<PAGE>
As filed with the Securities and Exchange Commission on September 16, 1999
Registration No. 333-83439
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT No. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
eGAIN COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 7372 77-0466366
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE> ---------------
455 W. Maude Avenue
Sunnyvale, California 94086
(408) 737-7400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------
Ashutosh Roy
Chief Executive Officer
eGAIN COMMUNICATIONS CORPORATION
455 W. Maude Avenue
Sunnyvale, California 94086
(408) 737-7400
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------
Copies To:
<TABLE>
<S> <C>
Stanley F. Pierson, Esq. Kenneth L. Guernsey
Davina K. Kaile, Esq. Karyn R. Smith
Jeffrey S. Harrell, Esq. Steve R. Daetz
Pillsbury Madison & Sutro LLP Cooley Godward LLP
2550 Hanover Street One Maritime Plaza, 20th Floor
Palo Alto, CA 94304 San Francisco, CA 94111
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1999
[LOGO OF EGAIN]
5,000,000 Shares
Common Stock
eGain Communications Corporation is offering 5,000,000 shares of its common
stock. This is eGain's initial public offering, and no public market currently
exists for its shares. We have applied for approval for quotation on the Nasdaq
National Market under the symbol "EGAN" for the shares we are offering. We
anticipate that the initial public offering price will be between $9.00 and
$11.00 per share.
---------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.
---------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.................................... $ $
Underwriting Discounts and Commissions................... $ $
Proceeds to eGain........................................ $ $
</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.
eGain has granted the underwriters a 30-day option to purchase up to an
additional 750,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on , 1999.
---------------
BancBoston Robertson Stephens
Donaldson, Lufkin & Jenrette
Volpe Brown Whelan & Company
The date of this prospectus is , 1999.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
----------------
TABLE OF CONTENTS
<TABLE>
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Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 6
Forward Looking Statements............................................... 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 32
Management............................................................... 48
Certain Transactions..................................................... 56
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find More Information...................................... 68
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
<PAGE>
[Gatefold]
[Text appears against left margin]
eGain is a leading provider of customer service infrastructure for eCommerce
eGain's Internet-based software products and related services help companies
deliver customer service via email and real-time Web collaboration.
.multi-application platform for Web-based customer service
. highly flexible and scalable Web Component Architecture
. leading provider of hosted customer service solutions
eGain eMail Management Systems (EMS) is a Web-based application that enables
customer service departments to route, track and respond to high volumes of
customer email and Web form inquires.
eGain Web Collaboration System (WCS) enables customer service representatives
to answer customer questions and provide interactive assistance over the Web
using browser sharing, text chat and assisted form-filling technology.
[Graphic depicting the alternative modes of deploying eGain's customer service
solutions]
Installed Software Solution
[Boxes with "eGain EMS" and "eGain WCS"]
Companies can deploy eGain applications by purchasing a license and installing
the applications in-house
[Box with "In-House Customer Service Department or Outsourced Call Center
Provider"]
[Graphic depicting online shopper interacting with an eCommerce Website through
the Internet]
[Graphic depicting the eGain Hosted Network]
Companies can also deploy our applications through the eGain Hosted Network--a
network of eGain-managed operations centers and redundant hosting partners
linked by high-speed Internet connections.
[within eGain Hosted Network graphic are graphics depicting two hosting
partners connected to the Internet and eGain Network Operations Center]
Remote Application Management
Solution Development
System Implementation
customer service infrastructure for eCommerce eGain
<PAGE>
SUMMARY
eGain Communications
We are a leading provider of customer service infrastructure for companies
engaged in electronic commerce. Our software products and related services are
designed to help businesses provide more effective Internet-based customer
service, thereby improving customer satisfaction and converting a higher
percentage of Web site visitors to buyers. We believe we are one of the leading
providers of customer service infrastructure for companies engaged in eCommerce
because we were the first company to offer a platform for online customer
service which companies can access remotely through the eGain Hosted Network.
The eGain Hosted Network allows companies to access our platform through the
Internet while we maintain the software applications and hardware. Our solution
is also available as installed software for in-house implementation.
Approximately 50% of our current customers access our applications through the
eGain Hosted Network. Our customers include both dedicated Internet companies,
such as Go2Net, Snap.com and WebTV, and traditional companies engaged in
eCommerce, such as Mazda USA and FCC National's Wingspan Bank.
Businesses use our applications to effectively manage high volumes of
customer email as well as live Web-based interaction. Our email management
system helps businesses route, track, analyze and respond to customer emails.
Our Web collaboration system helps businesses provide live online assistance to
visitors on their Web site. Our solutions are built on a scalable, Web-based
architecture designed to meet the growth in Internet-based communications. Our
products are built on technologies that are based on industry standards and are
therefore designed to integrate easily with existing customer databases and
applications.
Superior customer service is critical to businesses competing in the
eCommerce marketplace. Today, most online customer communication takes place
through email. However, according to a recent Jupiter Communications study of
125 top eCommerce sites, 42% of the sites either refused to accept an email,
never responded to an email, or took longer than five days to respond.
Companies that fail to address their online customer service needs risk losing
customers to eager competitors located a mouse click away. Traditional
approaches to online customer service, such as trying to extend front office
software packages that were designed for telephone-based interactions or
developing homegrown solutions, have proved to be inadequate for many
businesses. As a result, businesses are seeking dedicated, scalable
applications to help them deliver superior Internet-based customer service.
International Data Corporation estimates that worldwide license revenues for
eCommerce customer service and support applications will grow from $42 million
in 1998 to $1.6 billion in 2002.
We provide a flexible and scalable Web-based customer service platform for
companies engaged in eCommerce. Our applications for email management and Web
collaboration are designed to provide the following strategic and operating
benefits:
. Strengthen customer relationships. Our applications allow companies to
strengthen customer relationships by providing rapid, personalized and
effective customer service.
. Convert Web site visitors to buyers. Our Web collaboration product
enables live assistance for visitors on a Web site, thereby increasing
the likelihood of converting them into customers.
. Scale to meet growing eCommerce demands. Our architecture allows
companies to scale their customer service infrastructure to meet the
growing volume and complexity of electronic customer communications.
3
<PAGE>
. Rapidly deployable solution. Businesses can quickly deploy customer
service capabilities as an application service through our eGain Hosted
Network. Also, our applications can be rapidly customized through Web-
based interfaces.
. Gain customer insight. Our solution enables companies to capture and
analyze customer communications in order to understand the needs and
preferences of their customers.
. Maximize productivity of customer service organizations. Our email
management and workflow tools make customer service representatives and
managers more efficient.
. Reduce costs and administrative burden. Customers using the eGain Hosted
Network recognize cost efficiencies by eliminating the need to manage and
administer in-house customer service applications.
. Integrate applications to provide comprehensive customer information. Our
applications integrate with existing eCommerce platforms, call center
systems and customer databases, providing customer service
representatives with comprehensive customer information.
Our objective is to be the leading provider of customer service
infrastructure for businesses engaged in eCommerce. To achieve this objective,
we intend to:
. Capitalize on our first mover advantage and extend our brand recognition.
We intend to capitalize on the momentum we have built as the first
company to offer a multi-application platform for Web-based customer
service in a hosted environment and on our early investment in building
our brand.
. Expand the eGain Hosted Network. We intend to expand the eGain Hosted
Network, which we believe offers cost, administrative and performance
benefits, by establishing additional hosting centers that leverage our
partners' physical hosting infrastructure.
. Introduce value-added products. We intend to continue to add products
that complement and enhance our existing online customer service platform
to address the evolving needs of eCommerce businesses.
. Expand strategic relationships. We intend to enter into strategic
relationships that benefit our marketing and distribution efforts to
rapidly capture market share.
. Expand international presence. We intend to continue to expand our
presence internationally into additional markets, including Europe and
Asia.
4
<PAGE>
The Offering
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<C> <S>
Common stock offered by eGain...................... 5,000,000 shares
Common stock to be outstanding after the offering.. 27,815,562 shares
Use of proceeds.................................... For working capital and other general
corporate purposes
Proposed Nasdaq National Market symbol............. EGAN
</TABLE>
The number of shares of common stock to be outstanding after this offering
includes 269,994 shares issuable upon exercise of warrants that will expire
upon completion of this offering and assumes no exercise of the underwriters'
over-allotment option. The number of shares of common stock to be outstanding
after this offering excludes 2,829,431 shares that could be issued upon
exercise of options and warrants outstanding as of August 20, 1999 and
3,318,923 additional shares available for future issuance under our stock
plans.
Summary Consolidated Financial Data
(in thousands, except per share data)
Please see Note 1 of the notes to the consolidated financial statements for
an explanation of the determination of the number of shares used in computing
per share data. The pro forma as adjusted consolidated balance sheet data
summarized below reflects the net proceeds from the sale of shares of common
stock offered by eGain at an assumed initial public offering price of $10.00
per share, after deducting the underwriting discounts and commissions and our
estimated offering expenses.
<TABLE>
<CAPTION>
Period from
September 10, 1997 Year Ended
(Inception) June 30,
to June 30, 1998 1999
------------------ ----------
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenue........................................... $ 2 $ 1,019
Costs and expenses................................ 884 12,319
Loss from operations.............................. (882) (11,300)
----- --------
Net loss.......................................... (938) (11,305)
===== ========
Pro forma net loss per share (unaudited):
Net loss per share--basic and diluted........... $ (0.93)
========
Weighted average shares--basic and diluted...... 12,153
========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
--------------------
Pro Forma
Actual as Adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ................................. $ 1,265 $52,197
Working capital (deficit).................................. (755) 50,176
Total assets............................................... 23,965 74,896
Notes payable, less current portion........................ 221 221
Stockholders' equity....................................... 20,483 74,415
</TABLE>
Our headquarters are located at 455 W. Maude Avenue, Sunnyvale, California
94086 and our telephone number is (408) 737-7400. Our Web site address is
www.egain.com. The information on our Web site is not a part of this
prospectus.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. Our business, operating
results and financial condition could be harmed by any of the following risks.
The trading price of our common stock could decline due to any of these risks,
and you could lose all or part of your investment. You should also refer to the
other information in this prospectus, including our financial statements and
the related notes.
Company Risks
We expect continuing losses and may never achieve profitability, which in
turn may harm our future operating performance and may cause the market price
of our stock to decline
We incurred net losses of approximately $938,000 for the period from
September 10, 1997 (inception) through June 30, 1998 and approximately $11.3
million for the year ended June 30, 1999. As of June 30, 1999, we had an
accumulated deficit of approximately $12.2 million. We expect to continue to
incur net losses for the foreseeable future. If we continue to incur net
losses, we may not be able to increase our number of employees or our
investment in capital equipment, sales, marketing, customer support and
research and development programs in accordance with our present plans. We do
not know when or if we will become profitable. If we do not become profitable
within the timeframe expected by securities analysts or investors, the market
price of our stock will likely decline. If we do achieve profitability, we may
not sustain or increase profitability in the future.
Our operating expenses may increase as we build our business and this
increase may harm our operating results and financial condition
We have spent heavily on technology and infrastructure development. We expect
to continue to spend substantial financial and other resources on developing
and introducing product and service offerings, and expanding our sales,
marketing and customer support organizations and operating infrastructure. We
expect that our operating expenses will continue to increase in absolute
dollars and may increase as a percentage of revenue. If our revenue does not
correspondingly increase, our business and operating results could suffer.
We may not meet quarterly financial expectations, which could cause our stock
price to decline
We were incorporated in September 1997 and shipped our first product in
September 1998. Because of this limited operating history and other factors,
our quarterly revenue and operating results are difficult to predict. In
addition, due to the emerging nature of the eCommerce customer service market
and other factors, our quarterly revenue and operating results may fluctuate
from quarter to quarter. It is likely that our operating results in some
quarters will be below the expectations of securities analysts or investors. In
this event, the market price of our common stock is likely to decline.
A number of factors are likely to cause fluctuations in our operating results,
including, but not limited to, the following:
. the growth rate of eCommerce;
. demand for eCommerce customer service applications;
. our ability to attract and retain customers and maintain customer
satisfaction;
. our ability to upgrade, develop and maintain our systems and
infrastructure;
6
<PAGE>
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure;
. technical difficulties or system outages;
. our ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;
. the announcement or introduction of new or enhanced products and services
by our competitors;
. changes in our pricing policies and those of our competitors;
. failure to increase our international sales; and
. governmental regulation surrounding the Internet and eCommerce in
particular.
We base our expense levels in part on our expectations regarding future
revenue levels. If our revenue for a particular quarter is lower than we
expect, we may be unable to proportionately reduce our operating expenses for
that quarter. For example, our hosting agreements are typically for a period of
one year and automatically renew unless terminated by either party with 60
days' prior notice. In addition, some of our hosting agreements give the
customer the right to terminate the contract at any time. Period-to-period
comparisons of our operating results are not a good indication of our future
performance.
Our business is premised on a novel business model that is largely untested
Our business is premised on novel business assumptions that are largely
untested. Customer service historically has been provided primarily in person
or over the telephone. Our business model assumes that companies engaged in
eCommerce will continue to elect to provide customer service through the
Internet rather than by telephone. Our business model also assumes that many
companies recognize the benefits of a hosted delivery model and will seek to
have their customer service applications hosted by eGain. If any of these
assumptions is incorrect, our business will be seriously harmed.
Our success will depend on sales of the eGain EMS platform
In fiscal 1999, we derived substantially all of our revenue from sales of the
eGain EMS platform and related services. Although we recently added eGain WCS
to our product offerings, we expect to continue to derive a majority of our
revenue from sales of the eGain EMS platform in the future. Implementation of
our strategy depends upon the eGain EMS platform being able to solve the
customer service needs of businesses engaging in eCommerce. In fiscal 1999, two
of our eGain EMS customers, FCC National and WebTV, accounted for 15.6% and
10.8% of total revenue. If these or other current or future customers are not
satisfied with the eGain EMS platform, our business and operating results will
be seriously harmed.
We face a number of integration risks and significant goodwill costs related
to our recent acquisition of Sitebridge
We will face integration risks and record significant goodwill costs as a
result of our acquisition of Sitebridge in April 1999. We may be unable to
effectively integrate the operations, personnel and systems of Sitebridge with
our other operations in a timely fashion, or at all. In addition, we may not
achieve value from our acquisition of Sitebridge commensurate with the
consideration paid. We have just begun to integrate Sitebridge with our
operations and we expect this integration to place a significant burden on our
management team. If we are unable to effectively integrate Sitebridge into our
operations or to generate sufficient revenue from eGain WCS or our combined
operations, our business and operating results are likely to suffer.
7
<PAGE>
As a result of the Sitebridge acquisition, we have recorded a significant
amount of goodwill that will adversely affect our operating results for the
foreseeable future. As of June 30, 1999, we had goodwill and other purchased
intangible assets of approximately $20.2 million, which we expect to amortize
over three years from the date of the acquisition. If the amount of recorded
goodwill or other intangible assets is increased or we have future losses and
are unable to demonstrate our ability to recover the amount of goodwill, the
amount of amortization could be increased or the period of amortization could
be shortened. This would increase annual amortization charges or result in the
write off of goodwill in a one-time non-cash charge, which could be significant
and would likely harm our operating results.
We may engage in future acquisitions or investments that could dilute our
existing stockholders, cause us to incur significant expenses or harm our
business
We may review acquisition or investment prospects that would complement our
current business or enhance our technological capabilities. Integrating any
newly acquired businesses, technologies or products, may be expensive and time-
consuming. To finance any acquisitions, it may be necessary for us to raise
additional funds through public or private financings. Additional funds may not
be available on terms that are favorable to us and, in the case of equity
financings, may result in dilution to our stockholders. We may not be able to
operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to integrate any newly acquired
entities or technologies effectively, our operating results could suffer.
Future acquisitions by us could also result in large and immediate write-offs,
incurrence of debt and contingent liabilities, or amortization of expenses
related to goodwill and other intangibles, any of which could harm our
operating results.
We could incur additional non-cash charges associated with stock-based
compensation arrangements
Our operating results may be impacted if we incur significant non-cash
charges associated with stock-based compensation arrangements with employees
and non-employees. We have issued options to non-employees which are subject to
various vesting schedules of up to 48 months. For deferred compensation
purposes, these options are required to be remeasured at each vesting date,
which may require us to record additional non-cash accounting expenses. These
expenses may result in us incurring net losses or increased net losses for a
given period and this could seriously harm our operating results and stock
price.
In addition, in connection with our acquisition of Sitebridge, we may face
stock-based compensation charges related to Sitebridge's relationship with
Ambrose, an independent professional employer organization, which formerly
provided payroll and employee benefits for Sitebridge employees. Based on a
recent draft pronouncement by the Financial Accounting Standards Board, we may
be required to recognize additional deferred stock-based compensation estimated
to be approximately $6.0 million related to this relationship.
If we fail to expand our sales, marketing and customer support activities, we
may be unable to expand our business
If we do not successfully expand our sales, marketing and customer support
activities, we cannot expand our business and our stock price could decline.
The complexity of our eCommerce customer service platform and related products
and services requires us to have highly trained sales, marketing and customer
support personnel to educate prospective customers regarding the use and
8
<PAGE>
benefits of our services, and provide effective customer support. With our
relatively brief operating history and our plans for expansion, we have
considerable need to recruit, train, and retain qualified staff. Any delays or
difficulties we encounter in these staffing efforts could impair our ability to
attract new customers and to enhance our relationships with existing customers.
This in turn would adversely impact the timing and extent of our revenue.
Because the majority of our sales, marketing and customer support personnel
have recently joined us and have limited experience working together, our
sales, marketing and customer support organizations may not be able to compete
successfully against bigger and more experienced organizations of our
competitors.
We must recruit and retain our key employees to expand our business
Our success will depend on the skills, experience and performance of our
senior management, engineering, sales, marketing and other key personnel, many
of whom have worked together for only a short period of time. The loss of the
services of any of our senior management or other key personnel, including our
Chief Executive Officer and co-founder, Ashutosh Roy, and our President and co-
founder, Gunjan Sinha, could harm our business. We do not have employment
agreements with, or life insurance policies on, any of our key employees. These
employees may terminate their employment with us at any time. Our success also
will depend on our ability to recruit, retain and motivate other highly skilled
engineering, sales, marketing and other personnel. Competition for these
personnel is intense, especially in the San Francisco Bay Area, and we have had
difficulty hiring employees in the timeframe we desire. In particular, we may
be unable to hire a sufficient number of qualified software engineers. If we
fail to retain and recruit necessary engineering, sales and marketing, customer
support or other personnel, our business and our ability to develop new
products and services and to provide acceptable levels of customer service
could suffer. In addition, companies in the software industry whose employees
accept positions with competitors frequently claim that competitors have
engaged in unfair hiring practices. We could incur substantial costs in
defending ourselves against any of these claims, regardless of the merits of
such claims.
Our failure to expand third-party distribution channels would impede our
revenue growth
To increase our revenue, we must increase the number of our marketing and
distribution partners, including software and hardware vendors and resellers.
Our existing or future marketing and distribution partners may choose to devote
greater resources to marketing and supporting the products of competitors,
which could also harm us.
Failure to expand our relationships with systems integrators would impede
acceptance of our products and growth of our revenue
To increase our revenue and implementation capabilities, we must develop and
expand relationships with systems integrators. We rely on systems integrators
to recommend our products to their customers and to install and support our
products for their customers. Systems integrators may develop, market or
recommend software applications that compete with our products. Moreover, if
these firms fail to implement our products successfully for their customers, we
may not have the resources to implement our products on the schedule required
by our customers.
9
<PAGE>
Unknown software defects could disrupt our products and services, which could
harm our business and reputation
Our product and service offerings depend on complex software, both internally
developed and licensed from third parties. Complex software often contains
defects, particularly when first introduced or when new versions are released.
We may not discover software defects that affect our new or current services or
enhancements until after they are deployed. It is possible that, despite
testing by us, defects may occur in the software. These defects could result
in:
. damage to our reputation;
. lost sales;
. product liability claims;
. delays in or loss of market acceptance of our products;
. product returns; and
. unexpected expenses and diversion of resources to remedy errors.
We may face liability associated with our management of sensitive customer
information
Our applications manage sensitive customer information, and we may be subject
to claims associated with invasion of privacy or inappropriate disclosure, use
or loss of this information. Any imposition of liability, particularly
liability that is not covered by insurance or is in excess of insurance
coverage, could harm our reputation and our business and operating results.
If our system security is breached, our business and reputation could suffer
A fundamental requirement for online communications and transactions is the
secure transmission of confidential information over public networks. Third
parties may attempt to breach our security or that of our customers. We may be
liable to our customers for any breach in our security and any breach could
harm our business and our reputation. Although we have implemented network
security measures, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays or loss of data. We may be required to expend significant
capital and other resources to license encryption technology and additional
technologies to protect against security breaches or to alleviate problems
caused by any breach.
Due to the lengthy sales cycles of some of our products, the timing of our
sales are difficult to predict and may cause us to miss our revenue
expectations
Our sales cycle for our eCommerce customer service applications can be as
long as three months or more and may vary substantially from customer to
customer. While our customers are evaluating our products and before they may
place an order with us, we may incur substantial sales and marketing expenses
and spend significant management effort. Consequently, if revenue forecasted
from a specific customer for a particular quarter are not realized in that
quarter, we may incur significant expenses that are not offset by corresponding
sales.
If we do not successfully address the risks inherent in the expansion of our
international operations, our business could suffer
We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. For example, we have
established a subsidiary in the United
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Kingdom. If our revenue from international operations does not exceed the
expense associated with establishing and maintaining these operations, our
business and operating results will suffer. We have limited experience in
international operations and may not be able to compete effectively in
international markets. We face various risks inherent in conducting business
internationally, such as the following:
. unexpected changes in regulatory requirements;
. difficulties and costs of staffing and managing international operations;
. differing technology standards;
. difficulties in collecting accounts receivable and longer collection
periods;
. political and economic instability;
. fluctuations in currency exchange rates;
. imposition of currency exchange controls;
. potentially adverse tax consequences; and
. reduced protection for intellectual property rights in foreign countries.
Our recent growth has placed a strain on our resources and if we fail to
manage our future growth, our business could suffer
We recently began to expand our operations rapidly and intend to continue
this expansion. The number of our full-time employees increased from 20 at June
30, 1998 to 155 at August 15, 1999. This expansion has placed, and is expected
to continue to place, a significant strain on our managerial, operational and
financial resources. To manage any further growth, we will need to improve or
replace our existing operational, customer support and financial systems,
procedures and controls. Any failure by us to properly manage these system and
procedural transitions could impair our ability to attract and service
customers, and could cause us to incur higher operating costs and delays in the
execution of our business plan. We will also need to continue the expansion of
our operations and employee base. Our management may not be able to hire,
train, retain, motivate and manage required personnel. In addition, our
management may not be able to successfully identify, manage and exploit
existing and potential market opportunities.
We may not be able to upgrade our systems and the eGain Hosted Network to
accommodate growth in eCommerce
We face risks related to ability of the eGain Hosted Network to operate with
higher activity levels while maintaining expected performance. As the volume
and complexity of eCommerce customer communications increases, we will need to
expand our systems and hosted network infrastructure. The expansion and
adaptation of our network infrastructure will require substantial financial,
operational and management resources. Due to the limited deployment of our
products and services to date, our ability to connect and manage a
substantially larger number of customers is unknown.
Customer demand for our products and services could be greatly reduced if we
fail to maintain high capacity data transmission. In addition, as we upgrade
our network infrastructure, we are likely to encounter equipment or software
incompatibility. We may not be able to expand or adapt our hosted network
infrastructure to meet additional demand or our customers' changing
requirements in a timely manner or at all.
11
<PAGE>
Unplanned system interruptions and capacity constraints could reduce our
ability to provide hosting services and could harm our business and our
reputation
Our customers have in the past experienced some interruptions with our hosted
network. We believe that these interruptions will continue to occur from time
to time. These interruptions could be due to hardware and operating system
failures. We expect a substantial portion of our revenue to be derived from
customers who use our hosted network. As a result, our business will suffer if
we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosted network or reduce our
ability to provide remote management services. We expect to experience
occasional temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired quality and degradation in levels of customer service. If this were to
continue to happen, our business and reputation could be seriously harmed.
Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and network systems. Substantially all
of our computer and communications systems are located in Santa Clara County,
California. Our systems and operations are vulnerable to damage or interruption
from fire, earthquake, power loss, telecommunications failure and similar
events.
We have entered into service agreements with some of our customers that
require minimum performance standards, including standards regarding the
availability and response time of our remote management services. If we fail to
meet these standards, our customers could terminate their relationships with us
and we could be subject to contractual monetary penalties. Any unplanned
interruption of services may harm our ability to attract and retain customers.
We rely on relationships with, and the system integrity of, hosting partners
for our eGain Hosted Network
Our hosted network consists of virtual data centers co-located in the
physical data centers of our hosting partners. Accordingly, we rely on the
speed and reliability of the systems and networks of these hosting partners. If
our hosting partners experience system interruptions or delays, or if we do not
maintain or develop relationships with hosting partners, our business could
suffer.
Problems arising from use of our products with other vendors' products could
cause us to incur significant costs, divert attention from our product
development efforts and cause customer relations problems
Our customers generally use our products together with products from other
companies. As a result, when problems occur in the network, it may be difficult
to identify the source of the problem. Even when these problems are not caused
by our products, they may cause us to incur significant warranty and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems.
We may be unable to protect our intellectual property and proprietary rights
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers and partners to protect our
proprietary rights. eGain is a registered trademark, and eGain EMS, eGain WCS,
eGain Hosted Network and eGain eCommerce Bridge are trademarks, of eGain.
Despite our efforts to protect our
12
<PAGE>
proprietary rights through confidentiality and license agreements, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. These precautions may not prevent misappropriation or infringement
of our intellectual property.
In addition, the status of United States patent protection in the software
industry is not well defined and will evolve as the U.S. Patent and Trademark
Office grants additional patents. We have one patent application pending in the
United States, and we may seek additional patents in the future. We do not know
if our patent application or any future patent application will result in a
patent being issued with the scope of the claims we seek, if at all, or whether
any patents we may receive will be challenged or invalidated. It is difficult
to monitor unauthorized use of technology, particularly in foreign countries
where the laws may not protect our proprietary rights as fully as in the United
States, and our competitors may independently develop technology similar to
ours.
We may face intellectual property infringement claims that could be costly to
defend
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against us. Although we have not received notice of any alleged
infringement, our products may infringe issued patents that may relate to our
products. In addition, because the contents of patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our software products. We may
be subject to legal proceedings and claims from time to time in the ordinary
course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running our business. This litigation
could also require us to develop non-infringing technology or enter into
royalty or license agreements. These royalty or license agreements, if
required, may not be available on acceptable terms, if at all, in the event of
a successful claim of infringement. Our failure or inability to develop non-
infringing technology or license the proprietary rights on a timely basis would
harm our business.
We may need to license third-party technologies and may be unable to do so
To the extent we need to license third-party technologies, we may be unable
to do so on commercially reasonable terms or at all. In addition, we may fail
to successfully integrate any licensed technology into our services. Third-
party licenses may expose us to increased risks, including risks with the
integration of new technology, the diversion of resources from the development
of our own proprietary technology, our inability to generate revenue from new
technology sufficient to offset associated acquisition and maintenance costs.
Our inability to obtain any of these licenses could delay product and service
development until equivalent technology can be identified, licensed and
integrated. This in turn would harm our business and operating results.
Industry Risks
We must compete successfully in the eCommerce customer service market
The eCommerce customer service market is new and intensely competitive. There
are no substantial barriers to entry in this market, and established or new
entities may enter this market in the near future. We compete with companies
that develop and maintain internally developed email
13
<PAGE>
management systems. We also compete directly with companies that provide
licensed software products for email management such as:
. Brightware, Inc.,
. Kana Communications, Inc.,
. Mustang Software, Inc. and
. Silknet Software, Inc.,
as well as Web collaboration application companies such as WebLine
Communications Corp. In addition, some of our competitors who currently offer
licensed software products are now beginning to offer hosted approaches. We
also face competition from larger, front office software companies such as:
. Clarify, Inc.,
. Oracle Corporation,
. Siebel Systems, Inc. and
. The Vantive Corporation.
Furthermore, established enterprise software companies, including IBM, Hewlett-
Packard Company, Microsoft Corporation and similar companies may leverage their
existing relationships and capabilities to offer eCommerce customer service
applications.
We believe competition will increase as our current competitors increase the
sophistication of their offerings and as new participants enter the market.
Many of our current and potential competitors have:
. longer operating histories;
. larger customer bases;
. greater brand recognition;
. more diversified lines of products and services; and
. significantly greater financial, marketing and other resources.
These competitors may enter into strategic or commercial relationships with
larger, more established and better-financed companies. These competitors may
be able to:
. undertake more extensive marketing campaigns;
. adopt more aggressive pricing policies; and
. make more attractive offers to businesses to induce them to use their
products or services.
Further, any delays in the general market acceptance of the eCommerce
customer service applications and our hosted delivery model would likely harm
our competitive position. Any delay would allow our competitors additional time
to approve their service or product offerings, and also provide time for new
competitors to develop eCommerce customer service applications and solicit
prospective customers within our target markets. Increased competition could
result in pricing pressures, reduced operating margins and loss of market
share.
14
<PAGE>
We depend on broad market acceptance of Web-based eCommerce customer service
applications
We depend on the widespread acceptance and use of Web-based customer service
applications as an effective solution for businesses seeking to manage high
volumes of customer communication over the Internet. We cannot estimate the
size or growth rate of the potential market for our product and service
offerings, and we do not know whether our products and services will achieve
broad market acceptance. The market for Web-based eCommerce customer service is
new and rapidly evolving, and concerns over the security and reliability of
online transactions, the privacy of users and quality of service or other
issues may inhibit the growth of the Internet and commercial online services.
If the market for eCommerce customer service applications fails to grow or
grows more slowly than we currently anticipate, our business will be seriously
harmed.
We may be unable to develop or enhance products or services that address the
changing needs of the eCommerce customer service market
To be competitive in the eCommerce customer service industry, we must
continually improve the performance, features and reliability of our products
and services, including our existing eCommerce customer service applications,
and develop new products, services, functionality and technology that address
changing industry standards and customer needs. If we cannot adapt or respond
in a cost-effective and timely manner to changing industry standards, market
conditions or customer requirements, our business and operating results will
suffer.
If we do not adequately address Year 2000 issues, we may incur significant
costs and our business could suffer
Many existing computer programs use only two digits to identify a year. These
programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond 2000. As a
result, the networks that incorporate our products and our own internal
networks could fail, leading to disruptions in operations and business
activities. As a result of the year 2000 problem, we believe that we face
potential risks which could harm our business in the following areas:
. disruption in our customer relationships or in our sales efforts because
of failures of our customers' networks which are correctly or incorrectly
attributed to the non-compliance of our products;
. claims from our customers based on alleged breach of warranties
concerning the Year 2000 compliance of our products;
. disruption of our business resulting from failure of systems we use to
run our business;
. disruption of our business resulting from failure of systems used by our
suppliers, customers and potential customers; and
. the potential reduced spending by companies on networking solutions as a
result of significant information systems spending on Year 2000
remediation.
If we, our customers, our providers of hardware and software, or our third-
party network providers fail to remedy any Year 2000 issues, the reasonably
likely worst case scenario would be the interruption of our services, which in
turn could require us to incur material costs or lose revenue. Presently, we
believe we are unable to reasonably estimate the duration and extent of any
such interruption, or quantify the effect it may have on our future revenue.
15
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Year 2000 Issues."
We will only be able to execute our business plan if Internet usage continues
to grow
Our business will be seriously harmed if Internet usage does not continue to
grow or grows at significantly lower rates compared to current trends. The
continued growth of the Internet depends on various factors, many of which are
outside our control. These factors include the following:
. the Internet infrastructure may be unable to support the demands placed
on it;
. the performance and reliability of the Internet may decline as usage
grows;
. security and authentication concerns with respect to transmission over
the Internet of confidential information, such as credit card numbers,
and attempts by unauthorized computer users, so-called hackers, to
penetrate online security systems; and
. privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent.
Because we provide our customer service applications to companies conducting
business over the Internet, our business could suffer if efficient
transmission of data over the Internet is interrupted
The recent growth in the use of the Internet has caused frequent
interruptions and delays in accessing the Internet and transmitting data over
the Internet. Because we provide Internet-based eCommerce customer service
applications, interruptions or delays in Internet transmissions will harm our
customers' ability to receive and respond to email messages. Therefore, our
market depends on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.
Governmental regulation and legal uncertainties could impair the growth of
the Internet and decrease demand for our services or increase our cost of
doing business
Governmental regulation may impair the growth of the Internet or commercial
online services. This could decrease the demand for our products and services,
increase our cost of doing business or otherwise harm our business and
operating results. Although there are currently few laws and regulations
directly applicable to the Internet and the use of the Internet as a commercial
medium, a number of laws have been proposed involving the Internet. These
proposed laws include laws addressing user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of products
and services. Further, the growth and development of the market for commercial
online transactions may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies engaged in
eCommerce. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve.
We may be liable for activities of our customers or others using our hosted
network
As a provider of eCommerce customer service applications, we face potential
liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the actions of our customers or others
using our hosted network. This liability could result from the nature and
content of the communications transmitted by our customers through our hosted
network. We do not and cannot screen all of the communications generated by our
customers, and we could be exposed to liability with respect to this content.
Furthermore, some foreign governments, such as Germany, have enforced laws and
regulations related to content distributed over the Internet that are more
strict than those currently in place in the United States.
16
<PAGE>
Offering Risks
Our stock price may be volatile, and you may not be able to sell your shares
at or above the offering price
Our common stock has not been publicly traded, and an active trading market
may not develop or be sustained after this offering. You may not be able to
sell your shares at or above the offering price. The price at which our common
stock will trade after this offering is likely to be highly volatile and may
fluctuate substantially due to factors such as the following:
. actual or anticipated fluctuations in our operating results;
. changes in or our failure to meet securities analysts' expectations;
. announcements of technological innovations;
. introduction of new services by us or our competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
We may become involved in securities class action litigation which could
divert management's attention and harm our business
The stock market has from time to time experienced significant price and
volume fluctuations that have affected the market prices for the common stocks
of technology companies, particularly Internet companies. These broad market
fluctuations may cause the market price of our common stock to decline. In the
past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. We may become involved in this type of litigation in the
future. Litigation is often expensive and diverts management's attention and
resources, which could harm our business and operating results.
After this offering, our directors, executive officers and principal
stockholders will continue to have substantial control over matters requiring
stockholder approval and may not vote in the same manner as our other
stockholders
After this offering, our directors, executive officers and stockholders who
currently own over 5% of our common stock will collectively beneficially own
approximately 48.7% of our outstanding common stock. These stockholders, if
they vote together, will be able to significantly influence all matters
requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also delay or prevent a change in control of eGain.
We may need additional capital, and raising additional capital may dilute
existing stockholders
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may choose to, or be
required to, raise additional funds due to unforeseen circumstances. If our
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. This financing may not be
available in sufficient amounts or on terms acceptable to us and may be
dilutive to existing stockholders.
17
<PAGE>
Future sales of our common stock may depress our stock price
Sales of a substantial number of shares of common stock in the public market
after this offering or after the expiration of lockup and holding periods could
cause the market price of our common stock to decline. After this offering, we
will have approximately 27,815,562 shares of common stock outstanding. All the
shares sold in this offering will be freely tradable. The remaining 22,815,562
shares of common stock outstanding after this offering are subject to lock-up
agreements that prohibit the sale of the shares for 180 days after the date of
this prospectus. Immediately after the 180 day lockup period, 16,963,195 shares
which will be outstanding after the offering will become available for sale.
The remaining shares of our common stock will become available at various times
thereafter upon the expiration of one-year holding periods.
Purchasers of our common stock will suffer immediate and substantial dilution
Purchasers of our common stock in this offering will experience immediate
dilution of $8.07 in the pro forma net tangible book value per share of common
stock, based on an assumed public offering price of $10.00 per share.
Purchasers will also experience additional dilution upon the exercise of
outstanding stock options and warrants. The initial public offering price is
expected to be substantially higher than the book value per share of our common
stock. Some elements of our market value do not originate from measurable
transactions. Therefore, there is not a corresponding rise in "book", or
historical accounting, value for our rise in market value, if any. Examples of
these elements include the perceived value associated with our strategic
relationships, perceived growth prospects of our market and our perceived
competitive position within that market.
Our certificate of incorporation and bylaws contain provisions which could
delay or prevent a change in control even if the change in control would be
beneficial to our stockholders
Our certificate of incorporation and bylaws contain provisions that could
delay or prevent a change in control of eGain. These provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. Some of these provisions:
. authorize the issuance of preferred stock that can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock; and
. prohibit stockholder action by written consent.
See "Description of Capital Stock" for additional discussion of these
provisions.
We do not have a quantified business plan for our future operations and if we
do not use the proceeds in a manner beneficial to us, our business could
suffer
We do not have a quantified business plan for our future operations and we
have no current specific plans for the net proceeds from this offering. As a
result, our management will have significant flexibility in applying the net
proceeds of this offering. If the proceeds are not used in a manner beneficial
to eGain, our business could suffer and our stock price could decline. We
intend generally to use the net proceeds from this offering for working capital
and general corporate purposes. We have not yet determined the actual expected
expenditures and thus cannot estimate the amounts to be used for each specified
purpose. The actual amounts and timing of these expenditures will vary
significantly depending on a number of factors, including, but not limited to,
the amount of cash used in or generated by our operations and the market
response to the introduction of any new product and service offerings.
Depending on future developments and circumstances, we may use some of the
proceeds for uses other than those described above.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words
such as "expect," "anticipate," "intend," "plan," "will" and similar
expressions. Our actual results could differ materially from those discussed in
these statements. Factors that could contribute to such differences include,
those discussed in "Risk Factors," "Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this prospectus.
USE OF PROCEEDS
The net proceeds we will receive from the sale of the 5,000,000 shares of
common stock offered by us are estimated to be $45,520,000 after deducting the
underwriting discounts and commissions and the estimated offering expenses
payable by us and assuming an initial public offering price of $10.00 per
share.
The principal purposes of this offering are:
. to obtain additional capital;
. to create a public market for our common stock;
. to increase our visibility and credibility; and
. to facilitate future access to the public equity markets.
We intend to use the net proceeds of this offering for working capital and
other general corporate purposes, including product and services development
and expansion of our hosted network. We have not yet determined the expected
expenditures and thus cannot estimate the amounts to be used for each specified
purpose. The actual amounts and timing of these expenditures will vary
significantly depending on a number of factors, including, but not limited to,
the amount of cash used in or generated by our operations and the market
response to the introduction of any new product and service offerings.
In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and are not currently engaged in any negotiations with respect to such
transactions. Accordingly, our management will retain broad discretion as to
the allocation of the net proceeds of this offering. We intend to invest the
net proceeds of this offering in short-term, interest-bearing investment grade
securities until they are used.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends in the foreseeable future. We currently intend
to retain our earnings, if any, for the development of our business.
Furthermore, our bank line of credit agreement prohibits the payment of
dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. on a pro forma basis after giving effect to:
-- the sale of 652,000 shares of Series D preferred stock for gross
proceeds of $5,216,000 in July 1999;
-- the assumed exercise of outstanding warrants to purchase an
aggregate of 394,139 shares of common stock; and
-- the conversion of all outstanding shares of preferred stock into
common stock and changes to our authorized capital stock upon
completion of this offering.
. on the same pro forma basis as adjusted to give effect to the sale of
5,000,000 shares of common stock by us at an assumed initial public
offering price of $10.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us.
This information should be read together with the consolidated financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands except share
data)
<S> <C> <C> <C>
Notes payable, excluding current portion....... $ 221 $ 221 $ 221
======== ======== ========
Stockholders' equity:
Convertible preferred stock: $0.001 par value;
10,035,887 shares authorized,
9,566,378 shares issued and outstanding,
actual; 10,035,887 shares authorized, no
shares issued and outstanding, pro forma ..... $ 16,987 $ -- $ --
Preferred stock: $0.001 par value; 5,000,000
shares authorized, no shares issued and
outstanding................................... -- -- --
Common stock: $0.001 par value; 50,000,000
shares authorized, 10,946,661 shares issued
and outstanding, actual; 21,559,178 shares
issued and outstanding,
pro forma; 50,000,000 shares authorized,
26,559,178 shares issued and outstanding, pro
forma as adjusted............................. 7,289 22 27
Additional paid-in capital..................... 17,549 47,215 92,730
Notes receivable from stockholders............. (144) (144) (144)
Deferred stock compensation.................... (8,956) (8,956) (8,956)
Accumulated deficit and accumulated other
comprehensive income.......................... (12,242) (12,242) (12,242)
-------- -------- --------
Total stockholders' equity................... 20,483 25,895 71,415
-------- -------- --------
Total capitalization........................... $ 20,704 $ 26,116 $ 71,636
======== ======== ========
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $5,699,692, or
$0.26 per share. Pro forma net tangible book value per share is determined by
dividing the amount of our total tangible assets less total liabilities by the
number of shares of common stock outstanding at that date, assuming conversion
of all outstanding shares of preferred stock. Dilution in net tangible book
value per share represents the difference between the amount per share paid by
purchasers of common stock in this offering and the net tangible book value per
share of common stock immediately after completion of this offering. After
giving effect to the sale of the 5,000,000 shares of common stock offered by
eGain in this offering (at an assumed initial public offering price of $10.00
per share and after deducting the underwriting discounts and commissions and
our estimated offering expenses), our pro forma net tangible book value at June
30, 1999 would have been $51,219,692, or $1.93 per share. This represents an
immediate increase in net tangible book value of $1.67 per share to the
existing stockholders and an immediate dilution of $8.07 per share to new
investors purchasing shares in this offering. If the public offering price is
higher or lower, the dilution to the new investors will in turn be greater or
less. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $10.00
Pro forma net tangible book value per share as of June 30,
1999......................................................... $0.26
Increase per share attributable to this offering.............. 1.67
-----
Pro forma net tangible book value per share after this
offering..................................................... 1.93
------
Dilution per share to new investors........................... $ 8.07
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999, the
total number of shares of common stock purchased from eGain, the total
consideration paid to eGain and the average price per share paid by existing
stockholders and by new investors purchasing shares in this offering (based
upon an assumed initial public offering price of $10.00 per share and before
deducting the underwriting discounts and commissions and our estimated offering
expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 21,559,178 81% $15,033,880 23% $ 0.70
New investors.......... 5,000,000 19 50,000,000 77 $10.00
---------- --- ----------- ---
Total................ 26,559,178 100% $65,033,880 100%
========== === =========== ===
</TABLE>
The foregoing table:
. gives effect to the sale of 652,000 shares of Series D preferred stock
for gross proceeds of $5,216,000 in July 1999,
. gives effect to the assumed exercise of outstanding warrants to purchase
394,139 shares of common and preferred stock that terminate upon
completion of this offering and
. assumes no exercise of outstanding warrants that survive the offering or
outstanding stock options. As of June 30, 1999, there were outstanding
warrants to purchase an aggregate of 195,517 shares of common stock with
a weighted average exercise price of $0.9212 per share that survive the
offering and options to purchase an aggregate of 2,463,031 shares of
common stock with a weighted average exercise price of $0.24 per share.
To the extent any of these warrants or options are exercised, there will
be further dilution to new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below for
the period from inception through June 30, 1998 and for the year ended June 30,
1999 and the selected consolidated balance sheet data as of June 30, 1998 and
1999 have been derived from our audited consolidated financial statements
included elsewhere in this prospectus. Our historical results are not
necessarily indicative of results to be expected for any future period. The
data have been derived from financial statements that have been prepared in
accordance with generally accepted accounting principles and should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and related
notes included elsewhere in this prospectus. See Note 1 of notes to the
consolidated financial statements for an explanation of the determination of
the number of shares used in computing basic and diluted net loss per share.
The pro forma information gives effect to the conversion of all outstanding
shares of preferred stock as of June 30, 1999 into 9,566,378 shares of common
stock upon completion of this offering.
<TABLE>
<CAPTION>
Period from
September 10, 1997 Year Ended
(Inception) to June 30,
June 30, 1998 1999
------------------ ----------
<S> <C> <C>
(in thousands except
per share data)
Consolidated Statement of Operations Data:
Revenue:
Hosting....................................... $ -- $ 137
License fees.................................. -- 473
Service....................................... 2 409
------- --------
Total revenue............................... 2 1,019
Costs and expenses:
Cost of revenue............................... 39 1,772
Sales and marketing........................... 231 4,182
Research and development...................... 299 2,096
General and administrative.................... 257 1,235
Amortization of goodwill and other intangible
assets....................................... -- 1,217
Amortization of deferred compensation......... 58 1,817
------- --------
Total costs and expenses.................... 884 12,319
------- --------
Loss from operations............................ (882) (11,300)
Interest and other income (expense), net........ (56) (5)
------- --------
Net loss........................................ $ (938) $(11,305)
======= ========
Basic and diluted net loss per share............ $(17.78) $ (2.14)
======= ========
Shares used in computing basic and diluted net
loss per share................................. 53 5,295
======= ========
Pro forma basic and diluted net loss per share
(unaudited).................................... $ (0.93)
========
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)......... 12,153
========
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------
1998 1999
------ -------
<S> <C> <C>
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents....................................... $3,831 $ 1,265
Working capital (deficit)....................................... 3,691 (755)
Total assets.................................................... 3,990 23,965
Notes payable less current portion.............................. -- 221
Total stockholders' equity...................................... 3,801 20,483
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our company was founded in September 1997 to provide customer service
infrastructure solutions to companies engaged in electronic commerce. From
inception to September 1998, our operating activities related primarily to the
planning and developing our proprietary technological solution, recruiting
personnel, raising capital and purchasing operating assets. In September 1998,
we commenced commercial shipment of our eGain Email Management System, or eGain
EMS, an application that helps companies route, track and respond to high
volumes of customer email and Web form inquiries. On April 30, 1999, we
acquired Sitebridge Corporation and added its primary product to our customer
service platform. The product, now called eGain Web Collaboration System, or
eGain WCS, is an application that allows customer service representatives to
interact online with customers on the Web. We began selling eGain WCS in May
1999. Our products and services are designed to enable businesses to deliver
effective customer service, improve customer satisfaction and convert Web site
visitors to buyers. Our products are designed to be highly scalable and to
integrate with a company's existing infrastructure to allow the company to
consolidate customer data from other applications in order to have access to
comprehensive customer information. We offer our customers the flexibility to
access our solution from an external hosted environment or to purchase and
implement our solution directly in-house.
Our revenue consists of hosting revenue, license fees and service revenue
associated with our eGain EMS and eGain WCS applications.
. Hosting Revenue. We derive hosting revenue when our customers choose to
have our applications provided through our eGain Hosted Network, which is
a network of service centers and hosting partners linked by high speed
Internet connections. Our contracts with hosted customers generally
provide for the payment of hosting fees on a monthly basis. Hosting
revenue is recognized monthly as the services are performed.
. License Fees. We derive revenue from license fees when our customers
choose to license our software for in-house installation. Revenue from
license fees is recognized after a license agreement has been executed or
a definitive purchase order has been received, the product has been
delivered, the license fee has become fixed and determinable and
collection of the fee is considered probable.
. Service Revenue. We derive service revenue from support and maintenance
contracts on software licenses and professional services and training.
Substantially all of our customers that purchase software licenses also
purchase annual support and maintenance, which is paid in advance on an
annual basis and initially recorded as deferred revenue. Revenue from
support and maintenance contracts is recognized ratably over the term of
the support and maintenance period. Professional services revenue is
primarily related to customer support services and training and
installation services and is recognized upon completion of specific
contractual milestone events, or based on an estimated percentage of
completion as work progresses.
We expect to make significant investments in product development and
technology to enhance our current products and services, develop new products
and services and further advance our solution offerings. In addition, an
important part of our strategy is to expand our operations and employee base
and build our sales, marketing, customer support, technical and operational
resources.
23
<PAGE>
In particular, we intend to expand our strategic distribution, hosting and
solution relationships to add capabilities to our current product offerings and
to help market our products to new customers.
We have incurred significant losses since our inception, and as of June 30,
1999, had an accumulated deficit of approximately $12.2 million. We expect to
continue to incur substantial operating losses for the foreseeable future. In
view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our revenue and
operating results are not meaningful and should not be relied upon as
indications of future performance.
Acquisition of Sitebridge
We acquired Sitebridge effective April 1999. In connection with the
acquisition, we issued 1,609,793 shares of Series C convertible preferred
stock, 1,455,514 shares of common stock, options and warrants to acquire
1,144,456 shares of common stock and warrants to acquire 121,006 shares of
Series C preferred stock in exchange for all the outstanding preferred stock,
common stock, and options and warrants to purchase shares of Sitebridge stock.
The acquisition was accounted for as a purchase, and accordingly the results of
operations of Sitebridge have been included in the consolidated financial
statements since the date of acquisition. The fair market value of the
securities issued in the acquisition was approximately $20.1 million.
Sitebridge, originally Social Science Incorporated, was founded in 1996 to
create tools for live collaboration on Web sites. Sitebridge shipped its first
product, NetDiscussion, in 1997. In late 1997, Sitebridge shifted its business
focus to developing software applications for sales and service organizations
within large- and medium-sized companies. In the second quarter of 1998,
Sitebridge shipped the first version of CustomerNow, an application that allows
customer service representatives to provide live assistance to customers
through real time Web interaction. With our acquisition of Sitebridge, we
changed the name of CustomerNow to eGain WCS. eGain EMS and eGain WCS are
available today as stand-alone applications or as combined solutions with
specific integrated functions.
Goodwill and Other Non-Cash Charges
We recorded goodwill and other purchased intangible assets of approximately
$21.4 million associated with our acquisition of Sitebridge. Goodwill and other
purchased intangible assets are being amortized on a straight-line basis over
the estimated useful lives of three years. We currently expect to record
amortization of goodwill and other intangible assets of approximately
$7.1 million in fiscal 2000, $7.1 million in fiscal 2001 and $6.0 million in
fiscal 2002.
In connection with the grant of stock options to employees and consultants,
we recorded deferred stock compensation totaling approximately $234,000 in
fiscal 1998 and $10.6 million in fiscal 1999. Deferred compensation for options
granted to employees has been determined as the difference between the deemed
fair value of our common stock on the date these options were granted and the
exercise price. Deferred compensation for options granted to consultants has
been determined in accordance with SFAS 123 as the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured. Deferred compensation for options granted
to consultants is periodically remeasured as the underlying options vest. These
amounts were initially recorded through stockholders' equity and are being
amortized by charges to operations. We recorded amortization of deferred stock
compensation of approximately $58,000 in fiscal 1998 and $1.8 million in fiscal
1999. We recorded additional deferred compensation in July
24
<PAGE>
and August 1999 of approximately $8.1 million. We expect to record amortization
expense relating to deferred stock compensation approximately as follows: $9.4
million in fiscal 2000, $4.6 million in fiscal 2001, $2.3 million in fiscal
2002 and $870,000 in fiscal 2003. The amortization expense relates to options
awarded to employees and consultants in all operating expense categories. See
Note 6 of Notes to Financial Statements.
Sitebridge previously outsourced its payroll processing and other aspects of
its employee benefits programs under a co-employment arrangement with Ambrose,
an independent professional employer organization that was terminated effective
July 31, 1999. On March 31, 1999, the Financial Accounting Standards Board
issued an Exposure Draft of an FASB Interpretation, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25. This FASB Exposure Draft, if adopted in its current form, could be
interpreted to indicate that employees subject to co-employment arrangements
would not be considered employees for purposes of applying APB No. 25. If
additional clarification regarding the definition of an employee is not
provided in the final FASB pronouncement, we may be required to establish a new
measurement date for stock options granted by Sitebridge after December 15,
1998 to these employees for the purpose of accounting for stock options under
APB No. 25. If a new measurement date is required to be established, we would
recognize the deferred stock-based compensation, which would be amortized over
the remaining vesting periods of the options. We estimate that this charge
would be approximately $6.0 million. This amortization could have a material
adverse effect on our operating results.
Results of Operations
We were incorporated in September 1997 but did not commence significant
operations until January 1998. Data for September 1997 through June 30, 1998
(the inception period) are not comparable to those for fiscal 1999 due to the
acceleration of our activities and related expenses during fiscal 1999 and the
different duration of the periods.
Revenue
Revenue for fiscal 1999 was $1.0 million, 60.7% of which was recognized in
the quarter ended June 30, 1999. In fiscal 1999, FCC National accounted for
15.6% of total revenue and WebTV accounted for 10.8% of total revenue. In
fiscal 1999, hosting revenue represented 13.5% of total revenue, license fees
represented 46.4% of total revenue and service revenue represented 40.1% of
total revenue.
Costs and Expenses
Cost of revenue. Cost of revenue consists primarily of costs incurred for
customer support, hosting and professional services. Cost of revenue includes
depreciation of capital equipment used in our hosted network, personnel costs,
cost of third-party products and lease costs paid to remote co-location
centers. In fiscal 1999, cost of revenue was $1.8 million. From July 1, 1998 to
June 30, 1999, the number of customer support and professional services
personnel increased from 2 to 37.
Sales and marketing. Sales and marketing expenses consist primarily of
compensation and benefits of our sales, marketing and business development
personnel, advertising, trade show and other promotional costs and, to a lesser
extent, occupancy costs and related overhead. Sales and marketing expenses were
$4.2 million in fiscal 1999. From July 1, 1998 to June 30, 1999, the number of
our sales and marketing personnel increased from 6 to 29.
25
<PAGE>
Research and development. Research and development expenses consist primarily
of compensation and benefits of our engineering and quality assurance personnel
and, to a lesser extent, occupancy costs and related overhead. Research and
development expenses are expensed as incurred. Research and development
expenses were $2.1 million in fiscal 1999. From July 1, 1998 to June 30, 1999,
the number of our research and development personnel increased from 7 to 33.
General and administrative. General and administrative expenses consist
primarily of compensation and benefits for our finance, human resources,
administrative and legal services personnel, fees for outside professional
services and, to a lesser extent, occupancy costs and related overhead. General
and administrative expenses were $1.2 million in fiscal 1999. From July 1, 1998
to June 30, 1999, the number of our general and administrative personnel
increased from 5 to 15.
Interest income and expense. Interest income consists of interest earned on
our cash and cash equivalents. Interest income was $111,000 in fiscal 1999. To
date, we have incurred interest expense on a working capital line of credit and
notes payable for equipment financing. In fiscal 1999, interest expense was
$116,000.
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly statement of
operations data for the six quarters ended June 30, 1999. This information has
been derived from our unaudited consolidated financial statements, which, in
management's opinion, have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the quarters presented. This information should be read in conjunction with the
audited financial statements and related notes included elsewhere in this
prospectus. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue
Hosting............... $ -- $ -- $ -- $ 3 $ 18 $ 116
License fees.......... -- -- -- 79 201 193
Service............... -- -- -- 65 34 310
----- ----- ------- ------- ------- -------
Total revenue....... -- -- -- 147 253 619
Costs and expenses
Cost of revenue....... 4 46 143 296 460 873
Sales and marketing... 61 176 508 929 1,078 1,667
Research and
development.......... 107 189 214 355 584 943
General and
administrative....... 70 134 225 205 296 509
Amortization of
goodwill and other
intangible assets.... -- -- -- -- -- 1,217
Amortization of
deferred
compensation......... -- 58 89 190 387 1,151
----- ----- ------- ------- ------- -------
Total costs and
expenses........... 242 603 1,179 1,975 2,805 6,360
----- ----- ------- ------- ------- -------
Loss from operations.... (242) (603) (1,179) (1,828) (2,552) (5,741)
Interest income
(expense), net......... (19) (19) 24 2 (18) (13)
----- ----- ------- ------- ------- -------
Net loss................ $(261) $(622) $(1,155) $(1,826) $(2,570) $(5,754)
===== ===== ======= ======= ======= =======
</TABLE>
26
<PAGE>
Fluctuations in Quarterly Results
Revenue increased substantially in the quarter ended June 30, 1999, primarily
due to the increase in the number of hosting customers and an increase in
consulting services. Cost of revenue increased each quarter primarily due to
the development of the eGain Hosted Network and increased personnel costs.
Sales and marketing expenses increased substantially during the quarters ended
March 31, 1999 and June 30, 1999 due to marketing programs related to the
launch of eGain EMS and the increase in sales personnel costs. The amortization
of goodwill and other intangible assets recorded in the quarter ended June 30,
1999 is associated with our acquisition of Sitebridge in April 1999.
We have incurred operating losses since inception, and we may never achieve
profitability in the future. We believe that future operating results will be
subject to quarterly fluctuations due to a variety of factors, many of which
are beyond our control. These factors may include our ability to do the
following:
. compete in a highly competitive eCommerce customer service market;
. expand our sales, marketing and customer support activities;
. create and maintain strategic relationships, including relationships
with our hosting partners;
. expand our customer base;
. introduce new products and services;
. upgrade our systems and infrastructure;
. reduce service interruptions; and
. recruit and retain key personnel.
Liquidity and Capital Resources
Since our inception in September 1997, we have financed our operations
primarily through the private placement of our preferred stock and, to a lesser
extent, through bank borrowings and capital equipment lease financing. As of
June 30, 1999, we had $1.3 million in cash and cash equivalents and $1.2
million of borrowings available under an equipment financing line of credit.
Net cash provided by financing activities was $6.4 million in fiscal 1999 and
was primarily attributable to net proceeds from the issuance of stock.
Net cash used in operating activities was $7.8 million in fiscal 1999. Cash
used in operating activities was primarily the result of net operating losses
(exclusive of non-cash charges) and increases in accounts receivable and
prepaid assets, partially offset by increases in accrued expenses and accounts
payable.
Net cash used in investing activities was $1.2 million in fiscal 1999. Cash
used in investing activities was primarily related to purchases of property and
equipment.
As of June 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments
for capital expenditures, we anticipate a substantial increase in our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel.
27
<PAGE>
During fiscal 1999, we obtained a line of credit with a bank for equipment
purchases and working capital financing in the amount of $1.0 million and an
equipment line of credit with a leasing company in the amount of $1.5 million.
As of June 30, 1999, approximately $1.0 million was outstanding under the bank
line of credit and approximately $342,000 was outstanding under the equipment
credit facility. In addition, in connection with the acquisition of Sitebridge,
we assumed two promissory notes in the total principal amount of $380,000.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to our hosted network,
sales, marketing and customer support services, and other factors. We have
experienced substantial increases in our expenditures since our inception
consistent with growth in our operations and personnel, and we anticipate that
our expenditures will continue to increase for the foreseeable future.
We believe that the net proceeds from the sale of common stock offered
hereby, together with our current cash balances and cash available under our
lines of credit, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. In addition, although
there are no present understandings, commitments or agreements with respect to
any acquisition of other businesses, products or technologies, we from time to
time evaluate potential acquisitions of other businesses, products and
technologies and may in the future require additional equity or debt financings
to consummate any potential acquisitions. We may also need to raise additional
funds, however, in order to fund more rapid expansion, including significant
increases in personnel and office facilities, to develop new or enhance
existing services or products or respond to competitive pressures. In addition,
in order to meet our long term liquidity needs, we may need to raise additional
funds, establish a credit facility or seek other financing arrangements.
Additional funding may not be available on favorable terms, if at all.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash and cash
equivalents, which have short maturities and, therefore, minimal market risk.
Year 2000 Issues
Background
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations for any company using such computer programs or hardware, including,
among other things, a temporary inability to process transactions, send
invoices or engage in normal business activities. As a result, many companies'
computer systems may need to be upgraded or replaced in order to avoid "Year
2000" issues.
State of Readiness
We initiated a Year 2000 compliance program in April 1999. Our quality
assurance group is directing the program for our internally developed products,
and our information technology group is directing the program for all other
operational areas. We are a comparatively new enterprise, and, accordingly, the
software and hardware we use to manage our business has all been purchased or
28
<PAGE>
developed by us within the last 24 months. While this fact pattern does not
completely protect us against Year 2000 exposure, we believe we gain some
mitigation from the fact that the information technology we use to manage our
business is not based upon older hardware and software systems developed when
there was less awareness of Year 2000 issues.
Our Product Testing
Our quality assurance team has tested the most current versions of eGain EMS
and eGain WCS for Year 2000 compliance. This team, led by a senior eGain
Product Manager and staffed by other eGain engineers and programmers, devised
and has been executing a Year 2000 compliance plan as follows:
. Phase 1--Inventory: Identify all products and product versions, including
eGain EMS, eGain WCS and discrete product modules, that might have Year
2000 related issues. This phase has been completed.
. Phase 2--Devise compliance tests: Devise appropriate and comprehensive
tests that would accurately determine whether the inventoried product
offerings, including eGain EMS, eGain WCS and discrete product modules,
are Year 2000 compliant. This included especially determining which
product features contained date data or other code that might be affected
by the Year 2000 issue. This phase has been completed.
. Phase 3--Conduct compliance tests: Perform the compliance tests on the
inventoried products. For both eGain EMS and eGain WCS, the members of
eGain's Year 2000 quality assurance team tested all potentially affected
product features to determine whether they could accurately recognize,
process, calculate, manipulate, sort, store and transfer date data
relating to a number of key dates. In particular, the team tested the
core functionality of the identified product features to assess their
performance prior to, through and after the following dates:
. December 31, 1999 to January 1, 2000 (millenium transition);
. February 28, 2000 to February 29, 2000 (first leap year transition in
the new millenium);
. February 29, 2000 to March 1, 2000 (second leap year transition in the
new millenium), and
. December 31, 2010 to January 1, 2011.
This phase has been completed.
. Phase 4--Remediation assessment: Determine, in light of the compliance
tests, whether any product-related remediation is necessary to address
any Year 2000 related issues. As a result of the compliance tests, our
quality assurance team has determined that, when running on Year 2000
compliant hardware and operating systems, the most current versions of
eGain EMS and eGain WCS are Year 2000 compliant according to the
following definition:
. they can process, calculate, manipulate, sort, store and transfer date
data without material error or material performance degradation, while
taking into account century boundaries and leap years where required,
and
. they can operate between year 1999 and year 2000 without producing
date-related errors.
29
<PAGE>
Because our products obtain and process all date information (such as
creation dates, modification dates, and time/date stamps) from the
underlying operating system being used by our customers, the foregoing
statement only applies if:
. the other software, hardware, networks and systems with which our
applications interface are themselves Year 2000 compliant according to
the above definition, and
. our products are used in accordance with applicable documentation and
other operating instructions provided by eGain.
Our quality assurance team has determined that there are a small number of
code files relating to search and reporting features in the current version
of eGain EMS that may have Year 2000 related problems. These are peripheral
product features unrelated to the core email receiving and processing
functionality of eGain EMS. Nonetheless, our Products Group has already
designed a patch that addresses these performance issues to be installed on
all hosted and existing eGain EMS licensed customers. Future eGain EMS
customers will receive product versions that do not contain the affected
files.
The remediation assessment phase has been completed.
. Phase 5--Deploy remediation: The patch designed to remedy the minor Year
2000 related issues identified in eGain EMS is scheduled to be deployed
to all existing customers no later than September 30, 1999.
Our Internal System
The scope of our internal Year 2000 compliance program plan covers all
computing and network resources within the eGain enterprise. This internal
compliance program is being directed by eGain's Manager of Information
Technology and a team of eGain IT professionals. As with our product-related
Year 2000 program, our internal program is comprised of a number of phases as
follows: inventory all internal hardware, software, and operating systems for
year 2000 compliance; devise a testing plan for all identified systems; conduct
compliance testing; assess any necessary remediation measures to address any
problems discovered through the compliance testing and deploy any necessary
remediation measures.
Our Year 2000 internal compliance team has completed all but the final phase
of the compliance program. We have obtained Year 2000 certification for
substantially all hardware, software and other systems we use, and we require
such certification on all new systems we have purchased or will consider
purchasing. The only noncompliant systems we have identified relate to certain
Microsoft products and software programs, including Microsoft NT 4.0, 95 and 98
operating systems, Microsoft Office 97, Microsoft SQL 6.5 database servers, and
Microsoft Exchange 5.5 mail systems. All identified vulnerabilities within
deployed Microsoft applications and operating systems have been well-
publicized, and Microsoft has devised remediation paths for each affected
system. eGain's IT professionals are Microsoft Corporation Systems Engineers
certified and trained in the use of Microsoft Year 2000 tools and affected
eGain systems no later than September 15, 1999, and we foresee no problem
meeting that schedule. At that time, we believe all internal computing and
network resources within the eGain enterprise will be Year 2000 compliant.
30
<PAGE>
Budget
We have not incurred any significant expenses to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will exceed $100,000. Expenses associated with our Year 2000
remediation efforts will be funded from available cash reserves. We have not
deferred any specific IT projects due to our Year 2000 efforts, and we do not
anticipate doing so in the future.
Reasonably Likely Worst Case Scenario
If we, our customers, our providers of hardware and software, or our third-
party network providers fail to remedy any Year 2000 issues, the reasonably
likely worst case scenario would be the interruption of our services, which in
turn could require us to incur material costs or lose revenue. Presently, we
believe we are unable to reasonably estimate the duration and extent of any
such interruption, or quantify the effect it may have on our future revenue.
Contingency Plans
We expect our Year 2000 compliance program to be substantially completed by
September 1999. If we encounter delays or are unable to meet this schedule, we
will analyze non-compliant areas and develop a comprehensive contingency plan
to address the issues by October 1999.
See "Risk Factors--If we do not adequately address Year 2000 issues, we may
incur significant costs and our business could suffer."
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. We are required to adopt SOP No. 98-1 effective July 1, 1999. We
do not expect that the adoption of SOP No. 98-1 will have a material impact on
our financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities," which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for all fiscal quarters for fiscal
years beginning after June 15, 2000 and is not anticipated to have a
significant impact on our operating results or financial condition when
adopted.
31
<PAGE>
BUSINESS
Company Overview
We are a leading provider of customer service infrastructure for companies
engaged in eCommerce. Our products and related services are designed to help
businesses provide more effective Internet-based customer service, thereby
improving customer satisfaction and converting a higher percentage of Web site
visitors to buyers. We believe we are one of the leading providers of customer
service infrastructure for companies engaged in eCommerce because we were the
first company to offer a platform for online customer service which companies
can access remotely through the eGain Hosted Network. We offer our solutions
both as a Web-based hosted application service through our eGain Hosted Network
and as installed software for in-house implementation. Approximately 50% of our
current customers access our applications through our eGain Hosted Network. Our
customers include both dedicated Internet companies, such as Go2Net, Snap.com
and WebTV, and traditional companies engaged in eCommerce, such as Mazda USA
and FCC National's Wingspan Bank.
Industry Background
Customer Service Is Critical to eCommerce
In a short period of time, the Internet has evolved from primarily an
information source to a new platform for commerce. International Data
Corporation, or IDC, estimates that the number of customers buying goods and
services over the Internet worldwide will grow from approximately 30 million in
1998 to 133 million in 2002, and that the total value of goods and services
purchased over the Internet will increase from approximately $50 billion in
1998 to over $734 billion by 2002.
This growth has increased competitive pressures in online markets. To
maintain or gain market share, many businesses engaged in eCommerce are
focusing on the quality of customer service as a key competitive
differentiator. Providing high quality customer service may be even more
important on the Internet than it is in the physical world. Unlike a
traditional commercial setting where customers can talk to a customer service
representative either in person or by phone, customers on the Internet cannot
easily contact agents with their inquiries. Whether to ask about product
features, check the status of an order or get help with a loan application,
online consumers have traditional service needs, and they want to be assured
that these needs will be met before conducting a transaction. In the
increasingly competitive eCommerce environment, companies that fail to address
these customer service needs may lose sales to competitors located a mouse
click away.
The Need for eCommerce Customer Service Applications
Today, most online customer communication takes place through email. As email
volume is rising, the content within email messages is also becoming more
complex. However, many companies have not taken adequate steps to effectively
address this increase in email volume and complexity. According to a recent
survey by Jupiter Communications of 125 top eCommerce sites, 42% of the sites
either refused to accept an email message, never responded to the message or
took longer than five days to respond. These survey results suggest that online
customers are not receiving the level of service they demand.
Businesses engaged in eCommerce that provide poor customer service risk
losing customers. According to a recent survey by Net Effect Systems, two-
thirds of all online commercial transactions that are initiated are abandoned
before completion. By improving responsiveness to email and
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<PAGE>
providing real-time customer communication, companies can convert more of these
potential buyers into actual customers. Moreover, by analyzing captured
customer communications, companies can gain insight into customer preferences
to create new revenue opportunities.
To help address online customer service shortcomings, companies are beginning
to adopt technologies to help them manage email and other forms of online
customer communication. The market for these products is growing rapidly. IDC
estimates that worldwide license revenues for eCommerce customer service and
support applications will grow from $42 million in 1998 to $1.6 billion by
2002.
Existing Customer Service Approaches Are Insufficient
The market for online customer service software applications has developed
mainly because existing approaches to online customer service are typically
unable to effectively handle large volumes of email. Traditional client-server
customer service systems were designed primarily to manage telephone call
center operations and are typically expensive and difficult to deploy and
maintain. Recognizing this, many companies engaged in eCommerce, particularly
companies that came early to the Internet, have developed in-house solutions
for customer service email management. These internally developed approaches,
while customized to fit a company's needs, can also be expensive and time-
consuming to develop and maintain. Furthermore, many in-house systems have
difficulty scaling to keep pace with the rapid expansion of eCommerce.
More recently, several vendors have developed point solutions, or software
packages to handle specific online customer service needs, such as email
management, real-time Web collaboration or self-service. However, these point
solutions often do not work well with each other or integrate easily with a
company's existing legacy system. This lack of integration makes them expensive
to implement and maintain. As a result, there is an increasing need for an
online customer service platform that offers applications that can handle
multiple channels of communication, scale to meet growing Internet-based
communication needs and integrate easily with a company's existing legacy
systems.
The Trend Toward Hosted Customer Service Applications
As the number of software business applications grows and their technological
complexity increases, many companies are recognizing the benefits of the hosted
application service model. Under a typical application hosting arrangement, a
company can enjoy the business benefits of an application without having to
devote the resources to install, maintain and continually upgrade it. These
functions are performed instead by the application hosting provider. The recent
evolution of the Internet into a relatively secure and reliable network has
increased the demand for hosted applications. Also, there is a new generation
of software applications that has been designed specifically to run in a Web-
based environment. Finally, the recent emergence of global physical hosting
providers has created the connectivity and co-location facilities required to
support these applications. The convergence of these trends has led to the
growing appeal of the hosted model today.
The Web-based application hosted model is appropriate for customer service
applications for several reasons. The hosted option allows businesses engaged
in eCommerce to deploy a customer service solution rapidly without using
valuable internal resources. In addition, many companies doing
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business over the Internet rely on geographically dispersed customer service
departments to meet their rapidly growing, 24-hours, 7-days a week customer
needs. The hosted model provides the network security and ease of maintenance
that are crucial to these companies. Finally, many of these companies prefer to
outsource the management and maintenance of customer service applications and
instead focus on developing proprietary customer service processes and content.
For these reasons, we believe that hosting is becoming a preferred delivery
model for eCommerce customer service applications.
The eGain Solution
We provide our customers with a Web-based customer service platform that can
be delivered either as a hosted application service or as in-house software.
Our solution helps companies route, track and respond to high volumes of
customer email and Web form inquiries and allows customer service
representatives to provide real-time online assistance to these customers. Our
applications work together with a company's existing customer service and
database software to provide customer service representatives with
comprehensive information about each customer. We provide our solutions to
businesses seeking to use their customer support capabilities as a competitive
tool to convert Web site visitors to buyers, build lasting customer
relationships and generate incremental revenue. Our customers realize both
strategic and operating benefits of our solution.
Strategic Benefits
Strengthen Customer Relationships. Our eGain Email Management System, or
eGain EMS, is a software application that allows our customers to respond
rapidly and effectively to large volumes of email. Based on business rules set
by our customers, eGain EMS can automatically respond to customer emails or
route each inquiry to an appropriate customer service representative for
personalized attention. The combination of a timely, automated response and
personalized attention improves customer satisfaction and helps build lasting
customer relationships.
Convert Web Site Visitors to Buyers. Our eGain Web Collaboration System, or
eGain WCS, facilitates real-time online communication between the customer and
a company's customer service organization. Online visitors can interact
directly with a company's customer service representative and inquire about a
potential purchase. This personalized and immediate interaction increases the
likelihood that a Web site visitor will complete a purchase.
Scale to Meet Growing eCommerce Demands. Many companies find that their
customer service infrastructure is unable to handle the higher volume and
complexity of customer communication. Our architecture allows us to
incrementally add hardware capacity to address increased customer communication
volume. Whether provided through our hosted network or deployed in-house, our
products provide a customizable solution to the growing business needs of our
customers.
Rapidly Deployable Solution. Our platform is designed to allow business to
quickly deploy customer service capabilities as an application service through
our eGain Hosted Network. Also, our applications can be rapidly customized
through Web-based interfaces.
Gain Customer Insight. Our solution enables companies to capture and analyze
customer communications in order to understand the needs and preferences of
their customers. This understanding can provide a company with a competitive
advantage when targeting customers for
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future promotions and cross-selling opportunities. In addition, comprehensive
knowledge of a customer's needs and preferences can be used strategically to
enhance a company's product offerings.
Operating Benefits
Maximize Productivity of Customer Service Organization. By using the
productivity tools on our platform, customer service representatives can
respond rapidly to complex customer inquiries. Our tracking and workload
reporting features enable supervisors to monitor service levels and agent
productivity. Our customizable workflow capability allows managers to improve
team performance by intelligently distributing workload.
Reduce Cost and Administrative Burden. Customers using the eGain Hosted
Network recognize cost efficiencies by eliminating the need to manage and
administer in-house customer service applications. Moreover, by increasing
productivity, our applications enable companies to reduce personnel costs
associated with their customer service functions.
Integrate Applications to Provide Comprehensive Customer Information. Our
applications are based on open standards and can be integrated easily with
leading eCommerce platforms, call center systems and customer databases. This
integration enables customer service representatives to combine information
from multiple applications to provide customer service representatives with
comprehensive customer information.
The eGain Strategy
Our objective is to be the leading provider of customer service
infrastructure for businesses engaged in eCommerce. Our strategy for achieving
this objective includes the following elements:
Capitalize on First Mover Advantage and Extend Brand Recognition. We were the
first company to offer a platform for Internet-based customer service both as a
hosted application service and as installed software. In addition, we were the
first to offer a customer service platform incorporating both email management
and Web-based collaboration. Having invested early in advertising our solution
and building our brand, we intend to capitalize on our first mover advantage
and extend our brand recognition to become the de facto standard for Internet-
based customer service solutions.
Expand the eGain Hosted Network. We believe that the benefits of the eGain
Hosted Network offer compelling advantages over competing alternatives. These
advantages include the ability to leverage eGain's expertise, easy scalability,
low up-front costs, fast deployment, system security and 24-hour, 7 days-a-week
support. We plan to expand hosting centers in California and add centers in New
York, London and other cities to meet customer needs.
Introduce Value-Added Products. We intend to differentiate ourselves in the
customer service market by adding new products to our platform. For example, we
recently added the eGain WCS, which allows businesses to offer personalized
live online assistance to visitors on their Web site. In the future, we intend
to enhance our platform by leveraging new technologies, such as voice over
Internet Protocol, or voice over IP, which enables voice communications to take
place over the Internet.
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Expand Strategic Relationships. We intend to enter into strategic
relationships that can assist us in marketing and distributing our products.
We plan to expand existing and enter into new strategic relationships with
external hosting partners, front office software companies, outsourced call
center companies and systems integrators focused on eCommerce.
Expand Our International Presence. In addition to expanding our domestic
marketing efforts, we intend to expand internationally. We have recently
formed a subsidiary in the United Kingdom. We have also commenced product
localization efforts for some European and Asian languages. We intend to
capture international market share by marketing overseas, establishing
additional sales offices and developing strategic relationships.
Products and Services
We provide customer service infrastructure for companies engaged in
eCommerce. Our solutions are built on a scalable, Web-based architecture
designed to meet the growth in Internet-based communications. Our products are
built on technologies that are based on industry standards and are therefore
designed to integrate with existing customer databases and applications.
Our two primary Web-based applications, eGain EMS and eGain WCS, are
designed to manage the high volume and complexity of online customer
communication, including email and live interactions on the Web. Our
applications are available to our customers both as a hosted application
service and as installed software. Although each application may be purchased
separately, our applications are designed to work closely with one another and
to integrate into a company's existing software architecture.
Product and Service Offerings
. eGain Email Management System (eGain EMS) -- an application that helps
companies route, track and respond to high volumes of customer email and
Web form inquiries.
. eGain Web Collaboration System (eGain WCS) -- an application that allows
customer service representatives to provide live assistance to customers
through real-time Web interaction.
. eGain eCommerce Bridge -- an application-linking module that enables
rapid integration of eGain EMS with external eCommerce platforms, call
centers and customer databases.
. Professional Services -- includes application management services,
security services and customer support services.
Flexible Deployment
. eGain Hosted Network -- a company may access our solution through the
eGain Hosted Network, a network of eGain service centers and hosting
partners linked by high speed Internet connections designed to host our
customer service applications.
. In-house installation -- a company may implement our solution in-house
and either maintain the application internally or outsource management of
the application to eGain.
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The following provides an overview of our products and services:
[A graphic depicting the various components of the eGain product
and service offerings appears here. Graphic includes eGain
applications, eGain Web Component Architecture, eGain Hosted Network
and eGain Commerce Bridge. ]
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eGain Application Platform
eGain EMS
eGain EMS is a Web-based application that enables customer service
departments to route, track and respond to high volumes of customer email and
Web form inquiries. Using eGain EMS, companies can maintain a comprehensive
customer communication history and improve customer satisfaction with prompt
and effective responses. eGain EMS is designed to scale to the customer service
needs of any company engaging in eCommerce, regardless of size.
Companies using eGain EMS receive emails and Web form inquires from their
email servers or Web sites. Based on business rules selected by the company,
these emails are categorized using a form of artificial intelligence technology
called statistical vector analysis. Once categorized, eGain EMS will send an
automated response or route the email to the appropriate customer service
representative with suggested responses. The customer service representative
can use our productivity tools to access relevant customer-related information
and prepare an effective response. Supervisors use our Web-based monitoring
capability to set performance levels and track service levels. Managers use our
flexible, Web-based reporting system to monitor workload, analyze trends in
customer communications and forecast resource needs. Finally, businesses can
use customer information captured in our system using our direct mail manager,
a system that helps create and target personalized mailings based on customer
attributes. This proactive, targeted customer communication helps strengthen
customer relationships and provides new revenue opportunities.
<TABLE>
<S> <C> <C>
Feature Description Benefits
</TABLE>
Email Processing . Tracks all inbound and . Maintains complete
and outbound email customer
Categorization . Develops Web forms to link communication history
to email . Increases effectiveness
. Categorizes communications of responses to customer
using inquiries
predetermined instructions
- --------------------------------------------------------------------------------
eGain Artificial . Uses statistical vector . Enables routing and
Intelligence analysis, a robust automatic response by
artificial intelligence reading incoming email
technology, to "read" and
determine the substance of
incoming emails
- --------------------------------------------------------------------------------
Powerful Workflow. Specifies instructions for . Routes each inquiry to
email routing appropriate CSR
. Pre-built instruction . Enables better workflow
library for various call decisions based on
center functions, including enhanced knowledge about
load-balancing, skill-based customers
routing, shift management
and quality of service
management
- --------------------------------------------------------------------------------
Knowledge . Searchable knowledge base . Continually gathers,
Database . Content can be dynamically reviews and disseminates
constructed from foreign knowledge efficiently
data sources . Allows CSRs to use the
. Real-time system-wide most current information
knowledge update to respond to issues
- --------------------------------------------------------------------------------
Customer Service . Customizable high-speed Web . Increases CSR
Representative interface productivity
(CSR) . Provides suggested . Improves customer
Productivity responses, response satisfaction with prompt
Tools templates, group email and effective responses
reply, multiple-issue
emails, customer search
capability and audit trails
- --------------------------------------------------------------------------------
System Monitoring. Web-based interface for all . Enables supervisors to
and system monitoring customize, set
Administration and administration performance levels and
. Monitors system load, agent monitor with "point-and-
productivity and service click" ease
levels
- --------------------------------------------------------------------------------
Enterprise . Real-time and historical . Allows administrators to
Management reports plan system capacity
Reporting . Preconfigured and using workload reports
customizable reports . Enables company to
. Archived reports for analyze trends in
analysis and forecasting customer communication
. Scheduled report delivery
through email
- --------------------------------------------------------------------------------
Direct Mail . Creates personalized content . Enables companies to
Manager and targets email based on conduct targeted
customer attributes promotions, proactively
. Captures responses and links address customer concerns
to mailings to monitor and survey customer
efficacy satisfaction
- --------------------------------------------------------------------------------
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eGain WCS
eGain WCS enables customer service representatives to answer customer
questions and provide interactive assistance over the Web using browser
sharing, text chat and assisted form-filling technology. Through eGain WCS, a
user is able to communicate with a customer service representative by simply
clicking a hyperlink on a company's Web site, which in turn prompts a customer
service representative to reply. Once connected, the customer service
representative and the customer can engage in a real-time online conversation.
The agent has access to comprehensive information about the customer's past
activity and browsing patterns. eGain WCS integrates with leading eCommerce
platforms, call center systems, computer telephony integration software,
customer databases and customer relationship management systems. eGain WCS is
designed to allow customer service representatives to handle multiple customer
interactions simultaneously, thereby reducing costs associated with traditional
call centers while delivering personalized service.
<TABLE>
<CAPTION>
Feature Description Benefits
<S> <C> <C>
Real-Time . Presents a real-time . Provides valuable
Collaboration interface optimized for the information to help close a
customer's specific platform sale
. CSR console displays the . Enables CSR to escort the
customer's profile along with customer through pre- or post-
a tracking summary of the sales situations
customer's activity on the Web
site
- -----------------------------------------------------------------------------------
Queuing and . Tracks customers as they . Queuing helps company route
Profiling interact with specific pages the inquiries to appropriate
. Displays the hyperlinks to CSRs
pages visited by customer . Profiling collects customer
information before a CSR
addresses an inquiry
- -----------------------------------------------------------------------------------
Monitoring, . Generates a summary screen . Enables managers to run
Reporting & at the end of a WCS session reports on customers and
Administration . Emails customer a transcript access customer profiles and
of the session, including all session transcripts
text chat and hyperlinks . Enables managers to audit
shared agent performance and
. Stores session information establish effective staffing
into a database policies
- -----------------------------------------------------------------------------------
WorksEverywhere . Patent-pending technology . Does not require downloading
that matches customers or installation of software
browsing platforms with
appropriate real-time
interaction method
. Works on browsers and . Offers live customer service
through firewalls and proxy to a broad customer base
servers
</TABLE>
eGain eCommerce Bridge
The eGain eCommerce Bridge allows eGain EMS to be easily linked with leading
eCommerce platforms, call center systems and customer databases. This allows
customer service representatives to get a complete profile of the customer by
pulling information from other systems, enabling them to formulate an informed,
personalized response by drawing on prior interactions with the customer. In
addition, the eCommerce Bridge can be used to update existing customer
databases with relevant customer information extracted from eGain EMS. We are
in the process of enhancing the eGain eCommerce Bridge to interface with eGain
WCS. We intend to enable remote application integration by implementing XML-
based interfaces. This remote integration capability would allow our hosted
customers to access their valuable customer information residing in in-house
applications behind corporate firewalls.
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We offer several pre-built adaptors that connect into our eCommerce Bridge to
link eGain applications with a variety of eCommerce platforms, call center
systems and relational databases. These adaptors minimize the need for custom
programming to integrate eGain applications with other enterprise software. We
currently offer adaptors for Microsoft Site Server (Commerce Edition) and
Remedy Action Response System, Siebel Systems Siebel 99, Intershop 3, Oracle
relational databases and ODBC-compliant databases. In the future, we intend to
continue to develop, as well as enable our partners to develop, adaptors to
other leading enterprise applications and call center solutions.
Professional Services
As of August 15, 1999, we had 38 professionals dedicated to providing a wide
range of professional services for application management, solution
development, system installation and training.
Our operations group provides application management services that offer a
24-hour, 7-days-a-week application response monitoring service. We also provide
database services to maintain and enhance the performance, availability and
reliability of production systems. Finally, we offer network security services
to prioritize, assess and address the security concerns of customers at
different levels based on their needs.
Our consulting group offers solution development and system integration
services. The team works with our customers to understand their specific
requirements, analyze their business needs and implement an integrated solution
based on the eGain customer service platform. The eGain eCommerce Bridge and
our industry expertise allow us to integrate enterprise-wide systems with our
customer service solutions. We provide these services ourselves or in
partnership with system integrators who have built consulting expertise on our
platform and can implement complete solutions for our clients.
Our installation group offers rapid implementation services designed to have
a customer up and running quickly. The installation teams are involved in
client engagement, needs assessment, EMS configuration, training and
activation.
Flexible Deployment
We offer our customer service solutions both as a Web-based hosted service
through our eGain Hosted Network and as a licensed software product that can be
implemented and maintained in-house.
eGain Hosted Network
Through a network of eGain service centers and hosting partners linked by
high-speed Internet connections, we provide our customers with multiple
redundant paths to access their hosted customer service applications. We
remotely manage these applications which reside on server machines co-located
at our hosting partners' facilities. We believe the eGain Hosted Network
provides a compelling alternative for companies engaged in eCommerce that seek
to quickly deploy and efficiently scale their customer service capabilities. We
have strategically located eGain service centers in Sunnyvale (Silicon Valley),
London and New York. We select our co-location partners with a view to
providing high bandwidth availability, peering arrangements with other Internet
service providers and global presence. As part of our eGain Hosted Network, we
offer value-added services for application management, database maintenance,
mail hosting and anti-virus protection.
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We have invested early to build a scalable hosted network, and have recruited
experienced operations personnel to maintain the system effectively. For
example, our service centers are linked through dedicated high-speed
connections to the co-location centers to provide our customers with multiple
redundant paths to access their hosted customer service applications. In the
event one of these links fails, user traffic can be quickly rerouted for
continued operations. We have also developed proprietary Web-based hosted
service management systems, enabling our service professionals to efficiently
administer and manage large numbers of hosted customer applications. For
example, we have developed Web-based software tools to monitor application
response and system health.
[Graphic depicting architecture of the eGain Hosted Network appears
here. Graphic depicts the relationships between eGain, its customers
and its hosting partners in the eGain Hosted Network.]
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Sales and Marketing
Sales Strategy
We sell our customer service solutions either as a subscription-based hosted
service or as a licensed software product for installation in-house. We sell
primarily through a worldwide direct sales organization and target our sales to
companies seeking to improve customer relations and increase their eCommerce
activities.
During our sales process, we typically approach the head of customer service
of the organization. In smaller companies, our sales personnel, working closely
with the sales engineers, make product demonstrations and presentations to
address a customer's needs. In larger accounts, we often engage our
professional services team, and in some cases, strategic partners to create
customer-specific demonstrations, presentations and proposals.
As prospective customers proceed towards selecting our products and services,
our professional services team manages the project and may work with outside
system integrators to facilitate timely deployment. Our services team delivers
customer and partner training through lectures, demonstrations, discussions and
hands-on use of our solutions. Following implementation, our account managers
work with the customers to identify and serve their ongoing needs, freeing up
our sales professionals to focus on new business opportunities.
Marketing Strategy
Our marketing strategy is to continue to build brand awareness of eGain as a
leading provider of customer service infrastructure solutions for eCommerce. We
focus our marketing efforts on dedicated Internet companies as well as
traditional companies seeking to take advantage of the commercial opportunities
presented by eCommerce.
We rely on a range of available marketing avenues to pursue our objectives,
including print advertisements, email newsletters, Internet advertisements,
billboards, telemarketing, targeted direct mailing and a variety of trade
shows, seminars and interest groups.
Our marketing group assists our sales team by providing them with product
collateral materials, customer case studies, market surveys and customer
profiles. In addition, our marketing group helps identify and develop key
partnership opportunities and channel distribution relationships.
As of August 15, 1999, we had 40 sales and marketing professionals, including
sales engineers, major account representatives and channel/partner salespeople.
Our sales personnel are located in New York City, Washington DC, Minneapolis,
Toronto, Dallas, Los Angeles, Denver, Seattle and Sunnyvale. We plan to open
new sales offices and expand our direct sales force.
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Customers
We have over 100 customers, which include both dedicated Internet companies
and Fortune 1000 companies that have established a commercial Web site. The
following is a representative list of companies that have entered into
agreements to install eGain EMS or eGain WCS:
Internet Searching and
Computer Technology and Networking Auctions
Microsoft WebTV DoughNET
RealNetworks eGuard
Transition Networks FairMarket
Go2Net
Consumer e-Retail Looksmart
Chapters.ca MediaRing.com
Cooking.com Talk City
Digital Chef ONElist
HMV Canada Six Degrees
Internet Shopping Network Snap.com
KB Toys Winebid.com
PlanetRx
Shopping.com Financial Services
Tucows Consumer Financial Network
i-Escrow
Customer Service Centers Nova Information Systems
Brigade Solutions Quote.com
PanAmerican Call Centers Suretrade
Sykes Enterprises Wingspan Bank
Manufacturing
Mazda USA
Customer Support
We provide customer support to our hosted customers on a 24-hour, 7-days-a-
week basis as part of the basic monthly hosting license fee. In addition, we
offer customers that license our applications and deploy them in-house the
option of purchasing customer support services for an annual fee. Our customer
support professionals refer complex customer issues as needed to our internal
technical support group, to diagnose and solve. Our customer support
representatives use the eGain EMS applications to manage telephone- and email-
based customer inquiries.
Strategic Relationships
We intend to develop strategic relationships which we believe will add
capabilities to our current product offering as well as help market our
products to new customers. Specifically, we seek to establish relationships
with distribution, hosting and solution providers.
Distribution. We intend to continue working with companies, both domestic and
international, to help us identify and close new customer opportunities and
expand market share. We intend to develop arrangements with call center
providers that require assistance in handling email and other Internet-based
customer inquiries for their clients. We also intend to distribute our products
in partnership with leading systems integrators and front office software
companies.
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Solution. We have worked with companies such as Inference, Microsoft, Oracle,
Remedy Corporation and Siebel Systems to ensure that our products can be
integrated easily with the database servers, front office software
applications, and other products they provide.
Hosting. The eGain Hosted Network is enabled by relationships with various
hosting providers that supply the database and connectivity hardware that
supports our applications. We currently have arrangements with AboveNet
Communications and Frontier GlobalCenter, two leading providers of managed co-
location and Internet connectivity. These hosting partners serve as data
centers that, in conjunction with eGain's information systems specialists,
guarantee redundant network and server infrastructure for continuous, 24-hour,
7-days-a-week availability of our applications to our hosted customers.
Competition
The market for eCommerce customer service solutions is relatively new and
growing rapidly. We expect the level of competition in this evolving market to
intensify in the future, as new and existing competitors seek to provide
products and services for our market.
Our current principal competitors for our licensed software products include:
. Brightware, Inc.,
. Kana Communications, Inc.,
. Mustang Software, Inc.,
. Silknet Software, Inc. and
. Webline Communications Corp.
While we were the first company to offer a customer service applications
platform in a hosted environment, some of our competitors for licensed software
products are now beginning to offer hosted approaches.
We also face competition from larger, front office software companies such
as:
. Clarify, Inc.,
. Oracle Corporation,
. Siebel Systems, Inc. and
. The Vantive Corporation.
In the future, we may face competition from established software companies such
as IBM, Hewlett-Packard, Microsoft and others that may seek to enter the market
for eCommerce customer service solutions.
We believe that the principal competitive factors affecting our market are
product features; product performance, including scalability, flexibility and
availability, price, quality of support and service and brand reputation. We
believe that our products currently compete favorably with respect to these
factors; however, our market is evolving rapidly, and we expect to face
increased competition for our product offerings. Some of our competitors have,
and our future competitors may have, longer operating histories, larger
customer base, greater brand recognition and significantly
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greater financial, marketing, technical, support and other resources. Some of
these competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies or devote
substantially greater resources to product development.
We may not be able to compete successfully against our current and future
competitors. See "Risk Factors--We must compete successfully in the eCommerce
customer service market."
Technology
All of our software products are built on a standards-based, scalable
architecture designed to address the evolving needs of companies engaged in
eCommerce. Specifically, our software is based on our proprietary eGain Web
Component Architecture, or eGain WCA, an open, scalable framework for software
design that builds upon three industry trends:
. widespread availability of reliable Internet connectivity to businesses,
which is enabling the delivery and management of hosted applications over
the Internet;
. investment in Internet technologies, which is driving development of new
Web applications that natively incorporate powerful and flexible
protocols; and
. the success of component-based software development models which provide
the tools for developing robust distributed software applications.
Our eGain WCA is a more scalable approach to application design compared to
traditional client-server or three-tier architectures. For example, in contrast
to client-server or three-tier architectures that require the download and
maintenance of dedicated client-side software, our eGain WCA does not require
the download of any client software. This allows use of the application from
anywhere across the Internet through a standard Web browser. In contrast to
traditional monolithic server-side applications where scalability meant buying
the fastest server machines with maximum memory, the eGain WCA adopts a divide-
and-conquer approach by using distributed processing in a modular hardware
environment.
The component-based software model of our eGain WCA makes it more fault-
resilient and flexible than traditional architectures. Each component can be
diagnosed and monitored independently, and the overall system does not stop if
there is a problem with an individual component. Moreover, each independent
software component can be readily swapped out or augmented to meet the specific
needs of customers.
Our eGain WCA organizes software into logical layers: Presentation,
Application, Service, Object and Data. Each layer consists of software
components that implement specific tasks, and each component offers a well-
defined external programming interface. In addition, each layer includes as an
option a management service that oversees the activities of the components
within that layer. This modular approach facilitates customization and provides
flexibility for future enhancements.
. Presentation Layer. The Presentation Layer localizes the look and feel
logic of the user interface so that customization of the user interface
can be easily managed. Our user interface can be accessed through
standard browsers.
. Application Layer. The design of the Application Layer offers high
reliability and scalable performance by balancing and allocating workload
across multiple application servers.
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. Service Layer. The Service Layer comprises the core set of independent
services that receive, parse, route and dispatch emails. The eGain
service manager monitors all the service instances in real-time, alerting
the system administrator of any performance bottlenecks.
. Object Layer. The Object Layer allows new types of business objects to be
added as needed to handle richer customer service models. This layer
presents to the Application and Service Layers a logical view to system
data in the form of business objects such as a ticket, user, customer and
message.
. Data Layer. The Data Layer allows for greater database portability by
insulating the objects from vendor specific difference across databases.
This layer manages the data access across various data sources and
maintains connection pools for efficiency.
Intellectual Property
We regard our copyrights, service marks, trademarks and similar intellectual
property as critical to our success. We rely on patent, trademark, copyright,
trade secret and other laws to protect the proprietary aspects of our
technology and business. We have no patents to date. We presently have one
patent pending for our WorkEverywhere technology that matches customers'
browsing platform with appropriate real-time interaction method. We also have
several trademark applications pending. Our trademarks include:
. eGain,
. eGain EMS,
. eGain WCS,
. eGain Hosted Network and
. eGain eCommerce Bridge.
We will continue to assess appropriate occasions for seeking patent and other
intellectual property protections for those aspects of our technology that we
believe constitute innovations providing significant competitive advantages.
The pending and any future applications may or may not result in the issuance
of valid patents and trademarks.
We routinely require our employees, customers, and potential business
partners to enter into confidentiality and nondisclosure agreements before we
will disclose any sensitive aspects of our products, technology, or business
plans. In addition, we require employees to agree to surrender to eGain any
proprietary information, inventions or other intellectual property they
generate or come to possess while employed by us. Despite our efforts to
protect our proprietary rights through confidentiality and license agreements,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. These precautions may not prevent misappropriation or
infringement of our intellectual property.
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. In addition, other parties may assert infringement
claims against us. Although we have not received notice of any alleged
infringement, our products may infringe issued patents that may relate to our
products. In addition, because patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been filed
which relate to our software products. We may be subject to legal proceedings
and claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other
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intellectual property rights of third parties. Intellectual property litigation
is expensive and time-consuming and could divert management's attention away
from running our business. This litigation could also require us to develop
non-infringing technology or enter into royalty or license agreements. These
royalty or license agreements, if required, may not be available on acceptable
terms, if at all, in the event of a successful claim of infringement. Our
failure or inability to develop non-infringing technology or license the
proprietary rights on a timely basis would harm our business.
Employees
As of August 15, 1999, we had 155 full-time employees, including 49 in
research and development, 47 in services, 40 in sales and marketing and 19 in
general and administrative. None of our employees are covered by collective
bargaining agreements. We believe our relations with our employees are good.
Legal Proceedings
We are not a party to any material legal proceeding. We may be subject to
various claims and legal actions arising in the ordinary course of business.
Facilities
Our corporate headquarters are located in Sunnyvale, California, where we
occupy approximately 46,000 square feet under a lease expiring in September
2001. We also maintain a direct operating presence through offices in New York
City and London. We believe our facilities will be adequate to meet our
requirements for at least the next 12 months.
47
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees and their ages as of
August 15, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ashutosh Roy............ 33 Chief Executive Officer and Chairman
Gunjan Sinha............ 32 President and Director
Harpreet Grewal......... 32 Chief Financial Officer
Robert Apollo........... 44 Vice President and General Manager of European Operations
Ravinder Grewal......... 37 Vice President of Services
Ram Kedlaya............. 40 Vice President of Products
Stephen E. Klann........ 55 Senior Vice President of Sales
Wendell W. Lansford..... 30 Vice President of New Business Initiatives
Prakash Mishra.......... 30 Vice President of Technology
Ryan M. Rosenberg....... 38 Vice President of Marketing
Eric N. Smit............ 37 Vice President of Finance and Administration
A. Michael Spence
(1)(2)................. 55 Director
Mark A. Wolfson(1)(2)... 46 Director
</TABLE>
- --------
(1) Member of audit committee.
(2) Member of compensation committee.
Ashutosh Roy co-founded eGain and has served as Chief Executive Officer and a
director of eGain since September 1997. From May 1995 through April 1997, Mr.
Roy served as Chairman of WhoWhere? Inc., an Internet-service company co-
founded by Mr. Roy. From June 1994 to April 1995, Mr. Roy co-founded Parsec
Technologies, a call center company based in New Delhi, India. From August
1988, to August 1992, Mr. Roy worked as Software Engineer at Digital Equipment
Corp. Mr. Roy holds a B.S. in Computer Science from the Indian Institute of
Technology, New Delhi, a Masters degree in Computer Science from Johns Hopkins
University and an MBA from Stanford University.
Gunjan Sinha co-founded eGain and served as a director of eGain since
inception in September 1997 and as President of eGain since January 1, 1998.
From May 1995 through April 1997, Mr. Sinha served as President of WhoWhere?
Inc., an Internet-services company co-founded by Mr. Sinha. Prior to co-
founding WhoWhere? Inc., Mr. Sinha was a developer of hardware for
multiprocessor servers at Olivetti Advanced Technology Center. In June 1994,
Mr. Sinha co-founded Parsec Technologies. Mr. Sinha holds a degree in Computer
Science from the Indian Institute of Technology, New Delhi, a Masters degree in
Computer Science from UC Santa Cruz, and a Masters degree in Engineering
Management from Stanford University.
Harpreet Grewal has served as Chief Financial Officer of eGain since July
1999. From November 1998 to July 1999, Mr. Grewal served as Chief Financial
Officer of Pepsi-Cola's North American Fountain Beverage Division. From April
1996 to October 1998, Mr. Grewal held various positions in PepsiCo's Corporate
Strategy and Development Group. From August 1995 to March 1996, Mr. Grewal
worked for International Equity Partners, a private equity firm. Mr. Grewal
holds a Masters degree in International Studies from the Johns Hopkins School
of International Studies and a B.A. in Economics from the University of
California, Berkeley.
48
<PAGE>
Robert Apollo has served as Vice President and General Manager of European
Operations of eGain since June 1999. From July 1998 to May 1999, Mr. Apollo
served as Vice President, European Operations of Sterling Commerce, an
eCommerce software and services provider. From June 1996 to July 1998, Mr.
Apollo served as Vice President and Managing Director, International, of
XcelleNet Limited, a remote and mobile systems management vendor. From February
1990 until March 1996, Mr. Apollo held various positions at The Santa Cruz
Operation, Inc. and most recently served as Vice President of Marketing for
Europe, Middle East and Africa of The Santa Cruz Operation, Inc. Mr. Apollo
holds a B.A. in Business Studies from Thames Valley University (formerly known
as Ealing College of Higher Education).
Ravinder Grewal has served as Vice President, Worldwide Professional Services
since March 1999. From January 1998 to February 1999, Mr. Grewal served as a
director of Documentum, an enterprise document management software company.
From February 1997 to January 1998, Mr. Grewal served as Vice President,
Consulting for Workgroup Management, Inc., a knowledge management consulting
firm that was acquired by Documentum in January 1998. From May 1995 to February
1997, Mr. Grewal served as Senior Project Director of MCI Systemhouse, a
telecommunications company. From January 1994 to May 1995, Mr. Grewal served as
Director of KPMG/Kanbay Resources (HK) Ltd., a management consulting company.
Mr. Grewal holds a B.S. in Computer Science from the University of California,
Berkeley.
Ram Kedlaya has served as Vice President, Products, of eGain since December
1998. From August 1992 to March 1998, Mr. Kedlaya was a co-founder of NUKO
Information Systems, a provider of networking products and solutions for
broadband network service providers. Mr. Kedlaya served in several positions at
NUKO, most recently as a Vice President, Strategic Planning. Mr. Kedlaya holds
an M.S. in Computer Science from the University of Texas, Austin and a B.S.
from the Indian Institute of Technology, Madras.
Stephen E. Klann has served as Senior Vice President of Sales of eGain since
July 1999. From May 1998 to July 1999, Mr. Klann served as Vice President of
Sales of eGain. Prior to joining eGain, Mr. Klann spent 13 years with Honeywell
Information Systems and 3 years with Wang Labs in various sales management
positions. He then spent 5 years as Vice President of Sales for Interleaf, 3
years as Vice President of Sales and Marketing for Frame Technology and 2 years
as President and CEO of IXI Software Corporation. Over the past 5 years and
just prior to joining eGain, Mr. Klann has been serving in long-term Vice
President capacities as a consultant from State of the Art, Open Text, Thinking
Tools and ShareData.
Wendell W. Lansford has served as Vice President of New Business Initiatives
of eGain since May 1999. From September 1996 to May 1999, Mr. Lansford served
as President and Chief Executive Officer of Sitebridge Corporation, an
ECommerce customer service software company which was acquired by eGain. From
March 1995 to September 1996, Mr. Lansford served as Director of Technology of
CondeNet, the Internet division of Conde Nast Publications. From September 1994
to March 1995, Mr. Lansford served as Partner of Lancomp, a systems integration
and consulting firm. From May 1991 to September 1994, Mr. Lansford served as
Member of Technical Staff of Bellcore, a telecommunications research firm which
was recently renamed Telcordia. Mr. Lansford holds a Masters degree in
Information Networking from Carnegie-Mellon University, and a B.S. in
Electrical Engineering from the University of Tulsa.
Prakash Mishra has served as Vice President of Technology of eGain since May
1999. From September 1996 to May 1999, Mr. Mishra served as Chief Technology
Officer and Executive Vice
49
<PAGE>
President of SiteBridge Corporation, an eCommerce customer service software
company. From August 1994 to September 1996, Mr. Mishra served as Associate in
Fixed Income Research at Goldman, Sachs & Co. From January 1994 to August 1994,
Mr. Mishra served as Principal of Internet Consulting Corporation, a New York-
based Internet business consultancy. Mr. Mishra holds a Masters degree in
Information Networking from Carnegie-Mellon University, and a B.S. in Computer
Engineering from Rensselaer Polytechnic Institute.
Ryan M. Rosenberg has served as Vice President of Marketing of eGain since
June 1998. From June 1996 to June 1998, Mr. Rosenberg served as Director of
Product Marketing for Symantec Corporation, a business and personal software
company. From November 1993 to June 1996, Mr. Rosenberg served as a Product and
Senior Product Manager for Symantec. Mr. Rosenberg holds a B.S. in Computer
Science from Michigan State University, and an M.B.A. in Marketing from the
University of California, Los Angeles.
Eric N. Smit has served as Vice President, Finance and Administration of
eGain since June 1999. From June 1998 to June 1999, Mr. Smit served as Director
of Finance of eGain. From December 1996 to May 1998, Mr. Smit served as
Director of Finance for WhoWhere? Inc., an Internet services company. From
April 1993 to November 1996, Mr. Smit served as Vice President of Operations
and Chief Financial Officer of Velocity Incorporated, a software game developer
and publisher company. Mr. Smit holds a Bachelor of Commerce in Accounting from
Rhodes University, South Africa.
A. Michael Spence has served as a director of eGain since July 1999. Since
1990, Dr. Spence has served as Dean of the Graduate School of Business at
Stanford University. From 1984 to 1990, Dr. Spence served as Dean of Faculty of
Arts and Sciences at Harvard University. Dr. Spence also serves as a director
of General Mills, Inc., Nike, Inc., Siebel Systems, Inc., Sun Microsystems,
Inc., ITI Education Corporation and Torstar Corporation. Dr. Spence received a
B.A. in Philosophy from Princeton University, a B.A. and an M.A. in Mathematics
from Oxford University and a Ph.D. in Economics from Harvard University.
Mark A. Wolfson has served as a director of eGain since June 1998. Since
October 1998, Mr. Wolfson has served as a managing partner of Oak Hill Capital
Management, Inc. Prior to October 1998, Mr. Wolfson served as a principal of
Oak Hill Venture Partners, L.L.C. Since 1997, Mr. Wolfson has held the position
of professor at the Stanford University Graduate School of Business. Mr.
Wolfson holds a Ph.D. and a Masters degree from the University of Texas, Austin
and a B.S. from the University of Illinois.
Our Chief Financial Officer, Harpreet Grewal, and our Vice President of
Services, Ravinder Grewal, are brothers. There are no other family
relationships among any of our directors or executive officers.
Board Committees
Our board of directors has a compensation committee and an audit committee.
The compensation committee is responsible for determining salaries, incentives
and other forms of compensation for directors, officers and other employees of
eGain and administering various incentive compensation and benefit plans. Mark
Wolfson and Gunjan Sinha served as the compensation committee throughout the
last fiscal year. Mr. Wolfson and Mr. Spence are the current members of the
compensation committee. Ashutosh Roy, our chief executive officer, will
participate
50
<PAGE>
in all discussions and decisions regarding salaries and incentive compensation
for all employees and consultants of eGain, except that he will be excluded
from decisions regarding his own salary and incentive compensation.
The audit committee reviews our annual audit and meets with our independent
auditors to review our internal controls and financial management practices.
Mr. Wolfson and Mr. Roy served as the audit committee throughout the last
fiscal year. Mr. Wolfson and Mr. Spence are the current members of the audit
committee.
Director Compensation
Except for the grant of stock options, we do not currently compensate our
directors for their services as directors. Directors who are employees of eGain
are eligible to participate in our 1998 Stock Plan and our 1999 Employee Stock
Purchase Plan. In addition, we granted A. Michael Spence, a director of eGain,
an option to purchase 25,000 shares of our common stock. We also reimburse each
member of our board of directors for out-of-pocket expenses incurred in
connection with attending board meetings.
Executive Compensation
The following table provides summary information concerning compensation
earned by or paid to our chief executive officer and to each of our four other
most highly compensated executive officers whose total annual salary and bonus
exceeded $100,000, for services rendered in all capacities to eGain during the
fiscal year ended June 30, 1999. These individuals are referred to as the
"named executive officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
--------------- ------------
Security
Underlying
Name and Principal Position Salary Bonus Options (#)
- --------------------------- -------- ------ ------------
<S> <C> <C> <C>
Ashutosh Roy...................................... $100,008 $ -- --
Chief Executive Officer and Chairman
Gunjan Sinha...................................... 100,008 -- --
President
Stephen E. Klann.................................. 194,000 8,600 34,271
Senior Vice President of Sales
Ryan M. Rosenberg................................. 135,000 -- 145,000
Vice President of Marketing
Eric N. Smit ..................................... 105,381 -- 125,000
Vice President of Finance and Administration
</TABLE>
51
<PAGE>
Option Grants in Last Fiscal Year
The percentage of total options granted is based on an aggregate of 2,666,101
options granted in fiscal 1999. The exercise price on the date of grant was
equal to the fair market value on the date of grant as determined by the board
of directors. Options have a maximum term of 10 years subject to earlier
termination for specified events related to cessation of employment.
The 5% and 10%, assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent eGain's estimate or
projection of the future stock price. The values reflected in the table may
never be achieved. The dollar values have been calculated by determining the
difference between the fair market value of the securities underlying the
options at June 30, 1999 and the exercise prices of the options. Solely for
purposes of determining the value of the options at June 30, 1999, we have
assumed that the fair market value of shares of common stock issuable upon
exercise of options was $10.00 per share, the assumed initial public offering
price, since the common stock was not traded in an established market prior to
the offering.
All of Mr. Klann's options were immediately vested in full. Both of Mr.
Rosenberg's options and Mr. Smit's option for 50,000 shares vest as to 25% of
the shares on the first anniversary of the vesting start date and 1/48 of the
shares each full month thereafter. Mr. Smit's option for 75,000 shares vests as
to 12/45 of the shares on the first anniversary of the vesting start date and
1/45 of the shares each full month thereafter.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percentage of Annual Rates of Stock
Total Options Exercise Price Appreciation for
Granted to or Base Option Term
Options Employees in Price Expiration -----------------------
Name Granted Fiscal 1999 ($/Share) Date 5% 10%
- ---- ------- ------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ashutosh Roy............ -- --% $ -- -- $ -- $ --
Gunjan Sinha............ -- -- -- -- -- --
Stephen E. Klann........ 8,671 0.3 .10 10/9/08 139,829 222,654
8,400 0.3 .20 1/29/09 134,091 213,517
3,200 0.1 .20 3/19/09 51,082 81,340
10,400 0.4 .40 5/20/09 162,629 258,959
3,600 0.1 .50 6/18/09 55,708 88,706
Ryan M. Rosenberg....... 125,000 4.7 .10 7/31/08 2,015,757 3,209,756
20,000 0.8 .20 1/29/09 319,263 508,374
Eric N. Smit............ 75,000 2.8 .10 10/9/08 1,209,454 1,925,854
50,000 1.9 .50 6/18/09 773,725 1,232,028
</TABLE>
52
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table assumes a per-share fair market value equal to the
initial public offering price of $10.00.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Shares Year-End Fiscal Year-End
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ---------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Ashutosh Roy............ -- $ -- --/-- $ --/--
Gunjan Sinha............ -- -- --/-- --/--
Stephen E. Klann........ 68,271 677,123 14,000/-- 134,040/--
Ryan M. Rosenberg....... 145,000 1,433,500 --/-- --/--
Eric N. Smit............ 86,500 849,425 50,000/-- 475,000/--
</TABLE>
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee are currently Mark Wolfson and A.
Michael Spence. No interlocking relationship exists, or has existed in the
past, between the board of directors or compensation committee and the board of
directors or compensation committee of any other company.
1998 Stock Plan
Our 1998 Stock Plan was adopted by the board of directors in June 1998 and
will be amended and restated effective upon completion of this offering. Our
1998 Stock Plan provides for the grant of incentive stock options as defined in
Section 422 of the Internal Revenue Code to employees and the grant of
nonstatutory stock options and stock purchase rights to employees, non-employee
directors and consultants. A total of 3,500,000 shares of common stock has been
reserved for issuance under our 1998 Stock Plan as of June 30, 1999. In July
1999 an additional 3,000,000 shares of common stock were reserved for issuance
under our 1998 Stock Plan.
Our 1998 Stock Plan is administered by our compensation committee and our
non-insider option committee. Our compensation committee consists of at least
two directors who are "non-employee directors," as defined in Rule 16b-3. The
board of directors may amend our 1998 Stock Plan as desired without further
action by eGain's stockholders except as required by applicable law. Our 1998
Stock Plan will continue in effect until terminated by the board or for a term
of 10 years from its amendment and restatement date, whichever is earlier.
The consideration for each award under our 1998 Stock Plan will be
established by the compensation committee, but in no event will the option
price for incentive stock options be less than 100% of the fair market value of
the stock on the date of grant. Awards will have such terms and be exercisable
in such manner and at such times as the compensation committee may determine.
However, each incentive stock option must expire within a period of not more
than 10 years from the date of grant.
Generally, options granted under the 1998 Stock Option Plan vest over four
years, and are nontransferable other than by will or the laws of descent and
distribution. In the event of specified changes in control of eGain, the
acquiring or successor corporation may assume or substitute for options
outstanding under the 1998 Stock Option Plan, or these options will terminate.
Some options granted to our executive officers provide for partial acceleration
upon a change in control of eGain.
53
<PAGE>
As of August 20, 1999,
. 2,386,896 shares of common stock have been issued upon the exercise of
options; and
. 2,499,350 shares were available for future awards.
Sitebridge 1997 Stock Plan
Upon the closing of our acquisition of Sitebridge, we assumed outstanding
options to purchase shares of common stock of Sitebridge that became
exercisable for 1,114,016 shares of eGain common stock. As of August 20, 1999,
options to purchase 675,166 shares of common stock were outstanding under this
plan.
1999 Employee Stock Purchase Plan
The board of directors adopted our 1999 Employee Stock Purchase Plan in July
1999, to be effective upon completion of this offering. A total of 750,000
shares of common stock have been reserved for issuance under our employee stock
purchase plan. Our 1999 Employee Stock Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, is administered by the
board of directors or by a committee appointed by the board. Employees
(including officers and employee directors of eGain but excluding 5% or greater
stockholders) are eligible to participate if they are customarily employed for
more than 20 hours per week and for at least five months in any calendar year.
Our 1999 Employee Stock Purchase Plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed 15% of an
employee's compensation.
The board of directors will establish participation periods for our 1999
Employee Stock Purchase Plan, none of which will exceed 6 months. During each
participation period, payroll deductions will accumulate, without interest. On
the purchase dates set by the board of directors for each participation period,
accumulated payroll deductions will be used to purchase common stock. The
purchase price will be equal to 85% of the fair market value per share of
common stock on either the first day of the participation period or on the
purchase date, whichever is less. Employees may withdraw their accumulated
payroll deductions at any time. Participation in our 1999 Employee Stock
Purchase Plan ends automatically on termination of employment with eGain.
Immediately prior to the effective time of a corporate reorganization, the
participation period then in progress shall terminate and stock will be
purchased with the accumulated payroll deductions, unless the 1999 Employee
Stock Purchase Plan is assumed by the surviving corporation or its parent
corporation pursuant to the plan of merger or consolidation. Our 1999 Employee
Stock Purchase Plan will terminate in July 2009, unless sooner terminated by
the board of directors.
401(k) Plan
We intend to establish a tax-qualified employee savings and retirement plan
for which eGain's employees will generally be eligible. Pursuant to the 401(k)
Plan, employees may elect to reduce their current compensation and have the
amount of such reduction contributed to the 401(k) Plan. To date, eGain has
made no matching contributions. The 401(k) Plan is intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) Plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by eGain, if any, will be deductible by eGain when made.
54
<PAGE>
Employment Agreements and Change in Control Arrangements
We do not currently have any employment contracts with any of our named
executive officers. The shares of common stock issued to Ashutosh Roy and
Gunjan Sinha vest over a period of time, which vesting is accelerated in the
event of a change of control of eGain.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers and may indemnify its other officers and
employees and other agents to the fullest extent permitted by law. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the bylaws would permit indemnification.
We are entering into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our certificate of
incorporation and bylaws. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
55
<PAGE>
CERTAIN TRANSACTIONS
Since our inception, there has not been any transaction or series of
transactions to which we were or are a party in which the amount involved
exceeded or exceeds $60,000 and in which any director, executive officer,
holder of more than 5% of any class of our voting securities or any member of
the immediate family of any of the foregoing persons had or will have a direct
or indirect material interest, other than the transactions described below.
Transactions with Management and Others
In December 1997, we sold 4,000,000 shares of common stock to each of
Ashutosh Roy, a founder and our Chief Executive Officer, and Gunjan Sinha, a
founder and our President, at a purchase price of $0.005 per share.
Between June 1998 and July 1999, we sold and issued 8,608,585 shares of our
preferred stock for an aggregate consideration of $14,671,004. We sold
5,406,585 shares of Series A preferred stock in June 1998 at a price of $0.8055
per share, 2,550,000 shares of Series B preferred stock between December 1998
and March 1999 at a price of $2.00 per share and 652,000 shares of Series D
preferred stock in July 1999 at a price of $8.00 per share. Upon completion of
this offering, each share of Series A preferred stock, Series B preferred stock
and Series D preferred stock will convert into one share of common stock.
The following table summarizes purchases, valued in excess of $60,000, of
shares of preferred stock by our directors, executive officers and our 5%
stockholder:
<TABLE>
<CAPTION>
Number of Shares
---------------------------
Series A Series B Series D
--------- -------- --------
<S> <C> <C> <C>
Directors and Executive Officers
Ashutosh Roy........................................ -- 750,000 191,375
Gunjan Sinha........................................ -- 750,000 191,375
5% Stockholder
FW Ventures I, L.P.................................. 3,103,663 574,052 163,875
</TABLE>
These affiliates purchased the securities described above at the same price
and on the same terms and conditions as the unaffiliated investors in the
private financings. Messrs. Roy and Sinha were affiliates of eGain at the time
they purchased the above securities. FW Ventures I, L.P. became an affiliate of
eGain in connection with the Series A preferred stock financing.
In August 1999, A. Michael Spence, a director of eGain, exercised an option
to purchase 25,000 shares of common stock at a purchase price of $6.40 per
share by payment of $25 and execution of a five-year, full recourse promissory
note in the amount of $159,975. The note does not bear interest.
Business Relationships
In May 1999, we issued FW Ventures I, L.P. a warrant to purchase 175,000
shares of common stock at a price of $0.20 per share in connection with
financial advisory services rendered in connection with our acquisition of
Sitebridge. Mark Wolfson, a director of eGain, is a limited partner of FW
Ventures I, L.P. The transaction with FW Ventures I, L.P. was negotiated with
the unaffiliated directors of eGain and approved by the disinterested directors
of the Registrant and eGain believes that the services provided by FW Ventures
I, L.P. were provided on terms no less favorable to eGain than would have been
obtained from unaffiliated third parties.
It is our current policy that all transactions between us and our officers,
directors, 5% stockholders and their affiliates will be entered into only if
these transactions are approved by a majority of the disinterested directors,
are on terms no less favorable to us than could be obtained from unaffiliated
parties and are reasonably expected to benefit us.
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
common stock as of August 20, 1999, and as adjusted to reflect the sale of
5,000,000 shares of common stock in this offering, by:
. each person or entity known to us to own beneficially more than 5% of
our common stock;
. each of our directors;
. each of the named executive officers; and
. all executive officers and directors as a group.
The following table assumes no exercise of the underwriters' over-allotment
option. Applicable percentage ownership is based on 22,545,568 shares of common
stock outstanding as of August 20, 1999 and 27,815,562 shares outstanding
immediately after completion of this offering.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of August 20, 1999 are
deemed outstanding. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares set forth opposite such
stockholder's name.
Unless otherwise indicated, the address for the following stockholders is c/o
eGain Communications Corporation, 455 W. Maude Avenue, Sunnyvale, California
94086.
<TABLE>
<CAPTION>
Percentage Owned
Total Shares ------------------------------
Name and Address of Beneficial Beneficially
Owner Owned Before Offering After Offering
- ------------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholder:
FW Ventures I, L.P.(1)............ 4,016,590 17.7% 14.4%
201 Main Street, Suite 2600
Ft. Worth, TX 76011
Directors and Executive Officers:
Ashutosh Roy...................... 4,496,931 19.9% 16.2%
Gunjan Sinha...................... 4,496,931 19.9% 16.2%
Stephen E. Klann(2)............... 196,225 * *
Ryan M. Rosenberg(3).............. 150,000 * *
Eric N. Smit(4)................... 136,500 * *
A. Michael Spence(5).............. 25,000 *
Mark A. Wolfson(6)................ -- *
All directors and executive
officers as a group
(8 persons)(6)(7)................ 9,621,587 42.2% 34.3%
</TABLE>
- --------
* Less than 1%.
(1) Includes a warrant currently exercisable for 175,000 shares. J. Taylor
Crandall is a general partner of Group 31, Inc., which is the general
partner of FW Ventures I, L.P. and, as such, Mr. Crandall is the ultimate
natural person with voting or dispositive powers over the shares held by FW
Ventures I, L.P.
57
<PAGE>
(2) Includes 117,554 shares issuable under immediately exercisable options, of
which 96,000 shares are subject to eGain's right of repurchase.
(3) Includes 126,337 shares of common stock subject to eGain's right of
repurchase and 5,000 shares issuable under immediately exercisable options
and subject to eGain's right of repurchase.
(4) Includes 125,000 shares of common stock subject to eGain's right of
repurchase.
(5) Includes 25,000 shares subject to eGain's right of repurchase.
(6) Excludes 4,016,590 shares beneficially owned by FW Ventures I, L.P., of
which Mr. Wolfson is a limited partner.
(7) Includes 276,337 shares of common stock subject to eGain's right of
repurchase and 122,554 shares issuable under immediately exercisable
options, of which 101,000 shares are subject to eGain's right of
repurchase.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, and after giving effect to the conversion
of all outstanding preferred stock into common stock and the amendment of our
certificate of incorporation, our authorized capital stock will consist of
50,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value.
Common Stock
As of August 20, 1999, there were 22,545,568 shares of common stock
outstanding, held by approximately 130 stockholders of record.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of common stock are entitled to the
following:
Dividends. Holders of common stock are entitled to receive dividends out of
assets legally available for the payment of dividends at the times and in the
amounts as the board of directors from time to time may determine.
Voting. Holders of common stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders, including the election of
directors, and will not have cumulative voting rights unless eGain is subject
to Section 2115 of the California Corporations Code. Cumulative voting for the
election of directors is not authorized by our certificate of incorporation,
which means that the holders of a majority of the shares voted can elect all of
the directors then standing for election.
Preemptive rights, conversion and redemption. The common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Liquidation, dissolution and winding-up. Upon liquidation, dissolution or
winding-up of eGain, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation of any
preferred stock.
Each outstanding share of common stock is, and all shares of common stock to
be outstanding upon completion of this offering will be, upon payment
therefore, duly and validly issued, fully paid and nonassessable.
Preferred Stock
The board of directors is authorized, without action by the stockholders, to
designate and issue up to 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions on these shares.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could have the effect of delaying, deferring or preventing a
change in control of eGain. We have no current plans to issue any shares of
preferred stock.
59
<PAGE>
Warrants
In August 1998 and October 1998, we issued warrants to purchase an aggregate
of 74,511 shares of our Series A preferred stock at an exercise price of
$0.8055 per share. These warrants expire between August 2005 and five years
after completion of this offering. In May 1999, we assumed warrants exercisable
for the Series A preferred stock of Sitebridge in connection with our
acquisition of Sitebridge. These warrants became exercisable for an aggregate
of 121,006 shares of our Series C preferred stock at an exercise price of
$0.9916 per share. Upon completion of this offering, all of our warrants to
purchase preferred stock will convert into the right to purchase the equivalent
number of shares of common stock at the same exercise price per share.
In 1998, we also issued warrants to purchase 188,699 shares of Series A
preferred stock at an exercise price of $0.8055 per share. In April 1999, we
assumed a warrant to purchase common stock of Sitebridge that is exercisable
for 30,440 shares of our common stock at an exercise price of $0.2754 per
share. In June 1999, we issued a warrant to FW Ventures I, L.P. to purchase
175,000 shares of common stock at an exercise price of $0.20 per share. Each of
these warrants will expire upon completion of this offering.
Registration Rights
Upon completion of this offering, the holders of 10,602,594 shares of common
stock issuable upon conversion of the Series A, B, C and D preferred stock and
upon the exercise of warrants have the right to cause us to register these
shares under the Securities Act as follows:
. Demand Registration Rights. Six months after this offering, the holders
of a majority of the common stock issued upon conversion of Series A, B,
C or D preferred stock may request that we register their shares with
respect to all or part of their registrable securities having aggregate
proceeds of at least $10,000,000.
. Piggyback Registration Rights. The holders of registrable securities may
request to have their shares registered anytime we file a registration
statement to register any of our securities for our own account or for
the account of others.
. S-3 Registration Rights. The holders of at least thirty percent (30%) of
registrable securities have the right to request registrations on Form
S-3 if we are eligible to use Form S-3, have not already effected such
an S-3 registration within the past six (6) months, and if the aggregate
proceeds are at least $1,000,000.
Holders of an additional 7,111,112 shares of common stock have the piggyback
registration rights and S-3 registration rights described above.
Registration of shares of common stock pursuant to the exercise of demand
registration rights, piggyback registration rights or S-3 registration rights
under the Securities Act would result in these shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of such registration. See "Shares Eligible for Future Sale" and "Certain
Transactions."
eGain will pay all registration expenses, other underwriting discounts and
commissions in connection with any registration. The registration rights
terminate five years following completion of this offering, or, with respect to
each holder of registrable securities, when the holder can sell all of the
holder's shares in any 90-day period under Rule 144 under the Securities Act.
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<PAGE>
Section 2115
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, certain provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of
record by persons having addresses in California and the majority of the
company's operations occur in California. For example, while we are subject to
Section 2115, stockholders may cumulate votes in electing directors. This means
that each stockholder may vote the number of votes equal to the number of
candidates multiplied by the number of votes to which the stockholder's shares
are normally entitled in favor of one candidate. This potentially allows
minority stockholders to elect some members of the board of directors. When we
are no longer subject to Section 2115, cumulative voting will not be allowed
and a holder of 50% or more of our voting stock will be able to control the
election of all directors. In addition to this difference, Section 2115 has the
following additional effects:
. enables removal of directors with or without cause with majority
stockholder approval;
. places limitations on the distribution of dividends;
. extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of
shares; and
. provides for information rights and required filings in the event we
effect a sale of assets or complete a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders.
Delaware Anti-Takeover Law and Certain Charter Provisions
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, which,
subject to some exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested
stockholder, unless:
. prior to this date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
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<PAGE>
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person who, together with affiliates and associates owns, or within three
years, did own beneficially 15% or more of the outstanding voting stock of the
corporation.
Certificate of Incorporation and Bylaws
Under our certificate of incorporation, the board of directors has the power
to authorize the issuance of up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
stockholders. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may:
Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. delay, defer or prevent a change in control of eGain;
. discourage bids for the common stock at a premium over the market price
of our common stock;
. adversely affect the voting and other rights of the holders of our
common stock; and
. discourage acquisition proposals or tender offers for our shares and, as
a consequence, inhibit fluctuations in the market price of our shares
that could result from actual or rumored takeover attempts.
Our bylaws provide that:
. all stockholder action be taken at a stockholders' meeting; and
. special meetings of stockholders may only be called by the chairman of
the board, the chief executive officer or the board of directors.
The provisions described above, together with the ability of the board of
directors to issue preferred stock may have the effect of deterring a hostile
takeover or delaying a change in control or management of eGain.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Boston EquiServe.
Listing
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "EGAN."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock,
and we cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. As described below, only a limited number of shares will be
available for sale shortly after this offering due to contractual and legal
restrictions on resale. Nevertheless, sales of substantial amounts of our
common stock in the public market after the restrictions lapse could cause the
market price of our common stock to decline.
When this offering is completed, we will have a total of 27,815,562 shares of
common stock outstanding, assuming no exercise of outstanding options. The
5,000,000 shares offered by this prospectus will be freely tradable unless they
are purchased by our "affiliates," as defined in Rule 144 under the Securities
Act of 1933. The remaining 22,815,562 shares are "restricted," which means they
were originally sold in offerings that were not subject to a registration
statement filed with the Securities and Exchange Commission. These restricted
shares may be resold only through registration under the Securities Act of 1933
or under an available exemption from registration, such as provided through
Rule 144.
Lock-up Agreements
The holders of 22,815,562 shares of common stock have agreed to a 180-day
"lock-up" with respect to these shares. This generally means that they cannot
sell these shares during the 180 days following the date of this prospectus.
After the 180-day lock-up period, these shares may be sold in accordance with
Rule 144.
Rule 144
In general, under Rule 144, a person or persons whose shares are aggregated,
who has beneficially owned restricted securities for at least one year,
including the holding period of any holder who is not an affiliate, is entitled
to sell within any three month period a number of our shares of common stock
that does not exceed the greater of:
. 1% of the then outstanding shares of our common stock, which will equal
approximately 278,156 shares upon completion of this offering; or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of sale is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. Under Rule
144 and subject to volume limitations, 16,963,195 of the restricted shares will
be eligible for sale beginning 180 days after the date of the final prospectus,
and the remaining restricted shares will become salable at various times
thereafter.
Rule 144(k)
A person who is not deemed an affiliate of ours at any time during the 90
days preceding a sale and who has beneficially owned shares for at least two
years, including the holding period of any prior owner who is not an affiliate,
would be entitled to sell shares following this offering under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information or notice requirements of Rule 144.
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<PAGE>
Rule 701 and Options
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with some restrictions, including the holding period requirement, of
Rule 144. Any employee, officer or director or consultant who purchased his or
her shares pursuant to a written compensatory plan or contract may be entitled
to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without complying with the holding
period requirements of Rule 144. Rule 701 further provides that non-affiliates
may sell such shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait 90 days after the
date of this prospectus before selling such shares. However, all shares issued
by us pursuant to Rule 701 are subject to lock-up provisions and will only
become eligible for sale upon the expiration of 180 days after the date of this
prospectus.
Registration
Following this offering, we intend to file a registration statement under the
Securities Act covering shares of common stock subject to outstanding options
or issued or issuable under our 1997 Stock Option Plan, 1998 Stock Plan and our
1999 Employee Stock Purchase Plan. Based on the number of shares subject to
outstanding options at August 20, 1999, and currently reserved for issuance
under these plans, this registration statement would cover approximately
5,682,843 shares. This registration statement will automatically become
effective upon filing. Accordingly, shares registered under this registration
statement will, subject to Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market immediately after the
expiration of the 180-day lock-up agreements. In addition, holders of
10,602,594 shares of common stock will be entitled to registration rights. See
"Description of Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Volpe Brown Whelan & Company, LLC, have severally agreed with
us, subject to the terms and conditions of the underwriting agreement, to
purchase from us the number of shares of common stock set forth opposite their
names below. The underwriters are committed to purchase and pay for all such
shares if any are purchased.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
Volpe Brown Whelan & Company, LLC................................
---------
Total.......................................................... 5,000,000
=========
</TABLE>
We have been advised by the representatives that the underwriters propose to
offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which $
may be reallowed to other dealers. After the initial public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the representatives. No such reduction shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or
in part.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 750,000 additional shares of common stock at the initial public
offering price per share as we will receive for the 5,000,000 shares that the
underwriters have agreed to purchase. To the extent that the underwriters
exercise this option, each of the underwriters will have a firm commitment to
purchase approximately the same percentage of these additional shares that the
number of shares of common stock to be purchased by it shown in the above table
represents as a percentage of the shares offered hereby. If purchased, these
additional shares will be sold by the underwriters on the same terms as those
on which the 5,000,000 shares are being sold. We will be obligated, pursuant to
the option, to sell shares to the extent the option is exercised. The
underwriters may exercise this option only to cover over- allotments made in
connection with the sale of the shares of common stock offered in this
offering. If this option is exercised in full, the total public offering price,
underwriting discounts and commissions and proceeds to us will be
$ , $ and $ , respectively.
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<PAGE>
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
Total
-------------------
Without With
Per Over- Over-
Share allotment allotment
----- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable
by us.......................................... $ $ $
</TABLE>
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $980,000.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-up Agreements. Each of our officers, directors and stockholders has
agreed, for a period of 180 days after the date of this prospectus, that,
subject to exceptions, they will not offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock, any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock owned as of the date of this prospectus or, with certain
exceptions, thereafter acquired directly by such holders or with respect to
which they have or hereafter acquire the power of disposition, without the
prior written consent of BancBoston Robertson Stephens Inc. However, BancBoston
Robertson Stephens Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to the lock-up
agreements. There are no agreements between the representatives and any of our
stockholders providing consent by the representatives to the sale of shares
prior to the expiration of the lock-up period.
Future Sales. In addition, we have agreed that until 180 days after the date
of this prospectus, we will not, subject to certain exceptions, without the
prior written consent of BancBoston Robertson Stephens Inc.:
. consent to the disposition of any shares held by stockholders prior to
the expiration of the lock-up period or
. issue, sell, contract to sell or otherwise dispose of any shares of
common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock other than (1) the sale of shares in this
offering, (2) the issuance of common stock upon the exercise of
outstanding warrants and options, and (3) the issuance of options under
existing stock option and incentive plans. See "Shares Eligible for
Future Sale."
Listing. We have applied for quotation on the Nasdaq National Market under
the symbol "EGAN."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the representatives. Among the factors to be considered in such
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us,
66
<PAGE>
estimates of our business potential, our present state of development and
other factors deemed relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the common stock on behalf
of the underwriters for the purpose of fixing or maintaining the price of the
common stock. A "syndicate covering transaction" is the bid for or the
purchase of the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed
by such underwriter or syndicate member. The representatives have advised us
that these transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
Directed Share Program. At our request, the underwriters have reserved up to
250,000 shares of common stock to be issued by us and offered hereby for sale,
at the initial public offering price, to directors, officers, employees,
business associates and related persons of eGain. 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
that are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.
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<PAGE>
LEGAL MATTERS
Selected legal matters with respect to the validity of the common stock
offered by this prospectus are being passed upon for eGain by Pillsbury Madison
& Sutro LLP, Palo Alto, California. Certain partners of Pillsbury Madison &
Sutro LLP beneficially own an aggregate of 51,490 shares of eGain common stock.
Legal matters in connection with this offering will be passed upon for the
underwriters by Cooley Godward LLP, San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at June 30, 1998 and 1999, for the period from September
30, 1997 (inception) through June 30, 1998, and for the year ended June 30,
1999 as set forth in their report. We have included our consolidated financial
statements in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given upon the authority of such firm
as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Sitebridge Corporation (a development stage company) at December
31, 1997 and 1998, for the period from September 10, 1996 (inception) through
December 31, 1997 and for the year ended December 31, 1998 and for the period
from September 10, 1996 (inception) through December 31, 1998 as set forth in
their report. The financial statements of Sitebridge Corporation (a development
stage company) are included in the prospectus in reliance on Ernst & Young
LLP's report, given upon the authority of such firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement. For
further information with respect to eGain and the common stock offered by this
prospectus, we refer you to the registration statement and the exhibits and
schedules filed as part of the registration statement. You may read and copy
any document we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities and Exchange Act, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. These periodic reports, proxy
statements and other information will be available for inspection and copying
at the SEC's public reference rooms and the Web site of the SEC referred to
above.
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<PAGE>
eGAIN COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF eGAIN COMMUNICATIONS CORPORATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statement of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
AUDITED FINANCIAL STATEMENTS OF SITEBRIDGE CORPORATION
Report of Ernst & Young LLP, Independent Auditors......................... F-21
Balance Sheets............................................................ F-22
Statements of Operations.................................................. F-23
Statement of Stockholders' Equity (Net Capital Deficiency)................ F-24
Statements of Cash Flows.................................................. F-25
Notes to Financial Statements............................................. F-26
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF eGAIN
COMMUNICATIONS CORPORATION AND SITEBRIDGE CORPORATION..................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders eGain Communications Corporation
We have audited the accompanying consolidated balance sheets of eGain
Communications Corporation as of June 30, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from inception (September 10, 1997) to June 30, 1998 and for
the year ended June 30, 1999. These financial statements are the
responsibility of eGain Communications Corporation'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 eGain
Communications Corporation at June 30, 1998 and 1999, and the consolidated
results of its operations and its cash flows for the period from inception
(September 10, 1997) to June 30, 1998 and for the year ended June 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young llp
Palo Alto, California
July 16, 1999
F-2
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
stockholders'
June 30, equity at
------------------------ June 30,
1998 1999 1999
---------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............ $3,830,692 $ 1,265,147
Accounts receivable.................. -- 705,488
Prepaid and other current assets..... 49,164 512,896
---------- ------------
Total current assets............... 3,879,856 2,483,531
Property and equipment, net............ 110,134 1,132,651
Goodwill and other purchased intangible
assets, net........................... -- 20,194,972
Other assets........................... -- 153,884
---------- ------------
$3,989,990 $ 23,965,038
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings--line of credit...... $ -- $ 1,000,000
Accounts payable..................... 188,651 683,761
Accrued compensation................. -- 343,471
Accrued liabilities.................. -- 474,757
Deferred revenue..................... -- 302,119
Current portion of notes payable..... -- 434,762
---------- ------------
Total current liabilities.......... 188,651 3,238,870
Notes payable, net of current portion.. -- 221,093
Other long-term liabilities............ -- 21,791
Commitments
Stockholders' Equity:
Convertible preferred stock, $0.001
par value, 10,035,887 shares
authorized, issuable in series:
5,406,585 and 9,566,378 shares
issued and outstanding at June 30,
1998 and 1999; no shares issued, or
outstanding pro forma (aggregate
liquidation preference of $7,172,056
at June 30, 1999)................... 4,329,264 16,986,961 $ --
Preferred stock: $0.001 par value;
5,000,000 shares authorized, no
shares issued and outstanding....... -- -- --
Common stock, $0.001 par value,
50,000,000 shares authorized,
8,000,000 and 10,946,661 shares
issued and outstanding at June 30,
1998 and 1999; 20,513,039 shares
issued and outstanding pro forma.... 295,000 7,288,859 20,513
Additional paid-in capital........... 291,287 17,549,416 41,804,723
Notes receivable from stockholders... -- (143,653) (143,653)
Deferred stock compensation.......... (175,774) (8,956,117) (8,956,117)
Accumulated other comprehensive
income.............................. -- 757 757
Accumulated deficit.................. (938,438) (12,242,939) (12,242,939)
---------- ------------ ------------
Total stockholders' equity......... 3,801,339 20,483,284 $ 20,483,284
---------- ------------ ============
$3,989,990 $ 23,965,038
========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
inception
(September 10,
1997) to Year ended
June 30, June 30,
1998 1999
-------------- ------------
<S> <C> <C>
Revenue:
Hosting........................................ $ -- $ 137,385
License fees................................... -- 473,450
Service........................................ 2,000 408,508
--------- ------------
Total revenue................................ 2,000 1,019,343
Costs and expenses:
Cost of revenue................................ 52,481 1,772,159
Sales and marketing............................ 245,553 4,181,816
Research and development....................... 313,894 2,095,784
General and administrative..................... 214,052 1,234,865
Amortization of goodwill and other intangible
assets........................................ -- 1,217,057
Amortization of deferred compensation.......... 58,258 1,817,266
--------- ------------
Total costs and expenses..................... 884,238 12,318,947
--------- ------------
Loss from operations............................. (882,238) (11,299,604)
Interest income.................................. 1,509 111,360
Interest and other expenses...................... (57,709) (116,257)
--------- ------------
Net loss......................................... $(938,438) $(11,304,501)
========= ============
Basic and diluted net loss per share............. $ (17.78) $ (2.14)
========= ============
Shares used in computing basic and diluted net
loss per share.................................. 52,778 5,294,736
========= ============
Proforma basic and diluted net loss per share
(unaudited)..................................... $ (0.93)
============
Shares used in computing proforma basic and
diluted net loss per share (unaudited).......... 12,153,444
============
</TABLE>
See accompanying notes.
F-4
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Notes Accumulated
Preferred Stock Common Stock Additional Receivable Deferred Other
--------------------- --------------------- Paid-In From Stock Comprehensive Accumulated
Shares Amount Shares Amount Capital Stockholders Compensation Income Deficit
--------- ----------- ---------- ---------- ----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock to
founders........ -- $ -- 8,000,000 $ 295,000 -- $ -- $ -- $ -- $ --
Issuance of
Series A
convertible
preferred stock
for cash and
conversion of
notes, net of
issuance costs
of $25,740...... 5,406,585 4,329,264 -- -- -- -- -- -- --
Issuance of
warrant......... -- -- -- -- 57,255 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 234,032 -- (234,032) -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 58,258 -- --
Net loss........ -- -- -- -- -- -- -- -- (938,438)
--------- ----------- ---------- ---------- ----------- --------- ------------ ---- ------------
BALANCE AT JUNE
30, 1998........ 5,406,585 4,329,264 8,000,000 295,000 291,287 -- (175,774) -- (938,438)
Issuance of
Series B
convertible
preferred stock
for cash, net of
issuance costs
of $24,494...... 2,550,000 5,075,506 -- -- -- -- -- -- --
Issuance of
common stock
upon exercise of
employee stock
options and
other issuances
under the 1998
Stock Plan...... -- -- 1,491,147 167,500 -- (143,653) -- -- --
Issuance of
Series C
preferred and
common stock in
exchange for
SiteBridge
preferred and
common stock.... 1,609,793 7,582,191 1,455,514 6,826,359 6,603,225 -- -- -- --
Issuance of
warrants........ -- -- -- -- 36,000 -- -- -- --
Deferred stock
compensation.... -- -- -- -- 10,618,904 -- (10,618,904) -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- 1,838,561 -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (11,304,501)
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- 757 --
Total
comprehensive
loss............ -- -- -- -- -- -- -- -- --
--------- ----------- ---------- ---------- ----------- --------- ------------ ---- ------------
BALANCE AT JUNE
30, 1999........ 9,566,378 $16,986,961 10,946,661 $7,288,859 $17,549,416 $(143,653) $ (8,956,117) $757 $(12,242,939)
========= =========== ========== ========== =========== ========= ============ ==== ============
<CAPTION>
Stockholders'
Equity
--------------
<S> <C>
Issuance of
common stock to
founders........ $ 295,000
Issuance of
Series A
convertible
preferred stock
for cash and
conversion of
notes, net of
issuance costs
of $25,740...... 4,329,264
Issuance of
warrant......... 57,255
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 58,258
Net loss........ (938,438)
--------------
BALANCE AT JUNE
30, 1998........ 3,801,339
Issuance of
Series B
convertible
preferred stock
for cash, net of
issuance costs
of $24,494...... 5,075,506
Issuance of
common stock
upon exercise of
employee stock
options and
other issuances
under the 1998
Stock Plan...... 23,847
Issuance of
Series C
preferred and
common stock in
exchange for
SiteBridge
preferred and
common stock.... 21,011,775
Issuance of
warrants........ 36,000
Deferred stock
compensation.... --
Amortization of
deferred stock
compensation.... 1,838,561
Comprehensive
loss:
Net loss........ (11,304,501)
Foreign currency
translation
adjustment...... 757
--------------
Total
comprehensive
loss............ (11,303,744)
--------------
BALANCE AT JUNE
30, 1999........ $ 20,483,284
==============
</TABLE>
See accompanying notes.
F-5
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
inception
(September 10,
1997) to Year ended
June 30, June 30,
1998 1999
-------------- ------------
<S> <C> <C>
Operating activities
Net loss....................................... $ (938,438) $(11,304,501)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................. 7,000 279,400
Amortization of goodwill and other intangible
assets...................................... -- 1,217,057
Amortization of deferred compensation........ 58,258 1,838,561
Amortization of loan discount associated with
warrants.................................... 57,255 14,000
Changes in operating assets and liabilities:
Accounts receivable........................ -- (653,988)
Prepaid and other current assets........... (49,164) (456,307)
Other assets............................... -- (136,384)
Accounts payable........................... 187,982 417,894
Accrued compensation....................... 670 267,800
Other accrued liabilities.................. -- 409,645
Deferred revenue........................... -- 302,119
Other liabilities.......................... -- 21,791
---------- ------------
Net cash used in operating activities.... (676,437) (7,782,913)
---------- ------------
Investing activities
Purchases of property and equipment............ (117,134) (1,258,162)
Cash assumed in Sitebridge acquisition......... -- 78,321
---------- ------------
Net cash used in investing activities.... (117,134) (1,179,841)
---------- ------------
Financing activities
Proceeds from loans............................ -- 1,297,855
Net proceeds from issuance of preferred stock.. 4,329,263 5,075,507
Proceeds from issuance of common stock ........ 295,000 23,847
---------- ------------
Net cash provided by financing
activities.............................. 4,624,263 6,397,209
---------- ------------
Net increase (decrease) in cash and cash
equivalents..................................... 3,830,692 (2,565,545)
Cash and cash equivalents at beginning of
period.......................................... -- 3,830,692
---------- ------------
Cash and cash equivalents at end of period....... $3,830,692 $ 1,265,147
========== ============
Supplemental disclosure of cash flow information
Interest paid.................................. $ -- $ 111,146
========== ============
Conversion of promissory notes to preferred
stock........................................... $ 800,000 $ --
========== ============
Issuance of warrants in exchange for services in
connection with the Sitebridge acquisition...... $ -- $ 789,250
========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
eGain Communications Corporation ("eGain"), formerly known as Parsec
Communications Corporation, is a developer of customer service infrastructure
solutions for companies engaged in eCommerce. Businesses use eGain's
applications to effectively manage high volumes of customer email as well as
live Web-based interaction. eGain's email management system helps businesses
route, track, analyze and respond to customer emails. eGain was incorporated in
Delaware on September 10, 1997.
During fiscal 1999, eGain commenced shipment of its principal products and
emerged from the development stage. Although eGain is no longer in the
development stage, eGain continues to be subject to many of the risks and
challenges associated with companies in a comparable stage of development,
including dependence on key individuals, competition from substitute products
and from larger companies, successful marketing of its products and acceptance
of its technology, successful development of product enhancements on a
continuing basis and the need for adequate financing to support anticipated
future growth.
eGain has incurred cumulative losses totaling approximately $12,243,000 since
its incorporation and expects to incur additional losses for the foreseeable
future. eGain's current operating plan shows that eGain will continue to
require additional capital to fund its operations and market its products. To
date, eGain has financed its operations with the net proceeds from private
sales of convertible preferred stock, bank borrowings and capital equipment
financing. eGain plans to seek additional funding through public or private
financing or other arrangements with third parties. If the financing
arrangements contemplated by management are not consummated, eGain may have to
seek other sources of capital or adjust its operating plan to delay or reduce
the Company's expenditures and the scope of its operations.
Principles of Consolidation
The consolidated financial statements include the accounts of eGain and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ materially from these
estimates.
Revenue Recognition
Revenue from hosting services is recognized ratably over the period of the
agreement as services are provided. Hosting agreements are typically for a
period of one year and automatically renew unless either party cancels the
agreement.
F-7
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue from 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 eGain obligations remain, the fee is fixed or
determinable, and collectibility is probable. License fee revenue in multiple
element contracts is recognized using the residual method when there is vendor
specific appropriate evidence of the fair value of all undelivered elements in
an arrangement but vendor specific appropriate evidence of fair value does not
exist for one or more of the delivered elements in an arrangement. Under the
residual method, the total fair value of the undelivered elements, as indicated
by vendor specific objective evidence, is deferred and the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements, regardless of any
separate prices stated within the contract for each element. If sufficient
vendor-specific objective evidence does not exist for undelivered elements in
an arrangement, all revenue from the arrangement is deferred until the earlier
of the point at which (a) such sufficient vendor-specific objective evidence
does exist or (b) all elements of the arrangement have been delivered.
Service revenue is primarily comprised of revenue from consulting fees,
maintenance agreements, and training. Service revenue from consulting and
training billed on a time and materials basis is recognized as performed.
Service revenue on fixed price service arrangements is recognized upon
completion of specific contractual milestone events, or based on an estimated
percentage of completion as work progresses. Maintenance agreements include the
right to software updates on an if-and-when-available basis. Maintenance
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.
eGain has adopted Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97- 2"), and Statement of Position 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 97-
2 and SOP 98-4 provide guidance for recognizing revenue on software
transactions and supersedes SOP 91-1. The adoption of SOP 97-2 and SOP 98-4 did
not have a material impact on eGain's financial results.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9
amends SOP 98-4 to extend the 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 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. eGain believes
that the adoption of SOP 98-9 will not have a material effect on results of
operations or financial condition.
Cash and Cash Equivalents
eGain considers all highly liquid investments with a maturity from date of
purchase of three months or less to be cash equivalents. Cash equivalents
consist primarily of money market accounts.
Concentration of Credit Risk and Significant Customers
Financial instruments that subject eGain to concentrations of credit risk
consist principally of cash investments and trade accounts receivable. eGain
invests cash which is not required for
F-8
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
immediate operating needs principally in money market funds, which bear minimal
risk.
eGain's customers are currently concentrated in the United States. eGain
performs ongoing credit evaluations and generally does not require collateral.
For the year ended June 30, 1999, two customers accounted for 15.6% and 10.8%
of revenue. One customer represented all of the revenue for the period from
inception (September 10, 1997) to June 30, 1998.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, typically three years.
Goodwill and Purchased Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair
market value of tangible and intangible net assets acquired in a business
combination. Goodwill and other purchased intangible assets related to the
acquisition of Sitebridge Corporation are amortized on a straight-line basis
over three years from the date of acquisition.
Under Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS No. 121"), the carrying values of long-term assets and intangibles other
than developed technology ("other intangibles") will be regularly reviewed to
determine if the carrying value of the assets is impaired. The reviews look for
the existence of facts or circumstances, either internal or external, which
indicate the carrying value of the asset cannot be recovered. Such indicators
would include a lack of successful further development and integration of the
acquired company's technology into eGain's operations, lack of the market
acceptance of the products and lower than expected cash flows from operations.
No impairment has been indicated to date. If there is an indication of
impairment in the future, and undiscounted expected future cash flows are less
than the carrying amount of the assets, eGain will measure the amount of the
loss based on discounted expected future cash flows from the impaired assets.
The cash flow calculations would be based on management's best estimates, using
appropriate assumptions and projections at the time.
In addition, eGain will assess the impairment of goodwill not included in the
scope of SFAS 121 under Accounting Principles Board Opinion No. 17, "Intangible
Assets", (APB 17). Write-offs and write-downs to net realizable value of
goodwill not included in the scope of SFAS 121 will typically be made only when
the Company has effectively abandoned and stopped selling virtually all of the
products acquired in an acquisition. No impairment has been indicated to date.
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life or the ratio of current
revenues to the total of current and anticipated future revenues. The
recoverability of the carrying value of purchased developed technology and
associated goodwill is reviewed periodically. The carrying value of developed
technology is compared to the estimated future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that
product, including the costs of performing maintenance and customer support
(net undiscounted cash flows) and to the extent that the carrying value exceeds
the undiscounted cash flows the difference will be written off. No write-off
has been recorded to date.
F-9
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising Costs
Advertising costs are accounted for as expenses in the period in which they
are incurred. Advertising expense for the period from inception (September 10,
1997) to June 30, 1998 and the year ended June 30, 1999 were approximately zero
and $210,000, respectively.
Software Development Costs
Software development costs are included in research and development and are
expensed as incurred until the technological feasibility of the product is
achieved. To date, the period between achieving technological feasibility and
general availability of software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, eGain has
not capitalized any software development costs.
Stock-Based Compensation
eGain accounts for its stock-based compensation arrangements with employees
using the intrinsic value method. Deferred stock-based compensation is recorded
on the date of grant when the deemed fair value of the underlying common stock
exceeds the exercise price for stock options.
In accordance with the Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation. ("SFAS 123"), stock options and
warrants issued to non-employees are accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever is more reliably measured.
Comprehensive Loss
eGain adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), at June 30, 1999. Under SFAS 130, eGain is
required to display comprehensive income and its components as part of the
financial statements. Other comprehensive income includes certain changes in
equity that are excluded from net income (loss). Total comprehensive loss
(including foreign currency translation effects) is shown in the statement of
stockholders' equity.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), effective for
financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way that public business enterprises report
financial and descriptive information about reportable operating segments in
annual financial statements and interim financial reports issued to
stockholders. eGain adopted SFAS 131 effective July 1, 1998. eGain operates in
one segment. Operating losses generated by the foreign operations of eGain and
their corresponding identifiable assets were not material in any period
presented. eGain's export revenue has not been material in any period
presented.
F-10
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
Basic and diluted net loss per share are presented in accordance with SFAS
No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Pursuant
to the Securities and Exchange Commission Staff Accounting Bulletin No. 98,
ordinary shares and convertible preferred shares issued or granted for nominal
consideration prior to the anticipated effective date of eGain's initial public
offering must be included in the calculation of basic and diluted net loss per
share as if they had been outstanding for all periods presented. To date, eGain
has not had any issuances or grants for nominal consideration.
Basic and diluted net loss per share has been computed using the weighted-
average number of shares of common stock outstanding during the period. Had
eGain been in a net income position, diluted earnings per share would have
included the shares used in the computation of basic net loss per share as well
as the impact of common shares outstanding subject to repurchase and
outstanding options and warrants to purchase an additional 699,699 and
2,833,548 shares, prior to the application of the treasury stock method, for
the period from inception (September 10, 1997) to June 30, 1998 and the year
ended June 30, 1999. Such shares have been excluded because they are
antidilutive for all periods presented. Shares of convertible preferred stock
have been excluded from the computation.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted-average number of
shares of common stock outstanding, including the pro forma effects of the
automatic conversion of eGain's convertible preferred stock into shares of
common stock, effective upon the closing of eGain's initial public offering as
if such conversion occurred at the date of original issuance.
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows:
<TABLE>
<CAPTION>
Period from
inception
(September 10, Year ended
1997) to June 30,
June 30, 1998 1999
-------------- ------------
<S> <C> <C>
Net loss.......................................... $(938,438) $(11,304,501)
--------- ------------
Basic and diluted:
Weighted-average shares of common stock
outstanding.................................... 153,846 8,757,398
Less weighted-average shares subject to
repurchase..................................... (101,068) (3,462,662)
--------- ------------
Shares used in computing basic and diluted net
loss per share................................. 52,778 5,294,736
========= ============
Basic and diluted net loss per share.............. $ (17.78) $ (2.14)
========= ============
Pro forma:
Shares used above............................... 5,294,736
Pro forma adjustment to reflect weighted effect
of assumed conversion of convertible preferred
stock (unaudited).............................. 6,858,708
------------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)......... 12,153,444
============
Pro forma basic and diluted net loss per share
(unaudited).................................... $ (0.93)
============
</TABLE>
F-11
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for the year ending June 30, 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. eGain believes the adoption of SFAS 133 will not
have a material effect on the financial statements, since it currently does not
invest in derivative instruments and engage in hedging activities.
In March 1998, the American Institute of Certified Public Accounts issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that
entities capitalize certain costs related to internal use software once certain
criteria have been met. eGain is required to adopt SOP No. 98-1 effective July
1, 1999. eGain believes that the adoption of SOP No. 98-1 will not have a
material impact on its financial statements.
2. ACQUISITION OF SITEBRIDGE CORPORATION
Effective April 30, 1999, eGain acquired Sitebridge Corporation
("Sitebridge"). The acquisition was accounted for as a purchase and,
accordingly, the results of operations of Sitebridge have been included in the
consolidated financial statements since the date of acquisition. In connection
with the acquisition eGain issued the following equity securities in exchange
for all the outstanding common and preferred stock, and options and warrants to
purchase shares of Sitebridge common and preferred stock:
<TABLE>
<CAPTION>
No. of
Securities Per Share Aggregate
eGain Securities Issued Issued Value Value
----------------------- ---------- ----------- --------------
(in thousands)
<S> <C> <C> <C>
Series C convertible preferred stock.... 1,609,793 $4.71 $ 7,582
Common Stock............................ 1,455,514 $4.69 6,826
Warrants to acquire Series C preferred
stock.................................. 121,006 $3.85 466
Warrants to acquire common stock........ 30,440 $4.57 139
Options to acquire common stock......... 1,114,016 $4.57-$4.67 5,135
-------
Total value of securities issued in the
acquisition of Sitebridge.............. 20,148
Transaction Costs....................... 864
-------
Total purchase price.................... $21,012
=======
</TABLE>
The fair market value of the eGain securities issued to Sitebridge were based
on an independent appraisal that used a standard options-based methodology that
incorporated the estimated value range for eGain, the liquidation preference
and conversion features of eGain's preferred stock. Each security was split
into a number of call options, which were valued using the Black-Scholes option
pricing model. Principal assumptions used in the Black-Scholes model were
volatility of 100 percent, risk free interest rate of 4.5 percent, term of 9
months and the stock price was estimated as the indicated range of equity value
concluded through the market capitalization approach.
F-12
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated to the assets acquired based on their
estimated fair values. The excess of the purchase price over the fair value of
the net tangible and intangible assets acquired (goodwill) was approximately
$20,457,000. Goodwill and other intangible assets related to the acquisition of
Sitebridge Corporation are being amortized on a straight-line basis over three
years.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
<TABLE>
<S> <C>
Purchased intangible assets (including goodwill).................... $21,412
Cash, receivables, and other assets................................. 155
Property and equipment.............................................. 43
Liabilities assumed................................................. (598)
-------
Net assets acquired............................................... $21,012
=======
</TABLE>
Goodwill and purchased intangible assets include the following (in
thousands):
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Goodwill............................................................ $19,962
Developed technology................................................ 1,050
Workforce........................................................... 350
Customer base....................................................... 50
-------
21,412
Less accumulated amortization....................................... (1,217)
-------
$20,195
=======
</TABLE>
The following table presents the unaudited pro forma results assuming that
eGain had merged with Sitebridge at the beginning of fiscal 1999. These
unaudited pro forma results have been prepared for comparative purposes only
and include certain adjustments, such as additional amortization expense as a
result of goodwill. They do not purport to be indicative of the results of
operations that actually would have resulted had the combination occurred on
July 1, 1998, or of future results of operations of the consolidated entities.
<TABLE>
<CAPTION>
Year ended
June 30,
1999
-----------
<S> <C>
Revenue........................................................ $ 1,076,877
Net loss....................................................... $19,126,753
Basic and diluted net loss per share........................... $ (3.07)
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30,
--------------------
1998 1999
-------- ----------
<S> <C> <C>
Computers and equipment................................ $107,850 $1,215,244
Furniture and fixtures................................. 9,284 188,807
Leasehold improvements................................. -- 15,000
-------- ----------
117,134 1,419,051
Less accumulated depreciation.......................... (7,000) (286,400)
-------- ----------
Property and equipment, net............................ $110,134 $1,132,651
======== ==========
</TABLE>
F-13
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. NOTES PAYABLE
In August 1998, eGain obtained a $1,000,000 line of credit from a bank for
equipment purchases and working capital financing. Borrowings under the line of
credit are collateralized by all of eGain's assets and bear interest at the
bank's prime rate plus 0.25%. At June 30, 1999, $1,000,000 was outstanding
under this agreement. The entire balance is due on February 6, 2000.
In October 1998, eGain obtained a $1,500,000 credit facility with a leasing
company for equipment purchases. Borrowings under the credit facility are
collateralized by certain fixed assets and bear an imputed interest rate of
13.68%. At June 30, 1999, eGain had borrowed approximately $342,000 under the
credit facility, of which $297,855 was outstanding. Monthly payments of
approximately $9,400 are due under existing borrowings through July 2002.
In conjunction with the line of credit and equipment credit facilities, eGain
issued warrants to purchase 74,511 shares of its Series A preferred stock at
$0.8055 per share (see Note 6).
In connection with the acquisition of Sitebridge, eGain assumed two
promissory notes for a total amount of $380,000. The notes accrue interest at
5% per year and are payable on December 31, 2000.
Long-term debt repayments are due as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................ $434,762
2001................................................................ 110,547
2002................................................................ 110,546
--------
$655,855
========
</TABLE>
5. COMMITMENTS
Operating Lease Commitments
eGain leases its facilities under noncancelable operating leases expiring in
September 2003. Rent expense for facilities under operating leases was
approximately $80,000 and $362,000 for the period from inception (September 10,
1997) to June 30, 1998 and the year ended June 30, 1999. Future minimal rental
commitments under operating leases at June 30, 1999 are as follows:
<TABLE>
<S> <C>
2000.............................................................. $1,049,578
2001.............................................................. 1,360,782
2002.............................................................. 647,197
2003.............................................................. 397,252
2004.............................................................. 85,244
----------
$3,540,053
==========
</TABLE>
F-14
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Convertible preferred stock as of June 30, 1999 consisted of the following:
<TABLE>
<CAPTION>
Noncumulative Liquidation
Shares Shares Dividend Preference
Authorized Outstanding Per Share Per Share
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Series A.................... 5,707,043 5,406,585 $0.06 $0.8055
Series B.................... 2,600,000 2,550,000 $0.16 $2.00
Series C.................... 1,728,844 1,609,793 $0.08 $1.00
---------- ---------
10,035,887 9,566,378
========== =========
</TABLE>
Each share of Series A, B, and C preferred stock is convertible, at the
option of the holder, into a share of common stock, on a one-for-one basis,
subject to adjustments for dilution, if any, resulting from future stock
issuances. Additionally, the preferred shares automatically convert into common
stock concurrent with the closing of an underwritten public offering of common
stock under the Securities Act of 1933 in which eGain receives at least
$10,000,000 in gross proceeds and the price per share is at least $5.00
(subject to adjustment for a recapitalization or certain other stock
adjustments). Each share of Series A, B, and C preferred stock has voting
rights equal to one share common stock on an as-if-converted basis.
No dividends have been declared or paid through June 30, 1999. Under the
terms of the bank line of credit, eGain is prohibited from paying a dividend.
The Series A, B, and C preferred stockholders are entitled to receive, upon
liquidation, a distribution of $0.8055, $2.00, and $1.00 per share (subject to
adjustment for a recapitalization) plus all declared but unpaid dividends. The
Series A and B stockholders are entitled to receive liquidation preferences
prior to any distribution to the Series C stockholders. Thereafter, the
remaining assets and funds, if any, shall be distributed ratably on a per-share
basis among the common stockholders and the Series A, B, and C preferred
stockholders until the Series A, B, and C preferred stockholders have received
an aggregate amount of $2.81925, $6.00, and $2.00 per share.
Common Stock
eGain has issued shares of common stock to founders which are subject to
eGain's right to repurchase upon termination of employment. The repurchase
rights lapse ratably over a period of two years from the date of issuance. At
June 30, 1998 and 1999, 5,333,334 and 2,666,666 shares were subject to
repurchase.
At June 30, 1999, common stock was reserved for issuance as follows:
<TABLE>
<S> <C>
Conversion of preferred stock................................... 9,566,378
Exercise of outstanding stock options........................... 2,524,928
Shares of common stock available for grant under the 1998 Stock
Plan........................................................... 567,004
Exercise of preferred and common stock warrants outstanding..... 591,471
----------
13,249,781
==========
</TABLE>
F-15
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain option holders have exercised options to purchase shares of
restricted common stock in exchange for five-year, full recourse promissory
notes. The notes bear interest ranging from 4.5% to 5.5% and expire at various
dates through June 2004. eGain has the right to repurchase all unvested shares
at the original exercise price upon employee termination. The number of shares
subject to this repurchase right decreases as the shares vest under the
original option terms, generally four years. As of June 30, 1999, there were
shares 1,149,813 subject to repurchase.
eGain effected a two-for-one stock split of its common stock on June 23,
1998. All share and per share amounts have been adjusted to reflect the stock
split.
Warrants
Warrants to purchase 188,699 shares of Series A preferred stock for a price
of $0.8055 per share were issued in connection with the issuance of convertible
promissory notes in fiscal year 1998. The convertible promissory notes were
subsequently converted into Series A preferred stock. The warrants expire
within two to three years from the date of issuance or upon the closing of a
public offering by eGain. The fair value was appraised at the date of issuance
and additional interest expense of approximately $57,000 was recorded.
Warrants to purchase 74,511 shares of Series A preferred stock for a price of
$0.8055 per share were issued in connection with the line of credit and
equipment credit facilities entered into during fiscal year 1999. The warrants
expire at the earlier of seven years from the date of issuance or five years
after completion of an initial public offering. The warrants were appraised at
the date of issuance and additional interest expense of $36,000 is being
amortized to interest expense over the term of the loans. During the year ended
June 30, 1999, $14,000 of the additional interest expense was amortized.
A warrant to purchase 175,000 shares of common stock at a price of $0.20 per
share was issued to FW Ventures I, L.P. in connection with financial advisory
services rendered in connection with the acquisition of Sitebridge. Mark
Wolfson, a director of eGain, is a limited partner of FW Ventures I, L.P. The
warrant expires in July 2002 and is exercisable at any time prior to the
closing of a public offering by eGain. The fair value was appraised at the date
of issuance as $789,250 and has been included in the acquisition costs (see
Note 2).
Warrants to purchase 121,006 shares of Series C preferred stock for a price
of $0.9916 per share and 30,440 shares of common stock for a price of $0.2754
per share were assumed by eGain in connection with its acquisition of
Sitebridge. The warrants expire at various dates through May 2003. The fair
value of the warrants was appraised at the date of issuance and an amount of
$1,100,000 was included as part of the purchase consideration for Sitebridge
(see Note 2).
1998 Stock Plan
In June 1998, the board of directors adopted the 1998 Stock Plan (the
"Plan"), which provides for issuance to purchase options of common stock to
eligible participants. Options granted under the Plan may be either incentive
stock options or nonstatutory stock options. Incentive stock options may be
granted to employees with exercise prices of no less than the fair value and
nonstatutory options
F-16
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
may be granted to eligible participants at exercise prices of no less than 85%
of the fair value of the common stock on the grant date as determined by the
board of directors. Options are generally exercisable upon grant, subject to
repurchase rights by eGain until vested.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if eGain had accounted for its employee stock options under
the fair value method as specified by SFAS 123. The fair value of these options
was estimated at the date of grant using the minimum value method with the
following weighted-average assumptions: no dividends; an expected life of 3.5
years; and a risk-free interest rate of approximately 5.65% and 5.72% for the
periods ended June 30, 1998 and 1999.
Options generally vest ratably over a period of four years. Options may be
granted with different vesting terms at the discretion of the board of
directors. Options are generally exercisable for a term of ten years after the
date of grant.
The effect of applying the FASB statement's minimum value method to eGain's
stock options granted did not result in pro forma net loss amounts that are
materially different from the reported historical amounts. Therefore, such pro
forma information is not separately presented herein. Future pro forma net
income (loss) results may be materially different from actual amounts reported.
A summary of activity under eGain's stock option plan was as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Available Exercise
for Grant Options Price
---------- ---------- ---------
<S> <C> <C> <C>
Shares authorized for issuance................ 2,000,000
Options granted............................. (511,000) 511,000 $0.05
---------- ----------
Balance at June 30, 1998...................... 1,489,000 511,000 $0.05
Additional authorization.................... 1,500,000 --
Options granted............................. (2,666,101) 2,666,101 $0.24
Options exercised........................... -- (1,447,396) $0.12
Options cancellations....................... 249,105 (249,105) $0.08
Repurchases................................. 75,000 --
---------- ----------
Balance at June 30, 1999...................... 647,004 1,480,600 $0.24
========== ==========
</TABLE>
In connection with the acquisition of Sitebridge, eGain assumed options to
purchase 1,114,016 shares of common stock, of which 982,431 are outstanding at
June 30, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted-
Average Weighted- Options Weighted-
Remaining Average Exercisable Average
Exercise At June Contractual Exercise at June 30, Exercise
Price Range 30, 1999 Life Price 1999 Price
- ----------- --------- ----------- --------- ----------- ---------
(In years)
<S> <C> <C> <C> <C> <C>
$0.02-$0.05 246,544 8.04 $0.02 116,877 $0.02
$0.10-$0.20 1,371,237 8.47 $0.14 590,809 $0.14
$0.25-$0.50 845,250 9.94 $0.46 23,167 $0.45
--------- -------
2,463,031 8.92 $0.24 730,853 $0.23
========= =======
</TABLE>
F-17
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average fair value of options granted during the period from
inception (September 10, 1997) to June 30, 1998 was $0.01. It was $0.06 per
share for options granted during the fiscal year ended June 30, 1999.
Stock Compensation
The Company recorded deferred compensation of $168,932 and $8,295,974 during
the periods ended June 30, 1998 and 1999, respectively. These amounts represent
the difference between the exercise price and the deemed fair value of certain
stock options granted to employees by eGain in these periods. During the
periods ended June 30, 1998 and 1999, the Company also recorded deferred
compensation with respect to stock options granted to consultants totaling
$65,100 and $2,322,930 respectively. Options granted to consultants are
periodically valued as they vest in accordance with SFAS 123 and EITF 96-18
using a Black-Scholes model and the following weighted average assumptions for
fiscal 1998 and 1999: volatility of 0.5, risk-free interest rate of
approximately 5.7%, no dividend yield; and an expected life of the option equal
to the full term, generally 10 years from the date of grant. Deferred
compensation is being amortized by charges to operations on a graded vesting
method over the vesting periods of the individual stock options. Such
amortization amounted to $58,258 and $1,838,561 for the periods ended June 30,
1998 and 1999, respectively.
7. INCOME TAXES
Due to operating losses and the inability to recognize the benefits from the
resulting net operating losses, there is no provision for income taxes for the
period from inception (September 10, 1997) to June 30, 1998 or for the year
ended June 30, 1999.
As of June 30, 1999, eGain had federal net operating loss carryforwards of
approximately $11,000,000. eGain also had federal research and development
credit carryforwards of approximately $100,000. The net operating loss and
credit carryforwards will expire at various dates beginning in 2011 through
2019, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
F-18
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and credit carryforwards and of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and the
amounts used for income tax purposes. Significant components of eGain's
deferred tax assets and liabilities for federal and state income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
As of June 30,
----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 300 $ 4,300
Research credits......................................... -- 100
Deferred compensation.................................... -- 900
Other individually immaterial items...................... -- 100
------ --------
Total deferred tax assets.............................. 300 5,400
Valuation allowance for deferred tax assets............ (300) (4,900)
------ --------
Net deferred tax assets.................................... $ -- $ 500
Deferred tax liabilities:
Other intangibles.......................................... -- (500)
------ --------
$ -- $ --
====== ========
</TABLE>
SFAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes eGain's historical operating performance and the
reported cumulative net losses through June 30, 1999, eGain has provided a full
valuation allowance against its net deferred tax assets.
The net valuation allowance increased by $300,000 during the year ended June
30, 1998.
8. SUBSEQUENT EVENTS (UNAUDITED)
Series D Preferred Stock Financing
In July 1999, the Company issued 652,000 shares of Series D convertible
preferred stock at a price of $8.00 per share for total consideration of
$5,216,000.
Each share of Series D preferred stock is convertible into one share of
common stock (subject to antidilution adjustment) at any time at the option of
the holder. The Series D preferred stock will automatically convert into common
stock upon (i) the consummation of an underwritten public offering ("IPO") with
a price per share of at least $12.00 and aggregate proceeds in excess of
$20,000,000 or (ii) the election of holders of a majority of the outstanding
Series D preferred stock.
Each holder of Series D preferred stock is entitled to receive, when and if
declared by the Company's board, non cumulative dividends at an annual rate of
$0.64 which is equal to 8% of the purchase price per share. For any other
dividends or distributions, preferred stock participates with common stock on
an as-converted basis.
In the event of any liquidation or winding up of the Company, the holders of
Series D preferred will be entitled to receive in preference to the holders of
common stock and Series C preferred stock
F-19
<PAGE>
eGAIN COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
and pari passu with the holders of the Series A preferred stock and Series B
preferred stock an amount equal to the Purchase Price plus any declared and
unpaid dividends on the preferred stock. Thereafter, any remaining assets will
be distributed ratably to the holders of the preferred stock and common stock
on an as-converted basis until the holders of the Series A preferred stock
shall have received an aggregate of $2.81925 per share, the holders of the
Series B preferred stock shall have received an aggregate of $7.00 per share,
the holders of the Series C preferred stock shall have received $2.00 and the
holders of Series D preferred stock shall have received an aggregate of $16.00.
Thereafter, the remaining assets of the Company will be distributed ratably to
the holders of common stock.
A merger, reorganization or similar transaction in which control of the
Company is transferred will be treated as a liquidation for purposes of the
above preferences.
Initial Public Offering
In July 1999, the board of directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed Initial Public Offering ("IPO"). If
the offering is consummated under the terms presently anticipated, all of the
currently outstanding convertible preferred stock and the Series D preferred
stock issued in July 1999 will convert to shares of common stock upon the
closing of the IPO on a one-for-one basis. The effect of this conversion has
been reflected as unaudited pro forma stockholders' equity in the accompanying
consolidated balance sheet at June 30, 1999.
In July 1999, the board of directors also authorized 5,000,000 shares of
undesignated preferred stock, for which the board of directors is authorized to
fix the designation, powers, preferences and rights and an increase in the
authorized number of shares of common stock to 50,000,000 shares.
1999 Employee Stock Purchase Plan
The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors and approved by the stockholders in July 1999 to be effective upon
the completion of the Company's initial public offering of its common stock.
The Company has reserved a total of 750,000 shares of common stock for issuance
under the plan. Eligible employees may purchase common stock at 85% of the
lesser of the fair market value of the Company's common stock on the first and
last days of the applicable six month offering period.
Increase in Option Pool
In July 1999, the board of directors authorized and the stockholders approved
an increase of 3,000,000 shares for issuance under eGain's stock option plan
and granted approximately 773,000 options to purchase common stock to employees
and consultants.
F-20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sitebridge Corporation
We have audited the accompanying balance sheets of Sitebridge Corporation (a
development stage company) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity (net capital deficiency), and
cash flows for the period from inception (September 10, 1996) to December 31,
1997, the year ended December 31, 1998, and the period from inception
(September 10, 1996) to December 31, 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 financial position of Sitebridge Corporation (a
development stage company) at December 31, 1997 and 1998, and the results of
its operations and its cash flows for the period from inception (September 10,
1996) to December 31, 1997, the year ended December 31, 1998, and the period
from inception (September 10, 1996) to December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
July 16, 1999
F-21
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 71,695 $ 141,191
Accounts receivable.................................. -- 26,122
Other current assets................................. 1,500 22,547
--------- -----------
Total current assets................................... 73,195 189,860
Property and equipment, net............................ 5,040 47,354
Other long-term assets................................. -- 10,500
--------- -----------
$ 78,235 $ 247,714
========= ===========
Liabilities and stockholders' equity (net capital
deficiency)
Current liabilities:
Accounts payable and accrued liabilities............. $ 9,824 $ 33,112
Deferred revenue..................................... -- 37,045
Payable to stockholder............................... 10,500 --
--------- -----------
Total current liabilities.............................. 20,324 70,157
Notes payable.......................................... 348,305 430,000
Commitments
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $0.001 par value,
1,200,000 shares authorized, issuable in series;
822,600 shares issued and outstanding at December
31, 1998 (aggregate liquidation preference of
$1,480,680 at December 31, 1998).................... -- 1,456,573
Common stock, $0.001 par value, 4,000,000 shares
authorized, 777,900 and 801,900 shares issued and
outstanding at December 31, 1997 and 1998........... 15,195 21,195
Additional paid-in capital........................... -- 60,000
Accumulated deficit.................................. (305,589) (1,790,211)
--------- -----------
Stockholders' equity (net capital deficiency).......... (290,394) (252,443)
--------- -----------
$ 78,235 $ 247,714
========= ===========
</TABLE>
See accompanying notes.
F-22
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from inception Period from inception
(September 10, 1996) Year ended (September 10, 1996)
to December 31, December 31, to December 31,
1997 1998 1998
--------------------- ------------ ---------------------
<S> <C> <C> <C>
Revenue:
License............... $ -- $ 59,800 $ 59,800
Service............... -- 50,612 50,612
--------- ----------- -----------
Total revenue....... -- 110,412 110,412
--------- ----------- -----------
Costs and expenses:
Cost of revenues...... -- 144,073 144,073
Research and
development.......... 181,994 792,404 974,398
Sales, general and
administrative....... 113,175 588,463 701,638
--------- ----------- -----------
Total costs and
expenses........... 295,169 1,524,940 (1,820,109)
--------- ----------- -----------
Loss from operations.... (295,169) (1,414,528) (1,709,697)
Interest and other
expense, net........... (10,420) (70,094) (80,514)
--------- ----------- -----------
Net loss................ $(305,589) $(1,484,622) $(1,790,211)
========= =========== ===========
Basic and diluted net
loss per share......... $ (1.06) $ (1.88)
========= ===========
Weighted-average shares
outstanding............ 289,168 788,701
========= ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Total
Stockholders'
Convertible Preferred Stock Common Stock Additional Equity (Net
--------------------------- --------------- Paid-In Accumulated Capital
Shares Amount Shares Amount Capital Deficit Deficiency)
--------------------------- ------- ------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders for
technology and cash in
October 1996............ -- $ -- 720,000 $ 6,000 $ -- $ -- $ 6,000
Issuance of common stock
for cash in January
through October 1997 at
per share prices of
$0.03 and $0.25......... -- -- 57,900 9,195 -- -- 9,195
Net loss and
comprehensive loss...... -- -- -- -- -- (305,589) (305,589)
----------- --------------- ------- ------- ------- ------------ ----------
Balance at December 31,
1997.................... -- -- 777,900 15,195 -- (305,589) (290,394)
Issuance of Series A
preferred stock at $1.80
per share in May 1998,
net of issuance costs of
$24,131................. 510,831 895,389 -- -- -- -- 895,389
Issuance of Series A
preferred stock at $1.80
per share in May 1998
upon conversion of
promissory notes and
accrued interest........ 311,769 561,184 -- -- -- -- 561,184
Issuance of warrant in
May 1998................ -- -- -- -- 60,000 -- 60,000
Issuance of common stock
for cash in January
through June 1998 at per
share price of $0.25.... -- -- 24,000 6,000 -- -- 6,000
Net loss and
comprehensive loss...... -- -- -- -- -- (1,484,622) (1,484,622)
----------- --------------- ------- ------- ------- ------------ ----------
Balance at December 31,
1998.................... 822,600 $ 1,456,573 801,900 $21,195 $60,000 $ (1,790,211) $ (252,443)
=========== =============== ======= ======= ======= ============ ==========
</TABLE>
See accompanying notes.
F-24
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
inception inception
(September 10, (September 10,
1996) to Year ended 1996) to
December 31, December 31, December 31,
1997 1998 1998
-------------- ------------ --------------
<S> <C> <C> <C>
Operating activities:
Net loss.......................... $ (305,589) $ (1,484,622) $ (1,790,211)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation.................... 3,960 7,630 11,590
Accrued interest converted to
preferred stock................ -- 19,602 19,602
Warrant amortization............ -- 60,000 60,000
Changes in operating assets and
liabilities:
Accounts receivable........... -- (26,122) (26,122)
Other assets.................. (1,500) (31,547) (33,047)
Accounts payable and accrued
liabilities.................. 9,824 23,288 33,112
Deferred revenue.............. -- 37,045 37,045
---------- ------------ ------------
Net cash used in operating
activities................. (293,305) (1,394,726) (1,688,031)
---------- ------------ ------------
Investing activities:
Purchases of property and
equipment...................... (9,000) (49,944) (58,944)
---------- ------------ ------------
Net cash used in investing
activities................. (9,000) (49,944) (58,944)
---------- ------------ ------------
Financing activities:
Proceeds from issuance of
preferred stock................ -- 895,389 895,389
Proceeds from issuance of common
stock.......................... 15,195 6,000 21,195
Proceeds from issuance of notes
payable........................ 348,305 623,277 971,582
Loan from stockholder........... 10,500 (10,500) --
---------- ------------ ------------
Net cash provided by
financing activities....... 374,000 1,514,166 1,888,166
---------- ------------ ------------
Net increase in cash and cash
equivalents...................... 71,695 69,496 141,191
Cash and cash equivalents at
beginning of period.............. -- 71,695 --
---------- ------------ ------------
Cash and cash equivalents at end
of period........................ $ 71,695 $ 141,191 $ 141,191
========== ============ ============
Supplemental disclosure of cash
flow information
Promissory notes and accrued
interest converted into preferred
stock............................ $ -- $ 561,184 $ 561,184
========== ============ ============
Issuance of warrant............... $ -- $ 60,000 $ 60,000
========== ============ ============
</TABLE>
See accompanying notes.
F-25
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Sitebridge Corporation ("Sitebridge"), formerly known as Social Science,
Inc., develops and deploys mission-critical, Internet-based, front-office
applications for sales and service organizations and was incorporated in
Delaware on September 10, 1996. The operating results for the period from
inception to December 31, 1996 were not material. Sitebridge conducts its
business within one industry segment and all operations through December 31,
1998 were based in the United States.
Since inception, Sitebridge has been engaged primarily in research and
development activities in connection with the development of its products.
Other activities have included raising capital, recruiting managerial and
technical personnel, and establishment of business development and marketing
organizations. Accordingly, Sitebridge was classified as a development stage
enterprise at December 31, 1998.
On April 30, 1999, eGain Communications Corporation ("eGain"), acquired
Sitebridge (see Note 5). To date, Sitebridge has financed its operations with
the net proceeds from private placements of its equity securities. Additional
financing through eGain will be required to fund Sitebridge's operations and
market its products.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ materially from these
estimates.
Cash and Cash Equivalents
Sitebridge considers all highly liquid investments with a maturity from date
of purchase of three months or less to be cash equivalents.
Concentration of Credit Risk and Significant Customers
Financial instruments that subject Sitebridge to concentrations of credit
risk consist principally of cash investments and accounts receivable.
Sitebridge invests cash which is not required for immediate operating needs
principally in money market funds, which bear minimal risk.
At December 31, 1998, 3 customers represented 84% of the total balance of
accounts receivable. For the year ended December 31, 1998, 3 customers
accounted for 27%, 15%, and 9% of total revenue.
F-26
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of the assets, typically three to five
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the estimated life of the asset or the remaining term of the
lease.
Revenue Recognition
Revenue from 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 Sitebridge obligations with regard to implementation
remain, the fee is fixed or determinable, and collectibility is probable.
Revenue is deferred in cases where the license arrangement calls for future
delivery of products or services for which Sitebridge does not have vendor-
specific objective evidence to allocate a portion of the total fee to the
undelivered element. In such cases, revenue is recognized when the undelivered
elements are delivered or vendor-specific objective evidence of the undelivered
elements becomes available.
Service revenue consists of consulting services, training, and maintenance,
which includes product updates and technical support. Consulting service and
training revenue is generally recognized as services are performed. Maintenance
revenue is recognized ratably over the term of the agreement. In instances
where software license agreements include a combination of consulting services,
training, and maintenance, these separate elements are unbundled from the
arrangement based on the element's relative fair value.
Software Development Costs
Software development costs are included in research and development and are
expensed as incurred until technological feasibility is achieved. To date, the
period between achieving technological feasibility and general availability of
software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, Sitebridge has not
capitalized any software development costs.
Stock-Based Compensation
Sitebridge accounts for its stock-based compensation arrangements with
employees using the intrinsic value method. Deferred stock-based compensation
is recorded on the date of grant when the deemed fair value of the underlying
common stock exceeds the exercise price for stock options.
Comprehensive Loss
SiteBridge has no material components of other comprehensive loss and,
accordingly, the comprehensive loss is the same as net loss for all periods
presented.
Net Loss Per Share
Basic and diluted net loss per share has been computed using the weighted-
average number of shares of common stock outstanding during the period. Had
Sitebridge been in a net income
F-27
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
position, diluted earnings per share would have included the shares used in the
computation of basic net loss per share as well as the impact of outstanding
options and warrants to purchase an additional 291,035 and 586,806 shares,
prior to the application of the treasury stock method, for the period from
inception (September 10, 1996) to December 31, 1997 and the year ended December
31, 1998. Such shares have been excluded because they are antidilutive for all
periods presented. Shares of convertible preferred stock have been excluded
from the computation.
A reconciliation of shares used in the calculation of basic and diluted net
loss per share follows:
<TABLE>
<CAPTION>
Period from
inception
(September 10,
1996) to Year ended
December 31, December 31,
1997 1998
-------------- ------------
<S> <C> <C>
Net loss....................................... $(305,589) $(1,484,622)
--------- -----------
Basic and diluted:
Weighted-average shares of common stock
outstanding................................. 851,668 1,171,201
Less weighted-average shares subject to
repurchase.................................. (562,500) (382,500)
--------- -----------
Shares used in computing basic and diluted
net loss per share.......................... 289,168 788,701
========= ===========
Basic and diluted net loss per share........... $ (1.06) $ (1.88)
========= ===========
</TABLE>
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which will be effective for the year ending December 31, 2000.
This statement establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. Sitebridge believes the adoption of SFAS 133 will
not have a material effect on the financial statements, since it currently does
not invest in derivative instruments and engage in hedging activities.
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize
certain costs related to internal use software once certain criteria have been
met. Sitebridge is required to implement SOP 98-1 for the year ending December
31, 2000. Adoption of SOP 98-1 is expected to have no material impact on
SiteBridge's financial condition or results of operations.
F-28
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Furniture and equipment...................................... $9,000 $43,944
Leasehold improvements....................................... -- 15,000
------ -------
9,000 58,944
Less accumulated depreciation................................ 3,960 11,590
------ -------
Property and equipment, net.................................. $5,040 $47,354
====== =======
</TABLE>
3. CONVERTIBLE BRIDGE NOTES
In 1997 and 1998, Sitebridge issued convertible bridge notes to investors.
The convertible notes accrued interest at a rate of 5.63% per year and were
convertible into preferred stock at the Company's option. In May 1998,
convertible notes in the amount of $541,582 plus accrued interest of $19,602
were exchanged for 311,769 shares of Series A convertible preferred stock at a
price of $1.80 per share.
In October 1998, Sitebridge issued a convertible bridge note in the amount of
$250,000 which was outstanding at December 31, 1998. The convertible note
accrued interest at 5.06% per year and was convertible into preferred stock at
a price of $4.00 per share. The principle and accrued interest related to the
note was converted into 64,302 shares of Series A convertible preferred stock
in April 1999.
In December 1998, Sitebridge issued a promissory note in the amount of
$180,000 which was outstanding at December 31, 1998. The note accrues interest
at 5.0% per year and is payable on January 31, 2000, as amended.
In connection with the issuance of the convertible notes, Sitebridge issued
warrants to purchase both preferred and common stock (see Note 5).
4. COMMITMENTS
Operating Lease Commitments
Sitebridge leases its facilities under noncancelable operating leases
expiring in March 2003. Rent expense for facilities under operating leases was
$13,859 and $45,660 for the period from inception (September 10, 1996) to
December 31, 1997 and the year ended December 31, 1998. Future minimal rental
commitments under operating leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................ $ 67,500
2000................................................................ 70,500
2001................................................................ 76,500
2002................................................................ 78,000
2003................................................................ 19,500
--------
$312,000
========
</TABLE>
F-29
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Sitebridge's Certificate of Incorporation provides for the issuance of up to
1,200,000 shares of convertible preferred stock, 889,667 shares of which have
been designated as Series A.
Each share of Series A preferred stock is convertible, at the option of the
holder, into a share of common stock, on a one-for-one basis, subject to
certain adjustments for dilution, if any, resulting from future stock
issuances. Additionally, the preferred shares automatically convert into common
stock concurrent with the closing of an underwritten public offering of common
stock under the Securities Act of 1933 in which Sitebridge receives at least
$15,000,000 in net proceeds and the price per share is at least $1.80 (subject
to adjustment for a recapitalization or certain other stock adjustments).
Series A preferred stockholders are entitled to annual noncumulative
dividends, before and in preference to any dividends paid on common stock, when
and as declared by the board of directors. No dividends have been declared
through December 31, 1998.
The Series A preferred stockholders are entitled to receive, upon liquidation
or merger, a distribution of $1.80 per share (subject to adjustment for a
recapitalization) plus all declared but unpaid dividends. Thereafter, the
remaining assets and funds, if any, shall be distributed ratably on a per-share
basis among the common stockholders and the Series A preferred stockholders.
The Series A preferred stockholders have voting rights equal to the common
shares they would own upon conversion.
As of December 31, 1998, Sitebridge has reserved 960,102 shares of common
stock for issuance upon conversion of its Series A preferred stock.
Common Stock
In October 1996, Sitebridge issued 720,000 shares of common stock to founders
for technology and cash. The common stock is subject to repurchase upon
termination of employment. Sitebridge's repurchase right lapses ratably over
four years with respect to such shares. At December 31, 1998, approximately
315,000 shares were subject to repurchase.
Warrants
Sitebridge had the following warrants to purchase shares of preferred and
common stock outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Number of Exercise Price Expiration of
Shares Stock Type Per Share Date Issued Warrants
- --------- ------------------------ -------------- ------------ -------------
<S> <C> <C> <C> <C>
66,667 Series A preferred stock $1.80 May 1998 May 2003
16,771 Common stock $0.50 October 1998 October 2001
</TABLE>
F-30
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Outstanding warrants are exercisable immediately prior to the close of
business on the date of its surrender. The warrants were appraised at the date
of issuance or the date when all terms were fixed, and additional interest
expense of $60,000 was recorded during 1998.
Warrants to purchase 36,109 shares of Series A preferred stock were exercised
in 1998 as part of the Series A preferred stock financing.
1997 Stock Plan
In May 1997, the board of directors adopted the 1997 Stock Plan (the "Plan")
for issuance of options of common stock to eligible participants. Options
granted may be either incentive stock options or nonstatutory stock options.
Incentive stock options may be granted to employees with exercise prices of no
less than the fair value and nonstatutory options may be granted to eligible
participants at exercise prices as determined by the plan administrator.
Options generally vest at the rate of 25% after one year from the date of
grant, with the remaining balance vesting monthly over the next four years with
a term of 10 years. Sitebridge has reserved 650,000 shares of common stock for
the grant of options under the Plan.
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if Sitebridge had accounted for its employee stock options
under the fair value method as specified by SFAS 123. The fair value of these
options was estimated at the date of grant using the minimum value method with
the following weighted-average assumptions: no dividends; an expected life of
five years; and a risk-free interest rate of approximately 5.5% for the periods
ended December 31, 1997 and 1998.
The effect of applying the FASB statement's minimum value method to
Sitebridge's stock options granted did not result in pro forma net loss amounts
that are materially different from the reported historical amounts. Therefore,
such pro forma information is not separately presented herein. Future pro forma
net income (loss) results may be materially different from actual amounts
reported.
A summary of activity under Sitebridge's stock plan was as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Available Average
for Grant Options Exercise Price
---------------- ------- --------------
<S> <C> <C> <C>
Shares authorized for issuance.... 220,000 --
Additional authorization........ 150,000 --
Options granted................. (296,035) 296,035 $0.17
Options canceled................ 5,000 (5,000) $0.25
-------- -------
Balance at December 31, 1997...... 78,965 291,035 $0.17
Additional authorization........ 280,000 --
Options granted................. (347,597) 347,597 $0.25
Options canceled................ 68,542 (68,542) $0.25
-------- -------
Balance at December 31, 1998...... 79,910 570,090 $0.21
======== =======
</TABLE>
F-31
<PAGE>
SITEBRIDGE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------- Weighted-
Options Average Options
Exercise Outstanding at Remaining Exercisable at
Price December 31, Contractual December 31,
Range 1998 Life 1998
-------- -------------- ----------- --------------
(In years)
<S> <C> <C> <C>
$0.03 102,774 7.62 --
$0.25 467,316 9.19 63,170
</TABLE>
The weighted-average fair value of options granted during the period ended
December 31, 1997 was $0.03. It was $0.04 per share for options granted during
the year ended December 31, 1998.
6. INCOME TAXES
As of December 31, 1998, Sitebridge had federal net operating loss
carryforwards of approximately $1,700,000. The net operating loss and credit
carryforwards will expire at various dates beginning in 2011 through 2018, if
not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses and credits before
utilization.
As of December 31, 1997 and 1998, Sitebridge had deferred tax assets of
approximately $100,000 and $900,000. The net deferred tax assets have been
fully offset by a valuation allowance. The net valuation allowance increased by
$800,000 during the year ended December 31, 1998. Deferred tax assets relate
primarily to net operating loss carryforwards, and deferred compensation not
currently deductible.
SFAS 109 provides for the recognition of deferred tax assets if realization
of such assets is more likely than not. Based upon the weight of available
evidence, which includes Sitebridge's historical operating performance and the
reported cumulative net losses through December 31, 1998, Sitebridge has
provided a full valuation allowance against its net deferred tax assets.
7. SUBSEQUENT EVENTS (UNAUDITED)
Borrowings
During 1999, Sitebridge issued a promissory note in the amount of $200,000,
which accrues interest at 5% per year and is payable on January 31, 2000.
Acquisition
On April 30, 1999, eGain acquired all the outstanding shares of Sitebridge's
common and preferred stock. Outstanding options and warrants to purchase
Sitebridge's common and preferred stock have been assumed by eGain.
F-32
<PAGE>
eGAIN COMMUNICATIONS CORPORATION AND SITEBRIDGE CORPORATION
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
On April 30, 1999, eGain Communications Corporation ("eGain") completed the
acquisition of Sitebridge Corporation ("Sitebridge"). The acquisition of
Sitebridge has been accounted for as a purchase. Accordingly, the results of
operations of Sitebridge have been included in the consolidated statement of
operations of eGain commencing on the date of acquisition.
The accompanying pro forma condensed combined statement of operations for
eGain's year ended June 30, 1999 assumes that the acquisition took place as of
the beginning of fiscal 1999 and combined Sitebridge's statement of operations
for the ten months ended April 30, 1999 with eGain's consolidated statement of
operations for the fiscal year ended June 30, 1999.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
acquisition had been consummated as of the date indicated, nor is it
necessarily indicative of future operating results or financial position. The
pro forma adjustments are based on the information available at the time of the
printing of this prospectus.
F-33
<PAGE>
eGAIN COMMUNICATIONS CORPORATION AND SITEBRIDGE CORPORATION
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Ten Months
June 30, Ended
1999 April 30, 1999
------------ --------------
Pro Forma Pro Forma
eGain Sitebridge Adjustments Combined
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $ 1,019,343 $ 57,534 $ -- $ 1,076,877
Costs and expenses:
Cost of revenue........ 1,772,159 126,060 -- 1,898,219
Research and
development........... 2,095,784 982,549 -- 3,078,333
Sales, general and
administrative........ 5,416,681 678,006 -- 6,094,687
Amortization........... 3,034,323 -- 5,920,276 (A) 8,954,599
------------ ----------- ----------- ------------
Total costs and
expenses............. 12,318,947 1,786,615 5,920,276 20,025,838
------------ ----------- ----------- ------------
Loss from operations.. (11,299,604) (1,729,081) (5,920,276) (18,948,961)
Interest and other
expenses, net......... (4,897) (7,885) -- (12,782)
------------ ----------- ----------- ------------
Net loss.............. $(11,304,501) $(1,736,966) $(5,920,276) $(18,961,743)
============ =========== =========== ============
Basic and diluted net
loss per share......... $ (2.14) $ (3.04)(B)
============ ============
Shares used in computing
basic and diluted net
loss per share......... 5,294,736 6,239,366 (B)
============ ============
</TABLE>
See accompanying notes
F-34
<PAGE>
Notes to the Unaudited Pro Forma Condensed
Combined Financial Information
The total estimated purchase price of the acquisition has been allocated to
acquired assets and liabilities based on estimates of their fair values. The
excess of the purchase price over the fair value of the tangible and intangible
net assets acquired has been allocated to goodwill.
The adjustments to the unaudited pro forma condensed combined statement of
operations for the year ended June 30, 1999, assume the acquisition occurred as
of July 1, 1998 and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the acquisition. The goodwill and other intangible assets
are being amortized over three years.
(B) Basic and diluted net loss per share excludes the preferred shares of eGain
issued in the acquisition as their inclusion would be antidilutive.
In connection with the acquisition, eGain issued Series C convertible
preferred stock, common stock, and options and warrants to purchase preferred
and common stock in exchange for all of the outstanding preferred stock, common
stock and options and warrants to purchase preferred and common stock of
Sitebridge. The acquisition was accounted for as a purchase and, accordingly,
the results of operations for Sitebridge have been included in the consolidated
financial statements commencing on the date of acquisition. The fair market
value of the equity securities issued in the acquisition was approximately
$20.1 million. Goodwill and purchased intangible assets of approximately $21.4
million were recorded and are being amortized on a straight-line basis over the
useful lives of three years.
F-35
<PAGE>
[LOGO OF eGAIN APPEARS HERE]
customer service infrastructure for eCommerce
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
SEC registration fee............................................... $ 16,680
National Association of Securities Dealers, Inc. filing fee ....... 6,500
Nasdaq National Marketing listing fee.............................. 95,000
Blue Sky fees and expenses......................................... 5,000
Accounting fees and expenses....................................... 400,000
Legal fees and expenses............................................ 275,000
Printing and engraving expenses.................................... 150,000
Registrar and Transfer Agent fees.................................. 15,000
Miscellaneous fees and expenses.................................... 16,820
--------
Total............................................................ $980,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article VI of the Registrant's
Amended and Restated Certificate of Incorporation (Exhibit 3.2 hereto) and
Article XII of the Registrant's Amended and Restated Bylaws (Exhibit 3.4
hereto) provide for indemnification of the Registrant's directors, officers,
employees and other agents to the extent and under the circumstances permitted
by the Delaware General Corporation Law. The Registrant has also entered into
agreements with its directors and officers that will require the Registrant,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors or officers to the
fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
Item 15. Recent Sales of Unregistered Securities
Since inception in September 1997, we have issued and sold the following
unregistered securities:
1. From September 1997 to June 30, 1999, the Registrant issued and sold
8,558,508 shares of common stock to employees, directors and consultants at
prices ranging from $0.005 to $0.50 per share.
II-1
<PAGE>
2. From April 1998 to June 1998, the Registrant issued warrants that became
exercisable for an aggregate of 188,699 shares of Registrant's Series A
preferred stock at a purchase price of $0.8055 per share, in connection with
certain loans made to the Registrant.
3. In June 1998, the Registrant issued and sold 5,406,585 shares of Series A
preferred stock to 11 investors for an aggregate purchase price of
$4,355,004.21.
4. From August 1998 to October 1998, the Registrant issued warrants to
purchase an aggregate of 74,511 shares of Registrant's Series A preferred
stock at a purchase price between $0.8050 and $0.8055 per share, in connection
with certain equipment financing.
5. From December 1998 to February 1999, the Registrant issued and sold
2,550,000 shares of Series B preferred stock to a total of 14 investors for an
aggregate purchase price of $5,100,000.00.
6. In May 1999, the Registrant issued an aggregate of 1,455,514 shares of
common stock and 1,609,793 shares of Series C preferred stock to 28 holders of
capital stock of Sitebridge Corporation in connection with the Registrant's
acquisition of Sitebridge Corporation. The Registrant also assumed (a)
warrants to purchase the capital stock of Sitebridge Corporation which became
exercisable for 121,006 shares of the Registrant's Series C preferred stock at
a purchase price per share of $0.9916 and 30,440 shares of the Registrant's
common stock at a purchase price per share of $0.2754 and (b) options to
purchase common stock of Sitebridge Corporation, which became exercisable for
1,114,016 shares of the Registrant's common stock.
7. In June 1999, the Registrant issued a warrant to purchase an aggregate of
175,000 shares of Registrant's common stock at a purchase price of $0.20 per
share in connection with certain financial advisory services rendered to
Registrant.
8. In July 1999, the Registrant issued and sold 652,000 shares of Series D
preferred stock to 6 investors for an aggregate purchase price of
$5,216,000.00.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on section 4(2) of such
Securities Act as transactions by an issuer not involving any public offering.
In addition, certain issuances were deemed exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated under the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and warrants issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page of
this Form S-1, which is incorporated herein by reference.
(b) Financial Statement Schedules
Schedules have been omitted because they are not applicable or not required
or because the information is included elsewhere in the Financial Statements
or the notes thereto.
II-2
<PAGE>
Item 17. Undertakings
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 foregoing provisions, 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, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question 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 purposes of determining any liability under the Securities Act of
1933, as amended, 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 the purpose of determining any liability under the Securities Act of
1933, as amended, 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.
(3) The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sunnyvale, State of California, on the 16th day of September, 1999.
eGAIN COMMUNICATIONS CORPORATION
/s/ Ashutosh Roy
By: _________________________________
Ashutosh Roy
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Ashutosh Roy Chief Executive Officer and September 16, 1999
______________________________________ Director (Principal Executive
Ashutosh Roy Officer)
* President and Director September 16, 1999
______________________________________
Gunjan Sinha
* Chief Financial Officer September 16, 1999
______________________________________
Harpreet Grewal
* Vice President--Finance and September 16, 1999
______________________________________ Administration (Principal
Eric N. Smit Financial and Accounting
Officer)
* Director September 16, 1999
______________________________________
A. Michael Spence
* Director September 16, 1999
______________________________________
Mark A. Wolfson
</TABLE>
*By: /s/ Ashutosh Roy
------------------------------
Ashutosh Roy
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1*+ Agreement and Plan of Reorganization among Registrant, Sitebridge
Corporation, ECC Acquisition Corporation, Wendell Lansford, Prakash
Mishra and Chelsea M.C. LLC.
3.1* Restated Certificate of Incorporation, as amended.
3.2* Form of Amended and Restated Certificate of Incorporation to be
effective upon completion of this offering.
3.3* Bylaws of the Registrant, as amended.
3.4* Form of Amended and Restated Bylaws of the Registrant to be effective
upon completion of this offering.
4.1* Form of Common Stock Certificate.
4.2* Amended and Restated Investors' Rights Agreement dated as of July 21,
1999.
4.3* Warrant to purchase Common stock dated as of August 7, 1998 issued by
the Registrant to Imperial Bank.
4.4* Warrant to purchase shares of Series A preferred stock dated as of
October 15, 1998 issued to Phoenix Leasing Incorporated.
4.5* Warrant to purchase Series A Convertible Preferred Stock of Sitebridge
Corporation dated as of May 5, 1998 issued to Chelsea Capital Partners
LLC (assumed by Registrant in connection with Sitebridge acquisition).
4.6* Warrant to purchase Series A Convertible Preferred Stock of Sitebridge
Corporation dated as of May 5, 1998 issued to Amir Bahhtiar (assumed
by Registrant in connection with Sitebridge acquisition).
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.1* Form of Indemnification Agreement.
10.2* Social Science, Inc. 1997 Stock Option Plan (assumed by registrant in
connection with Sitebridge acquisition).
10.3* Amended and Restated 1998 Stock Plan and forms of stock option
agreements thereunder.
10.4* 1999 Employee Stock Purchase Plan.
10.5* Golden Gate Commercial Lease Agreement dated as of July 21, 1998
between Registrant and Golden Gate Commercial Company.
10.6* Starter Kit Loan and Security Agreement dated as of August 7, 1998
between Registrant and Imperial Bank.
10.7* Senior Loan and Security Agreement No. 6194 dated as of October 15,
1998 between Registrant and Phoenix Leasing Incorporated.
10.8* Amendment to Common Stock Purchase Agreement dated as of June 24, 1998
between Registrant and Ashutosh Roy.
10.9* Amendment to Common Stock Purchase Agreement dated as of June 24, 1998
between Registrant and Gunjan Sinha.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.10* Sub-sublease dated as of June 1999 by and between Cadence Design
Systems Inc. and eGain Communications Corporation.
10.11* Promissory Note of A. Michael Spence dated August 6, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
99.1* Consent of Jupiter Communications.
99.2* Consent of International Data Corporation.
</TABLE>
- --------
*Previously filed.
+ Schedules and similar attachments to this exhibit have been omitted as
permitted by Item 601(b)(2) of Regulation S-K. Schedules or attachments
omitted will be furnished supplementally to the Commission upon request.
<PAGE>
EXHIBIT 1.1
Underwriting Agreement
September __, 1999
BancBoston Robertson Stephens Inc.
Donaldson, Lufkin & Jenrette, Inc.
Volpe Brown Whelan & Co.
As Representatives of the several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, CA 94104
Ladies and Gentlemen:
Introductory. Egain Communications Corporation, a Delaware corporation
(the "Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 5,000,000 shares (the "Firm
- ----------
Shares") of its Common Stock, par value $0.001 per share (the "Common Shares").
In addition, the Company has granted to the Underwriters an option to purchase
up to an additional 750,000 Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares". BancBoston Robertson
Stephens Inc., Donaldson, Lufkin & Jenrette, Inc. and Volpe Brown Whelan & Co.
have agreed to act as representatives of the several Underwriters (in such
capacity, the "Representatives") in connection with the offering and sale of the
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-83439), which contains a form of prospectus to be used in connection with
the public offering and sale of the Shares. Such registration statement, as
amended, including the financial statements, exhibits and schedules thereto, in
the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Shares, is called the "Prospectus"; provided, however, if
the Company has, with the consent of BancBoston Robertson Stephens Inc., elected
to rely upon Rule 434 under the Securities Act, the
<PAGE>
term "Prospectus" shall mean the Company's prospectus subject to completion
(each, a "preliminary prospectus") dated August 31, 1999 (such preliminary
prospectus is called the "Rule 434 preliminary prospectus"), together with the
applicable term sheet (the "Term Sheet") prepared and filed by the Company with
the Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
Section 1. Representations and Warranties of the Company.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and 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. The Prospectus, as
amended or supplemented, as of its date and at all subsequent times, did not and
will not contain any untrue statement of a material fact or omit 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. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
2
<PAGE>
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete conformed copies of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representatives have
reasonably requested for each of the Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement except for such rights as have been
duly waived .
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a "Material Adverse Change" or a "Material
Adverse Effect"); (ii) the Company and its subsidiaries, considered as one
entity, have not incurred any material liability or obligation, indirect, direct
or contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of business; and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company or, except for dividends paid to the Company or other
subsidiaries, any of its subsidiaries on any class of capital stock or
repurchase or redemption by the Company or any of its subsidiaries of any class
of capital stock.
3
<PAGE>
(h) Independent Accountants. Ernst & Young LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) and supporting schedules filed
with the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act.
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the consolidated financial position of the
Company and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the information
required to be stated therein. Such financial statements and supporting
schedules have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Prospectus Summary--Summary
Consolidated Financial Data", "Selected Consolidated Financial Data" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited consolidated financial statements contained
in the Registration Statement.
(j) Company's Accounting System. The Company and each of its subsidiaries
maintain a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States and to maintain
accountability for assets; (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 existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed in Exhibit 21.1 to the Registration Statement.
(l) Incorporation and Good Standing of the Company and its Subsidiaries.
Each of the Company and its subsidiaries has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction in
which it is organized with full corporate power and authority to own its
properties and conduct its business as described in the prospectus, and is duly
qualified to do business as a foreign corporation and is in good standing under
the laws of each jurisdiction that requires such qualification.
(m) Capitalization of the Subsidiaries. All the outstanding shares of
capital stock of each subsidiary have been duly and validly authorized and
issued and are fully paid and nonassessable, and, except as otherwise set forth
in the Prospectus, all outstanding shares of capital stock of the subsidiaries
are owned by the Company either
4
<PAGE>
directly or through wholly owned subsidiaries free and clear of any security
interests, claims, liens or encumbrances.
(n) No Prohibition on Subsidiaries from Paying Dividends or Making Other
Distributions. No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(o) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(p) Stock Exchange Listing. The Shares have been approved for inclusion on
the Nasdaq National Market, subject only to official notice of issuance.
(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, LLC and (iii) by the federal and
provincial laws of Canada.
(r) Non-Contravention of Existing Instruments. Neither the issue and sale
of the Shares nor the consummation of any other of the transactions herein
contemplated nor the fulfillment of the terms hereof will conflict with, result
in a breach or violation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries pursuant to,
(i) the charter or bylaws of the Company or any of its subsidiaries, (ii) the
terms of any indenture, contract, lease,
5
<PAGE>
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject or
(iii) any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its or their
properties.
(s) No Defaults or Violations. Neither the Company nor any subsidiary is
in violation or default of (i) any provision of its charter or bylaws, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is subject
or (iii) any statute, law, rule, regulation, judgment, order or decree of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except any such violation or default which
would not, singly or in the aggregate, result in a Material Adverse Change
except as otherwise disclosed in the Prospectus.
(t) No Actions, Suits or Proceedings. No action, suit or proceeding by or
before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.
(u) All Necessary Permits, Etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies necessary to
conduct their respective businesses, and neither the Company nor any subsidiary
has received any notice of proceedings relating to the revocation or
modification of, or non-compliance with, any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(v) Title to Properties. The Company and each of its subsidiaries has good
and marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(A)(h) above (or elsewhere in the
Prospectus), in each case free and clear of any security interests, mortgages,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not materially
interfere with the use made or proposed to be made of such property by the
Company or such subsidiary. The real property, improvements, equipment and
personal property held under lease by the Company or any subsidiary are held
under valid and enforceable leases, with such exceptions as are not material and
do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or
such subsidiary.
6
<PAGE>
(w) Tax Law Compliance. The Company and its subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(A)(h) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to
which the tax liability of the Company or any of its subsidiaries has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company or any of its
subsidiaries that could result in a Material Adverse Change.
(x) Intellectual Property Rights. Each of the Company and its subsidiaries
owns or possesses adequate rights to use all patents, patent rights or licenses,
inventions, collaborative research agreements, trade secrets, know-how,
trademarks, service marks, trade names and copyrights that are necessary to
conduct its businesses as described in the Registration Statement and
Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Change. There is no
claim being made against the Company regarding patents, patent rights or
licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries do not in the conduct of their business as now or proposed to be
conducted as described in the Prospectus infringe or conflict with any right or
patent of any third party, or any discovery, invention, product or process which
is the subject of a patent application filed by any third party, known to the
Company or any of its subsidiaries, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
(y) Year 2000 Preparedness. There are no issues related to the Company's,
or any of its subsidiaries', preparedness for the Year 2000 that (i) are of a
character required to be described or referred to in the Registration Statement
or Prospectus by the Securities Act which have not been accurately described in
the Registration Statement or Prospectus or (ii) might reasonably be expected to
result in any Material Adverse Change or that might materially affect their
properties, assets or rights. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its subsidiaries fully comply with Year 2000 Qualification
Requirements. "Year 2000 Qualifications Requirements" means that the internal
computer systems and each Constituent Component (as defined below) of those
systems and all computer-related products and each Constituent Component (as
defined below) of those products of the Company and each of its Subsidiaries (i)
7
<PAGE>
have been reviewed to confirm that they store, process (including sorting and
performing mathematical operations, calculations and computations), input and
output data containing date and information correctly regardless of whether the
date contains dates and times before, on or after January 1, 2000, (ii) have
been designated to ensure date and time entry recognition and calculations, and
date data interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration. The Company
has inquired of material vendors as to their preparedness for the Year 2000 and
has disclosed in the Registration Statement or Prospectus any issues that might
reasonably be expected to result in any Material Adverse Change.
(z) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the shares.
(aa) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Shares will not be, an "investment company" or an entity "controlled" by
an "investment company" within the meaning of the Investment Company Act and
will conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(bb) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and Directors and Officers liability. The Company
has no reason to believe that it or any subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.
(cc) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers that might be
expected to result in a Material Adverse Change.
8
<PAGE>
(dd) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(ee) Lock-Up Agreements. Each officer and director of the Company and
each beneficial owner of the outstanding issued share capital of the Company has
signed an agreement substantially in the form attached hereto as Exhibit A (the
---------
"Lock-up Agreements"). The Company has provided to counsel for the Underwriters
a complete and accurate list of all securityholders of the Company and the
number and type of securities held by each securityholder. The Company has
provided to counsel for the Underwriters true, accurate and complete copies of
all of the Lock-up Agreements presently in effect or effected hereby. The
Company hereby represents and warrants that it will not release any of its
officers, directors or other stockholders from any Lock-up Agreements currently
existing or hereafter effected without the prior written consent of BancBoston
Robertson Stephens Inc.
(ff) Related Party Transactions. There are no business relationships or
related party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus that have not been described
as required.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
(gg) No Unlawful Contributions or Other Payments. Neither the Company nor
any of its subsidiaries nor, to the best of the Company's knowledge, any
employee or agent of the Company or any subsidiary, has made any contribution or
other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be
disclosed in the Prospectus.
(hh) ERISA Compliance. The Company and its subsidiaries and any "employee
benefit plan" (as defined under the Employee Retirement Income Security Act of
1974, as amended, and the regulations and published interpretations thereunder
(collectively, "ERISA")) established or maintained by the Company, its
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in
all material respects with ERISA. "ERISA Affiliate" means, with respect to the
Company or a subsidiary, any member of any group of organizations described in
Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended,
and the regulations and published interpretations thereunder (the "Code") of
which the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfounded benefit liabilities" (as defined under ERISA). Neither the
Company, its subsidiaries nor any of their ERISA Affiliates has incurred or
reasonably expects to incur
9
<PAGE>
any liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or
4980B of the Code. Each "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates that is intended to
be qualified under Section 401(a) of the Code is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss of
such qualification.
Section 2. Purchase, Sale and Delivery of the Shares.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price per
----------
Firm Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m. San Francisco time, at the offices of Pillsbury,
Madison & Sutro, LLP, 2550 Hanover Street, Palo Alto, CA 94304-1115 (or at such
other place as may be agreed upon among the Representatives and the Company),
(i) on the third (3rd) full business day following the first day that Shares are
traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San
Francisco time, the fourth (4th) full business day following the day that this
Agreement is executed and delivered or (iii) at such other time and date not
later that seven (7) full business days following the first day that Shares are
traded as the Representatives and the Company may determine (or at such time and
date to which payment and delivery shall have been postponed pursuant to Section
8 hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representatives may, in its sole discretion, postpone the
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 750,000 Option Shares from the Company at the purchase price
per share to be paid by the Underwriters for the Firm Shares. The option granted
hereunder is for use by the Underwriters solely in covering any over-allotments
in connection with the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise.
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If any Option Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Option Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may determine)
that bears the same proportion to the total number of Option Shares to be
purchased as the number of Firm Shares set forth on Schedule A opposite the name
----------
of such Underwriter bears to the total number of Firm Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in its sole judgment, has determined
is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for
their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
BancBoston Robertson Stephens Inc., individually and not as the Representatives
of the Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
on the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
Section 3. Covenants of the Company.
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A. Covenants of the Company. The Company further covenants and agrees with
each Underwriter as follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the
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Prospectus. If during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, any event shall occur as a result of
which, in the judgment of the Company or in the reasonable opinion of the
Representatives or counsel for the Underwriters, it becomes necessary to amend
or supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause BancBoston Robertson
Stephens Inc. to be added as an additional insured to such policy in respect of
the offering contemplated hereby.
(g) Notice of Subsequent Events. If at any time during the ninety (90) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the 12-month period
ending [September 30, 2000] that satisfies the provisions of Section 11(a) of
the Securities Act.
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(k) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not, without the prior written consent of BancBoston Robertson Stephens Inc.,
for a period of 180 days following the date of the Prospectus, offer, sell or
contract to sell, or otherwise dispose of or enter into any transaction which is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other Common Shares or any
securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
on during the period of 180 days from the date that the Registration Statement
is declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such Common Shares and (ii) the Company may issue Common Shares issuable
upon the conversion of securities or the exercise of warrants outstanding at the
date of the Prospectus and described in the Prospectus.
(m) Future Reports to the Representatives. During the period of five
years hereafter the Company will furnish to the Representatives (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section
1(A) hereof as of the date hereof and as of the First Closing Date as though
then made and, with respect to the Option Shares, as of the Second Closing Date
as though then made, to the timely performance by the Company of its covenants
and other obligations hereunder, and to each of the following additional
conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the National Association of Securities Dealers, LLC. The Registration
Statement shall have become effective prior to the execution of this Agreement,
or at such later
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<PAGE>
date as shall be consented to in writing by you; and no stop order suspending
the effectiveness thereof shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge of the Company or any
Underwriter, threatened by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the satisfaction of
Underwriters' Counsel; and the National Association of Securities Dealers, LLC
shall have raised no objection to the fairness and reasonableness of the
underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be, there shall not have been any Material Adverse Change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Pillsbury, Madison & Sutro LLP, counsel for the Company substantially in the
form of Exhibit B attached hereto, dated the First Closing Date, or the Second
---------
Closing Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
---------
questions of law not involving the laws of the United States or the State of
California and Delaware upon opinions of local counsel, and as to questions of
fact upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(f) Opinion of Counsel for the Underwriters . You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Cooley Godward LLP, substantially in the form of Exhibit C hereto.
---------
The Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(g) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Ernst & Young
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LLP addressed to the Underwriters, dated the First Closing Date or
the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations and based
upon the procedures described in such letter delivered to you concurrently with
the execution of this Agreement (herein called the "Original Letter"), but
carried out to a date not more than four (4) business days prior to the First
Closing Date or the Second Closing Date, as the case may be, (i) confirming, to
the extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the First Closing Date or the Second Closing Date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not disclose any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, is material and adverse and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus. The Original Letter from Ernst
& Young shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheet of the Company as of June 30, 1999 and related
consolidated statements of operations, stockholders' equity, and cash flows for
the twelve (12) months ended June 30, 1999, (iii) state that Ernst & Young LLP
has performed the procedures set out in Statement on Auditing Standards No. 71
("SAS 71") for a review of interim financial information and providing the
report of Ernst & Young LLP as described in SAS 71 on the financial statements
for each of the quarters in the six-quarter period ended June 30, 1999 (the
"Quarterly Financial Statements"), (iv) state that in the course of such review,
nothing came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, and address other matters
agreed upon by Ernst & Young LLP and you. In addition, you shall have received
from Ernst & Young LLP a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's consolidated
financial statements as of June 30, 1999 did not disclose any weaknesses in
internal controls that they considered to be material weaknesses.
(h) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or the
Second Closing
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Date, as the case may be, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to the First Closing Date or the Second Closing Date,
as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Securities Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the
Securities Act and in all material respects conformed to the requirements
of the Securities Act, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, did not and does not include 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; and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (b) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (c)
any obligation, direct or contingent, that is material to the Company and
its subsidiaries considered as one enterprise, incurred by the Company or
its subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding indebtedness
of the Company or any of its subsidiaries that is material to the Company
and its subsidiaries considered as one enterprise, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or any of its subsidiaries, or (f) any loss or damage (whether or
not insured) to the property of the Company or any of its subsidiaries
which has been sustained or will have been sustained which has a material
adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(i) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of Exhibit A attached hereto from each officer and director of the
---------
Company and each beneficial owner of the outstanding issued share capital of the
Company.
(j) Stock Exchange Listing. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
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(k) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(l) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
Section 5. Payment of Expenses. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Shares for offer and
sale under the state securities or blue sky laws or the provincial securities
laws of Canada or any other country, and, if requested by the Representatives,
preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey"
or other memorandum, and any supplements thereto, advising the Underwriters of
such qualifications, registrations and exemptions, (vii) the filing fees
incident to, and the reasonable fees and expenses of counsel for the
Underwriters in connection with, the National Association of Securities Dealers,
LLC review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
listing the Common Stock on the Nasdaq National Market, (ix) all costs and
expenses incident to the preparation and undertaking of "road show" preparations
to be made to prospective investors, and (x) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
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provided in this Section 5, Section 6 and Section 7 hereof, the Underwriters
shall pay their own expenses, including the fees and disbursements of their
counsel.
Section 6. Reimbursement of Underwriters' Expenses'. If this Agreement is
terminated by the Representatives pursuant to Section 4, Section 7, Section 8 or
Section 9, or if the sale to the Underwriters of the Shares on the First Closing
Date is not consummated because of any refusal, inability or failure on the part
of the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
Section 7. Indemnification and Contribution.
(a) Indemnification of the Underwriters . The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; or (iii)
in whole or in part upon any inaccuracy in the representations and warranties of
the Company contained herein; or (iv) in whole or in part upon any failure of
the Company to perform its obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon any matter
covered by clause (i), (ii), (iii) or (iv) above, provided that the Company
shall not be liable under this clause (v) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such
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Underwriter through its bad faith or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses (including
the fees and disbursements of counsel chosen by BancBoston Robertson Stephens
Inc.) as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by the
Representatives expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2 and 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 loss, claim, damage, liability
or expense. The indemnity agreement set forth in this Section 7(a) shall be in
addition to any liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
20
<PAGE>
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and the second
paragraph under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section
7(b) and Section 8), representing the indemnified parties who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
21
<PAGE>
(e) Settlements. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, 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 against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, 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, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party 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 from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, (or
actions or proceedings in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriter on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault 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 on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
22
<PAGE>
The Company and Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(f) 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 which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 7(f) shall be deemed to include 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 subsection (f), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within 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 Underwriters' obligations in
this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or any
persons controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A successor to
any Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
Section 8. Default of One or More of the Several Underwriters. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common
23
<PAGE>
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase does not exceed 10% 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 Common Shares set forth opposite
their respective names on Schedule A 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 may be specified by the Representatives with the
consent of the non-defaulting Underwriters, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date. If, on the First Closing Date or the Second Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares and the aggregate number of Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Shares to be purchased on
such date, and arrangements satisfactory to the Representatives and the Company
for the purchase of such Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 4, and Section 7 shall at all times be
effective and shall survive such termination. In any such case either the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 9. Termination of this Agreement. Prior to the First Closing Date,
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the National Association of
Securities Dealers, LLC; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective change in United States' or international
political, financial or economic conditions, as in the judgment of the
Representatives is material and adverse and makes it impracticable or
inadvisable to market the Common Shares in the manner and on the terms described
in the Prospectus or to enforce contracts for the sale of securities; (iv) in
the judgment of the Representatives there shall have occurred any Material
Adverse Change; or (v) the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as in the
judgment of the Representatives may interfere materially with the conduct of the
business and operations of the Company regardless of whether or not such loss
shall have been insured. Any termination pursuant to this
24
<PAGE>
Section 9 shall be without liability on the part of (a) the Company to any
Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Representatives and the Underwriters pursuant to Sections 5 and
6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any
other party except that the provisions of Section 7 shall at all times be
effective and shall survive such termination.
Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
25
<PAGE>
Section 11. Notices. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
BANCBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2696
Attention: General Counsel
If to the Company:
eGain Communications Corporation
624 E. Evelyn Avenue
Sunnyvale, CA 94086
Facsimile: (408) 737-8400
Attention: Chief Financial Officer
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 12. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 9 hereof, and to the benefit of the employees, officers and directors
and controlling persons referred to in Section 7, and to their respective
successors, and no other person will have any right or obligation hereunder. The
term "successors" shall not include any purchaser of the Shares as such from any
of the Underwriters merely by reason of such purchase.
Section 13. Partial Unenforceability. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
Section 14. Governing Law Provisions.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related
26
<PAGE>
Proceedings") may be instituted in the federal courts of the United States of
America located in the City and County of San Francisco or the courts of the
State of California in each case located in the City and County of San Francisco
(collectively, the "Specified Courts"), and each party irrevocably submits to
the exclusive jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to which
such jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process for any
suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of
any suit, action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such suit, action or other proceeding brought in any such court has been brought
in an inconvenient forum. Each party not located in the United States
irrevocably appoints CT Corporation System, which currently maintains a San
Francisco office at 49 Stevenson Street, San Francisco, California 94105, United
States of America, as its agent to receive service of process or other legal
summons for purposes of any such suit, action or proceeding that may be
instituted in any state or federal court in the City and County of San
Francisco.
Section 15. General Provisions. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement may not be amended or modified unless in writing by
all of the parties hereto, and no condition herein (express or implied) may be
waived unless waived in writing by each party whom the condition is meant to
benefit. The Table of Contents and the Section headings herein are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
[The remainder of this page has been intentionally left blank.]
27
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company the enclosed copies hereof, whereupon this
instrument, along with all counterparts hereof, shall become a binding agreement
in accordance with its terms.
Very truly yours,
eGain Communications Corporation
By:__________________________
Ashutosh Roy
Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives as of the date first above written.
BANCBOSTON ROBERTSON STEPHENS INC.
DONALDSON, LUFKIN & JENRETTE, INC.
VOLPE BROWN WHELAN & CO.
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
By BANCBOSTON ROBERTSON STEPHENS INC.
By:_________________________________
Authorized Signatory
28
<PAGE>
SCHEDULE A
Number of
Firm Common
Underwriters Shares
To be Purchased
BANCBOSTON ROBERTSON STEPHENS INC...............
DONALDSON, LUFKIN & JENRETTE, INC...............
VOLPE BROWN WHELAN & CO.........................
................................................
Total........................................
S-A
<PAGE>
Exhibit A
Lock-Up Agreement
BancBoston Robertson Stephens Inc.
Donaldson, Lufkin & Jennette, Inc.
Volpe Brown Whelan & Co.,
As Representatives of the Several Underwriters
c/o BancBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
RE: eGain Communications Corporation (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives (the "Representatives") of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters are
relying on the representations and agreements of the undersigned contained in
this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into or exchangeable
for shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by such person or with respect to which such person has or
hereafter acquires the power of disposition, otherwise than (i) as a bona fide
gift or gifts, provided the donee or donees thereof agree in writing to be bound
by this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, (iii) with respect to dispositions of Common
Shares acquired on the open market, (iv) with respect to sales or purchases of
Common Stock acquired on the open market or (v) with the prior written consent
of BancBoston Robertson Stephens Inc., for a period commencing on the date
hereof and continuing to a date 180 days after the Registration Statement is
declared effective by the Securities and Exchange Commission (the "Lock-up
Period"). The foregoing restriction has been expressly
A-1
<PAGE>
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Securities or with respect to any security (other than a broad-based
market basket or index) that included, relates to or derives any significant
part of its value from Securities. The undersigned also agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or Securities held by
the undersigned except in compliance with the foregoing restrictions.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated:__________________________________
________________________________________
Printed Name of Holder
By:_____________________________________
Signature
________________________________________
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
A-2
<PAGE>
Exhibit B
Matters to be Covered in the Opinion of Company Counsel
(i) The Company and each subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
(ii) The Company and each subsidiary has the corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company and each subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction, if any,
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a Material Adverse Effect.
To such counsel's knowledge, the Company does not own or control, directly
or indirectly, any corporation, association or other entity other than
Sitebridge Corporation.
(iv) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of
the dates stated therein, the issued and outstanding shares of capital
stock of the Company have been duly and validly issued and are fully paid
and nonassessable, and, to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
(v) All issued and outstanding shares of capital stock of each subsidiary
of the Company have been duly authorized and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right and are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement have been
duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly issued and fully
paid and nonassessable, and will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right, right
of first refusal or other similar right.
(vii) The Company has the corporate power and authority to enter into this
Agreement and to issue, sell and deliver to the Underwriters the Shares to
be issued and sold by it hereunder;
B-1
<PAGE>
(viii) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered
by the Company and, assuming due authorization, execution and delivery by
you, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to or affecting creditors' rights generally or by general
equitable principles;
(ix) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened under the
Securities Act;
(x) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder;
(xi) The Registration Statement and the Prospectus, and each amendment or
supplement thereto (other than the consolidated financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion), as of the effective date of
the Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and Regulations;
(xii) The information in the Prospectus under the caption "Description of
Capital Stock," to the extent that it constitutes matters of law or legal
conclusions, has been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of certificates evidencing the
Common Stock and filed as exhibits to the Registration Statement comply
with Delaware law;
(xiii) The description in the Registration Statement and the Prospectus of
the charter and bylaws of the Company and of statutes are accurate and
fairly present the information required to be presented by the Securities
Act;
(xiv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents to which the Company is a party of a character required
to be described or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
(xv) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification
B-2
<PAGE>
obligations hereunder, concerning which no opinion need be expressed) will
not (a) result in any violation of the Company's charter or bylaws or (b)
to such counsel's knowledge, result in a material breach or violation of
any of the terms and provisions of, or constitute a default under, any
bond, debenture, note or other evidence of indebtedness, or any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture
or other agreement or instrument known to such counsel to which the Company
is a party or by which its properties are bound, or any applicable statute,
rule or regulation known to such counsel or, to such counsel's knowledge,
any order, writ or decree of any court, government or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries, or
over any of their properties or operations;
(xvi) No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated, except
(i) such as have been obtained under the Securities Act, (ii) such as may
be required under state or other securities or Blue Sky laws in connection
with the purchase and the distribution of the Shares by the Underwriters,
(iii) such as may be required by the National Association of Securities
Dealers, LLC and (iv) such as may be required under the federal or
provincial laws of Canada;
(xvii) To such counsel's knowledge, there are no legal or governmental
proceedings pending or threatened against the Company or any of its
subsidiaries of a character required to be disclosed in the Registration
Statement or the Prospectus by the Securities Act, other than those
described therein;
(xviii) To such counsel's knowledge, neither the Company nor any of its
subsidiaries is presently (a) in material violation of its respective
charter or bylaws, or (b) in material breach of any applicable statute,
rule or regulation known to such counsel or, to such counsel's knowledge,
any order, writ or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over
any of their properties or operations; and
(xix) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Company Shares or
other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the Company having
rights known to such counsel to registration of such shares of Company
Shares or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering contemplated
thereby, waived such rights or such rights have expired by reason of lapse
of time following notification of the Company's intent to file the
Registration Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction of such
rights.
B-3
<PAGE>
(xx) The Company is not and, after giving effect to the offering and the
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.
(xxi) To such counsel's knowledge, the Company owns or possesses sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals,
trade secrets and other similar rights (collectively, "Intellectual
Property Rights") reasonably necessary to conduct their business as now
conducted; and the expected expiration of any such Intellectual Property
Rights would not result in a Material Adverse Effect. The Company has not
received any notice of infringement or conflict with asserted Intellectual
Property Rights of others, which infringement or conflict, if the subject
of an unfavorable decision, would result in a Material Adverse Effect. To
such counsel's knowledge, the Company's discoveries, inventions, products,
or processes referred to in the Registration Statement or Prospectus do not
infringe or conflict with any right or patent which is the subject of a
patent application known to the Company.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements, including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) 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, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
B-4
<PAGE>
Exhibit C
Matters to be Covered in the Opinion of Underwriters' Counsel
(i) The Firm Shares have been duly authorized and, upon issuance and
delivery and payment therefor in accordance with the terms of the
Underwriting Agreement, will be validly issued, fully paid and non-
assessable.
(ii) The Registration Statement complied as to form in all material
respects with the requirements of the Act; the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto have been instituted or threatened
or are pending under the Act.
(iii) The 8-A Registration Statement complied as to form in all material
respects with the requirements of the Exchange Act; the 8-A Registration
Statement has become effective under the Exchange Act; and the Firm Shares
or the Option Shares have been validly registered under the Securities Act
and the Rules and Regulations of the Exchange Act and the applicable rules
and regulations of the Commission thereunder; and
(iv) The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall state that such counsel has reviewed the opinions
addressed to the Representatives from Pillsbury Madison & Sutro LLP, each dated
the date hereof, and furnished to you in accordance with the provisions of the
Underwriting Agreement. Such opinions appear on their face to be appropriately
responsive to the requirements of the Underwriting Agreement.
In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the First Closing Date or Second Closing Date, as the case may be, the
Registration Statement and any amendment or supplement thereto (other than the
financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) 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, or at the First Closing Date or the Second
Closing Date, as the case may be, the Registration Statement, the Prospectus and
any amendment or supplement thereto (except as aforesaid) contained
C-1
<PAGE>
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
C-2
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and to
the use of our reports pertaining to eGain Communications Corporation dated
July 16, 1999 and pertaining to Sitebridge Corporation dated July 16, 1999
included in Amendment No. 2 to the Registration Statement (Form S-1) and
related Prospectus of eGain Communications Corporation for the registration of
its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
September 15, 1999
