limited information technology resources environment
- Rapid development, deployment and modification of
Web applications
- --------------------------------------------------------------------------------------------------------
</TABLE>
To meet these challenges, organizations have been required to use multiple
development tools, programming languages and applications from different
vendors. As a result, organizations have typically had to rely on custom
programming and complex integration activities to develop their Web
applications, which have often been difficult and expensive to create, deploy
and manage.
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THE SILVERSTREAM SOLUTION
SilverStream is a global provider of software and services that enable
businesses and other large organizations to create, deploy and manage software
programs for intranets, extranets and the Internet. Organizations use our
products for such diverse Web applications as e-commerce, employee self-service,
supply chain management and customer service. We believe our products and
services provide the following benefits:
Enable Creation and Deployment of Business-Focused Web
Applications. Business-focused Web applications enable the dynamic delivery of
information and transactional capabilities to a broad group of users. Our
products enable large organizations to manage scalable, reliable and secure Web
applications and address the unpredictable traffic volumes and patterns and
other challenges faced by Web applications. By addressing performance,
connectivity and security issues, our products allow customers to focus their
resources on the business elements of their Web applications such as reaching
new customers, developing new businesses, providing superior customer service,
shortening supply cycles and improving the flow of information.
Extend Reach of Applications and Simplify Administration. The SilverStream
Application Server allows organizations to leverage the advantages of thin
client computing, which eliminates the need for application software to be
installed on the user's computer. Our Application Server allows users to access
Web applications through common, easy-to-use Web browsers and other graphical
interfaces. The central location of Web applications permits organizations to
rapidly modify and deploy applications, enabling organizations to respond
quickly to evolving business requirements. These benefits allow organizations to
extend Web applications to a broader audience and assist these organizations in
reducing their administrative and maintenance costs.
Enable Creation of Applications that Access Multiple Information
Sources. The existence of diverse systems, information and data sources often
results in stand-alone applications that are unable to interact with one
another. SilverStream's products allow Web applications to access information
and data seamlessly from various sources, such as databases, software
applications that run on mainframe computers, and manufacturing, accounting,
inventory, purchasing and document management systems. By using our products,
customers can focus on the design and functionality of strategic Web
applications to create comprehensive solutions while preserving their
investments in legacy systems.
Reduce the Complexity of Developing Web Applications. SilverStream's
integrated set of development tools provide a common development environment and
a consistent look and feel that span multiple, diverse technologies, such as the
language used to describe Web pages known as Hyper-Text Markup Language and
commonly referred to as HTML, a widely used programming language known as Java,
and reusable software objects. We provide a consistent development interface
that is familiar to application developers and we offer powerful development
functionality. Our products and related consulting, education and support
services enhance the productivity of Web application developers, allowing our
customers to leverage the existing capabilities of their development staff in an
environment where skilled Web application developers are in short supply.
STRATEGY
Our objective is to enhance our position as a global provider of
application server software and related products and services. To achieve this
goal, we are pursuing the following strategies:
Capture Emerging Market Opportunity. The market for Web-based application
servers is relatively new. We believe that it is important to reach customers at
an early stage of their adoption of Web technology. We intend to expand our
customer base by seeding a large number of accounts with our products and
offering a range of services to help ensure that initial implementations are
successful. We plan to leverage these initial successes by selling additional
application servers as customers expand their initial deployments and develop
new Web applications.
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Extend Technology Leadership. We intend to enhance our leadership position
by increasing the performance, functionality and ease of use of our Application
Server and by integrating new technologies into our products. We will continue
to devote substantial resources to the enhancement of our application server
software. The next release of our Application Server, Version 3.0, is expected
to include improvements to the programming environment as well as support for
computing standards such as Enterprise JavaBeans (EJB) and Java2, and
third-party development tools such as Inprise's JBuilder and Symantec's Visual
Cafe. We intend to leverage our core technology by developing and selling
additional complementary products. In early 1999, we introduced our Enterprise
Data Connectors, which facilitate connections to popular business applications
such as SAP, Lotus Notes and PeopleSoft.
Maintain Commitment to Generally Accepted Industry Standards and
Interoperability. We plan to continue to support generally accepted industry
standards in our Application Server to facilitate interoperability with major
databases, operating systems, network protocols and hardware platforms. Our
Application Server currently supports standards for programming languages such
as Hyper-Text Markup Language and Java, as well as standards for communication
protocols, security mechanisms, and directory and database access. By supporting
generally accepted standards, we are able to market our products to a broad
range of customers who can then choose among the hardware, software and
networking technologies that best serve their needs without sacrificing
performance, functionality or flexibility.
Leverage Professional Services Capabilities. As Web-based technologies
have become increasingly important to our customers, there has been increased
demand for comprehensive service offerings. By offering our clients a full range
of professional services on a global basis, we promote the rapid success of
customer projects, creating significant opportunities to sell additional
software licenses to our customers. We intend to increase the size of our
service organization worldwide. In addition, we intend to augment our service
offerings by developing and strengthening our strategic relationships with
systems integrators and consultants.
Expand Worldwide Sales Efforts. To expand our sales to both new and
existing customers, we plan to continue to pursue a multi-channel distribution
strategy that includes both our direct sales force and relationships with
independent software vendors, value-added resellers and consulting partners. We
currently have ten offices throughout North America and plan to continue to
expand our North American sales staff. We also plan to continue expansion of our
international presence by establishing additional overseas offices, adding
direct sales personnel and increasing our indirect sales and services channels.
We currently have seven sales offices in Europe and three in Asia. Our
international sales accounted for approximately 27% and 33% of our total revenue
in 1998 and the first six months of 1999, respectively.
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PRODUCTS AND SERVICES
PRODUCTS
Our product offerings are summarized below:
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION SHIPMENT DATES
- --------------------------------------------------------------------------------------------------------
Application Server Application server for the creation, deployment and Version 2.5 shipped in
management of Web applications. May 1999. First
version shipped in
Available for Windows NT, Solaris or HP-UX November 1997.
operating systems.
Licensed on a per processor basis for unlimited
users with no per seat or per connection charges.
Single Developer A complete set of development and testing software Version 2.5 shipped in
Pack products for creating Web applications integrated May 1999. First
Group Developer Pack with the SilverStream Application Server. version shipped in
(5 or 10 Developers) November 1997.
The Single Developer Pack is for standalone
development on a single Windows NT machine.
The Group Developer Packs are for teams of up to 5
or 10 developers to work both independently on
their own computers and as a group. Includes 5 or
10 Single Developer Packs and a 5- or 10-user
SilverStream Application Server for group testing
on Windows NT, Solaris or HP-UX operating
systems.
Each of the Developer Packs is priced and sold
separately.
Enterprise Data Products that provide connections to SAP, Lotus First shipped in April
Connectors Notes and PeopleSoft applications. 1999.
Each Enterprise Data Connector is priced and sold
separately.
- --------------------------------------------------------------------------------------------------------
</TABLE>
SERVICES
As part of our ongoing commitment to provide a complete solution for our
customers, we offer comprehensive consulting, education and technical support
services that complement our product offerings. As of July 31, 1999, our
services organization comprised 73 professionals.
To complement our service organization, we train and promote a broad
network of SilverStream partners, ranging from international consulting firms to
local consultants that offer consulting, education and technical support
services. Our customers are encouraged to engage consultants, instructors and
developers whose proficiency with our products has been certified by us and who
have been designated Certified SilverStream Developers or Certified SilverStream
Field Application Engineers.
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Consulting Services. We provide application engineering and implementation
services to assist our customers in developing and implementing Web applications
using our products. Consulting services include advisory, prototyping, design,
test and configuration, deployment and tuning services, and technical account
management services. We generally provide our consulting services on a time and
materials basis.
Education Services. We offer our customers and partners introductory and
advanced training in the use of our software products. Our employees as well as
Certified SilverStream Trainers offer our training classes around the world. We
price these services by course.
Technical Support Services. We believe that a high level of technical
support services is critical to our customers' success and an important
competitive advantage. We offer technical support to our customers, ranging from
dedicated on-site support personnel, to telephone support from our Burlington
and Belgium offices during normal business hours, to 24-hour on-line support
available through our Website. The pricing of our technical support services
varies according to the level of support required.
PRODUCT ARCHITECTURE
The SilverStream Application Server incorporates components and features
required to create, deploy and manage scalable and sophisticated Web
applications. The fundamental components of the architecture are shown below:
[Narrative description of graphic material omitted in electronically filed
document]
This is a detailed graphic outlining the fundamental components of the
SilverStream Application Server architecture:
1. At the bottom is a horizontal three-dimensional rectangle entitled
"Enterprise Deployment Services," which rectangle includes four boxes
entitled "Scalability," "Reliability," "Security" and "Manageability."
2. On top of the rectangle are three vertical three-dimensional rectangles:
a. The vertical rectangle on the left is entitled "Presentation Layer," and
includes two boxes entitled "HTML" and "Java"
b. The vertical rectangle in the middle is entitled "Business Logic Layer,"
and includes three boxes entitled "Distributed Objects," "Transactions"
and "Content Management"
c. The vertical rectangle on the right is entitled "Data Access Layer," and
includes two boxes entitled "Data Access Objects" and "Enterprise Data
Connectors"
3. Above the three rectangles and connected to each by thin lines is a
horizontal three-dimensional rectangle entitled "Development Tools."
4. To the left of the rectangle entitled "Presentation Layer" are two computer
icons under the title "Users." There is a two-way arrow between the rectangle
and the icons.
5. To the right of the rectangle entitled "Data Access Layer" are three
three-dimensional cylinders under the title "Data." There is a two-way arrow
between the rectangle and the cylinders.]
PRESENTATION LAYER
Presentation refers to the user interface layer of an application. This is
where the user interacts with the application by entering data, using menus and
hyperlinks, and viewing dynamically generated pages containing data and rich
content. Our products allow developers to support both Hyper-Text Markup
Language and Java graphical user interfaces. Hyper-Text Markup Language has the
advantage of quickly running in any Web browser. Java has the advantage of
providing a much richer interactive user interface that is similar to that of a
Microsoft Windows application, but requires an initial download of some
software. Typically, our customers choose to mix both technologies in a single
application, using Hyper-Text Markup Language for Internet users and Java for
intranet users who interact heavily with the application.
Hyper-Text Markup Language. The SilverStream Application Server
incorporates a powerful engine for generating dynamic Hyper-Text Markup
Language pages that contain data and rich
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content. Developers can design their Hyper-Text Markup Language pages
either by writing industry standard Java Servlets, or using a graphical
page designer which generates Servlets automatically.
Java. The SilverStream Application Server enables the secure
development, downloading and running of graphic Java applications. Java
applications are stored centrally in the SilverStream Application Server
and are downloaded on demand to browsers on remote user computers via the
Web. Our Application Server also provides a Java application runtime called
JRunner which allows the same Java applications to run without a browser,
behaving more like a full Windows application. Our JRunner feature also
provides for the download of applications on demand, providing the feel of
a client/server application, but without requiring the application to be
installed or maintained on each remote computer.
BUSINESS LOGIC LAYER
Business logic is the set of rules that a Web-based application follows,
based on the customer's business policies. For example, in a supply-chain Web
application, business logic defines how items such as discounts, freight and
state tax are calculated, how products are re-ordered and how a customer's
credit limit is checked. In a Web-based application, it is usually desirable to
separate the business logic from the user interface. This makes it easier to
change the business logic and maintain the application.
Distributed Objects and Transactions. The SilverStream Application
Server provides a complete set of tools that allows developers to create
re-usable business objects that encapsulate their business logic. We also
provide powerful capabilities for managing transactions involving multiple
tables. In our next version of the SilverStream Application Server, Version
3.0, we intend to provide support for the industry standard Enterprise
JavaBeans version 1.1. This is intended to allow customers to distribute
objects across the network and control transactions across objects.
Content Management. In addition to its primary focus on structured
data, our Application Server also provides a set of features to manage rich
content such as product catalogs, news articles, financial research,
documents, Adobe Acrobat PDF files, graphics, and photographs. These
features include full text retrieval, file upload/download, version control
and a powerful Hyper-Text Markup Language edit control written in Java.
These features allow developers to create Web applications such as
e-commerce sites and corporate portals that combine rich content with
transactions.
DATA ACCESS LAYER
The data access layer provides connectivity to multiple disparate data
sources. The SilverStream Application Server provides high performance drivers,
using industry standard Java Database Connectivity (JDBC), for relational
databases, including Oracle, DB/2, Sybase, Microsoft SQL Server, Informix and
others. For non-relational data sources, our Application Server provides an
architecture known as data source objects. Customers, partners and consultants
can write data source objects to connect to a wide range of data sources. To
simplify the creation of data source objects, we offer our Enterprise Data
Connectors that allow customers to easily create data source objects for SAP,
Lotus Notes and PeopleSoft. Our partners offer a wide range of additional
enterprise data connectors for data sources such as CICS, MQ Series, Tuxedo, Top
End and Encina.
ENTERPRISE DEPLOYMENT SERVICES
Enterprise-class Web applications, which consist of connectivity, business
logic and presentation, require the following attributes:
Scalability. The SilverStream Application Server utilizes a number of
techniques for improving the performance of a large computer system to
deliver very high performance and throughput across multiple processors in
a single server machine. Our Application Server also offers scalability
using load-balanced clusters of servers, which allows our customers to
handle increased load simply by adding more machines to the cluster.
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<PAGE> 40
Reliability. SilverStream's advanced failover capabilities are
designed to ensure that customers' applications remain operational even
when a server fails. SilverStream's session-level failover feature enables
users to continue operations uninterrupted with seamless recovery of their
transactional data even when the server to which they were previously
connected fails.
Manageability. The SilverStream management console provides a full
interface to monitor server performance, manage clusters, database
connections, security, and other settings. SilverStream provides a standard
network management protocol to interoperate with existing enterprise
systems management software such as Tivoli's TME, Computer Associates'
Unicenter, or Hewlett-Packard's OpenView. SilverStream's Application Server
allows an application to be updated without taking the server or cluster
down.
Security. Our product provides a complete set of features for
encryption, authentication and access control that are required to create
highly secure applications. In addition to providing its own directory, our
Application Server is also able to interface to directories such as Windows
NT, NIS+ and those that are standard Lightweight Directory Access Protocol
(LDAP) compliant.
INTEGRATED DEVELOPMENT TOOLS
SilverStream provides a rich set of development tools that are tightly
integrated with the functionality provided by the SilverStream Application
Server. These include several visual designers for Hyper-Text Markup Language
pages, Java applications, business objects and content management. Also included
are a programming editor, context sensitive help, a repository, a debugger and
facilities for integrating with popular source control products. SilverStream's
integrated development tools consist of the following graphical designers:
Page Designer. SilverStream development tools allow developers to
design their Hyper-Text Markup Language pages by writing either industry
standard Java Servlets, or using SilverStream's Page Designer which creates
Servlets graphically. SilverStream's Page Designer offers a visual, object-
oriented, event-driven programming model that makes the development of
data-driven dynamic pages far easier and faster than coding them manually.
Developers drag and drop elements onto a page from a tool palette, set
properties using a property sheet, and then define the behavior of the
elements by writing Java code that is executed at the server whenever an
event is generated (for example, when a user clicks a button). Unlike
competing alternatives that embed scripts inside Hyper-Text Markup Language
pages, this technique leverages the existing skills of developers who have
worked with products such as PowerBuilder or Visual Basic.
Form and View Designers. SilverStream provides a development
environment for generating graphic Java applications. The development
environment is similar to the Page Designer, with a common look and feel.
The Form Designer allows developers to build graphical forms, typically
displaying data. The View Designer is frequently used in conjunction with
the Form Designer to display data in a multi-row presentation.
Object Designer. The Object Designer allows developers to create
business logic written in Java, that will typically reside on the
application server and may be reused by other applications. These objects
may use any of the services offered by the SilverStream Application Server,
including connecting to data sources. They may also be triggered by events
like the receipt of an e-mail or a request to modify a specific piece of
data.
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CUSTOMERS
Our customer base spans multiple industry segments. The following is a
representative list of our customers who have purchased a SilverStream
Application Server license. We do not intend the identification of these
customers to imply that these customers are actively endorsing or promoting our
products.
<TABLE>
<S> <C> <C>
COMMUNICATION MANUFACTURING TECHNOLOGY
Ameritech Fuji Photo Advanced Micro
MCI WorldCom Owens Illinois Devices
Raytheon Hewlett-Packard
Samsung Siebel Systems
StorageTek
MEDIA ENERGY TRANSPORTATION
TCI Communications ARCO Federal Express
The Walt Disney Conoco Southwest Airlines
Company Enron UPS
FINANCIAL SERVICES GOVERNMENT OTHER
Bankers Trust Federal Home Loan Bank AAA
Bank One of Atlanta Dupont
Citicorp Federal Reserve Bank InterContinental Hotels
J.P. Morgan of New York Polaroid
The Chicago Stock Internal Revenue Red Herring
Exchange Service Sears, Roebuck
Transamerica The United States Army
PHARMACEUTICAL
Johnson & Johnson
Pfizer
</TABLE>
Software license revenue from the customers listed above represented
approximately 23% of SilverStream's total software license revenue for the year
ended December 31, 1998 and approximately 10% of SilverStream's total software
license revenue for the six-month period ended June 30, 1999. We derive our
software license revenue from the sale of software product licenses. We do not
charge our customers based on frequency of use of our products.
The following case studies illustrate the challenges faced by
representative customers in deploying business applications and the benefits
derived from developing and deploying these applications using our Application
Server.
GLOBAL TRAVEL COMPANY
The travel agency industry has recently undergone changes due to reduced
commissions from airlines, hotels and rental car companies. To remain
competitive, a global travel company needed to be able to create rapidly many
travel product offerings while providing superior service through travel
agencies and via direct, self-service over the Internet. The company's
requirements included the maintenance of customer profiles in a relational
database, as well as access to a diverse set of airline, hotel and other
reservation systems. Travel agent experts needed to be able to perform the
complex transactions required to plan multi-leg trips, including air travel,
hotel, car rental and dinner and theater reservations.
The travel company selected the SilverStream Application Server and
deployed its Web-based application in two phases. In the first phase, the
company rolled out the application to its affiliated travel agencies.
SilverStream's connectivity features were used to maintain customer profiles and
access travel services. In the second phase, the company used SilverStream's
Hyper-Text Markup Language capability
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to provide a browser-based interface to customers via the Internet. Because the
company is able to provide access to a diverse set of reservation systems and
offer self-service to customers, we believe the SilverStream Application Server
enabled the company to provide more efficient processing by travel agents and
better customer service. Because the company is able to rapidly create travel
product offerings by using the SilverStream Application Server, we believe the
company is able to meet changing market demands and to serve its customers more
efficiently.
NATIONAL INSURANCE PROVIDER
An insurance company provides coverage through a network of thousands of
geographically dispersed independent agents. A claim goes through a complex
process inside the company, during which critical information is available to
agents only on a limited basis by telephone inquiry. The customer wanted to
streamline its claims-handling process by providing its agents direct access to
data and information, including daily claim status, claims adjusters' notes and
monthly account activity. However, the claim and account information was stored
in separate relational databases and agents had widely differing hardware and
software packages and platforms.
The customer used the SilverStream Application Server to build and deploy
an application in approximately five months. Agents now have broad access to
relevant, up-to-date information about individual claims and accounts, including
powerful search capabilities. The insurance company is enhancing the application
to give each agent access to all information and services relevant to such
agent's relationship with the company. Because the customer is able to allow its
nationwide network of agents to access relevant data and information easily and
securely, regardless of the user's computer and networking system and without
local administration, we believe the SilverStream Application Server enabled the
customer to reduce inefficiencies in its claims-handling process.
GLOBAL SUPPLIER OF COMPUTER STORAGE DEVICES
A supplier of computer storage devices provides a constantly changing
selection of thousands of sophisticated technology products. These products are
sold by hundreds of direct employees and thousands of distributors worldwide.
The answers to the distributors' many detailed questions were typically hard to
find or unavailable when needed. As part of a strategic growth initiative, the
customer needed to build a repository of support and marketing information that
could be easily accessed across the globe. The source of this information was
hundreds of sales and service employees, who created information about the
products in a broad variety of ways, ranging from data sheets to video clips.
The customer needed an application that would let employee "content creators"
easily place information in a repository in whatever form they wished and then
have that information easily accessible by distributors worldwide. These
distributors had a variety of abilities and had a diverse set of platforms.
The solution was to use SilverStream's products to build a content-rich,
intranet/extranet application. Employees can use an intranet application to
create and manage content. Using a thin Java client, that requires no local
administration, employees are able to find and select "documents," annotate
them, associate them with products and attach any kind of file, including
Microsoft Word or PowerPoint files or even video clips. Documents can be
prioritized, versioned and secured to limit access. The intranet application
also provides usage reports and allows for the specification of expiration
dates. Distributors, using a standard browser, can log in and search for desired
topics. Search requests can be extremely complex, using a variety of criteria,
and may return multiple, prioritized answers. The attached files may then be
viewed or downloaded. Because of these features, we believe this new repository
efficiently links a community of information providers and distributors with a
database that is expected to grow beyond a terabyte in the near future.
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SALES, MARKETING AND DISTRIBUTION
We market our products through a worldwide combination of a direct sales
force, partners and distributors. As of July 31, 1999, our sales and marketing
organization consisted of 104 employees, of which:
- 32 are located in our headquarters in Burlington, Massachusetts,
- 30 are located in sales offices in North America, and
- 42 are located in sales offices in the United Kingdom, The Netherlands,
Belgium, Germany, Norway, the Czech Republic, France, Hong Kong,
Singapore and Taiwan.
We have three types of partners that either sell, or help us sell, our
products:
- Value added reseller partners, or VAR partners, resell our products to
customers;
- Consulting partners introduce new potential customers to us and provide
consulting services to our customers; and
- Independent software vendor partners, or ISV partners, use our products
to create their own software products.
We enter into partnership agreements with our partners which include some
or all of the following terms and conditions:
- Term of agreement is generally one year with subsequent one-year
renewals;
- Grant of license to demonstrate, use and resell SilverStream products;
- Grant of license to include SilverStream products in partner products;
- Grant of license to use SilverStream trademarks;
- Payment to SilverStream of initial and annual partnership fees; and
- SilverStream product discounts for value added resellers and independent
software vendors.
We derive revenue from our partners as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE APPROXIMATE
PERCENTAGE OF AGGREGATE PERCENTAGE OF
APPROXIMATE AGGREGATE TOTAL REVENUE REVENUE FOR TOTAL REVENUE FOR
TOTAL NUMBER REVENUE FOR FOR YEAR ENDED SIX MONTHS SIX MONTHS
AS OF YEAR ENDED DECEMBER 31, ENDED ENDED
TYPE OF PARTNER JUNE 30, 1999 DECEMBER 31, 1998 1998 JUNE 30, 1999 JUNE 30, 1999
--------------- ------------- --------------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
VAR partners.......... 86 $1,858,000 27% $1,552,000 20%
Consulting partners... 186 666,000 10 362,000 5
ISV partners.......... 27 123,000 2 502,000 6
</TABLE>
As of June 30, 1999, we had approximately 300 partners.
Our products are also sold in Japan, South Africa, South America and Spain
through distributors who sell our products and provide consulting, training and
educational courses to customers in those countries. In Japan, our distributor
has translated our products into Kanji. Our products allow customers to create
applications in different languages.
We also have marketing relationships with other companies who have products
that work well with our products. Our SilverNet technology partners are
comprised of companies who have created commercial products which complement our
products or who market and sell these complementary products. As of June 30,
1999, we had 62 SilverNet technology partners, including Actuate, IBM,
PeopleSoft, Rational and SAP. We work with SilverNet partners to help make it
easier for customers to use our products with the SilverNet partners' products.
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Our marketing programs are designed to attract potential customers so that
we, or one of our partners, can demonstrate our products directly to potential
customers. We hold many seminars, some with our partners, send out direct mail
and attend trade shows, and provide information about our company and our
products on our Web site. We also conduct public relations activities, including
interviews and demonstrations for industry analysts and product reviewers.
RESEARCH AND DEVELOPMENT
As of July 31, 1999, we had 52 employees responsible for product
development, quality assurance and documentation. Our research and development
organization is divided into five teams: server, client, application
development, quality assurance and documentation.
We are very focused on enhancing the scalability, performance and
reliability of our Application Server. Our quality assurance department has a
dedicated performance and tuning laboratory designed to improve the performance
of customers' Web-based applications. This laboratory has the ability to
simulate up to 12,000 simultaneous users communicating with SilverStream
Application Servers running on as many as 24 processors on a dedicated 100
megabits per second network.
We have made, and will continue to make, a substantial investment in
research and development. Research and development expenses were $2.6 million in
1997, $5.1 million in 1998 and $3.3 million in the first six months of 1999. All
of our software development costs have been expensed as incurred.
While we have developed, and expect to continue to develop, most new
products and enhancements to existing products internally, we have licensed
software technology from third parties.
COMPETITION
The market for application server software products is intensely
competitive, subject to rapid technological change and significantly affected by
new product introductions and other market activities of industry participants.
We expect competition to persist and intensify in the future. We encounter
current or potential competition from a number of sources, including:
- Vendors of application server products and services;
- Internally developed applications; and
- Companies that market business application software.
Our Application Server competes with application server products from other
vendors, including: IBM's WebSphere and Domino server solutions; Sun
Microsystems' NetDynamics and Netscape Application Server; Microsoft's Internet
Information Server, Active Server pages, Transaction Server and COM technology;
BEA Systems' Weblogic and Oracle's Application Server. In addition, we compete
with various methods of application distribution and management, including the
web browser, and with application server vendors and others that have introduced
software distribution capabilities into their products.
Potential competitors may bundle their products or incorporate an
application server component into existing products in a manner that discourages
users from purchasing our products. Furthermore, new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can.
We believe the primary factors upon which we compete with vendors of
application server software and services are:
- Product performance and functionality;
- Ease of use of our products;
- Ability of our products to handle large volumes of users and
transactions;
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<PAGE> 45
- The extent to which our products adhere to industry standards;
- The ability of our products to run on computer hardware from various
manufacturers;
- The ability of our products to connect to various data sources;
- Price; and
- Customer service.
In addition, we believe our products and services provide shorter
development time and lower cost of ownership in comparison to in-house
development efforts.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete are dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
patent, trademark, trade secret and copyright laws and contractual restrictions
to protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently have five patent
applications pending in the United States. We cannot predict whether any of
these applications will result in any issued patents or, if patents are issued,
any meaningful protection. We seek to protect our source code for our software,
documentation and other written materials under trade secret and copyright laws.
We license our software pursuant to "shrinkwrap" and, in some cases, signed
license agreements, which impose restrictions on the licensee's ability to
utilize the software. Finally, we seek to limit disclosure of our intellectual
property by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements with us and by restricting
access to our source code. Due to rapid technological change, we believe that
factors such as the technological and creative skills of our personnel, new
product developments and enhancements to existing products are more important
than the various legal protections of our technology to establishing and
maintaining a technology leadership position.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, software piracy can be expected to be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.
There can be no assurance that third parties will not claim infringement
with respect to our current or future products. We expect that developers of
Web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time-consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all. A successful infringement claim against us and our failure or inability to
license the infringed rights or develop or license technology with comparable
functionality could have a material adverse effect on our business, financial
condition and operating results.
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We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. The
third-party software that we license includes text search software, a database,
a Java compiler, a Java runtime environment, an internet browser and an object
request broker. These licensed components enhance features in our products but
are not critical to the operation of our products. Some of these components are
available, at no charge, to our customers from the supplier but are included in
our products for customer convenience. In cases where the licensed component
provides an operating feature, we believe there are alternative suppliers for
the technology who may license their software to us. We also license encryption
technology from RSA Data Security under a perpetual agreement that is terminable
by either party upon default by the other. RSA is the sole source of this
technology and therefore the loss of this license would seriously harm our
business. In addition, if we cannot maintain licenses to the other third-party
software included in our products, distribution of our products could be delayed
until equivalent software could be developed or licensed and integrated into our
products, which could materially adversely affect our business, operating
results and financial condition.
EMPLOYEES
As of July 31, 1999, we had a total of 252 employees of whom:
- 52 were in research and development;
- 104 were in sales and marketing;
- 73 were in customer service and support; and
- 23 were in finance and administration.
Our future success will depend in part on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. Our employees are not represented by any collective
bargaining unit. We believe our relations with our employees are good.
PROPERTIES
Our headquarters are currently located in a leased facility in Burlington,
Massachusetts, consisting of approximately 40,000 square feet under a sublease
that expires in July 2000. We have also leased offices for sales and support
personnel in North America, Europe and Asia.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of SilverStream and their ages and
positions as of May 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David R. Skok............................. 43 Chairman of the Board of Directors
David A. Litwack.......................... 52 President, Chief Executive Officer and Director
Peter E. Brumme........................... 49 Executive Vice President, Sales and Marketing
Craig A. Dynes............................ Vice President, Chief Financial Officer and
44 Treasurer
Arnold S. Epstein......................... 49 Vice President and Chief Technology Officer
Diane Gordon.............................. 40 Vice President, Customer Services
John W. Pearce............................ 45 Vice President, International Operations
Kim A. Sheffield.......................... 43 Vice President, Research and Development
Timothy Barrows........................... 42 Director
Richard A. D'Amore........................ 45 Director
Paul J. Severino.......................... 52 Director
</TABLE>
David R. Skok founded SilverStream and has served as our Chairman of the
Board of Directors since our inception and as our President and Chief Executive
Officer from May 1996 to November 1996. He also served as our Treasurer from May
1996 to June 1999. Before founding SilverStream, Mr. Skok founded Watermark
Software, a document management and imaging company, and served as its President
and Chief Executive Officer from January 1993 until June 1996, following its
acquisition by FileNet. From September 1990 to December 1994, Mr. Skok also
served as Chief Executive Officer of Xionics Document Technologies, Inc., a
document imaging company. Mr. Skok also currently serves as a director of
Xionics.
David A. Litwack has served as our President and Chief Executive Officer
since May 1997, and as a member of our Board of Directors since November 1996.
Before joining SilverStream, Mr. Litwack served as Executive Vice President of
Sybase Inc., an enterprise software company, from February 1995 to May 1997 and
as President of Powersoft Corporation, a client server development tools
company, from June 1991 to its acquisition by Sybase in February 1995. In
addition, Mr. Litwack is a director of Object Design, Inc., a data management
company.
Peter E. Brumme has served as our Executive Vice President, Sales and
Marketing since January 1999 and was our Chief Operating Officer from January
1997 to December 1998. Prior to joining SilverStream, Mr. Brumme served as Chief
Operating Officer of Watermark from July 1995 to December 1996 and as Senior
Vice President, Sales and Marketing from April 1993 to June 1995.
Craig A. Dynes has served as our Vice President and Chief Financial Officer
since July 1997 and as our Treasurer since June 1999. Prior to joining
SilverStream, Mr. Dynes served as Vice President of Finance, Products Group, of
Sybase from October 1996 to June 1997. Mr. Dynes served as Vice President of
Finance and Operations and Chief Financial Officer of Powersoft from August 1995
to October 1996, and as Chief Financial Officer of Watcom, a compiler software
company, from 1992 until July 1995, following its acquisition by Powersoft.
Arnold S. Epstein has served as our Vice President and Chief Technology
Officer since July 1996. Prior to joining SilverStream, Mr. Epstein served as
Chief Technical Officer of Watermark from March 1993 to June 1996.
Diane Gordon has served as our Vice President, Customer Services since
January 1999. Prior to joining SilverStream, Ms. Gordon served as Vice President
of Operations of Gartner Learning, an independent research company, from March
1997 to September 1998. From March 1991 to February 1997, Ms. Gordon served as
Director of Professional Services of Progress Software, a software company.
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John W. Pearce has served as our Vice President, International Sales since
January 1997. He also served as our Chief Financial Officer from July 1996 to
July 1997. Prior to joining SilverStream, Mr. Pearce served as Vice President,
International Sales and Chief Financial Officer of Watermark from January 1993
to June 1996.
Kim A. Sheffield has served as our Vice President, Research and Development
since July 1996. Prior to joining SilverStream, Mr. Sheffield served as Vice
President of Research & Development, Powersoft Division of Sybase from February
1995 to June 1996. From 1988 to February 1995, Mr. Sheffield served in various
capacities with Powersoft including as Vice President of Engineering from July
1994 to February 1995.
Timothy Barrows has served as a director of SilverStream since July 1996.
Mr. Barrows has been a General Partner of Matrix Partners since 1985.
Richard A. D'Amore has served as a director of SilverStream since July
1996. Mr. D'Amore has been a General Partner of North Bridge Venture Partners
since 1994. He is a director of Solectron Corporation, Veeco Instruments Inc.
and Xionics.
Paul J. Severino has served as a director of SilverStream since May 1999.
Mr. Severino has served as the Chairman of NetCentric Corporation, a provider of
Internet protocol telephony applications, since August 1997 and Chief Executive
Officer since February 1998. Prior to that, he served as NetCentric's Acting
Chief Executive Officer from August 1997 to February 1998. He is a founder of
Wellfleet Communications, Inc., a supplier of internetworking communication
products, where he served as Chairman of the Board from October 1986 to October
1994. From October 1994 to October 1996, he served as Chairman of BayNetworks
after its formation from the merger of Wellfleet and Synoptics. Mr. Severino is
also a director of Media 100 Inc. and MTDC (Massachusetts Telecommunications
Development Corporation).
Each executive officer serves at the discretion of the Board of Directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the directors or executive officers of SilverStream. Each of the
directors serves on the Board of Directors pursuant to the terms of an agreement
that will terminate upon the closing of this offering.
ELECTION OF DIRECTORS
Following this offering, the Board of Directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. Skok and Barrows will serve in the class whose term expires in 2000;
Messrs. Litwack and D'Amore will serve in the class whose term expires in 2001;
and Mr. Severino will serve in the class whose term expires in 2002. Upon the
expiration of the term of a class of directors, directors in such class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which such term expires. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
SilverStream.
COMPENSATION OF DIRECTORS
We reimburse directors for reasonable out-of-pocket expenses incurred in
attending meetings of the Board of Directors. We may, in our discretion, grant
stock options and other equity awards to our non-employee directors from time to
time pursuant to our 1997 Stock Incentive Plan. On April 30, 1999, we granted to
Paul J. Severino an option to purchase 25,000 shares of common stock at a per
share exercise price of $8.00 under our 1997 Stock Incentive Plan in connection
with his joining our Board. Mr. Severino's option was fully vested upon grant.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee, which consists of Messrs. Barrows,
D'Amore and Severino, reviews executive
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salaries, administers our bonus, incentive compensation and stock plans, and
approves the salaries and other benefits of our executive officers. In addition,
the Compensation Committee consults with our management regarding our benefit
plans and compensation policies and practices.
The Audit Committee, which consists of Messrs. Barrows, D'Amore and
Severino, reviews the professional services provided by our independent
accountants, the independence of such accountants from our management, our
annual financial statements and our system of internal accounting controls. The
Audit Committee also reviews such other matters with respect to our accounting,
auditing and financial reporting practices and procedures as it may find
appropriate or may be brought to its attention.
EXECUTIVE COMPENSATION
The table below sets forth, for the year ended December 31, 1998, the cash
compensation earned by (1) our Chairman of the Board, (2) our Chief Executive
Officer and (3) each of the four most highly compensated other executive
officers who received annual compensation in excess of $100,000, collectively
referred to below as the Named Executive Officers. In accordance with the rules
of the Securities and Exchange Commission the compensation set forth in the
table below does not include medical, group life or other benefits which are
available to all of our salaried employees, and perquisites and other benefits,
securities or property which do not exceed the lesser of $50,000 or 10% of the
person's salary and bonus shown in the table. In the table below, columns
required by the regulations of the Securities and Exchange Commission have been
omitted where no information was required to be disclosed under those columns.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
- --------------------------- --------- --------
<S> <C> <C>
David R. Skok............................................... $120,000 $ 0
Chairman of the Board of Directors
David A. Litwack............................................ 120,000 0
President and Chief Executive Officer
Peter E. Brumme............................................. 125,000 20,000
Executive Vice President, Sales and Marketing
John W. Pearce.............................................. 125,000 20,000
Vice President, International Operations
Kim A. Sheffield............................................ 120,000 20,000
Vice President, Research and Development
Arnold S. Epstein........................................... 120,000 20,000
Vice President and Chief Technology Officer
</TABLE>
The Board of Directors awarded the cash bonuses to the members of senior
management as identified above in recognition of individual performance and the
achievement of company goals in 1998.
STOCK OPTIONS
We have not granted any stock options to our Named Executive Officers.
BENEFIT PLANS
1997 Stock Incentive Plan. Our 1997 Stock Incentive Plan provides for the
issuance of up to 3,500,000 shares of our common stock. The 1997 Stock Incentive
Plan provides for the grant of incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted
stock awards and other stock-based awards to our officers, employees, directors,
consultants and advisors.
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Our Board of Directors has authorized the Compensation Committee to
administer the 1997 Stock Incentive Plan. The Compensation Committee selects the
recipients of awards and determines:
- The number of shares of common stock covered by options and the dates
upon which such options become exercisable;
- The exercise price of options;
- The duration of options; and
- The number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase
price.
In the event of a merger, liquidation or other acquisition event, our Board
of Directors is authorized to provide for outstanding awards to be assumed or
substituted for by the acquiror. If the acquiror refuses to assume or substitute
for outstanding awards, they will accelerate and become fully exercisable and
free of restrictions, prior to consummation of the acquisition event.
1996 Founders Stock Incentive Plan. Our 1996 Founders Stock Incentive Plan
authorized the issuance of up to 3,877,000 shares of our common stock. From May
1996 to April 1997, an aggregate of 3,775,031 shares of common stock was issued
under the plan pursuant to founders stock restriction agreements. As of July 31,
1999, an aggregate of 145,394 shares of common stock had been repurchased by
SilverStream pursuant to the terms of such agreements. No additional awards may
be made under the 1996 Founders Stock Incentive Plan.
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
provides for the issuance of up to 300,000 shares of our common stock to
participating employees.
All of our employees, including directors who are employees, and all
employees of any participating subsidiaries:
- Whose customary employment is more than 20 hours per week for more than
five months in a calendar year;
- Who were employed by us prior to July 1, 1999 for the first offering
period or for subsequent offering periods, who have been employed by us
for at least three months prior to enrolling; and
- Who are employed on the first day of a designated payroll deduction
offering period
are eligible to participate in the 1999 Employee Stock Purchase Plan. Employees
who would immediately after the grant own five percent or more of the total
combined voting power or value of our stock or any subsidiary are not eligible
to participate.
To participate in the 1999 Employee Stock Purchase Plan, an employee must
authorize us to deduct from one to ten percent of his or her base pay during the
offering period. The first offering period will commence on the first date of
trading of our common stock on the Nasdaq National Market. The purchase price of
the shares for the first offering period is 85% of the initial public offering
price or the closing price per share of the common stock on the last day of the
offering period, whichever is lower. The purchase price of the shares for the
subsequent offering periods is 85% of the closing price per share of the common
stock on either the first or last day of the offering period, whichever is
lower.
401(k) Plan. Our employee savings and retirement plan is qualified under
Section 401 of the Internal Revenue Code. Our employees may elect to reduce
their current compensation by up to the statutorily prescribed annual limit and
have the amount of such reduction contributed to the 401(k) plan. We may make
matching or additional contributions to the 401(k) plan in amounts to be
determined annually by our Board of Directors.
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<PAGE> 51
CERTAIN TRANSACTIONS
PREFERRED STOCK ISSUANCES
Since our incorporation in May 1996, we have issued and sold shares of
preferred stock to the following persons and entities who are our executive
officers, directors or principal stockholders. For more detail on shares held by
these purchasers, see "Principal Stockholders" on page 51.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D AGGREGATE
PREFERRED PREFERRED PREFERRED PREFERRED PURCHASE
INVESTOR STOCK STOCK STOCK STOCK PRICE
- -------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
David R. Skok.............................. 930,000 159,475 56,948 52,632 $2,780,009
David A. Litwack........................... 930,000 178,238 38,185 52,632 2,715,277
Peter E. Brumme............................ -- 11,257 -- -- 60,000
John W. Pearce............................. -- 9,381 -- -- 50,001
Kim A. Sheffield........................... -- 9,381 -- -- 50,001
Arnold S. Epstein.......................... -- 11,257 -- -- 60,000
Craig A. Dynes............................. -- 9,381 -- -- 50,001
Matrix Partners IV, L.P.(1)................ 870,000 375,235 113,896 134,210 5,145,004
North Bridge Venture Partners, L.P.(2)..... 870,000 375,235 113,896 105,263 4,870,008
Funds affiliated with Essex Investment
Management Co., LLC (3).................. -- -- 455,581 342,105 7,249,999
</TABLE>
- ------------
(1) Composed of Matrix Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P.
Matrix IV Management Co., L.P. is the general partner of each of Matrix
Partners IV, L.P. and Matrix IV Entrepreneurs Fund, L.P. Timothy Barrows, a
director of SilverStream, is a general partner of Matrix IV Management Co.,
L.P.
(2) Richard A. D'Amore, a director of SilverStream, is a general partner of
North Bridge Venture Management L.P., which is the general partner of North
Bridge Venture Partners, L.P.
(3) Composed of Essex Performance Fund, L.P., Essex High Technology Fund, L.P.,
The New Discovery Fund Limited Ltd., Robertson Foundation and Essex Private
Placement Fund, Limited Partnership.
Series A Financing. On July 9, 1996, August 15, 1996 and November 4, 1996
we issued an aggregate of 3,683,050 shares of Series A preferred stock to six
investors, including David R. Skok, David A. Litwack, Matrix and North Bridge.
The per share purchase price for our Series A preferred stock was $1.00.
Series B Financing. On June 16, 1997 and September 12, 1997, we issued an
aggregate of 1,500,938 shares of Series B preferred stock to 21 investors,
including David R. Skok, David A. Litwack, Peter E. Brumme, John W. Pearce, Kim
A. Sheffield, Arnold E. Epstein, Craig A. Dynes, Matrix and North Bridge. The
per share purchase price for our Series B preferred stock was $5.33.
Series C Financing. On November 6, 1997, December 24, 1997 and March 30,
1998, we issued an aggregate of 1,922,588 shares of Series C preferred stock to
35 investors, including David R. Skok, David A. Litwack, Matrix, North Bridge
and Essex. The per share purchase price for our Series C preferred stock was
$8.78.
Series D Financing. On March 1, 1999, April 9, 1999, April 14, 1999 and
May 27, 1999, we issued an aggregate of 1,552,632 shares of Series D preferred
stock to 23 investors, including David R. Skok, David A. Litwack, Matrix, North
Bridge and Essex. The per share purchase price for our Series D preferred stock
was $9.50.
49
<PAGE> 52
COMMON STOCK ISSUANCES
The following table presents selected information regarding our issuances
of common stock to our executive officers. On May 8, 1996, in connection with
our incorporation, we issued an aggregate of 1,000 shares of common stock to
David R. Skok. We issued the remaining shares of common stock pursuant to
founders stock restriction agreements with each of the executive officers which
give us rights to repurchase all or a portion of the shares at their purchase
price in the event that the executive officer ceases to be employed by us. Each
of the shares issued in 1996 had a purchase price of $.001 per share. Each of
the shares issued in 1997 had a purchase price of $.50 per share.
<TABLE>
<CAPTION>
EXECUTIVE OFFICER DATE OF ISSUANCE NUMBER OF SHARES
- ----------------- ---------------- ----------------
<S> <C> <C>
David R. Skok............................................... 05/08/96 1,000
07/09/96 1,122,000
David A. Litwack............................................ 11/04/96 1,123,000
Peter E. Brumme............................................. 11/12/96 564,850
John W. Pearce.............................................. 08/16/96 347,600
Kim A. Sheffield............................................ 08/16/96 347,600
Arnold S. Epstein........................................... 08/16/96 451,880
Craig A. Dynes.............................................. 11/02/97 70,000
</TABLE>
STOCK OPTION GRANTS
On March 1, 1999, we granted to Diane Gordon, our Vice President, Customer
Services, an option to purchase 40,000 shares of common stock at a per share
exercise price of $4.00 under our 1997 Stock Incentive Plan. Ms. Gordon's option
shall vest 20% on January 4, 2000 and then quarterly for four years.
On April 30, 1999, we granted to Craig A. Dynes, our Vice President, Chief
Financial Officer and Treasurer, an option to purchase 10,000 shares of common
stock at a per share exercise price of $8.00 under our 1997 Stock Incentive
Plan. Mr. Dynes' option shall vest 20% on April 30, 2000 and then quarterly for
four years.
On April 30, 1999, we granted to Diane Gordon an option to purchase 5,000
shares of common stock at a per share exercise price of $8.00 under our 1997
Stock Incentive Plan. Ms. Gordon's option shall vest 20% on April 30, 2000 and
then quarterly for four years.
On April 30, 1999, we granted to Paul J. Severino an option to purchase
25,000 shares of common stock at a per share exercise price of $8.00 under our
1997 Stock Incentive Plan in connection with his joining our Board. Mr.
Severino's options were fully vested upon grant.
------------------------
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. SilverStream agreed to the material terms of each of the preferred
stock issuances set forth above after arms'-length negotiations with previously
unaffiliated persons. All future transactions, including loans between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested directors on the Board of Directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
50
<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of May 31, 1999, and as adjusted to reflect the sale of
the shares of common stock in this offering, by:
- Each person who owns beneficially more than 5% of the outstanding shares
of our common stock;
- Each of our directors and the Named Executive Officers; and
- All of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to shares. Shares of common stock issuable under stock options that are
exercisable within 60 days after May 31, 1999 are deemed outstanding for
computing the percentage ownership of the person holding the options but are not
deemed outstanding for computing the percentage ownership of any other person.
Unless otherwise indicated below, to our knowledge, all persons named in the
table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law. Unless otherwise indicated, the address of each person owning
more than 5% of the outstanding shares of common stock is c/o SilverStream
Software, Inc., One Burlington Woods, Suite 200, Burlington, Massachusetts
01803.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Matrix Partners IV, L.P.(1)............................... 1,493,341 10.7% 8.8%
1000 Winter Street, Suite 4500
Waltham, MA 02154
North Bridge Venture Partners, L.P........................ 1,464,394 10.5 8.6
950 Winter Street, Suite 4600
Waltham, MA 02154
Funds affiliated with Essex Investment Management Co.,
LLC(2).................................................. 797,686 5.7 4.7
125 High Street
Boston, MA 02110-2702
David R. Skok(3).......................................... 2,322,055 16.6 13.7
David A. Litwack(4)....................................... 2,312,055 16.5 13.6
Peter E. Brumme........................................... 576,107 4.1 3.4
John W. Pearce............................................ 356,981 2.6 2.1
Kim A. Sheffield.......................................... 356,981 2.6 2.1
Arnold S. Epstein......................................... 453,757 3.2 2.7
Timothy Barrows(1)........................................ 1,493,341 10.7 8.8
c/o Matrix Partners IV, L.P.
1000 Winter Street, Suite 4500
Waltham, MA 02154
Richard A. D'Amore(5)..................................... 1,464,394 10.5 8.6
c/o North Bridge Venture Partners, L.P.
950 Winter Street, Suite 4600
Waltham, MA 02154
Paul J. Severino(6)....................................... 25,000 * *
All executive officers and directors as a group (11
persons)(7)............................................... 9,440,052 67.4 55.5
</TABLE>
- ------------
* Less than 1% of the outstanding common stock.
(1) Composed of 1,418,674 shares held by Matrix Partners IV, L.P. and 74,667
shares held by Matrix IV Entrepreneurs Fund, L.P. Matrix IV Management Co.,
L.P. is the general partner of each of Matrix Partners IV, L.P. and Matrix
IV Entrepreneurs Fund, L.P. Mr. Barrows, a director of SilverStream, is
51
<PAGE> 54
a general partner of Matrix IV Management Co., L.P. Mr. Barrows disclaims
beneficial ownership of the shares held by Matrix Partners IV, L.P. and
Matrix IV Entrepreneurs Fund, L.P. except to the extent of his pecuniary
interests therein arising from his general partnership interest in Matrix IV
Management Co., L.P.
(2) Composed of 192,417 shares held by Essex Performance Fund, L.P., 192,417
shares held by Essex High Technology Fund, L.P., 96,178 shares held by The
New Discovery Fund Limited Ltd., 32,099 shares held by Robertson Foundation,
and 284,575 shares held by Essex Private Placement Fund, Limited
Partnership. Essex Investment Management Co., LLC acts as investment advisor
to each of the foregoing entities. Joseph C. McNay is the Principal and
Chief Investment Officer of Essex Investment Management Co., LLC and has
voting and investment power with respect to such shares.
(3) Includes 1,000,000 shares held by the David R. Skok Irrevocable Trust and
100,000 shares held by the David R. Skok 1997 Irrevocable Family Trust.
(4) Includes 1,123,000 shares held by the Litwack Irrevocable Trust.
(5) Consists of 1,464,394 shares held by North Bridge Venture Partners, L.P. Mr.
D'Amore, a director of SilverStream, is a general partner of North Bridge
Venture Management L.P., which is the general partner of North Bridge
Venture Partners, L.P. Mr. D'Amore disclaims beneficial ownership of the
shares held by North Bridge Venture Partners, L.P. except to the extent of
his pecuniary interests therein arising from his general partnership
interests in North Bridge Venture Management, L.P.
(6) Consists of 25,000 shares of common stock issuable upon the exercise of
fully vested stock options.
(7) Includes 25,000 shares of common stock issuable upon the exercise of fully
vested stock options.
52
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
After this offering, the authorized capital stock of SilverStream will
consist of 100,000,000 shares of common stock, $.001 par value per share, and
2,000,000 shares of preferred stock, $.001 par value per share. As of June 30,
1999, there were outstanding:
- 5,320,208 shares of common stock held by 80 stockholders of record;
- 8,659,208 shares of convertible preferred stock held by 71 stockholders
of record; and
- Options to purchase an aggregate of 1,401,192 shares of common stock.
There will be 16,979,416 shares of common stock outstanding upon the
closing of this offering.
The following summary is not intended to be complete and is qualified by
reference to the provisions of applicable law and to our amended and restated
certificate of incorporation and amended and restated bylaws included as
exhibits to the Registration Statement of which this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
matters submitted to a vote of stockholders. Holders of our common stock do not
have cumulative voting rights. Accordingly, holders of a majority of the shares
of common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of common stock are entitled to
receive their proportionate share of any dividends declared by the Board of
Directors, subject to any preferential dividend rights of outstanding preferred
stock. Upon the liquidation, dissolution or winding up of SilverStream, the
holders of common stock are entitled to receive ratably the net assets of
SilverStream available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding preferred stock. The common stock
has no preemptive, subscription, redemption or conversion rights. All
outstanding shares of common stock are fully paid and nonassessable. The shares
offered by SilverStream in this offering will be fully paid and nonassessable.
The rights, preferences and privileges of the common stock are subject to the
rights of the holders of shares of any series of preferred stock which
SilverStream may designate and issue in the future.
PREFERRED STOCK
Our Board of Directors will be authorized to issue shares of preferred
stock in one or more series without stockholder approval. The Board will have
discretion to determine the rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock.
The purpose of authorizing the Board of Directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The Board's ability to issue preferred
stock will provide desirable flexibility in connection with possible
acquisitions and other corporate purposes. However, this ability could make it
more difficult for a third party to acquire, or could discourage a third party
from acquiring, a majority of the outstanding voting stock of SilverStream. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock. SilverStream has no
present plans to issue any shares of preferred stock.
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
SilverStream is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting stock.
53
<PAGE> 56
SilverStream's certificate of incorporation and by-laws to be effective on
the closing of this offering provide:
- That the Board of Directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;
- That directors may be removed only for cause by the vote of the holders
of at least 75% of the shares of our capital stock entitled to vote; and
- That any vacancy on the Board of Directors, however occurring, including
a vacancy resulting from an enlargement of the Board, may only be filled
by vote of a majority of the directors then in office.
The classification of the Board of Directors and the limitations on the
removal of directors and filling of vacancies could make it more difficult for a
third party to acquire, or discourage a third party from acquiring,
SilverStream.
The certificate of incorporation and by-laws to be effective on the closing
of this offering also provide that, after the closing of this offering:
- Any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if it
is properly brought before such meeting and may not be taken by written
action in lieu of a meeting; and
- Special meetings of the stockholders may only be called by the Chairman
of the Board of Directors, the President, or by the Board of Directors.
Our by-laws will also provide that, in order for any matter to be
considered "properly brought" before a meeting, a stockholder must comply
with requirements regarding advance notice to us.
These provisions could delay until the next stockholders' meeting actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity from
making a tender offer for our common stock, because such person or entity, even
if it acquired a majority of our outstanding voting securities, would be able to
take action as a stockholder only at a duly called stockholders' meeting, and
not by written consent.
Delaware law provides that the vote of a majority of the shares entitled to
vote on any matter is required to amend a corporation's certificate of
incorporation or by-laws, unless a corporation's certificate of incorporation or
by-laws, as the case may be, requires a greater percentage. Our certificate of
incorporation requires the affirmative vote of the holders of at least 75% of
the shares of our capital stock entitled to vote to amend or repeal any of the
foregoing provisions of our certificate of incorporation. Generally, our by-laws
may be amended or repealed by a majority vote of the Board of Directors or the
holders of a majority of the shares of our capital stock issued and outstanding
and entitled to vote. Changes to our by-laws regarding special meetings of
stockholders, written actions of stockholders in lieu of a meeting, and the
election, removal and classification of members of the Board of Directors
requires the affirmative vote of the holders of at least 75% of the shares of
our capital stock entitled to vote. The stockholder vote would be in addition to
any separate class vote that might in the future be required pursuant to the
terms of any series preferred stock that might be then outstanding.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that our directors and officers
shall be indemnified by us to the fullest extent authorized by Delaware law.
This indemnification covers all expenses and liabilities reasonably incurred in
connection with their services for or on behalf of us. In addition, our
certificate of incorporation provides that our directors will not be personally
liable for monetary damages to us for breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to us or our stockholders,
acted in bad faith, knowingly or intentionally violated the law, authorized
illegal dividends or redemptions or derived an improper personal benefit from
their action as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
54
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, based on the number of shares outstanding
at June 30, 1999, we will have 16,979,416 shares of common stock outstanding,
assuming no exercise of outstanding options. Of these shares, the 3,000,000
shares to be sold in this offering will be freely tradable without restriction
or further registration under the Securities Act except that any shares
purchased by our affiliates, as that term is defined in Rule 144 under the
Securities Act, may generally only be sold in compliance with the limitations of
Rule 144 described below. The remaining 13,979,416 shares of common stock are
"restricted securities" under Rule 144. Generally, restricted securities that
have been owned for at least two years may be sold immediately after the
completion of this offering and restricted securities that have been owned for
at least one year may be sold 90 days after the completion of this offering. Of
these restricted shares, 12,357,284 shares will become eligible for sale in the
public market beginning 180 days after the date of this prospectus, or earlier
with the consent of Morgan Stanley & Co. Incorporated, and 1,622,132 shares will
become eligible for sale in the public market at various times following 180
days after the date of this prospectus, subject in each case to the limitations
of Rule 144.
SALES OF RESTRICTED SHARES
In general, under Rule 144 stockholders, including our affiliates, who have
beneficially owned shares for at least one year are entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
one percent of the then outstanding shares of common stock or the average weekly
trading volume in the common stock on the Nasdaq National Market during the four
calendar weeks preceding the date on which notice of such sale is filed,
provided requirements concerning availability of public information, manner of
sale and notice of sale are satisfied. In addition, our affiliates must comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of common stock which are
not restricted securities.
Under Rule 144(k), a stockholder who is not an affiliate and has not been
an affiliate for at least three months prior to the sale and who has
beneficially owned shares for at least two years may sell such shares without
compliance with the foregoing requirements. In meeting the holding periods
described above, a stockholder can include the holding periods of a prior owner
who was not an affiliate. The holding periods described above do not begin until
the full purchase price or other consideration is paid by the stockholder. Rule
701 provides that currently outstanding shares of common stock acquired under
our employee compensation plans may be sold beginning 90 days after the date of
this prospectus (1) by stockholders other than affiliates subject only to the
manner of sale provisions of Rule 144, and (2) by affiliates under Rule 144
without compliance with its one-year holding period requirement.
STOCK OPTIONS
At June 30, 1999, approximately 217,800 shares of common stock were
issuable pursuant to vested options granted under our 1997 Stock Incentive Plan,
substantially all of which are subject to lock-up agreements with the
underwriters.
We intend to file a registration statement on Form S-8 under the Securities
Act within 180 days after the date of this prospectus, to register up to
3,089,792 shares of common stock issuable under our 1997 Stock Incentive Plan,
including the 1,401,192 shares of common stock subject to outstanding options as
of June 30, 1999. This registration statement is expected to become effective
upon filing.
LOCK-UP AGREEMENTS
SilverStream and our executive officers, directors and other
securityholders have entered into lock-up agreements with the underwriters.
Without the prior written consent of Morgan Stanley & Co. Incorporated, none of
us will sell or transfer shares of common stock during the period ending 180
days after the date of this prospectus. Up to 150,000 shares purchased pursuant
to the directed share program are not subject to the lock-up agreements. In
addition, for a period of 180 days from the date of this prospectus, except as
required by law, we have agreed not to consent to any offer for sale, sale or
other
55
<PAGE> 58
disposition, or any transaction which is designed or could be expected, to
result in, the disposition by any person, directly or indirectly, of any shares
of common stock without the prior written consent of Morgan Stanley & Co.
Incorporated except that we may, without such consent, grant options and sell
shares pursuant to our stock plans.
REGISTRATION RIGHTS
After this offering, the holders of approximately 10,905,208 shares of
common stock will be entitled to rights with respect to the registration of such
shares under the Securities Act. If we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of common stock.
Additionally, such holders are also entitled to demand registration rights
pursuant to which they may require us on up to two occasions to file a
registration statement under the Securities Act at our expense. We are required
to use our best efforts to effect any such registration. Further, holders may
require us to file an unlimited number of additional registration statements on
Form S-3 at our expense. All of these registration rights are subject to the
right of the underwriters of an offering to limit the number of shares included
in such registration and our right not to effect a requested registration within
180 days following an offering of our securities pursuant to a Form S-1,
including the offering made hereby.
56
<PAGE> 59
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement, the underwriters named below, for whom Morgan Stanley & Co.
Incorporated, BancBoston Robertson Stephens Inc. and SG Cowen Securities
Corporation are acting as representatives, have severally agreed to purchase,
and SilverStream has agreed to sell to the underwriters, the respective number
of shares of common stock set forth opposite the names of the underwriters
below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BancBoston Robertson Stephens Inc. .........................
SG Cowen Securities Corporation.............................
----------
Total............................................. 3,000,000
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered in this offering are
subject to the approval of legal matters by their counsel. The underwriters are
obligated to take and pay for all of the shares of common stock offered in this
offering, other than those covered by the over-allotment option described below,
if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page hereof and part to dealers at a price that represents a
concession not in excess of $ a share under the public offering price.
Any underwriters may allow, and such dealers may reallow, a concession not in
excess of $ a share to other underwriters or to other dealers. After
the initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives of the
underwriters.
SilverStream has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of 450,000
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered in this offering. To the extent such option is exercised,
each underwriter will become obligated to purchase approximately the same
percentage of such additional shares of common stock as the number set forth
next to such underwriter's name in the preceding table bears to the total number
of shares of common stock set forth next to the names of all underwriters in the
preceding table. If the underwriter's over-allotment option is exercised in
full, the total price to public would be $ , the total underwriters'
discounts and commissions would be $ , and the total proceeds to us
would be $ .
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 150,000 of the shares of common stock offered in
this offering for our directors, officers, employees and related persons.
Individuals purchasing these shares must have a retail account with Morgan
Stanley & Co. Incorporated and must commit to the purchase of these shares
within one day after the date of this prospectus. The number of shares of common
stock available for sale to the general public will be reduced to the extent
such individuals purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered hereby.
SilverStream, our directors and executive officers and other
securityholders have each agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters,
57
<PAGE> 60
during the period ending 180 days after the date of this prospectus, he, she or
it will not directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have applied to list our common stock on the Nasdaq National Market
under the symbol "SSSW."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed shares of common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against
liabilities in connection with this offering, including liabilities under the
Securities Act.
In March, April and May 1999, we sold shares of our Series D Preferred
Stock in a private placement. In this private placement, a fund invested in by
entities affiliated with Morgan Stanley & Co. Incorporated purchased 105,263
shares of Series D Preferred Stock, which are convertible into 105,263 shares of
common stock, for approximately $1,000,000, or $9.50 per share. The fund
purchased these shares on the same terms as the other investors in the private
placement.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares of
common stock will be determined by negotiations between SilverStream and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price will be:
- our record of operations, our current financial position and future
prospects;
- the experience of our management;
- sales, earnings and other financial and operating information in recent
periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
58
<PAGE> 61
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1997 and 1998, and for the
period ended December 31, 1996 and each of the two years in the period ended
December 31, 1998, as set forth in their report. We have included our financial
statements and schedule in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
we propose to sell in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in the
registration statement. For further information about us and the common stock we
propose to sell in this offering, we refer you to the registration statement and
the exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. The registration statement, including exhibits, may be
inspected without charge at the principal office of the Securities and Exchange
Commission in Washington, D.C. and copies of all or any part of which may be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained at prescribed rates by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the Commission at 1-800-SEC-0330. In addition,
the Securities and Exchange Commission maintains a website at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission.
59
<PAGE> 62
(This page intentionally left blank)
<PAGE> 63
SILVERSTREAM SOFTWARE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders' Equity (Deficit)........ F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SilverStream Software, Inc.
We have audited the accompanying consolidated balance sheets of
SilverStream Software, Inc. (the Company) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, redeemable convertible
preferred stock and stockholders' equity (deficit), and cash flows for the
period May 8, 1996 (inception) through December 31, 1996 and the years ended
December 31, 1997 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SilverStream
Software, Inc. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for the period May 8, 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Boston, Massachusetts
March 5, 1999, except for Note 13,
as to which the date is July 23, 1999
F-2
<PAGE> 65
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $16,649,341 $ 1,198,584 $10,777,706 $10,777,706
Marketable securities................................... -- 3,330,603 246,690 246,690
Accounts receivable; net of allowances of $44,660 at
December 31, 1997, $475,993 at December 31, 1998, and
$738,403 at June 30, 1999 (unaudited)................. 193,255 3,339,667 5,953,127 5,953,127
Prepaid expenses........................................ 317,250 247,413 3,310 3,310
Other................................................... 267,754 100,930 577,122 577,122
----------- ----------- ----------- -----------
Total current assets............................. 17,427,600 8,217,197 17,557,955 17,557,955
Furniture, equipment and leasehold improvements, net...... 1,528,155 1,796,346 2,323,845 2,323,845
Intangibles, (net)........................................ -- -- 1,013,273 1,013,273
----------- ----------- ----------- -----------
Total assets..................................... $18,955,755 $10,013,543 $20,895,073 $20,895,073
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 728,653 $ 1,176,190 $ 2,638,400 $ 2,638,400
Accrued expenses........................................ -- 422,749 1,562,061 1,562,061
Deferred revenue........................................ 37,087 1,063,658 2,416,690 2,416,690
Current portion of long-term debt....................... 313,210 435,820 502,168 502,168
----------- ----------- ----------- -----------
Total current liabilities........................ 1,078,950 3,098,417 7,119,319 7,119,319
Long-term debt, less current portion...................... 294,727 324,787 681,783 681,783
Commitments and contingencies............................. -- -- -- --
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $.001
par value -- authorized, issued and outstanding
3,683,050 (liquidation preference $3,683,050)......... 3,658,050 3,658,050 3,658,050 --
Series B redeemable convertible preferred stock, $.001
par value -- authorized 1,600,000 shares; issued and
outstanding 1,500,938 (liquidation preference
$8,000,000)........................................... 7,980,000 7,980,000 7,980,000 --
Stockholders' equity (deficit):
Series C convertible preferred stock, $.001 par value --
authorized 2,000,000 shares; issued and outstanding
1,728,283 at December 31, 1997 and 1,922,588 at
December 31, 1998 and June 30, 1999, respectively
(liquidation preference $16,880,323).................. 15,154,325 16,856,323 16,856,323 --
Series D convertible preferred stock, $.001 par value --
authorized 1,600,000 shares; issued and outstanding
1,552,632 at June 30, 1999 (liquidation preference
$12,475,001) (unaudited).............................. -- -- 14,727,997 --
Common stock, $.001 par value -- authorized 21,000,000
shares; issued and outstanding 5,086,391 at December
31, 1997, 5,206,779 at December 31, 1998, 5,320,208 at
June 30, 1999 (unaudited) and 13,979,416 at June 30,
1999 (pro forma)...................................... 5,086 5,207 5,320 13,979
Additional paid-in capital.............................. 174,796 365,985 3,404,612 46,618,323
Deferred compensation................................... -- -- (1,847,821) (1,847,821)
Accumulated deficit..................................... (9,286,679) (22,171,726) (31,513,775) (31,513,775)
Other comprehensive loss................................ -- -- (73,235) (73,235)
Notes receivable from stockholders...................... (103,500) (103,500) (103,500) (103,500)
----------- ----------- ----------- -----------
Total stockholders' equity (deficit)............. 5,944,028 (5,047,711) 1,455,921 13,093,971
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)...................................... $18,955,755 $10,013,543 $20,895,073 $20,895,073
=========== =========== =========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 66
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license.................... $ -- $ 248,524 $ 5,982,534 $ 1,526,718 $ 5,515,280
Services............................ -- -- 825,365 217,371 2,267,159
----------- ----------- ------------ ----------- -----------
Total revenue............... -- 248,524 6,807,899 1,744,089 7,782,439
Cost of revenue:
Software license.................... -- 89,997 767,225 234,213 685,399
Services............................ -- 281,796 1,413,962 519,033 3,166,726
----------- ----------- ------------ ----------- -----------
Total cost of revenue....... -- 371,793 2,181,187 753,246 3,852,125
----------- ----------- ------------ ----------- -----------
Gross profit (loss)................... -- (123,269) 4,626,712 990,843 3,930,314
Operating expenses:
Sales and marketing................. 34,532 3,853,766 10,776,396 4,421,760 8,258,392
Research and development............ 849,868 2,622,200 5,069,465 2,429,214 3,341,916
General and administrative.......... 120,398 1,961,205 2,141,187 993,326 1,659,914
Compensation charge for issuance of
stock options -- -- -- -- 190,257
----------- ----------- ------------ ----------- -----------
Total operating expenses.... 1,004,798 8,437,171 17,987,048 7,844,300 13,450,479
----------- ----------- ------------ ----------- -----------
Loss from operations.................. (1,004,798) (8,560,440) (13,360,336) (6,853,457) (9,520,165)
Interest income....................... 53,214 274,331 559,495 295,396 281,104
Interest expense...................... -- (48,986) (84,206) (43,409) (102,988)
----------- ----------- ------------ ----------- -----------
Net loss.............................. $ (951,584) $(8,335,095) $(12,885,047) $(6,601,470) $(9,342,049)
=========== =========== ============ =========== ===========
Basic and diluted net loss per
share:.............................. $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Weighted-average common shares used in
computing basic and diluted net loss
per share:.......................... 185,686 785,548 2,632,496 2,334,575 3,551,349
Pro forma basic and diluted net loss
per share........................... $ (1.33) $ (.83)
Weighted-average common shares used in
computing pro forma basic and
diluted net loss per share.......... 9,691,693 11,618,248
</TABLE>
See accompanying notes
F-4
<PAGE> 67
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- ----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES PAR VALUE
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in May, July, August and
November 1996....................................... 4,639,367 $4,639
Issuance of Series A preferred stock in July, August
and November 1996 (net of issuance costs of
$25,000)............................................ 3,683,050 $ 3,658,050
Net loss.............................................
--------- ----------- --------- ----------- --------- ------
Balance at December 31, 1996......................... 3,683,050 3,658,050 4,639,367 4,639
Issuance of common stock in April, August, November
and December 1997................................... 577,914 578
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)... 1,500,938 7,980,000
Note issued for purchase of common stock in August
1997................................................
Repurchase and retirement of common stock in February
and
October 1997........................................ (130,890) (131)
Issuance of Series C preferred stock in November and
December (net of issuance costs of $20,000)......... 1,728,283 $15,154,325
Net loss.............................................
--------- ----------- --------- ----------- --------- ------
Balance at December 31, 1997......................... 5,183,988 11,638,050 1,728,283 15,154,325 5,086,391 5,086
Issuance of common stock in January and December
1998................................................ 64,863 65
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)................... 194,305 1,701,998
Exercise of stock options in June through December
1998................................................ 55,525 56
Net loss.............................................
--------- ----------- --------- ----------- --------- ------
Balance at December 31, 1998......................... 5,183,988 11,638,050 1,922,588 16,856,323 5,206,779 5,207
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)
(unaudited)......................................... 1,552,632 14,727,997
Repurchase and retirement of common stock in March
1999 (unaudited).................................... (10,754) (11)
Exercise of stock options in March 1999
(unaudited)......................................... 54,683 54
Issuance of common stock in June 1999 (unaudited).... 69,500 70
Deferred compensation on grant of stock options
(unaudited).........................................
Amortization of deferred compensation (unaudited)....
Net loss (unaudited).................................
Currency translation adjustment (unaudited)..........
Comprehensive loss (unaudited).......................
--------- ----------- --------- ----------- --------- ------
Balance at June 30,
1999 (unaudited).................................... 5,183,988 $11,638,050 3,475,220 $31,584,320 5,320,208 $5,320
========= =========== ========= =========== ========= ======
<CAPTION>
OTHER NOTES
ADDITIONAL COMPREHENSIVE RECEIVABLE
PAID-IN DEFERRED ACCUMULATED INCOME FROM SALE
CAPITAL COMPENSATION DEFICIT (LOSS) OF STOCK
---------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in May, July, August and
November 1996.......................................
Issuance of Series A preferred stock in July, August
and November 1996 (net of issuance costs of
$25,000)............................................
Net loss............................................. $ (951,584)
---------- ----------- ------------ --------- ---------
Balance at December 31, 1996......................... (951,584)
Issuance of common stock in April, August, November
and December 1997................................... $ 174,796
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)...
Note issued for purchase of common stock in August
1997................................................ $(103,500)
Repurchase and retirement of common stock in February
and
October 1997........................................
Issuance of Series C preferred stock in November and
December (net of issuance costs of $20,000).........
Net loss............................................. (8,335,095)
---------- ----------- ------------ --------- ---------
Balance at December 31, 1997......................... 174,796 (9,286,679) (103,500)
Issuance of common stock in January and December
1998................................................ 181,887
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)...................
Exercise of stock options in June through December
1998................................................ 9,302
Net loss............................................. (12,885,047)
---------- ----------- ------------ --------- ---------
Balance at December 31, 1998......................... 365,985 (22,171,726) (103,500)
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)
(unaudited).........................................
Repurchase and retirement of common stock in March
1999 (unaudited)....................................
Exercise of stock options in March 1999
(unaudited)......................................... 27,619
Issuance of common stock in June 1999 (unaudited).... 972,930
Deferred compensation on grant of stock options
(unaudited)......................................... $2,038,078 $(2,038,078)
Amortization of deferred compensation (unaudited).... 190,257
Net loss (unaudited)................................. (9,342,049)
Currency translation adjustment (unaudited).......... $ (73,235)
----------- ---------
Comprehensive loss (unaudited).......................
---------- ----------- ------------ --------- ---------
Balance at June 30,
1999 (unaudited).................................... $3,404,612 $(1,847,821) $(31,513,775) $ (73,235) $(103,500)
========== =========== ============ ========= =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Issuance of common stock in May, July, August and
November 1996....................................... $ 4,639
Issuance of Series A preferred stock in July, August
and November 1996 (net of issuance costs of
$25,000)............................................
Net loss............................................. (951,584)
------------
Balance at December 31, 1996......................... (946,945)
Issuance of common stock in April, August, November
and December 1997................................... 175,374
Issuance of Series B preferred stock in June and
September 1997 (net of issuance costs of $20,000)...
Note issued for purchase of common stock in August
1997................................................ (103,500)
Repurchase and retirement of common stock in February
and
October 1997........................................ (131)
Issuance of Series C preferred stock in November and
December (net of issuance costs of $20,000)......... 15,154,325
Net loss............................................. (8,335,095)
------------
Balance at December 31, 1997......................... 5,944,028
Issuance of common stock in January and December
1998................................................ 181,952
Issuance of Series C preferred stock in March 1998
(net of issuance costs of $4,000)................... 1,701,998
Exercise of stock options in June through December
1998................................................ 9,358
Net loss............................................. (12,885,047)
------------
Balance at December 31, 1998......................... (5,047,711)
Issuance of Series D preferred stock in March, April
and May 1999 (net of issuance costs of $22,000)
(unaudited)......................................... 14,727,997
Repurchase and retirement of common stock in March
1999 (unaudited).................................... (11)
Exercise of stock options in March 1999
(unaudited)......................................... 27,673
Issuance of common stock in June 1999 (unaudited).... 973,000
Deferred compensation on grant of stock options
(unaudited).........................................
Amortization of deferred compensation (unaudited).... 190,257
Net loss (unaudited)................................. (9,342,049)
Currency translation adjustment (unaudited).......... (73,235)
------------
Comprehensive loss (unaudited)....................... (9,415,284)
------------
Balance at June 30,
1999 (unaudited).................................... $ 1,455,921
============
</TABLE>
See accompanying notes
F-5
<PAGE> 68
SILVERSTREAM SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................... $ (951,584) $(8,335,095) $(12,885,047) $ (6,601,470) $(9,342,049)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 29,750 345,494 724,045 328,421 541,235
Provision for allowances on accounts
receivable..................................... -- 44,660 431,333 119,086 262,410
Operating expenses paid with issuance of
preferred stock................................ 83,050 79,998 -- -- --
Operating expenses paid with issuance of common
stock.......................................... -- 20,700 181,952 22,500 --
Compensation charge for issuance of stock
options........................................ -- -- -- -- 190,257
Changes in operating assets and liabilities:
Accounts receivable............................ -- (237,915) (3,577,745) (1,545,511) (2,875,870)
Prepaid expenses............................... (13,671) (303,579) 69,837 (46,936) 244,103
Other current assets........................... -- -- 166,824 166,158 (476,192)
Other non-current assets....................... -- -- -- -- (735,273)
Accounts payable and accrued expenses.......... 75,413 385,486 870,286 23,632 2,601,522
Deferred revenue............................... -- 37,087 1,026,571 790,762 1,353,032
---------- ----------- ------------ ------------ -----------
Net cash used in operating activities.............. (777,042) (7,963,164) (12,991,944) (6,743,358) (8,236,825)
---------- ----------- ------------ ------------ -----------
INVESTING ACTIVITIES
Purchase of furniture and equipment................ (338,587) (1,564,812) (992,236) (486,339) (1,068,734)
Sale (purchase) of available-for-sale securities... -- -- (3,330,603) (6,807,351) 3,083,913
---------- ----------- ------------ ------------ -----------
Net cash provided by (used in) investing
activities....................................... (338,587) (1,564,812) (4,322,839) (7,293,690) 2,015,179
---------- ----------- ------------ ------------ -----------
FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock...... 3,575,000 23,054,327 1,701,998 1,701,993 14,727,997
Net proceeds from issuance of common stock......... 4,639 51,043 9,358 213 722,662
Proceeds from line of credit....................... 269,914 513,110 602,317 602,317 673,264
Payments on long-term debt......................... -- (175,087) (449,647) (199,727) (249,920)
---------- ----------- ------------ ------------ -----------
Net cash provided by financing activities.......... 3,849,553 23,443,393 1,864,026 2,104,796 15,874,003
---------- ----------- ------------ ------------ -----------
Effects of exchange rate on cash and cash
equivalents...................................... -- -- -- -- (73,235)
Net increase (decrease) in cash and cash
equivalents...................................... 2,733,924 13,915,417 (15,450,757) (11,932,252) 9,579,122
Cash and cash equivalents at beginning of period... -- 2,733,924 16,649,341 16,649,341 1,198,584
---------- ----------- ------------ ------------ -----------
Cash and cash equivalents at end of period......... $2,733,924 $16,649,341 $ 1,198,584 $ 4,717,089 $10,777,706
========== =========== ============ ============ ===========
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes..................................... $ -- $ 456 $ 14,283 $ 2,392 $ --
========== =========== ============ ============ ===========
Interest......................................... $ -- $ 48,986 $ 84,206 $ 43,409 $ 31,504
========== =========== ============ ============ ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 69
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
SilverStream Software, Inc. (the Company) was incorporated on May 8, 1996.
The Company is a global provider of application server software and services
that enable businesses and other large organizations to create, deploy and
manage software applications for intranets, extranets and the Internet. The
Company markets their software worldwide and has sales offices in the United
Kingdom, The Netherlands, Belgium, Germany, Norway, the Czech Republic, France,
Hong Kong, Singapore and Taiwan.
The market for application server software has only recently begun to
develop, is rapidly evolving and will likely have an increasing number of
competitors. The market is marked by rapid technological change, frequent new
product introductions and enhancements and evolving industry standards. The
Company's future financial performance will depend on the market's acceptance of
its application server products and the Company's ability to successfully
introduce enhancements to their application server products and to expand its
operations to meet the evolving customer needs within the industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its international subsidiaries, all of which are wholly owned, located in
Europe and Asia. All intercompany accounts and transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company accounts for cash equivalents and marketable securities in
accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Cash
equivalents are short-term, highly liquid investments with original maturity
dates of three months or less. Cash equivalents are carried at cost, which
approximates fair market value. The Company's marketable securities are
classified as available-for-sale and are recorded at fair value with any
unrealized gain or loss recorded as an element of stockholders' equity
(deficit). As of December 31, 1998 and March 31, 1999, the Company's marketable
securities consisted of investment-grade corporate bonds.
As of December 31, 1998, the Company's marketable securities had the
following contractual maturities.
<TABLE>
<S> <C>
Within 1 year............................................... $3,083,913
After 1 year through 5 years................................ 246,690
----------
$3,330,603
==========
</TABLE>
F-7
<PAGE> 70
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, marketable
securities and accounts receivable. Concentration of credit risk with respect to
marketable securities is limited as marketable securities are primarily
investment-grade corporate bonds with high-credit, quality financial
institutions.
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of companies comprising the Company's customer base.
On-going credit evaluations of customers' financial condition are performed and
collateral is generally not required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is computed by use
of the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Leasehold improvements........................
Lesser of remaining
lease-term or useful
life
Furniture and fixtures........................
5 years
Computer equipment and software...............
3 years
Telephone equipment...........................
3 years
</TABLE>
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs were
$0, $187,000 and $858,000 for the period ended December 31, 1996 and the years
ended December 31, 1997 and 1998, respectively, and $506,000 and $219,000 for
the six months ended June 30, 1998 and 1999, respectively.
CAPITALIZED SOFTWARE
Capitalization of software development costs under SFAS No. 86 begins upon
the establishment of technological feasibility. Technological feasibility is
established upon the completion of a working model. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life, and changes in software and hardware technologies. Costs incurred
by the Company between completion of a working model and the point at which the
product is ready for general release have been insignificant. Therefore, through
December 31, 1998 and June 30, 1999, all research and development costs have
been expensed as incurred.
REVENUE RECOGNITION
Revenue recognition from software license fees and from sales of software
products is recognized when persuasive evidence of an agreement exists, delivery
of the product has occurred, no significant Company obligations with regard to
implementation remain, the fee is fixed or determinable and collectibility is
probable. Update assurance agreements represent the right to receive unspecified
upgrades on an if-and-when available basis. Fees from update assurance
agreements, which are separately negotiated and priced, are deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.
F-8
<PAGE> 71
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Services revenue is primarily comprised of revenue from consulting,
technical support and education services. Services revenue from consulting and
education is billed on a time and materials basis and is recognized as the
services are performed. Technical support revenue is deferred and recognized on
a straight-line basis as service 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 and recognized as the
services are delivered.
Revenue derived from arrangements with resellers of our products is not
recognized until the software is shipped to the customer.
Sales to independent software vendors are deferred and recognized on a
straight line basis as product revenue over the life of the agreement, which is
typically one year, since the only undelivered element under these agreements is
service for which no pattern of performance is discernible. Partner fees are
deferred and recognized on a straight line basis as an offset to operating
expenses over the life of the agreement, which is typically one year, since the
Company considers such fees to be reimbursement for costs incurred, primarily
marketing support, in connection with its partner program.
Customer returns are estimated and accrued for as a percentage of net
product revenues based upon historical trends.
The Company adopted Statement of Position (SOP) 97-2, "Software Revenue
Recognition" and SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition," as of January 1, 1998. SOP 97-2 and SOP
98-4 provide guidance for recognizing revenue on software transactions and
supersede SOP 91-1.
The Company will adopt SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." SOP 98-9 amends SOP
98-4 to extend the period of deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of SOP 97-2 are effective for transactions
entered into in fiscal years beginning after March 15, 1999.
The adoption of SOP 97-2 and SOP 98-4 did not have a material impact on the
Company's financial results. In addition, the Company believes that the adoption
of SOP 98-9 will not have a material impact on the Company's financial results.
LICENSING AGREEMENTS
The Company has entered into various licensing agreements with third-party
software and technology companies, primarily for encryption technology,
requiring royalty payments which are based on either a percentage of product
revenue or per unit sales. Royalty expenses, which are charged to cost of
revenue under these license agreements, totaled $168,000 for the year ended
December 31, 1998, and $20,000 and $119,000 for the six months ended June 30,
1998 and 1999, respectively. Prepaid royalties related to these licensing
agreements were $183,000 and $113,000 for the years ended December 31, 1997 and
1998, respectively, and $217,000 and $316,000 for the periods ended June 30,
1998 and 1999, respectively.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share". SFAS 128 requires calculation and presentation of basic
and diluted earnings per share. Basic earnings per share is calculated based on
the weighted average number of common shares outstanding and excludes any
dilutive effects of warrants, stock options, common stock subject to repurchase
or other type securities. Diluted earnings per share is calculated based on the
weighted average number of common shares outstanding and the dilutive effect of
warrants, stock options, and related securities calculated using the
F-9
<PAGE> 72
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
treasury stock method. Dilutive securities are excluded from the diluted
earnings per share calculation if their effect is anti-dilutive.
INCOME TAXES
The Company provides for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax basis 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.
FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, which include cash
and cash equivalents, marketable securities, accounts receivable and accounts
payable and long term debt, are based on assumptions concerning the amount and
timing of estimated future cash flows and assumed discount rates reflecting
varying degrees of perceived risk. The carrying value of these financial
instruments approximated their fair value at December 31, 1997 and 1998 due to
the short term nature of these instruments and the variable interest rate on the
long term debt.
FOREIGN CURRENCY TRANSLATIONS
Financial statements of foreign subsidiaries are translated into U.S.
dollars at the exchange rate as of the balance sheet dates, with the exception
of revenues, costs and expenses. All revenues, costs and expenses are translated
at a weighted-average of exchange rates in effect during the year. Net exchange
gains or losses resulting from the translation of the foreign financial
statements are recorded as a separate component of comprehensive income.
Transaction adjustments for all foreign subsidiaries are included in income.
STOCK COMPENSATION ARRANGEMENTS
The Company adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has continued to account for employee stock options in accordance with
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," and has included the pro forma disclosures required by SFAS No.
123 for all periods presented.
NON-MONETARY TRANSACTIONS
The Company has entered into certain non-monetary transactions involving
the issuance of preferred or common stock in consideration for professional and
marketing services provided to the Company by third parties. The Company has
accounted for these non-monetary transactions in accordance with SFAS No. 123.
All transactions are accounted for based on the fair value of the goods or
services received or on the fair value of the equity instruments issued,
whichever is more reliably measurable. All expenses related to non-monetary
transactions were recognized in the period incurred.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its components. SFAS 130 requires unrealized gains
and losses on the Company's available-for-sale securities and the foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders'
F-10
<PAGE> 73
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity, to be included in other comprehensive income. Prior to the three-month
period ended March 31, 1999, amounts pertaining to comprehensive income were not
material and have therefore not been separately stated.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
superseded SFAS No. 14, "Financial Reporting for Segment of a Business
Enterprise." SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in interim financial
reports. The Company views its operations and manages its business as one
segment: the development and delivery of application server solutions, that
include software and related products and services. Factors used to identify the
Company's single operating segment include the organizational structure of the
Company and the financial information available for evaluation by the chief
operating decision maker in making decisions about how to allocate resources and
assess performance. The adoption of SFAS 131 did not affect results of operation
or financial position, but did affect the disclosure of segment information. See
Note 11.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information at June 30, 1999 and for the six months
ended June 30, 1998 and 1999, all of which is unaudited, was prepared by the
Company on a basis consistent with the audited financial statements. In
management's opinion, such information reflects all adjustments which are of a
normal recurring nature and which are necessary to present fairly the results of
the periods presented.
UNAUDITED PRO FORMA BALANCE SHEET
Upon an initial public offering of the Company's common stock, each
outstanding share of Series A, B, C, and D convertible preferred stock will be
converted into one share of common stock. This reclassification has been
reflected in the unaudited pro forma balance sheet as of June 30, 1999.
UNAUDITED PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE
The unaudited pro forma basic and diluted net loss per share is computed
using the weighted-average number of outstanding common shares assuming
conversion of all preferred shares into common shares (at date of original
issuance), which will occur upon completion of the initial public offering, as
contemplated herein. Common share equivalents are excluded from the calculation
as their effect is anti-dilutive.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standard Executive Committee ("AcSEC") issued
SOP 98-1, "Accounting of the Costs of Computer Software Developed or Obtained
for Internal Use." The adoption of SOP 98-1, which is effective for SilverStream
beginning January 1, 1999, did not have a material effect on SilverStream's
financial condition or results of operations.
In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 is effective for SilverStream's calendar year
1999 financial statements and the adoption did not have a material effect on
SilverStream financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities." The Company is
currently analyzing the effect, if any, the standard will have on its financial
condition or results of operations.
F-11
<PAGE> 74
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures....................... $ 360,315 $ 502,821 $ 443,804
Computer equipment and software.............. 1,302,285 2,051,809 3,077,767
Telephone equipment.......................... 150,067 162,205 163,306
Leasehold improvements....................... 90,732 178,800 279,492
---------- ----------- -----------
1,903,399 2,895,635 3,964,369
Less accumulated depreciation and
amortization............................... (375,244) (1,099,289) (1,640,524)
---------- ----------- -----------
$1,528,155 $ 1,796,346 $ 2,323,845
========== =========== ===========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses include the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
Fringe benefits............................................ $124,337 $ 482,718
Occupancy.................................................. 130,507 480,177
Professional fees.......................................... 66,387 83,829
Bonus...................................................... 19,996 239,998
Other...................................................... 81,522 275,339
-------- ----------
$422,749 $1,562,061
======== ==========
</TABLE>
5. DEBT
LONG-TERM DEBT
Under the terms of a credit facility, negotiated in 1996 and expiring March
1, 2000, borrowings of approximately $501,598 and $295,286 converted fully into
separate term loans on March 31, 1997 and September 30, 1997, respectively.
Principal repayments began April 1, 1997 and October 1, 1997 in 30 equal monthly
payments. Interest on the loans accrues at prime rate plus 0.5% (8.25% at
December 31, 1998) and is payable monthly in arrears. The outstanding balance
under the facility at December 31, 1997 and 1998 and June 30, 1999 was $607,937,
$308,870 and $159,336, respectively.
Under terms of a credit facility, negotiated in 1997 and expiring March 1,
2001, borrowings of approximately $602,000 converted fully into a term loan on
March 31, 1998. Principal repayments began April 1, 1998 in 36 equal monthly
payments. Interest on the loan accrues at prime rate plus 0.5% and is payable
monthly in arrears. The outstanding balance under the facility at December 31,
1998 and June 30, 1999 was $451,737 and $351,351, respectively.
Borrowings under the terms of both credit facilities are secured by
substantially all the Company's tangible assets.
F-12
<PAGE> 75
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long term debt are as follows:
<TABLE>
<S> <C>
1999............................................ $435,820
2000............................................ 274,594
2001............................................ 50,193
--------
$760,607
========
</TABLE>
LINE OF CREDIT
The Company currently has a $750,000 line of credit with its bank for the
purpose of financing equipment purchases. The line of credit converts fully into
a term loan on October 31, 1999. Principal repayments begin on November 1, 1999
in 36 equal monthly payments. Interest on the loan accrues at prime plus 0.5%
and is payable monthly. Borrowings are secured by substantially all the
Company's tangible assets. The loan contains restrictive covenants which
include, among other restrictions, maintaining minimum tangible net worth
requirements, and limitations on incurring additional indebtedness and paying
cash dividends. There was $673,263 outstanding under the line of credit at June
30, 1999.
6. LEASES
The Company leases office space and certain equipment under operating
leases expiring through April 2003. Future minimum payments under noncancelable
operating leases are as follows:
<TABLE>
<S> <C>
1999........................................... $1,184,150
2000........................................... 535,114
2001........................................... 31,876
2002........................................... 29,604
2003........................................... 2,415
----------
Total minimum lease payments................... $1,783,159
==========
</TABLE>
Rent expense charged to operations for the period ended December 1996, and
the years ended December 1997 and 1998 was $41,000, $336,000 and $602,000,
respectively, and for the six months ended June 30, 1998 and 1999 was $202,000
and $546,000, respectively.
7. EMPLOYEE BENEFITS
RESTRICTED STOCK ISSUED TO FOUNDER
In May and July 1996, the Company sold 1,123,000 shares of common stock to
the founder pursuant to a founders stock restriction agreement at the fair value
of the stock at the date of the issuance. The shares were issued in the name of
the founder, who has all rights of a stockholder, subject to certain repurchase
and transfer provisions. If the founder ceases to be employed by the Company,
the Company shall have the option to repurchase from the founder a portion of
the shares based upon a predetermined formula. In addition, the founder shall
not sell any of the shares that are subject to repurchase by the Company.
An aggregate of 617,650 shares, 393,050 shares and 280,750 shares of common
stock are subject to repurchase at December 31, 1997 and 1998, and June 30,
1999, respectively.
1996 FOUNDERS STOCK INCENTIVE PLAN
In May 1996, the Company adopted the 1996 Founders Stock Incentive Plan
(the 1996 Plan) covering all eligible employees, officers, directors consultants
and advisors. At inception of the 1996 Plan,
F-13
<PAGE> 76
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company authorized the issuance of up to 3,877,000 shares of common stock.
The Company issued and sold an aggregate of 3,775,031 shares of common stock
under the 1996 Plan pursuant to founders stock restriction agreements at the
fair value of the stock at the date of the issuance. The shares were issued in
the name of the employee, who has all rights of a stockholder, subject to
certain repurchase and transfer provisions. If the employee ceases to be
employed by the Company, the Company shall have the option to repurchase from
the employee a portion of the shares based upon a predetermined formula. In
addition, the employee shall not sell any of the shares that are subject to
repurchase by the Company. An aggregate of 145,394 shares of common stock have
been repurchased by the Company under the 1996 Plan.
An aggregate of 2,235,839 shares, 1,436,707 shares and 1,063,434 shares of
common stock are subject to repurchase at December 31, 1997 and 1998, and June
30, 1999, respectively.
1997 STOCK INCENTIVE PLAN
In February 1997, the Company adopted the 1997 Stock Incentive Plan (the
1997 Plan) covering all eligible employees, officers, directors, consultants and
advisors. At inception of the 1997 Plan, the Company authorized the issuance of
up to 3,500,000 shares of common stock. As of December 31, 1998 the Company has
reserved 1,305,719 shares of common stock for issuance under the 1997 Plan.
Under the 1997 Plan, the Company may grant stock options to purchase shares of
the Company's common stock, restricted common stock awards and other stock-based
awards having terms and conditions at the discretion of the Company's Board of
Directors. The prices, terms and vesting periods of stock awards under the 1997
Plan are determined by the Board of Directors at the date of the grant. The 1997
Plan also contains provisions which stipulate that upon an acquisition event the
Board of Directors is authorized to determine that any stock option, restricted
stock or other stock-based award granted under the 1997 Plan may become
immediately exercisable in full or in part.
The Company issued and sold an aggregate of 300,000 shares of common stock
under the 1997 Plan pursuant to founders stock restriction agreements at the
fair value of the stock at the date of issuance. The shares are issued in the
name of the employee, who has all rights of a stockholder, subject to certain
repurchase and transfer provisions. If the employee ceases to be employed by the
Company, the Company shall have the option to repurchase from the employee a
portion of shares based upon a predetermined formula. In addition, the employee
shall not sell any of the shares that are subject to repurchase by the Company.
An aggregate of 300,000 shares, 160,875 shares and 143,000 shares of common
stock are subject to repurchase at December 31, 1997 and 1998, and June 30,
1999.
In March 1999, options to purchase an aggregate of 201,450 shares of common
stock which vest over a five year period were granted to employees with an
exercise price of $4.00 per share. In April 1999, options to purchase an
aggregate of 11,600 and 215,450 shares of common stock which vest over a five
year period were granted to employees with an exercise price of $6.00 and $8.00
per share, respectively. Additionally, on April 30, 1999, an option to purchase
an aggregate of 25,000 shares of common stock which vested immediately was
granted to a director with an exercise price of $8.00 per share. In May 1999,
options to purchase an aggregate of 113,250 shares of common stock which vest
over a five year period were granted to employees with an exercise price of
$8.00 per share.
The Company has recorded deferred compensation of $2,038,078 relating to
these option grants, which is being charged ratably to operations over the
vesting period of the options.
The Company holds notes receivable totaling $103,500 from employees at
December 31, 1997 and 1998, and at June 30, 1998 and 1999. These notes arose
from transactions in September 1997 whereby the Company loaned the employees
money to purchase an aggregate of 207,000 shares of the Company's
F-14
<PAGE> 77
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock at the then fair market value. The notes receivable are fully
recourse to the employees and are due to be paid in full, with accrued interest
at the rate of 6.39% per annum, on August 26, 2002. These notes receivable are
shown as a reduction in stockholders' equity in the accompanying balance sheets.
401(K) PLAN
The Company has a 401(k) plan (the Plan), whereby eligible employees may
contribute up to 15% of their compensation, subject to limitations established
by the Internal Revenue Code. The Company may also contribute a discretionary
matching contribution, to each such participant's deferred compensation equal to
a discretionary percentage determined by the Company. As of June 30, 1999, the
Company had not made any discretionary matching contributions in any of the
fiscal periods presented.
STOCK OPTION DISCLOSURES
The Company has adopted the disclosure provisions only of SFAS 123. The
fair values for these options were estimated at the date of grant using the
minimum value method with the following assumptions:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------ ------------
1997 1998 1998 1999
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected life (years)........................... 4.97 5.35 5.17 5.16
Risk free interest rate......................... 5.66% 4.75% 5.5% 5.25%
Dividend yield.................................. -- -- -- --
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- ---------------------------
1997 1998 1998 1999
----------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pro forma net loss......................... $(8,351,473) $(12,996,310) $(6,662,982) $(9,675,132)
Pro forma net loss per share............... $ (10.63) $ (4.94) $ (2.85) $ (2.80)
</TABLE>
Compensation expense under SFAS 123 for 1997 and 1998 is not representative
of future expense, as it includes one and two years of expense, respectively. In
future years, the effect of determining compensation cost using the fair value
method will include additional vesting and associated expense.
F-15
<PAGE> 78
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the 1997 Plan is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------- SIX MONTHS ENDED
1997 1998 JUNE 30, 1999
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year........................ -- -- 607,000 $ .34 895,175 $ 1.15
Granted....................... 614,000 $.34 381,950 2.21 593,750 6.69
Expired or canceled........... (7,000) .20 (38,250) .37 (33,050) 1.32
Exercised..................... -- (55,525) .17 (54,683) .32
------- ------- ---------
Outstanding, end of year...... 607,000 .34 895,175 1.15 1,401,192 3.53
======= ======= =========
Exercisable at end of year.... -- 159,850 217,800
Available for future grants... 398,719 55,019 144,319
Weighted-average fair value of
options granted during
year........................ $.33 $2.16 $10.08
</TABLE>
The following table presents weighted-average price and life information
about significant option groups outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .02 - $ .20 162,475 6.79 Years $ .07 30,525 $.08
$ .50 363,750 5.89 Years .50 127,225 .50
$ .90 137,500 7.99 Years .90 2,100 .90
$3.00 241,450 9.23 Years 3.00 -- --
------- -------
$ .02 - $3.00 905,175 7.26 Years $1.15 159,850 $.43
======= =======
</TABLE>
8. PREFERRED STOCK
In July, August and November 1996, the Company sold 3,683,050 shares of
Series A redeemable convertible preferred stock, par value $.001, at $1.00 per
share. Proceeds to the Company were $3,575,000 (net of $25,000 of issuance
costs).
In June and September 1997, the Company sold 1,500,938 shares of Series B
redeemable convertible preferred stock, par value $.001, at $5.33 per share.
Proceeds to the Company were $7,900,002 (net of $20,000 of issuance costs).
In November and December 1997, the Company sold 1,728,283 shares of Series
C convertible preferred stock, par value $.001, at $8.78 per share. Proceeds to
the Company were $15,154,325 (net of $20,000 of issuance costs).
In March 1998, the Company sold 194,305 shares of Series C convertible
preferred stock, par value $.001, at $8.78 per share. Proceeds to the Company
were $1,701,998 (net of $4,000 of issuance costs).
The Company has reserved up to 8,659,208 shares of its common stock for
issuance upon conversion of the preferred stock.
F-16
<PAGE> 79
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant features of the Series A, B and C preferred stocks are as
follows:
CONVERSION
As more fully described in the Company's amended Certificate of
Incorporation, each share of preferred stock is convertible at the shareholder's
option into such number of shares of common stock as determined by a conversion
factor, as defined. The preferred stock will automatically convert upon the
closing of a qualified public offering of the Company's common stock, as
defined.
REDEMPTION
At the written request of the holders of a majority of the outstanding
shares of Series A and Series B preferred stock, the Company will redeem a
specified percentage of the Series A and Series B preferred stock on December
31, 2001, 2002 and 2003, respectively. The price per share to be paid to the
Series A and Series B preferred stockholders shall be $1.00 and $5.33,
respectively, plus any dividends declared but unpaid.
DIVIDENDS
The holders of preferred stock shall be entitled to receive, when and if
declared by the Board of Directors of the Company, dividends in the same amount
per share as would be payable on the number of shares of common stock into which
the preferred stock is then convertible, payable in preference and priority to
payment of any cash dividend on common stock.
VOTING
Shares of preferred stock are entitled to a number of votes on any matter
put before the shareholders of the Company equal to the number of shares of
common stock into which they are convertible.
LIQUIDATION
Upon liquidation of the Company, holders of Series A, Series B and Series C
preferred stock shall be first entitled, before any distribution or payment is
made to holders of common stock, to be paid $1.00, $5.33 and $8.78 per share,
respectively, plus any declared and unpaid dividends thereon.
9. NON-MONETARY TRANSACTIONS
In August 1996, the Company issued 83,050 shares of its Series A redeemable
convertible preferred stock in consideration for $83,050 of fees for personnel
placement services. The transaction was accounted for by recognizing
professional fees expense of $83,050 and increasing the preferred stock balance
by the same amount.
In June 1997, the Company issued 15,009 shares of its Series B redeemable
convertible preferred stock in consideration for $79,998 of fees for marketing
services. The transaction was accounted for by recognizing marketing expense of
$79,998 and increasing the preferred stock balance by the same amount.
In September 1997, the Company issued 207,000 shares of common stock in
exchange for interest bearing notes of $103,500 and cash of $11,500 (see Note
7).
In November 1997, the Company entered into an agreement to issue up to
48,000 shares of its common stock in consideration of software services and
co-marketing efforts. The Company has issued 48,000 shares under the agreement.
The transaction was accounted for by recognizing marketing expense of $43,200
and increasing the common stock balance by the same amount.
F-17
<PAGE> 80
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1998, the Company issued 39,863 shares of its common stock in
consideration for $159,452 of fees for marketing services. The transactions were
accounted for by recognizing total marketing expense of $159,452 and increasing
the common stock balance by the same amount.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. A valuation allowance has been established to reflect
the uncertainty of future taxable income to utilize available tax loss
carryforwards and other deferred tax assets. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward......................... $ 3,700,000 $ 8,900,000
Research and development credit carryforward............ 150,000 350,000
Other................................................... 67,000 146,000
Deferred tax liabilities:
Depreciation............................................ (135,000) (247,000)
----------- -----------
3,782,000 9,149,000
Less valuation allowance for deferred tax assets........ (3,782,000) (9,149,000)
----------- -----------
Total..................................................... $ -- $ --
=========== ===========
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards
and research and development tax carryforwards of approximately $22,300,000 and
$350,000, respectively, available to offset future Federal taxable income. These
carryforwards begin to expire in 2012 and may be subject to certain limitations.
11. SEGMENT AND GEOGRAPHIC INFORMATION
As discussed in Note 2, the Company operates in one business segment: the
development and delivery of application server software and related software
products and services. In making this determination, the Company considered the
information which management uses to oversee the Company's operations as well as
the manner in which the business is managed.
Foreign operations in 1998 were conducted in four countries in Europe.
During the first six months of 1999, foreign operations were expanded.
Operations are currently conducted in six countries in Europe and three
countries in the Asia Pacific region.
Revenues by geographic region are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996
(INCEPTION) TO YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States............ $ -- $ 181,017 $4,999,717 $1,023,022 $5,228,455
Other.................... -- 67,507 1,808,182 721,067 2,553,984
-------- ---------- ---------- ---------- ----------
Total.................... $ -- $ 248,524 $6,807,899 $1,744,089 $7,782,439
======== ========== ========== ========== ==========
</TABLE>
F-18
<PAGE> 81
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total long lived assets by geographic region are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States............ $308,837 $1,528,155 $1,733,471 $1,686,072 $2,841,435
Other.................... -- -- 62,876 -- 217,683
-------- ---------- ---------- ---------- ----------
Total.................... $308,837 $1,528,155 $1,796,347 $1,686,072 $3,059,118
======== ========== ========== ========== ==========
</TABLE>
12. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 8, 1996
(INCEPTION) TO YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss............. $ (951,584) $(8,335,095) $(12,885,047) $(6,601,470) $(9,342,049)
Beneficial
conversion........ -- -- -- -- (263,158)
Net loss available to
common
stockholders...... (951,584) (8,335,095) (12,885,047) (6,601,470) (9,605,207)
Denominator:
Weighted average
common shares
outstanding....... 2,322,605 5,065,356 5,122,480 5,109,286 5,230,455
Weighted average
common shares
subject to
repurchase........ (2,136,919) (4,279,808) (2,489,984) (2,774,711) (1,679,106)
---------- ----------- ------------ ----------- -----------
Denominator for basic
and diluted loss per
share................ 185,686 785,548 2,632,496 2,334,575 3,551,349
========== =========== ============ =========== ===========
Basic net loss per
share............. $ (5.12) $ (10.61) $ (4.89) $ (2.83) $ (2.70)
Pro forma:
Shares used above.... 2,632,496 3,551,349
Pro forma adjustment
to reflect
weighted effect of
assumed conversion
of convertible
preferred stock... 7,059,197 8,066,899
------------ -----------
Shares used in
computing pro
forma basic net
loss per share.... 9,691,693 11,618,248
============ ===========
Pro forma basic net
loss per share.... $ (1.33) $ (.83)
</TABLE>
The Company has excluded all preferred stock, outstanding stock options and
shares subject to repurchase by the Company from the calculation of loss per
share because all such securities are
F-19
<PAGE> 82
SILVERSTREAM SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
antidilutive for all periods presented. Weighted-average options outstanding to
purchase 0, 168,192, and 348,880 shares of common stock for the years ended
December 31, 1996, 1997, and 1998, were not included in the computation of net
loss per share because the effect would be antidilutive. Such securities, had
they been dilutive, would have been included in the computation of diluted net
loss per share using the treasury stock method.
13. SUBSEQUENT EVENTS
ISSUANCE OF SERIES D STOCK
In March, April and May 1999, the company sold 1,552,632 shares of Series D
convertible preferred stock, par value $.001, at $9.50 per share. Proceeds to
the Company were $14,727,997 (net of $22,000 of issuance costs). Terms of the
Series D stock are consistent with Series A, Series B and Series C (see Note 8)
except that Series D has no mandatory redemption provisions.
CHANGE IN AUTHORIZED STOCK
On June 9, 1999, the Board of Directors approved an amendment and
restatement of the Company's certificate of incorporation to increase the number
of authorized shares to 100,000,000 shares of common stock and 2,000,000 shares
of undesignated preferred stock. Such amended and restated certificated
incorporation will be effective upon the closing of this offering.
EMPLOYEE STOCK PURCHASE PLAN
On June 9, 1999, the Board of Directors approved the adoption of the
Company's 1999 employee stock purchase plan (the 1999 Purchase Plan). A total of
300,000 shares of common stock has been reserved for issuance under the 1999
Purchase Plan. The 1999 Purchase Plan permits eligible employees to acquire
shares of the Company's common stock through periodic payroll deductions of up
to 10% of base cash compensation. Each offering period will have a maximum
duration of 12 months. The price at which the common stock may be purchased is
85% of the lesser of the closing price of the Company's common stock on the
first day of the applicable offering period or on the last day of the respective
purchase period. The initial offering period will commence on the effectiveness
of the initial public offering and will end at the end of a six month period.
ACQUISITIONS
In June and July 1999, the Company acquired three international
distributors by issuing 140,000 shares of common stock. The transactions have
been accounted for as purchases and, accordingly, their results of operations
are included in the consolidated financial statements from the dates of
acquisition. The purchase prices have been allocated to the assets acquired and
liabilities assumed based upon their respective fair values.
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<PAGE> 85
[Narrative description of graphic material omitted in electronically filed
document:
This graphic consists of a group of three computer screen shots.
The following text appears to the left of the bottom screen shot:
SilverStream Application Server
Allowing corporations to build and deploy Java & HTML business applications.
<PAGE> 86
[LOGO][LOGO]
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 14,387
NASD filing fee............................................. 5,675
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 300,000
Blue Sky fees and expenses (including legal fees)........... 10,000
Transfer agent and registrar fees and expenses.............. 15,000
Miscellaneous............................................... 84,938
Total............................................. $1,000,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article SEVENTH of the Registrant's Second Amended and Restated Certificate
of Incorporation (the "Restated Certificate") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director notwithstanding any provision of law imposing such
liability, except to the extent that the Delaware General Corporation Law
prohibits the elimination or limitation of liability of directors for breach of
fiduciary duty.
Article EIGHTH of the Restated Certificate provides that a director or
officer of the Registrant (a) shall be indemnified by the Registrant against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of the Registrant) brought against him
by virtue of his position as a director or officer of the Registrant if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful and (b) shall be indemnified by the Registrant against all expenses
(including attorneys' fees) and amounts paid in settlement incurred in
connection with any action by or in the right of the Registrant naming him as a
party by virtue of his position as a director or officer of the Registrant if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Registrant, except that no indemnification
shall be made with respect to any matter as to which such person shall have been
adjudged to be liable to the Registrant, unless the Court of Chancery of
Delaware determines that, despite such adjudication but in view of all of the
circumstances, he is entitled to indemnification of such expenses.
Notwithstanding the foregoing, to the extent that a director or officer has been
successful, on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, he is required to be indemnified by
the Registrant against all expenses (including attorneys' fees) incurred in
connection therewith. Expenses shall be advanced to a director or officer in
advance of the final disposition of a legal proceeding, provided that he
undertakes to repay the amount advanced if it is ultimately determined that he
is not entitled to indemnification for such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
II-1
<PAGE> 88
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article EIGHTH of the Restated Certificate further provides that the
indemnification provided therein is not exclusive, and provides that in the
event that the Delaware General Corporation Law is amended to expand the
indemnification permitted to directors or officers the Registrant must indemnify
those persons to the fullest extent permitted by such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
The Registrant has obtained liability insurance for its officers and
directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception, the Registrant has issued the following securities that
were not registered under the Securities Act as summarized below.
(a) Issuances of capital stock.
1. On May 8, 1996, the Registrant issued and sold 1,000 shares of
its common stock for an aggregate purchase price of $10.00 to David R. Skok
in connection with the Registrant's incorporation.
2. On July 9, 1996, the Registrant issued and sold 1,122,000 shares
of its common stock for an aggregate purchase price of $1,122 to David R.
Skok pursuant to a Founders Stock Restriction Agreement.
3. On July 9, 1996, the Registrant issued and sold an aggregate of
2,670,000 shares of its series A preferred stock for an aggregate purchase
price of $2,670,000 to a group of investors pursuant to a Stock Purchase
Agreement.
4. On August 15, 1996, the Registrant issued and sold 83,050 shares
of its series A preferred stock to an individual pursuant to a Stock
Purchase Agreement in consideration of personnel placement services
rendered by the individual to the Registrant.
5. From August 16, 1996 to September 18, 1996, the Registrant issued
and sold an aggregate of 1,432,817 shares of its common stock for an
aggregate purchase price of approximately $1,433 to a group of employees
pursuant to Founders Stock Restriction Agreements.
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<PAGE> 89
6. On November 4, 1996, the Registrant issued and sold 1,123,000
shares of its common stock for an aggregate purchase price of $1,123 to
David A. Litwack pursuant to a Founders Stock Restriction Agreement.
7. On November 4, 1996, the Registrant issued and sold 930,000
shares of its series A preferred stock for an aggregate purchase price of
$930,000 to David A. Litwack pursuant to a Stock Purchase Agreement.
8. On November 12, 1996, the Registrant issued and sold an aggregate
of 960,550 shares of its common stock for an aggregate purchase price of
$960.55 to a group of employees pursuant to Founders Stock Restriction
Agreements.
9. On April 11, 1997, the Registrant issued and sold an aggregate of
258,664 shares of its common stock for an aggregate purchase price of
approximately $5,173 to a group of employees pursuant to Founders Stock
Restriction Agreements.
10. On June 16, 1997, the Registrant issued and sold an aggregate of
1,484,056 shares of its series B preferred stock for an aggregate purchase
price of $7,910,018.48 to a group of investors pursuant to a Stock Purchase
Agreement.
11. From August 26, 1997 to September 3, 1997, the Registrant issued
and sold an aggregate of 230,000 shares of its common stock for an
aggregate purchase price of $115,000 to a group of employees pursuant to
Founders Stock Restriction Agreements.
12. On September 12, 1997, the Registrant issued and sold 16,882
shares of its series B preferred stock for an aggregate purchase price of
$89,981.06 to an individual pursuant to a Stock Purchase Agreement.
13. On November 2, 1997, the Registrant issued and sold 70,000 shares
of its common stock for an aggregate purchase price of $35,000 to an
employee pursuant to a Founders Stock Restriction Agreement.
14. On November 5, 1997, December 1, 1997 and January 16, 1998, the
Registrant issued and sold an aggregate of 48,000 shares of its common
stock to Intel Corporation pursuant to a Collaboration Agreement in
consideration of services rendered by Intel to the Registrant.
15. On November 6, 1997, the Registrant issued and sold an aggregate
of 1,722,588 shares of its series C preferred stock for an aggregate
purchase price of $15,124,322.64 to a group of investors pursuant to a
Stock Purchase Agreement.
16. On December 24, 1997, the Registrant issued and sold 5,695 shares
of its series C preferred stock for an aggregate purchase price of
$50,002.10 to an individual pursuant to a Stock Purchase Agreement.
17. On March 30, 1998, the Registrant issued and sold an aggregate of
194,305 shares of its series C preferred stock for an aggregate purchase
price of $1,705,997.90 to a group of investors pursuant to a Stock Purchase
Agreement.
18. On December 31, 1998, the Registrant issued and sold an aggregate
of 39,863 shares of its common stock to SilverStream Benelux N.V. in
consideration of fees for marketing services from SilverStream Benelux N.V.
to the Registrant.
19. On March 1, 1999, the Registrant issued and sold an aggregate of
1,313,158 shares of its series D preferred stock for an aggregate purchase
price of $12,475,001 to a group of investors pursuant to a Stock Purchase
Agreement.
20. On April 9, 1999, the Registrant issued and sold an aggregate of
55,263 shares of its series D preferred stock for an aggregate purchase
price of $524,998.50 to a group of investors pursuant to a Stock Purchase
Agreement.
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<PAGE> 90
21. On April 14, 1999, the Registrant issued and sold an aggregate of
78,948 shares of its series D preferred stock for an aggregate purchase
price of $750,006 to a group of investors pursuant to a Stock Purchase
Agreement.
22. On May 27, 1999, the Registrant issued and sold 105,263 shares of
its series D preferred stock for an aggregate purchase price of $999,998.50
to an investor pursuant to a Stock Purchase Agreement.
23. On June 21, 1999, the Registrant issued and sold an aggregate of
15,000 shares of its common stock to the former shareholders of
SilverStream s.r.o. and SilverSolutions spol. s.r.o. in consideration of
all of the outstanding share capital of such companies.
24. On June 23, 1999, the Registrant issued and sold an aggregate of
54,500 shares of its common stock to the former shareholders of
SilverStream Norge AS in consideration of all of the outstanding share
capital of such company held by such shareholders and the cancellation of
certain debt payable by such company.
25. On July 23, 1999, the Registrant issued and sold an aggregate of
70,500 shares of its common stock to the former shareholders of
SilverStream France S.A. in consideration of all of the outstanding share
capital and subscription rights for share capital of such company held by
such shareholders and the assignment of certain debt payable by such
company.
(b) Certain grants and exercises of stock options.
1. From inception through June 30, 1999, the Registrant granted stock
options to purchase 1,589,700 shares of common stock at exercise prices
ranging from $.02 to $10.00 per share to employees, consultants and
directors pursuant to its 1997 Stock Incentive Plan.
2. From inception through June 30, 1999, the Registrant issued and
sold an aggregate of 110,208 shares of its common stock to employees,
consultants and directors for aggregate consideration of approximately
$26,532 pursuant to exercises of options granted under its 1997 Stock
Incentive Plan.
No underwriters were involved in any of the foregoing sales of securities.
Such sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
sales by an issuer not involving any public offering or the rules and
regulations thereunder, Regulation S relative to sales by an issuer outside the
United States, or, in the case of options to purchase common stock, Rule 701 of
the Securities Act. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
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<PAGE> 91
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2** Form of Second Amended and Restated Certificate of
Incorporation of the Registrant, to be filed after to the
closing of this offering
3.3** By-Laws of the Registrant
3.4** Form of Amended and Restated By-Laws of the Registrant, to
be effective upon the closing of this offering
4.1** Specimen common stock certificate
4.2** Third Amended and Restated Investor Rights Agreement dated
March 1, 1999, as amended
5.1 Opinion of Hale and Dorr LLP
10.1** 1996 Founders Stock Incentive Plan
10.2** Amended and Restated 1997 Stock Incentive Plan, and forms of
agreements thereunder
10.3** Amended and Restated 1999 Employee Stock Purchase Plan
10.4** Form of Founders Stock Restriction Agreement
10.5** Sub-Sublease Agreement, dated February 14, 1997, between
Rational Software Corporation (as successor to SQA, Inc.)
and the Registrant
10.6** First Amendment to Sub-Sublease Agreement, dated April 1998
10.7** Term Loan Agreement and Commercial Promissory Note, dated
March 1, 1999, between Fleet National Bank and the
Registrant
10.8** Term Loan Agreement and Commercial Promissory Note, dated
August 11, 1997, between Fleet National Bank and the
Registrant
10.9** Term Loan Agreement and Commercial Promissory Note, dated
November 5, 1996 between Fleet National Bank and the
Registrant
10.10+** OEM Master License Agreement between RSA Data Security, Inc.
and the Registrant, dated as of September 30, 1997, as
amended
10.11+** Support Agreement between RSA Data Security, Inc. and the
Registrant, dated as of June 30, 1999
10.12** Form of VAR Business Partner Agreement
10.13** Form of ISV Business Partners Agreement
10.14** Form of Consulting Partner Agreement
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1** Powers of Attorney
27.1 Financial Data Schedule for the period ended December 31,
1996
27.2 Financial Data Schedule for the year ended December 31, 1997
27.3 Financial Data Schedule for the year ended December 31, 1998
27.4 Financial Data Schedule for the six months June 30, 1998
27.5 Financial Data Schedule for the six months June 30, 1999
</TABLE>
- ------------
** Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.
II-5
<PAGE> 92
(b) Financial Statement:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Restated Certificate of the registrant, the Underwriting
Agreement, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
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<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Burlington,
Massachusetts, on this 3rd day of August, 1999.
SILVERSTREAM SOFTWARE, INC.
By:
/s/ DAVID A. LITWACK
------------------------------------
David A. Litwack
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of Directors August 3, 1999
- ---------------------------------------------
David R. Skok
* President, Chief Executive Officer August 3, 1999
- --------------------------------------------- and Director (Principal Executive
David A. Litwack Officer)
/s/ CRAIG A. DYNES Vice President, Chief Financial August 3, 1999
- --------------------------------------------- Officer and Treasurer (Principal
Craig A. Dynes Financial and Accounting Officer)
* Director August 3, 1999
- ---------------------------------------------
Timothy Barrows
* Director August 3, 1999
- ---------------------------------------------
Richard A. D'Amore
* Director August 3, 1999
- ---------------------------------------------
Paul J. Severino
*By: /s/ CRAIG A. DYNES
---------------------------------------
Craig A. Dynes
Attorney-in-Fact
</TABLE>
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<PAGE> 94
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
SILVERSTREAM SOFTWARE, INC.
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1998 Allowances for Returns and
Doubtful Accounts.............................. $ 44,660 $218,614 $592,500 $379,781 $475,993
December 31, 1997 Allowances for Returns and
Doubtful Accounts.............................. $ -- $ 44,660 -- -- $ 44,660
December 31, 1996 Allowances for Returns and
Doubtful Accounts.............................. $ -- $ -- -- -- $ 0
</TABLE>
S-1
<PAGE> 95
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant
3.2** -- Form of Second Amended and Restated Certificate of
Incorporation of the Registrant, to be filed after to the
closing of this offering
3.3** -- By-Laws of the Registrant
3.4** -- Form of Amended and Restated By-Laws of the Registrant, to
be effective upon the closing of this offering
4.1** -- Specimen common stock certificate
4.2** -- Third Amended and Restated Investor Rights Agreement dated
March 1, 1999, as amended
5.1 -- Opinion of Hale and Dorr LLP
10.1** -- 1996 Founders Stock Incentive Plan
10.2** -- Amended and Restated 1997 Stock Incentive Plan, and forms of
agreements thereunder
10.3** -- Amended and Restated 1999 Employee Stock Purchase Plan
10.4** -- Form of Founders Stock Restriction Agreement
10.5** -- Sub-Sublease Agreement, dated February 14, 1997, between
Rational Software Corporation (as successor to SQA, Inc.)
and the Registrant
10.6** -- First Amendment to Sub-Sublease Agreement, dated April 1998
10.7** -- Term Loan Agreement and Commercial Promissory Note, dated
March 1, 1999, between Fleet National Bank and the
Registrant
10.8** -- Term Loan Agreement and Commercial Promissory Note, dated
August 11, 1997, between Fleet National Bank and the
Registrant
10.9** -- Term Loan Agreement and Commercial Promissory Note, dated
November 5, 1996 between Fleet National Bank and the
Registrant
10.10+** -- OEM Master License Agreement between RSA Data Security, Inc.
and the Registrant, dated as of June 30, 1999
10.11+** -- Support Agreement between RSA Data Security, Inc. and the
Registrant, dated as of September 30, 1997, as amended
10.12** -- Form of VAR Business Partner Agreement
10.13** -- Form of ISV Business Partners Agreement
10.14** -- Form of Consulting Partner Agreement
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1** -- Powers of Attorney
27.1 -- Financial Data Schedule for the period ended December 31,
1996
27.2 -- Financial Data Schedule for the year ended December 31, 1997
27.3 -- Financial Data Schedule for the year ended December 31, 1998
27.4 -- Financial Data Schedule for the six months June 30, 1998
27.5 -- Financial Data Schedule for the six months June 30, 1999
</TABLE>
- ------------
** Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 1.1
3,000,000 SHARES
SILVERSTREAM SOFTWARE, INC.
COMMON STOCK, $.001 PAR VALUE
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
_____________, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
SG Cowen Securities Corporation
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
SilverStream Software, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "UNDERWRITERS") 3,000,000 shares of its Common Stock, $.001 par
value per share (the "FIRM SHARES"). The Company also proposes to issue and sell
to the several Underwriters not more than an additional 450,000 shares of its
Common Stock, $.001 par value per share (the "ADDITIONAL SHARES"), if and to the
extent that you, as Managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES." The
shares of Common Stock, $.001 par value per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS".
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to
reserve up to 150,000 Shares to be purchased by it under this Agreement for sale
to the Company's directors, officers and employees and other parties related to
the Company
-1-
<PAGE> 3
(collectively, "PARTICIPANTS"), as set forth in the Prospectus under the heading
"Underwriters" (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan
Stanley pursuant to the Directed Share Program are referred to hereinafter as
the "DIRECTED SHARES". Any Directed Shares not orally confirmed for purchase by
any Participant by the end of the business day on which this Agreement is
executed will be offered to the public by the Underwriters as set forth in the
Prospectus.
1. Representations and Warranties. The Company represents and warrants
to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective,
did not contain and, as amended or supplemented, if applicable, will
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) the Registration Statement and
the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder; and
(iii) the Prospectus does not contain and, as amended or supplemented,
if applicable, will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, except that the representations and warranties set
forth in this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated,
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to
-2-
<PAGE> 4
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and, except for director qualifying shares, are
owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
-3-
<PAGE> 5
(k) There are no (i) legal or governmental proceedings pending
or, to the Company's knowledge, threatened to which the Company or any
of its subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or (ii) statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(n) The Company and its subsidiaries (i) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"); (ii) have received all permits,
licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses; and (iii)
are in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental
Laws, failure to receive required permits, licenses or other approvals
or failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus (i) the
Company and its subsidiaries have not incurred any material liability
or obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (ii) the Company
has not purchased any of its outstanding capital stock,
-4-
<PAGE> 6
nor declared, paid or otherwise made any dividend or distribution of
any kind on its capital stock other than ordinary and customary
dividends; and (iii) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
subsidiaries, except in each case as described in the Prospectus.
(q) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title
to all personal property owned by them which is material to the
business of the Company and its subsidiaries, in each case free and
clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the
value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by
the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries, in
each case except as described in the Prospectus.
(r) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names currently employed by them in connection with the business
now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(s) No material labor dispute with the employees of the
Company or any of its subsidiaries exists, except as described in the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(t) The Company and its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks
and in such amounts as, in the Company's reasonable judgment, are
prudent and customary in the businesses in which they are engaged;
neither the Company nor any of its subsidiaries has been refused any
insurance coverage sought or applied for; and neither the Company nor
any of its subsidiaries has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such
-5-
<PAGE> 7
coverage expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would not have
a material adverse effect on the Company and its subsidiaries, taken as
a whole, except as described in the Prospectus.
(u) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses other than those which, if not so possessed, would not have
a material adverse effect on the Company and its subsidiaries, taken as
a whole, and neither the Company nor any of its subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the Company
and its subsidiaries, taken as a whole, except as described the
Prospectus.
(v) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(w) The accountants who have certified or shall certify the
financial statements filed or to be filed with the Commission as part
of the Registration Statement and the Prospectus are independent
accountants as required by the Securities Act. The consolidated
financial statements of the Company and its subsidiaries (together with
the related notes thereto) included in the Registration Statement
present fairly the financial position and results of operations of the
Company and its subsidiaries at the respective dates and for the
respective periods to which they apply, subject to normal year-end
adjustments. Such financial statements have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods involved except as otherwise stated therein.
(x) The Shares have been approved for listing on the Nasdaq
National Market, subject to official notice of issuance.
(y) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities
-6-
<PAGE> 8
of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement,
other than the Third Amended and Restated Investor Rights Agreement
dated March 1, 1999, as amended, for which an appropriate waiver has
been obtained.
(z) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
(aa) The Company has reviewed its operations and that
of its subsidiaries to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be affected
by the Year 2000 Problem (that is, any significant risk that computer
hardware or software applications used by the Company and its
subsidiaries will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the
case of dates or time periods occurring prior to January 1, 2000); as a
result of such review, (i) the Company has no reason to believe, and
does not believe, that (A) there are any issues related to the
Company's preparedness to address the Year 2000 Problem that are of a
character required to be described or referred to in the Registration
Statement or Prospectus which have not been accurately described in the
Registration Statement or Prospectus and (B) the Year 2000 Problem will
have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, or result in any material loss
or interference with the business or operations of the Company and its
subsidiaries, taken as a whole, and (ii) the Company reasonably
believes, after due inquiry, that the suppliers, vendors, customers or
other material third parties used or served by the Company and such
subsidiaries are addressing or will address the Year 2000 Problem in a
timely manner, except to the extent that a failure to address the Year
2000 Problem by any supplier, vendor, customer or material third party
would not have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(bb) The Registration Statement, the Prospectus and
any preliminary prospectus comply, and any amendments or supplements
thereto will comply, with any applicable laws or regulations of foreign
jurisdictions in which the Prospectus or any preliminary prospectus, as
amended or supplemented, if applicable, are distributed in connection
with the Directed Share Program.
(cc) No consent, approval, authorization or order of,
or qualification with, any governmental body or agency, other than
those obtained, is required in connection with the offering of the
Directed Shares in any jurisdiction where the Directed Shares are being
offered.
-7-
<PAGE> 9
(dd) The Company has not offered, or caused Morgan
Stanley to offer, Shares to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer
or supplier of the Company to alter the customer's or supplier's level
or type of business with the Company, or (ii) a trade journalist or
publication to write or publish favorable information about the Company
or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell
to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 450,000 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to
be sold hereunder, (B) the issuance by the Company of shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof that is described in the
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<PAGE> 10
Prospectus or of which the Underwriters have been advised in writing or (C) the
issuance by the Company of shares of Common Stock or options to purchase shares
of Common Stock issued pursuant to the Company's stock plans as described in the
Prospectus, provided that any such shares of Common Stock described in this
clause (C), whether to be issued directly or upon exercise of any option, shall
not be issued prior to the 181st day after the date of the Prospectus unless the
recipient of such shares executes and delivers to you on or before the date of
such issuance a "lock-up" agreement substantially in the form of Exhibit A
hereto.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on ____________, 1999, or at
such other time on the same or such other date, not later than _________, 1999,
as shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "CLOSING DATE". The closing of the offering and
sale of the Firm Shares will be held at the offices of Hale and Dorr LLP, 60
State Street, Boston, Massachusetts.
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than _______, 1999, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE". The closing of the offering and sale of the
Additional Shares will be held at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in
-9-
<PAGE> 11
connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [4:30] p.m. (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) if any of the Company's securities are rated by
any "nationally recognized statistical rating organization,"
as such term is defined for purposes of Rule 436(g)(2) under
the Securities Act, there shall not have occurred any
downgrading, nor shall any notice have been given of any
intended or potential downgrading or of any review for a
possible change that does not indicate the direction of the
possible change, in the rating accorded any such securities;
and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of
this Agreement) that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated
in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company, to the effect set forth in Section 5(a)(i) above and to
the effect that the representations and warranties of the Company
contained in this Agreement are true and correct as of the Closing Date
and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
-10-
<PAGE> 12
(c) The Underwriters shall have received on the Closing Date
an opinion of Hale and Dorr LLP, outside counsel for the Company, dated
the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in
the Commonwealth of Massachusetts, the State of California,
the State of Georgia, the State of Illinois, the State of
Kentucky, the State of Maryland, the State of Michigan, the
State of Minnesota, the State of New Jersey, the State of New
York, the State of Ohio, the Commonwealth of Pennsylvania, the
State of Texas and the State of Virginia, which to such
counsel's knowledge are the only jurisdictions in which the
Company owns or leases real property or maintains an office in
the United States;
(ii) to such counsel's knowledge, the Company has no
subsidiaries except as set forth on Exhibit 21.1 of the
Registration Statement, and each domestic subsidiary of the
Company listed on Exhibit 21.1 of the Registration Statement
has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the
jurisdiction of its incorporation, and has the corporate power
and authority to own its property and to conduct its business
as described in the Prospectus;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus and the Shares have been duly
authorized for quotation on the Nasdaq National Market;
(iv) the shares of Common Stock outstanding prior to
the issuance of the Shares have been duly authorized and are
validly issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each
domestic subsidiary of the Company listed on Exhibit 21.1 of
the Registration Statement have been duly authorized and
validly issued, are fully paid and non-assessable and are
owned of record directly by the Company, and none of the
documents filed as an exhibit to the Registration Statement or
that are listed on a schedule to be provided by or on behalf
of the Underwriters create any liens, encumbrances, equities
or claims on any such shares;
(vi) the Shares have been duly authorized and, when
issued and delivered and paid for by the Underwriters in
accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and
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the issuance of such Shares will not be subject to any
preemptive rights under the Delaware General Corporation Law,
statute, the certificate of incorporation or by-laws of the
Company or, to such counsel's knowledge, similar rights
granted by contract;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of applicable
law or the certificate of incorporation or by-laws of the
Company or, to such counsel's knowledge, any agreement or
other instrument binding upon the Company or any of its
subsidiaries that has been filed as an exhibit to the
Registration Statement, or, to such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary,
and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is
required for the performance by the Company of its obligations
under this Agreement, except such as may have been obtained or
made under the Securities Act and such as may be required by
the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(ix) to such counsel's knowledge, (i) no shares of
Common Stock are required pursuant to any agreement or other
right to be registered under the Registration Statement, and
(ii) no person has the right to require such registration,
except such rights that have either been satisfied or validly
waived;
(x) the statements (1) in the Prospectus under the
captions "Risk Factors -Anti-Takeover Provisions In Our
Charter Documents And Delaware Law Could Prevent or Delay a
Change in Control of Our Company," "Management - Benefit
Plans," "Description of Capital Stock," "Shares Eligible For
Future Sale," and the first, second, fourth, sixth, eighth,
tenth and eleventh paragraphs under "Underwriters" and (2) in
the Registration Statement in Items 14 and 15, in each case
insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal
matters, documents and proceedings and fairly summarize the
matters referred to therein;
(xi) after due inquiry, such counsel does not know of
any legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its
subsidiaries is subject that are required to be
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<PAGE> 14
described in the Registration Statement or the Prospectus and
are not so described or of any statutes, regulations,
contracts or other documents that are required by the
Securities Act or by the rules and regulations thereunder to
be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement that
are not described or filed as required;
(xii) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of the
proceeds thereof as described in the Prospectus, will not be
an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xiii) such counsel (1) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial and statistical
data included therein as to which such counsel need not
express any opinion) comply as to form in all material
respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder; (2) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading; and (3) has no reason to
believe that (except for financial statements and schedules
and other financial and statistical data as to which such
counsel need not express any belief) the Prospectus contains
any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading.
(d) The Underwriters shall have received on the Closing Date
an opinion of ___________, _____________, counsel for the Company,
dated the Closing Date, to the effect that:
(i) _______________ (the "_________ Subsidiary") has
been duly incorporated, is validly existing as a corporation
under the laws of _______, has the corporate power and
authority to own its property and to conduct its business as
now conducted and is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property
requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
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<PAGE> 15
(ii) all of the issued shares of capital stock of the
_______ Subsidiary have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned
directly by the Company, free and clear of all liens,
encumbrances, equities or claims, and there are no options,
warrants or rights to purchase, or other agreements or
obligations to issue, or rights to convert any obligation into
any shares of capital stock or ownership interest in the
_______ Subsidiary; and
(iii) after due inquiry, such counsel does not know
of any legal or governmental proceedings pending or threatened
to which the _______ Subsidiary is a party or to which any of
the properties of the _______ Subsidiary is subject.
(e) The Underwriters shall have received on the Closing Date
an opinion of Testa, Hurwitz & Thibeault, LLP, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to
in Sections 5(c)(vi), 5(c)(vii), 5(c)(x) (but only as to the statements
in the Prospectus under "Description of Capital Stock" and
"Underwriters") and 5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Hale and Dorr LLP
and Testa, Hurwitz & Thibeault, LLP may state that their opinion and
belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified.
The opinions of Hale and Dorr LLP and ___________ described in
Sections 5(c) and 5(d) above shall be rendered to the Underwriters at
the request of the Company and shall so state therein.
(f) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from Ernst & Young LLP, independent public
accountants, containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus;
provided that the letter delivered on the Closing Date shall use a
"cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form
of Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
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<PAGE> 16
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of
the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the Registration
Statement (without exhibits thereto) and to furnish to you in New York
City, without charge, prior to 10:00 a.m. New York City time on the
business day next succeeding the date of this Agreement and during the
period mentioned in Section 6(c) below, as many copies of the
Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the Company)
to which Shares may have been sold by you on behalf of the Underwriters
and to any other dealers upon request, either amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
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<PAGE> 17
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earnings statement
covering the twelve-month period ending September 30, 2000 that
satisfies the provisions of Section 11(a) of the Securities Act and the
rules and regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (1) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments
and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified; (2) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon; (3) the cost of printing or producing any
Blue Sky or Legal Investment memorandum in connection with the offer
and sale of the Shares under state securities laws and all expenses in
connection with the qualification of the Shares for offer and sale
under state securities laws as provided in Section 6(d) hereof,
including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and
in connection with the Blue Sky or Legal Investment memorandum; (4) all
filing fees and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification
of the offering of the Shares by the National Association of Securities
Dealers, Inc.; (5) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A
relating to the Common Stock and all costs and expenses incident to
listing the Shares on the Nasdaq National Market; (6) the cost of
printing certificates representing the Shares; (7) the costs and
charges of any transfer agent, registrar or depositary; (8) the costs
and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the offering
of the Shares, including, without limitation, expenses associated with
the production of road show slides and graphics, fees and expenses of
any consultants engaged in connection with the road show presentations
with the prior approval of the Company, travel and lodging expenses of
the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with
the road show; (9) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which
provision is not otherwise made in this Section; and (10) all fees and
disbursements of counsel incurred by the Underwriters in connection
with the Directed Share
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<PAGE> 18
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program. It is understood, however, that except as provided in this
Section, Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 10 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel,
stock transfer taxes payable on resale of any of the Shares by them and
any advertising expenses connected with any offers they may make.
(g) To place stop transfer orders on any Directed Shares that
have been sold to Participants subject to the three month restriction
on sale, transfer, assignment, pledge or hypothecation imposed by NASD
Regulation, Inc. under its Interpretative Material 2110-1 on
free-riding and withholding to the extent necessary to ensure
compliance with the three month restrictions.
(h) To comply with all applicable securities and other laws,
rules and regulations in each jurisdiction in which the Directed Shares
are offered in connection with the Directed Share Program.
7. Indemnity and Contribution. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by 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, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
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<PAGE> 19
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b), such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley, in the case of parties indemnified
pursuant to Section 7(a), and by the Company, in the case of parties indemnified
pursuant to Section 7(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
in writing an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by the second and third sentences of this
paragraph, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such
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<PAGE> 20
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
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the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this Section
7 and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter or
by or on behalf of the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
8. Directed Share Program Indemnification. (a) The Company agrees to
indemnify and hold harmless Morgan Stanley and each person, if any, who controls
Morgan Stanley within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to participants in
connection with the Directed Share Program or caused by 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; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
which, immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (iii) related to,
arising out of, or in connection with the Directed Share Program, other than
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from the bad faith or gross
negligence of Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeing indemnity, shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any others the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Morgan Stanley Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not, in respect of the legal expenses
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<PAGE> 22
of the Morgan Stanley Entities in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all Morgan
Stanley Entities. Any such separate firm for the Morgan Stanley Entities shall
be designated in writing by Morgan Stanley. The Company shall not be liable for
any settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Company agrees to indemnify the Morgan Stanley Entities from and against any
loss or liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time a Morgan Stanley Entity shall have requested
the Company to reimburse it for fees and expenses of counsel as contemplated by
the second and third sentences of this paragraph, the Company agrees that it
shall be liable for any settlement of any proceedings effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by the Company of the aforesaid request and (ii) the Company shall not
have reimbursed the Morgan Stanley Entity in accordance with such request prior
to the date of such settlement. The Company shall not, without the prior written
consent of Morgan Stanley, effect any settlement of any pending or threatened
proceeding in respect of which any Morgan Stanley Entity is or could have been a
party and indemnity could have been sought hereunder by such Morgan Stanley
Entity, unless such settlement includes an unconditional release of the Morgan
Stanley Entities from all liability on claims that are the subject matter of
such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then the Company in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with any statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Morgan Stanley Entities on the other hand in connection with
the offering of the Directed Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Directed Shares (before
deducting expenses) and the total underwriting discounts and commissions
received by the Morgan Stanley Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Directed Shares. If the loss, claim,
damage or liability is caused by an untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley Entities on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement or the omission or alleged omission
relates to information supplied by the
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<PAGE> 23
Company or by the Morgan Stanley Entities and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not
be just or equitable if contribution pursuant to this Section 8 were determined
by pro rata allocation (even if the Morgan Stanley Entities were treated as one
entity for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in Section 8(c). The amount
paid or payable by the Morgan Stanley Entities as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the Morgan Stanley
Entities in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Morgan Stanley Entity shall
be required to contribute any amount in excess of the amount by which the total
price at which the Directed Shares distributed to the public were offered to the
public exceeds the amount of any damages that such Morgan Stanley Entity has
otherwise been required to pay. The remedies provided for in this Section 8 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(e) The indemnity and contribution provisions contained in this Section
8 shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
-22-
<PAGE> 24
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such number of Shares without the written consent of such Underwriter. If, on
the Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased, and arrangements satisfactory to you and the Company for
the purchase of such Firm Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
-23-
<PAGE> 25
12. Applicable Law. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York.
-24-
<PAGE> 26
13. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
SILVERSTREAM SOFTWARE, INC.
By:____________________________
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
SG Cowen Securities Corporation
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:__________________________
Name:
Title:
-25-
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
SG Cowen Securities Corporation
---------------
Total 3,000,000
</TABLE>
<PAGE> 28
EXHIBIT A
________________, 1999
Morgan Stanley & Co. Incorporated
BancBoston Robertson Stephens Inc.
SG Cowen Securities Corporation
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Ladies and Gentlemen:
The undersigned understands that Morgan Stanley & Co. Incorporated
("Morgan Stanley") proposes to enter into an Underwriting Agreement (the
"Underwriting Agreement") with SilverStream Software, Inc., a Delaware
corporation (the "Company"), providing for the public offering (the "Public
Offering") by the several Underwriters named therein, including Morgan Stanley
(the "Underwriters"), of shares (the "Shares") of the Common Stock, par value
$.001 per share, of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, the undersigned will not, during the
period commencing on the date of the execution of the Underwriting Agreement and
ending 180 days after the date of the final prospectus relating to the Public
Offering (the "Prospectus"), (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of Common Stock, whether any
such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (a) the sale of any Shares to the
Underwriters pursuant to the Underwriting Agreement, (b) transactions relating
to shares of Common Stock or other securities acquired in open market
transactions after the completion of the Public Offering, (c) the sale of any
Shares acquired from the Underwriters or (d) the sale or transfer of Shares in
connection with the sale of the Company pursuant to a merger, sale of stock or
otherwise. In addition, the undersigned agrees that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, it will not, during the
period commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of
<PAGE> 29
any shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
Notwithstanding the foregoing (i) gifts or (ii) transfers to (A) the
undersigned's immediate family or (B) a trust, the beneficiaries of which are
the undersigned and/or members of the undersigned's immediate family, shall not
be prohibited by this agreement; provided, that, (x) the donee or transferee
agrees in writing to be bound by the foregoing in the same manner as it applies
to the undersigned and (y) if the donor or transferor is a reporting person
subject to Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act"), any gifts or transfers made in accordance with this paragraph shall not
require such person to, and such person shall not voluntarily, file a report of
such transaction on Form 4 under the Exchange Act. "Immediate family" shall mean
spouse, lineal descendants, father, mother, brother or sister of the transferor
and father, mother, brother or sister of the transferor's spouse.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
This agreement shall automatically terminate on the date that the
Underwriting Agreement is terminated, in the event that the Underwriters do not
purchase Common Stock and the Underwriting Agreement is terminated pursuant to
its terms.
Very truly yours,
___________________________
(Signature)
___________________________
(Print name of Stockholder)
___________________________
(Address)
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SILVERSTREAM SOFTWARE, INC.
SilverStream Software, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
1. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of the State of Delaware on May 8, 1996, under the name
Lionheart Software, Inc., which Certificate of Incorporation was amended by a
Certificate of Amendment of Certificate of Incorporation filed on July 8, 1996,
a Certificate of Amendment of Certificate of Incorporation filed on November 13,
1996, a Certificate of Amendment of Certificate of Incorporation filed on June
13, 1997, a Certificate of Amendment of Certificate of Incorporation filed on
November 6, 1997 and a Certificate of Amendment of Certificate of Incorporation
filed on March 1, 1999.
2. At a duly called meeting of the Board of Directors of the Corporation
at which a quorum was present at all times, a resolution was duly adopted,
pursuant to Sections 242 and 245 of the General Corporation Law of the State of
Delaware, setting forth an Amended and Restated Certificate of Incorporation of
the Corporation and declaring said Amended and Restated Certificate of
Incorporation advisable. The stockholders of the Corporation duly approved said
proposed Amended and Restated Certificate of Incorporation by written consent in
accordance with Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware. The resolution setting forth the Amended and Restated
Certificate of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, be and
- -------- hereby is amended and restated in its entirety so that the same
shall read as follows:
FIRST. The name of the Corporation is:
SilverStream Software, Inc.
<PAGE> 2
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is (i) 70,000,000 shares of Common
Stock, $.001 par value per share ("Common Stock"), and (ii) 8,883,050 shares of
Preferred Stock, $.001 par value per share. The Preferred Stock shall be issued
in series. The first such series shall be designated Series A Convertible
Preferred Stock ("Series A Preferred Stock") and shall consist of 3,683,050
shares. The second such series shall be designated Series B Convertible
Preferred Stock ("Series B Preferred Stock") and shall consist of 1,600,000
shares. The third such series shall be designated Series C Convertible Preferred
Stock ("Series C Preferred Stock") and shall consist of 2,000,000 shares. The
fourth such series shall be designated Series D Convertible Preferred Stock
("Series D Preferred Stock") and shall consist of 1,600,000 shares.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
------------
1. GENERAL. The voting, dividend and liquidation rights of the holders of
the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. VOTING. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
2
<PAGE> 3
3. DIVIDENDS. Dividends may be declared and paid on the Common Stock from
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. LIQUIDATION. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
---------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Different series
of Preferred Stock shall not be construed to constitute different classes of
shares for the purposes of voting by classes unless expressly provided.
C. SERIES PREFERRED STOCK.
----------------------
The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock shall have the following rights, preferences,
powers, privileges and restrictions, qualifications and limitations. For
purposes of the Certificate of Incorporation, unless the context otherwise
requires, "Preferred Stock" shall collectively refer to the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock.
1. DIVIDENDS. The Corporation shall not declare or pay any cash on shares
of Common Stock until the holders of the Preferred Stock then outstanding shall
have first received, or simultaneously receive, a distribution on each
outstanding share of Preferred Stock, in an amount at least equal to the product
of (i) the per share amount, if any, of the dividends or other distributions to
be declared, paid or set aside for the Common Stock, multiplied by (ii) the
number of whole shares of Common Stock into which such share of Preferred Stock
is then convertible.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
-------------------------------------------------------
Consolidations and Asset Sales.
------------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, by reason of
their ownership thereof, an amount equal to $1.00 per share (subject to
appropriate adjustment in the event of any stock dividend,
3
<PAGE> 4
stock split, combination or other similar recapitalization affecting such
shares), plus any dividends declared but unpaid thereon (the "Series A
Liquidation Amount"). In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series B
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, by reason of
their ownership thereof, an amount equal to $5.33 per share (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus any
dividends declared but unpaid thereon (the "Series B Liquidation Amount"). In
the event of any voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, the holders of shares of Series C Preferred Stock then
outstanding shall be entitled to be paid out of the assets of the Corporation
available for distribution to its stockholders, by reason of their ownership
thereof, an amount equal to $8.78 per share (subject to appropriate adjustment
in the event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares), plus any dividends declared but unpaid
thereon (the "Series C Liquidation Amount"). In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
holders of shares of Series D Preferred Stock then outstanding shall be entitled
to be paid out of the assets of the Corporation available for distribution to
its stockholders, by reason of their ownership thereof, an amount equal to $9.50
per share (subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting such
shares), plus any dividends declared but unpaid thereon (the "Series D
Liquidation Amount"). If upon any such liquidation, dissolution or winding up of
the Corporation the remaining assets of the Corporation available for
distribution to its stockholders shall be insufficient to permit the payment in
full of the Series A Liquidation Amount, the Series B Liquidation Amount, the
Series C Liquidation Amount and the Series D Liquidation Amount, then the
holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock shall share ratably in any
distribution of the remaining assets and funds of the Corporation in proportion
to the respective amounts which would otherwise be payable in respect of the
shares held by them upon such distribution if all amounts payable on or with
respect to such shares were paid in full.
(b) After the payment of all preferential amounts required to be paid
to the holders of Preferred Stock upon the dissolution, liquidation or winding
up of the Corporation, the holders of shares of Common Stock then outstanding
shall share ratably in the distribution of the remaining assets and funds of the
Corporation in proportion to the number of shares of Common Stock held by them.
(c) At the election of the holders of at least a majority of the then
outstanding shares of Preferred Stock, voting together as a class, any merger or
consolidation of the Corporation into or with another corporation (except one in
which the holders of capital stock of the Corporation immediately prior to such
merger or consolidation continue to hold at least 66 2/3% by voting power of the
capital stock of
4
<PAGE> 5
the surviving corporation), or the sale of all or of any Substantial Portion of
the assets of the Corporation shall be deemed to be a liquidation of the
Corporation, and all consideration payable to the stockholders of the
Corporation (in the case of a merger or consolidation), or all consideration
payable to the Corporation, together with all other available assets of the
Corporation (in the case of an asset sale), shall be distributed to the holders
of capital stock of the Corporation in accordance with Subsections 2(a) and 2(b)
above. The amount deemed distributed to the holders of Preferred Stock upon any
such merger or consolidation shall be the cash or the value of the property,
rights or securities distributed to such holders by the acquiring person, firm
or other entity. The value of such property, rights or other securities shall be
determined in good faith by the Board of Directors of the Corporation.
"Substantial Portion" shall mean assets with a fair market value of at least 50%
of the fair market value of the Company.
3. Voting.
------
(a) Each holder of outstanding shares of Preferred Stock shall be
entitled to the number of votes equal to the number of whole shares of Common
Stock into which the shares of Preferred Stock held by such holder are then
convertible (as adjusted from time to time pursuant to Section 4 hereof), at
each meeting of stockholders of the Corporation (and written actions of
stockholders in lieu of meetings) with respect to any and all matters presented
to the stockholders of the Corporation for their action or consideration. Except
as provided by law or by the provisions of Subsections 3(b) or (c) below or by
the provisions establishing any other series of Preferred Stock, holders of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and of any other outstanding series of stock shall vote
together with the holders of Common Stock as a single class.
(b) The holders of record of the shares of Preferred Stock,
exclusively and as a separate class, shall be entitled to elect two directors of
the Corporation, and the holders of record of the shares of Common Stock and of
any other class or series of voting stock (including the Preferred Stock),
exclusively and as a separate class, shall be entitled to elect the balance of
the total number of directors of the Corporation. At any meeting held for the
purpose of electing directors, the presence in person or by proxy of the holders
of a majority of the shares of Preferred Stock then outstanding shall constitute
a quorum of the Preferred Stock for the purpose of electing directors by holders
of the Preferred Stock. A vacancy in any directorship filled by the holders of
Preferred Stock shall be filled only by vote or written consent in lieu of a
meeting of the holders of the Preferred Stock or by any remaining director or
directors elected by the holders of Preferred Stock pursuant to this Subsection
3(b). The rights of the holders of the Preferred Stock under this Subsection
3(b) shall terminate on the first date on which there are issued and outstanding
less than 3,200,000 shares of Preferred Stock (subject to appropriate adjustment
in the event of any dividend, stock split, combination or other similar
recapitalization affecting such shares).
5
<PAGE> 6
(c) The Corporation shall not amend, alter or repeal the preferences,
special rights or other powers of the Series A Preferred Stock so as to affect
adversely the Series A Preferred Stock, without the written consent or
affirmative vote of the holders of a majority of the then outstanding shares of
Series A Preferred Stock, given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a class. The Corporation shall not
amend, alter or repeal the preferences, special rights or other powers of the
Series B Preferred Stock so as to affect adversely the Series B Preferred Stock,
without the written consent or affirmative vote of the holders of a majority of
the then outstanding shares of Series B Preferred Stock, given in writing or by
vote at a meeting, consenting or voting (as the case may be) separately as a
class. The Corporation shall not amend, alter or repeal the preferences, special
rights or other powers of the Series C Preferred Stock so as to affect adversely
the Series C Preferred Stock, without the written consent or affirmative vote of
the holders of a majority of the then outstanding shares of Series C Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a class. The Corporation shall not amend, alter or
repeal the preferences, special rights or other powers of the Series D Preferred
Stock so as to affect adversely the Series D Preferred Stock, without the
written consent or affirmative vote of the holders of a majority of the then
outstanding shares of Series D Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a class. For
this purpose, without limiting the generality of the foregoing, the
authorization of any shares of capital stock with preference or priority over
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
or Series D Preferred Stock as to the right to receive either dividends or
amounts distributable upon liquidation, dissolution or winding up of the
Corporation shall be deemed to affect adversely the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
as the case may be.
4. OPTIONAL CONVERSION. The holders of the Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and from time to
time, and without the payment of additional consideration by the holder thereof,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Series A Base Price (as defined below) by the Series
A Conversion Price (as defined below) in effect at the time of conversion. The
"Series A Base Price" shall be $1.00. The "Series A Conversion Price" shall
initially be $1.00. Such Series A Conversion Price, and the rate at which shares
of Series A Preferred Stock may be converted into shares of Common Stock, shall
be subject to adjustment as provided below. Each share of Series B Preferred
Stock shall be convertible, at the option of the holder thereof, at any time and
from time to time, and without the payment of additional consideration by the
holder thereof, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Series B Base Price (as defined
below) by the Series B
6
<PAGE> 7
Conversion Price (as defined below) in effect at the time of conversion. The
"Series B Base Price" shall be $5.33. The "Series B Conversion Price" shall
initially be $5.33. Such Series B Conversion Price, and the rate at which shares
of Series B Preferred Stock may be converted into shares of Common Stock, shall
be subject to adjustment as provided below. Each share of Series C Preferred
Stock shall be convertible, at the option of the holder thereof, at any time and
from time to time, and without the payment of additional consideration by the
holder thereof, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Series C Base Price (as defined
below) by the Series C Conversion Price (as defined below) in effect at the time
of conversion. The "Series C Base Price" shall be $8.78. The "Series C
Conversion Price" shall initially be $8.78. Such Series C Conversion Price, and
the rate at which shares of Series C Preferred Stock may be converted into
shares of Common Stock, shall be subject to adjustment as provided below. Each
share of Series D Preferred Stock shall be convertible, at the option of the
holder thereof, at any time and from time to time, and without the payment of
additional consideration by the holder thereof, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing the Series
D Base Price (as defined below) by the Series D Conversion Price (as defined
below) in effect at the time of conversion. The "Series D Base Price" shall be
$9.50. The "Series D Conversion Price" shall initially be $9.50. Such Series D
Conversion Price, and the rate at which shares of Series D Preferred Stock may
be converted into shares of Common Stock, shall be subject to adjustment as
provided below.
In the event of a notice of redemption of any shares of Series A
Preferred Stock and Series B Preferred Stock pursuant to Section 6 hereof, the
Conversion Rights of the shares designated for redemption shall terminate at the
close of business on the fifth full day preceding the date fixed for redemption,
unless the redemption price is not paid when due, in which case the Conversion
Rights for such shares shall continue until such price is paid in full. In the
event of a liquidation of the Corporation, the Conversion Rights shall terminate
at the close of business on the first full day preceding the date fixed for the
payment of any amounts distributable on liquidation to the holders of Preferred
Stock.
(b) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Stock. In lieu of any fractional shares
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price or Series D
Conversion Price, as the case may be.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of Preferred Stock to convert
shares of Preferred Stock into shares of Common Stock, such holder shall
surrender the certificate or certificates for such shares of Preferred Stock, at
the office of the transfer agent for the
7
<PAGE> 8
Preferred Stock (or at the principal office of the Corporation if the
Corporation serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of the shares of the Preferred
Stock represented by such certificate or certificates. Such notice shall state
such holder's name or the names of the nominees in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. If required
by the Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his
or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Preferred
Stock, or to his or its nominees, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled, together with
cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the Preferred
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the conversion of the Preferred
Stock, such number of its duly authorized shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding Preferred
Stock. Before taking any action which would cause an adjustment reducing the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price
or Series D Conversion Price below the then par value of the shares of Common
Stock issuable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
respectively, the Corporation will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price, as the case may be.
(iii) Upon any such conversion, no adjustment to the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price or Series
D Conversion Price shall be made for any declared but unpaid dividends on the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock, respectively, surrendered for conversion or on the
Common Stock delivered upon conversion.
(iv) All shares of Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any dividends
declared but unpaid thereon. Any shares of Preferred Stock so converted shall be
retired and cancelled and shall not be
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<PAGE> 9
reissued, and the Corporation (without the need for stockholder action) may from
time to time take such appropriate action as may be necessary to reduce the
authorized Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issuance or delivery of shares of
Common Stock upon conversion of shares of Preferred Stock pursuant to this
Section 4. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of shares of Common Stock in a name other than that in which the shares of
Preferred Stock so converted were registered, and no such issuance or delivery
shall be made unless and until the person or entity requesting such issuance has
paid to the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(d) Adjustments to Applicable Conversion Price for Diluting Issues:
--------------------------------------------------------------
(i) SPECIAL DEFINITIONS. For purposes of this Subsection
4(d), the following definitions shall apply:
(A) "OPTION" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
(B) "ORIGINAL ISSUE DATE" shall mean the date on which
a share of Series D Preferred Stock was first issued.
(C) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares or other securities directly or indirectly convertible
into or exchangeable for Common Stock.
(D) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below,
deemed to be issued) by the Corporation after the Original Issue Date, other
than shares of Common Stock issued or issuable:
(I) upon conversion of any Convertible
Securities outstanding on the Original
Issue Date, or upon exercise of any
Options outstanding on the Original
Issue Date;
(II) as a dividend or distribution on
Preferred Stock;
(III) by reason of a dividend, stock split,
split-up or other distribution on shares
of Common Stock that is covered by
Subsection 4(e) or 4(f) below;
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<PAGE> 10
(IV) up to 239,474 shares of Series D
Preferred Stock on or before
June 1, 1999 pursuant to Section 2 of
the Series D Preferred Stock Purchase
Agreement, dated as of March 1, 1999, by
and among the Corporation and the
parties thereto, and upon the conversion
of such shares of Series D Preferred
Stock;
(V) up to 1,955,719 shares of Common Stock
to employees or directors of, or
consultants to, the Corporation pursuant
to a stock option, restricted stock or
other plan or arrangement approved by
the Board of Directors of the
Corporation; or
(VI) shares issued in connection with a
strategic collaboration or partnership
approved by the Board of Directors of
the Corporation.
(ii) NO ADJUSTMENT OF APPLICABLE CONVERSION PRICE. No
adjustment in the number of shares of Common Stock into which the Preferred
Stock is convertible shall be made, by adjustment in the applicable Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price or Series
D Conversion Price, as the case may be: (a) unless the consideration per share
(determined pursuant to Subsection 4(d)(v)) for an Additional Share of Common
Stock issued or deemed to be issued by the Corporation is less than the
applicable Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price, as the case may be, in effect on
the date of, and immediately prior to, the issue of such Additional Shares, or
(b) if prior to such issuance, the Corporation receives written notice from the
holders of at least a majority of the then outstanding shares of Preferred Stock
voting together as a single class, agreeing that no such adjustment shall be
made as the result of the issuance of Additional Shares of Common Stock or both
designees of the Preferred Stock then serving as directors of the Company agree
to waive such adjustment.
(iii) ISSUE OF SECURITIES DEEMED ISSUE OF ADDITIONAL SHARES
OF COMMON STOCK. If the Corporation at any time or from time to time after the
Original Issue Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum
number of shares of Common Stock (as set forth in the instrument relating
thereto without regard to any provision contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such
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<PAGE> 11
a record date shall have been fixed, as of the close of business on such record
date, provided that Additional Shares of Common Stock shall not be deemed to
have been issued unless the consideration per share (determined pursuant to
Subsection 4(d)(v) hereof) of such Additional Shares of Common Stock would be
less than the applicable Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price or Series D Conversion Price, as the case may be, in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the applicable Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price or Series
D Conversion Price, as the case may be, shall be made upon the subsequent issue
of Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(B) If such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Corporation, upon the exercise, conversion or
exchange thereof, the applicable Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price, as the case may
be, computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon, shall,
upon any such increase becoming effective, be recomputed to reflect such
increase insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
(C) Upon the expiration or termination of any
unexercised Option, the applicable Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price or Series D Conversion Price, as the
case may be, shall not be readjusted, but the Additional Shares of Common Stock
deemed issued as the result of the original issue of such Option shall not be
deemed issued for the purposes of any subsequent adjustment of the applicable
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price
or Series D Conversion Price, as the case may be;
(D) In the event of any change in the number of shares
of Common Stock issuable upon the exercise, conversion or exchange of any Option
or Convertible Security, including, but not limited to, a change resulting from
the anti-dilution provisions thereof, the applicable Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price, as the case may be, then in effect shall forthwith be readjusted to such
applicable Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price, as the case may be, as would have
obtained had the adjustment which was made upon the issuance of such Option or
Convertible Security not exercised or converted prior to such change been made
upon the basis of such change; and
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<PAGE> 12
(E) No readjustment pursuant to clause (B) or (D)
above shall have the effect of increasing the applicable Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price or Series D
Conversion Price, as the case may be, to an amount which exceeds the lower of
(i) the applicable Series A Conversion Price, Series B Conversion Price, Series
C Conversion Price or Series D Conversion Price, as the case may be, on the
original adjustment date, or (ii) the applicable Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price, as the case may be, that would have resulted from any issuances of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) ADJUSTMENT OF APPLICABLE CONVERSION PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation shall at any
time after the Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Subsection 4(d)(iii), but excluding shares issued as a stock split or
combination as provided in Subsection 4(e) or upon a dividend or distribution as
provided in Subsection 4(f)), without consideration or for a consideration per
share less than the applicable Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price, as the case may
be, in effect on the date of and immediately prior to such issue, then and in
such event, such Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price, as the case may be, shall be
reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying such Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price or Series D Conversion Price, as the
case may be, by a fraction, (A) the numerator of which shall be (1) the number
of shares of Common Stock outstanding immediately prior to such issue plus (2)
the number of shares of Common Stock which the aggregate consideration received
or to be received by the Corporation for the total number of Additional Shares
of Common Stock so issued would purchase at such Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price or Series D Conversion
Price, as the case may be; and (B) the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.
Notwithstanding the provisions of this Subsection 4(d)(iv), in
the event the Corporation makes a Dilutive Issuance (as defined below), the
adjustment to the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price or Series D Conversion Price, as the case may be, provided for
in this Subsection 4(d)(iv) as a result of such Dilutive Issuance shall not be
made with respect to shares of Preferred Stock held by a person or entity who
was given the opportunity to purchase its Pro Rata Portion (as defined below) of
such Dilutive Issuance (whether pursuant to a right of first refusal or
otherwise), and who failed to purchase its Pro Rata Portion of such Dilutive
Issuance. Each such holder shall be deemed to have waived (i) the reductions in
the Series A Conversion Price, Series B Conversion Price, Series C
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<PAGE> 13
Conversion Price or Series D Conversion Price, as the case may be, of such
holder's shares of Preferred Stock that would have otherwise resulted pursuant
to this Subsection 4(d)(iv) from such Dilutive Issuance and from any future
issuances (or deemed issuances) of Additional Shares (other than as described in
Subsections 4(e) and 4(f)), and (ii) the right to receive, upon conversion of
its Preferred Stock pursuant to this Section 4, any additional shares of Common
Stock that would have been issuable as a result of such reductions in the Series
A Conversion Price, Series B Conversion Price, Series C Conversion Price or
Series D Conversion Price, as the case may be; and such waiver shall be binding
upon any transferee of the shares of Preferred Stock held by such holder. A
"Dilutive Issuance" shall mean any issuance of Additional Shares of Common Stock
that results (or would result, except for this paragraph) in a reduction in the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price
or Series D Conversion Price, as the case may be, pursuant to this Subsection
4(d)(iv). A holder's "Pro Rata Portion" of a Dilutive Issuance shall mean the
number of Additional Shares of Common Stock issued in such Dilutive Issuance,
multiplied by a fraction, the numerator of which is the number of shares of
Common Stock then held or issuable upon conversion of all convertible securities
(including the Preferred Stock) of the Corporation then held by such holder, and
the denominator of which is the aggregate number of shares of Common Stock then
outstanding (including shares issuable upon conversion of all convertible
securities of the Corporation then outstanding. For purposes of this paragraph,
the portion of a Dilutive Issuance purchased by a holder of Preferred Stock
shall be deemed to include any portion of such Dilutive Issuance purchased by an
"affiliate" (as defined in Rule 144 under the Securities Act of 1933, as
amended) of such holder.
All certificates representing shares of Preferred Stock shall have affixed
thereto a legend substantially in the following form:
"The shares represented by this certificate are convertible into shares of
common stock at a rate which may vary among different stockholders of the
corporation. Information concerning the conversion rate applicable to the
shares represented by this certificate may be obtained from the Secretary
of the corporation."
(v) DETERMINATION OF CONSIDERATION. For purposes of this
Subsection 4(d), the consideration received by the Corporation for the issue of
any Additional Shares of Common Stock shall be computed as follows:
(A) Cash and Property: Such consideration shall:
-----------------
(I) insofar as it consists of cash, be computed
at the aggregate of cash received by the Corporation, excluding amounts paid or
payable for accrued interest;
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<PAGE> 14
(II) insofar as it consists of property other
than cash, be computed at the fair market value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(vi) MULTIPLE CLOSING DATES. In the event the Corporation
shall issue on more than one date Additional Shares of Common Stock which are
comprised of shares of the same series or class of Preferred Stock, and such
issuance dates occur within a period of no more than 120 days, then the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price or Series
D Conversion Price, as the case may be, shall be adjusted only once on account
of such issuances, with such adjustment to occur upon the final such issuance
and to give effect to all such issuances as if they occurred on the date of the
final such issuance.
(e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation
shall at any time or from time to time after the Original Issue Date effect a
subdivision of the outstanding Common Stock, the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price and Series D Conversion
Price then in effect immediately before that subdivision shall be
proportionately decreased. If the Corporation shall at any time or from time to
time after the Original Issue Date combine the outstanding shares of Common
Stock, the Series A Conversion Price, Series B
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<PAGE> 15
Conversion Price, Series C Conversion Price and Series D Conversion Price then
in effect immediately before the combination shall be proportionately increased.
Any adjustment under this paragraph shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(f) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event
the Corporation at any time, or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price and
Series D Conversion Price then in effect shall be decreased as of the time of
such issuance or, in the event such a record date shall have been fixed, as of
the close of business on such record date, by multiplying the respective Series
A Conversion Price, Series B Conversion Price, Series C Conversion Price and
Series D Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend
or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the respective Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price and Series D Conversion Price shall be recomputed
accordingly as of the close of business on such record date and thereafter the
respective Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price and Series D Conversion Price shall be adjusted pursuant to
this paragraph as of the time of actual payment of such dividends or
distributions; and provided further, however, that no such adjustment shall be
made if the holders of Preferred Stock simultaneously receive a dividend or
other distribution of shares of Common Stock in a number equal to the number of
shares of Common Stock as they would have received if all outstanding shares of
Preferred Stock had been converted into Common Stock on the date of such event.
(g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event
the Corporation at any time or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of the Preferred
Stock shall receive upon conversion thereof in addition
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<PAGE> 16
to the number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation that they would have received had the Preferred
Stock been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
conversion date, retained such securities receivable by them as aforesaid during
such period, giving application to all adjustments called for during such period
under this paragraph with respect to the rights of the holders of the Preferred
Stock; and provided further, however, that no such adjustment shall be made if
the holders of Preferred Stock simultaneously receive a dividend or other
distribution of such securities in an amount equal to the amount of such
securities as they would have received if all outstanding shares of Preferred
Stock had been converted into Common Stock on the date of such event.
(h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR SUBSTITUTION. If
the Common Stock issuable upon the conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification, or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
above, or a reorganization, merger, consolidation, or sale of assets provided
for below), then and in each such event the holder of each such share of
Preferred Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification, or other change, by holders of the
number of shares of Common Stock into which such shares of Preferred Stock might
have been converted immediately prior to such reorganization, reclassification,
or change, all subject to further adjustment as provided herein.
(i) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In case of any
consolidation or merger of the Corporation with or into another corporation or
the sale of all or any Substantial Portion of the assets of the Corporation to
another corporation (other than a consolidation, merger or sale which holders of
the Preferred Stock elect to make subject to Subsection 2(c)), each share of
Preferred Stock shall thereafter be convertible (or shall be converted into a
security which shall be convertible) into the kind and amount of shares of stock
or other securities or property to which a holder of the number of shares of
Common Stock of the Corporation deliverable upon conversion of such Preferred
Stock would have been entitled upon such consolidation, merger or sale; and, in
such case, appropriate adjustment (as determined in good faith by the Board of
Directors) shall be made in the application of the provisions in this Section 4
set forth with respect to the rights and interest thereafter of the holders of
the Preferred Stock, to the end that the provisions set forth in this Section 4
(including provisions with respect to changes in and other adjustments of the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price
and Series D Conversion Price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of the Preferred Stock.
(j) NO IMPAIRMENT. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
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<PAGE> 17
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights against impairment.
(k) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price or Series D Conversion Price, as the case may
be, pursuant to this Section 4, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Preferred Stock, furnish or cause to be
furnished to such holder a similar certificate setting forth (i) such
adjustments and readjustments, (ii) the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price or Series D Conversion Price, as the
case may be, then in effect, and (iii) the number of shares of Common Stock and
the amount, if any, of other property which then would be received upon the
conversion of Preferred Stock.
(l) Notice of Record Date. In the event:
---------------------
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common
Stock or other securities of the Corporation;
(ii) that the Corporation subdivides or combines its
outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of
its outstanding shares of Common Stock or a stock
dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with
another corporation, or of the sale of all or
substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Preferred Stock, and shall cause to be
mailed to the holders of the Preferred Stock at their last addresses as shown on
the records of the Corporation or
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<PAGE> 18
such transfer agent, at least ten days prior to the date specified in (A) below
or twenty days before the date specified in (B) below, a notice stating
(A) the record date of such dividend, distribution, subdivision or
combination, or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to
such dividend, distribution, subdivision or combination are to be
determined, or
(B) the date on which such reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger,
sale, dissolution or winding up.
5. Mandatory Conversion.
--------------------
(a) Upon the closing of the sale of shares of Common Stock, at a
price of at least $10.00 per share (subject to appropriate adjustment for stock
splits, stock dividends, combinations and other similar recapitalizations
affecting such shares), in a firm underwritten public offering of the Company's
Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, resulting in at least $20,000,000 of gross
proceeds to the Corporation, (i) each outstanding share of Preferred Stock shall
automatically be converted into such number of shares of Common Stock as are
then issuable upon conversion thereof pursuant to the provisions of Section 4,
and (ii) the number of authorized shares of Preferred Stock shall be
automatically reduced by the number of shares of Preferred Stock that had been
designated as Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, and all provisions included under
the caption "Series Preferred Stock," and all references to the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, shall be deleted and shall be of no further force or effect.
(b) All holders of record of shares of Preferred Stock, as the case
may be, shall be given written notice of the date on which an automatic
conversion will occur pursuant to Section 5(a) ("Mandatory Conversion Date") and
the place designated for mandatory conversion of all such shares of Preferred
Stock, pursuant to this Section 5. Such notice need not be given in advance of
the occurrence of a Mandatory Conversion Date. Such notice shall be sent by
first class or registered mail, postage prepaid, to each record holder of
Preferred Stock at such holder's address last shown on the records of the
transfer agent for the Preferred Stock (or the records of the Corporation, if it
serves as its own transfer agent). Upon receipt of such notice, each holder of
shares of Preferred Stock shall surrender his or its certificate or certificates
for all such shares to
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<PAGE> 19
the Corporation at the place designated in such notice, and shall thereafter
receive certificates for the number of shares of Common Stock to which such
holder is entitled pursuant to this Section 5. On the Mandatory Conversion Date,
all rights with respect to the Preferred Stock so converted, including the
rights, if any, to receive notices and vote (other than as a holder of Common
Stock) will terminate, except only the rights of the holders thereof, upon
surrender of their certificate or certificates therefor, to receive certificates
for the number of shares of Common Stock into which such Preferred Stock has
been converted. If so required by the Corporation, certificates surrendered for
conversion shall be endorsed or accompanied by written instrument or instruments
of transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or by his or its attorney duly authorized in writing. As soon
as practicable after the Mandatory Conversion Date and the surrender of the
certificate or certificates for Preferred Stock, the Corporation shall cause to
be issued and delivered to such holder, or on his or its written order, a
certificate or certificates for the number of full shares of Common Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in Subsection 4(b) in respect of any fraction of a share of Common
Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Preferred Stock which are
required to be surrendered for conversion in accordance with the provisions
hereof shall, from and after the Mandatory Conversion Date, be deemed to have
been retired and cancelled and the shares of Preferred Stock represented thereby
converted into Common Stock for all purposes, notwithstanding the failure of the
holder or holders thereof to surrender such certificates on or prior to such
date. The Corporation may thereafter take such appropriate action (without the
need for stockholder action) as may be necessary to reduce the authorized
Preferred Stock accordingly.
6. Redemption.
----------
(a) The Corporation will, subject to the conditions set forth below,
on December 31, 2001, December 31, 2002 and December 31, 2003 (each, a
"Mandatory Redemption Date"), upon receipt not less than 30 nor more than 120
days prior to the applicable Mandatory Redemption Date of written request(s) for
redemption from holders of at least a majority of the shares of Series A
Preferred Stock and Series B Preferred Stock then outstanding (a "Redemption
Request"), redeem from each requesting holder of shares of Series A Preferred
Stock and Series B Preferred Stock then outstanding, at a price equal to $1.00
per share of Series A Preferred Stock and $5.33 per share of Series B Preferred
Stock, plus any dividends declared but unpaid thereon (the "Mandatory Redemption
Price"), the following respective portions of the number of shares of Series A
Preferred Stock and Series B Preferred Stock, as the case may be, held by such
requesting holder set forth opposite the applicable Mandatory Redemption Date:
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<PAGE> 20
Portion of Shares of Each of
Mandatory the Series A Preferred Stock and Series B
Redemption Date Preferred Stock to be Redeemed
--------------- ------------------------------
December 31, 2001 33 1/3%
December 31, 2002 50%
December 31, 2003 All shares then held
(b) If the funds of the Corporation legally available for redemption
of Series A Preferred Stock and Series B Preferred Stock on any Mandatory
Redemption Date are insufficient to redeem the number of shares of Series A
Preferred Stock and Series B Preferred Stock required under this Section 6 to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares of Series A Preferred Stock
and Series B Preferred Stock ratably on the basis of the number of shares of
Series A Preferred Stock and Series B Preferred Stock which would be redeemed on
such date if the funds of the Corporation legally available therefor had been
sufficient to redeem all shares of Series A Preferred Stock and Series B
Preferred Stock required to be redeemed on such date. At any time thereafter
when additional funds of the Corporation become legally available for the
redemption of Series A Preferred Stock and Series B Preferred Stock, such funds
will be used, at the end of the next succeeding fiscal quarter, to redeem, to
the extent of the available funds, the balance of the shares which the
Corporation was theretofore obligated to redeem. Until such redemption, holders
of such unredeemed shares shall have the right to receive quarterly in arrears
interest on the applicable Mandatory Redemption Price at the rate of five
percent (5%) per annum.
(c) Unless there shall have been a failure to pay the Mandatory
Redemption Price with respect to shares of Series A Preferred Stock and Series B
Preferred Stock requested to be redeemed on a Mandatory Redemption Date, on such
Mandatory Redemption Date all rights of the holder of such shares as a
stockholder of the Corporation by reason of the ownership of such share will
cease, except the right to receive the Mandatory Redemption Price of such share,
without interest, upon presentation and surrender of the certificate
representing such share, and such share will not from and after such Mandatory
Redemption Date be deemed to be outstanding.
(d) Any Series A Preferred Stock and Series B Preferred Stock
redeemed pursuant to this Section 6 will be cancelled and will not under any
circumstances be reissued, sold or transferred and the Corporation may from time
to time take such appropriate action as may be necessary to reduce the
authorized Preferred Stock accordingly.
20
<PAGE> 21
7. Negative Covenants.
------------------
(a) So long as at least 1,600,000 shares of Preferred Stock are
issued and outstanding (subject to appropriate adjustment in the event of any
dividend, stock split, combination or other similar recapitalization affecting
such shares), the Corporation shall not, without the prior written consent of
the holders of at least 66 2/3% of the then outstanding shares of Preferred
Stock, voting together as a single class:
(i) Authorize any class or series of stock having
preference or priority over the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock as to dividends or
liquidation;
(ii) Amend the Corporation's Certificate of Incorporation in
a manner materially adverse to the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock;
(iii) Declare or pay any dividends on Common Stock other than
dividends payable solely in Common Stock;
(iv) Repurchase shares of its capital stock at a price
greater than the price at which they were originally issued, except for shares
of Series A Preferred Stock or Series B Preferred Stock as provided above;
(v) Liquidate or wind-up the Corporation;
(vi) Make any loan or advance to any person, including
without limitation, any employee or director of the Company or any subsidiary,
except advances and similar expenditures in the ordinary course of business or
under the terms of an employee stock or option plan approved by the Board of
Directors;
(vii) (A) Merge with or into or consolidate with any other
corporation, (B) sell, lease, or otherwise dispose of all or substantially all,
or a Significant Portion (as defined below), of its properties or assets, or (C)
acquire all or substantially all of the properties or assets of any other
corporation or entity (except for consideration of less than 35% of the
Corporation's consolidated net worth as of the end of the prior fiscal quarter).
For the purposes of this Certificate of Incorporation, "Significant Portion"
shall mean properties or assets with a fair market value equal to more than 35%
of the book value of the Company's total properties or assets as of the end of
the most recent fiscal quarter; or
(viii) Incur indebtedness for borrowed money in excess of
$250,000, or such greater amount as may be approved by the Board of Directors of
the Company.
21
<PAGE> 22
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
SEVENTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
EIGHTH. 1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF
THE CORPORATION. The Corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 7
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the
22
<PAGE> 23
Indemnitee unless the initiation thereof was approved by the Board of Directors
of the Corporation. Notwithstanding anything to the contrary in this Article,
the Corporation shall not indemnify an Indemnitee to the extent such Indemnitee
is reimbursed from the proceeds of insurance, and in the event the Corporation
makes any indemnification payments to an Indemnitee and such Indemnitee is
subsequently reimbursed from the proceeds of insurance, such Indemnitee shall
promptly refund such indemnification payments to the Corporation to the extent
of such insurance reimbursement.
2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware shall
determine upon application that, despite the adjudication of such liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses (including attorneys' fees)
which the Court of Chancery of Delaware shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the
other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was
23
<PAGE> 24
unlawful, the Indemnitee shall be considered for the purposes hereof to have
been wholly successful with respect thereto.
4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below, in
the event that the Corporation does not assume the defense pursuant to Section 4
of this Article of any action, suit, proceeding or investigation of which the
Corporation receives notice under this Article, any expenses (including
attorneys' fees) incurred by an Indemnitee in defending a civil or criminal
action, suit, proceeding or investigation or any appeal therefrom shall be paid
by the Corporation in advance of the final disposition of such matter; provided,
however, that the payment of such expenses incurred by an Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article.
Such undertaking shall be accepted without reference to the financial ability of
the Indemnitee to make such repayment.
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
24
<PAGE> 25
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority vote
of the directors of the Corporation consisting of persons who are not at that
time parties to the action, suit or proceeding in question ("disinterested
directors"), whether or not a quorum, (b) a majority vote of a committee of
disinterested directors designated by majority vote of disinterested directors,
whether or not a quorum, (c) a majority vote of a quorum of the outstanding
shares of stock of all classes entitled to vote for directors, voting as a
single class, which quorum shall consist of stockholders who are not at that
time parties to the action, suit or proceeding in question, (d) independent
legal counsel (who may, to the extent permitted by law, be regular legal counsel
to the Corporation), or (e) a court of competent jurisdiction.
7. REMEDIES. The right to indemnification or advances as granted by this
Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.
25
<PAGE> 26
9. OTHER RIGHTS. The indemnification and advancement of expenses provided
by this Article shall not be deemed exclusive of any other rights to which an
Indemnitee seeking indemnification or advancement of expenses may be entitled
under any law (common or statutory), agreement or vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in any other capacity while holding office for the Corporation,
and shall continue as to an Indemnitee who has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of the Indemnitee. Nothing contained in this Article shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with officers and directors providing indemnification rights
and procedures different from those set forth in this Article. In addition, the
Corporation may, to the extent authorized from time to time by its Board of
Directors, grant indemnification rights to other employees or agents of the
Corporation or other persons serving the Corporation and such rights may be
equivalent to, or greater or less than, those set forth in this Article.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan) against any expense, liability
or loss incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the General Corporation Law
of Delaware.
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action,
26
<PAGE> 27
suit, proceeding or investigation, whether civil, criminal or administrative,
including an action by or in the right of the Corporation, to the fullest extent
permitted by any applicable portion of this Article that shall not have been
invalidated and to the fullest extent permitted by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of Delaware is
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
NINTH. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute and this Certificate of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
* * * * *
27
<PAGE> 28
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its President this 20th day of
July, 1999.
SILVERSTREAM SOFTWARE, INC.
/s/ David A. Litwack
-----------------------------------
David A. Litwack
President
<PAGE> 1
Exhibit 5.1
-----------
August 3, 1999
SilverStream Software, Inc.
One Burlington Woods
Suite 200
Burlington, MA 01803
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-80553) (as amended, the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), for the
registration of 3,450,000 shares of Common Stock, $.001 par value per share (the
"Shares"), of SilverStream Software, Inc., a Delaware corporation (the
"Company"), including 450,000 Shares issuable upon exercise of an over-allotment
option granted by the Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and Morgan Stanley & Co. Incorporated, BancBoston Robertson Stephens
Inc. and SG Cowen Securities Corporation, as representatives of the several
underwriters named in the Underwriting Agreement, the form of which will be
filed as Exhibit 1.1 to the Registration Statement.
We are acting as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreement, minutes of meetings of the stockholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the
Certificate of Incorporation and By-Laws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
<PAGE> 2
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of The Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we are
opining herein, we have assumed that such laws are identical to the state laws
of The Commonwealth of Massachusetts, and we are expressing no opinion herein as
to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreement, the Shares will be validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF SILVERSTREAM SOFTWARE, INC.
Subsidiary Name Jurisdiction of Organization
SilverStream Securities Corporation Massachusetts
SilverStream Netherlands, Inc. Delaware
SilverStream Software Limited United Kingdom
SilverStream Software GmbH Germany
SilverStream Software B.V. The Netherlands
SilverStream Software BVBA/SPRL Belgium
SilverStream Software (Asia) Limited Hong Kong
SilverStream Software (Asia) Pte. Ltd. Singapore
SilverStream s.r.o. Czech Republic
SilverSolutions spol. s.r.o. Czech Republic
SilverStream Norge AS Norway
SilverStream France S.A. France
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 5, 1999, (except for Note 13, as to which the date is July 23, 1999) with
respect to the Financial Statements included in the Registration Statement (Form
S-1) and related Prospectus of SilverStream Software, Inc. for the registration
of shares of its common stock.
Our audits also included the financial statement schedule of SilverStream
Software, Inc. listed in Item 16(b). This schedule is the responsibility of
SilverStream Software, Inc.'s management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects, the information set
forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
August 2, 1999
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