<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Reg. No. 333-73295
3,000,000 SHARES
[SILKNET SOFTWARE, INC. LOGO]
COMMON STOCK
------------------
Silknet is selling shares of common stock. Prior to this offering, there
has been no public market for the common stock. Silknet has listed the common
stock on The Nasdaq Stock Market's National Market under the symbol "SILK."
Silknet has granted the underwriters an option to purchase a maximum of
450,000 additional shares of common stock to cover over-allotments of shares.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SILKNET
------------- ------------- -------------
<S> <C> <C> <C>
Per Share................................. $15.00 $1.05 $13.95
Total..................................... $45,000,000 $3,150,000 $41,850,000
</TABLE>
Delivery of the shares of common stock will be made on or about May 10,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
BANCBOSTON ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
FIRST UNION CAPITAL MARKETS CORP.
Prospectus dated May 5, 1999
<PAGE> 2
Integrate. Engage. Leverage.
Silknet believes that the next great wave of efficiency will come -- not from
within the company -- but from the customer. Silknet's eBusiness solutions
integrate the customer, engage them in the company's business and leverage
their skills, knowledge and time to provide a more efficient and effective
experience for them and for the company.
"Silknet is the first vendor to deliver a Web-based electronic commerce product
that is already integrated with customer service software. This solution gives
companies a competitive edge and gives consumers a better experience when
shopping on the Web."
-- Aberdeen Group, Inc.
[SILKNET LOGO]
SPRINT PCS
[Depiction of Sprint PCS Web site]
INTEGRATE. Silknet's eService and eCommerce applications helped to provide
Sprint PCS with one view of the customer and to give their nearly 2.5 million
customers one place to learn, shop and manage their relationship with Sprint
PCS.
MICROSOFT
[Depiction of Microsoft Web site]
ENGAGE. Microsoft uses Silknet's eService application to provide on-line
service to its more than 7,000 sales and support employees. If an answer is not
available through self-service, the employee can submit a case inquiry and
receive a solution via e-mail or Intranet.
THE TRAVEL COMPANY
[Depiction of The Travel Company's Web site]
LEVERAGE. Silknet solutions help The Travel Company to leverage their sales
agent's skills, time and knowledge to improve the experience for their
customers. Silknet solutions help track all customer activity related to
selling and servicing cruise vacations.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 5
USE OF PROCEEDS............................................. 15
DIVIDEND POLICY............................................. 15
CAPITALIZATION.............................................. 16
DILUTION.................................................... 17
SELECTED CONSOLIDATED FINANCIAL DATA........................ 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 20
BUSINESS.................................................... 31
MANAGEMENT.................................................. 47
CERTAIN TRANSACTIONS........................................ 53
PRINCIPAL STOCKHOLDERS...................................... 55
DESCRIPTION OF CAPITAL STOCK................................ 58
SHARES ELIGIBLE FOR FUTURE SALE............................. 63
UNDERWRITING................................................ 65
NOTICE TO CANADIAN RESIDENTS................................ 67
LEGAL MATTERS............................................... 68
EXPERTS..................................................... 68
CHANGE IN INDEPENDENT ACCOUNTANTS........................... 68
ADDITIONAL INFORMATION...................................... 68
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
------------------------
Until May 30, 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
------------------------
Silknet has applied for federal registration of the trademarks "Silknet"
and "Silknet" combined with the Silknet logo. Other trademarks or service marks
appearing in this prospectus are the property of their respective holders.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the common stock. You should read the entire prospectus
carefully. Unless otherwise specified, all information in this prospectus
assumes no exercise of the underwriters' over-allotment option, reflects the
1-for-2 exchange of common stock and preferred stock in connection with the
reincorporation of Silknet from New Hampshire to Delaware and reflects the
mandatory conversion into common stock of all outstanding shares of preferred
stock upon the closing of this offering.
SILKNET
We provide software that allows companies to offer their customers
personalized marketing, sales, electronic commerce and customer support services
through a single Web site interface tailored by that company to meet its
customer requirements. Our products enable a company to deliver these services
to its customers over the Web through customer self-service and immediate,
direct collaboration among that company and its customers, partners, vendors and
suppliers. Our products allow a company to coordinate its interactions with
customers by integrating a variety of communications media, such as the Web,
e-mail and the telephone. Our software can capture and consolidate data derived
from all these sources and distribute it throughout a company and to its
partners to provide a single view of a customer. This solution is more efficient
for a company and also more efficient for its customers, creating a competitive
advantage for that company.
Accompanying the growth in the use of the Web has been a trend toward
customer self-service. Just as consumers have extensively used automated teller
machines rather than using the services of a bank teller, the Web now allows a
wide range of businesses the ability to offer electronic self-service to their
customers. For example, consumers are now shopping for goods and services and
seeking answers to customer service questions on their own from their computers
at any hour of the day. The Gartner Group estimates that by 2001 companies will
receive 25% of all customer contacts and inquiries over the Web and through
e-mail messages and other Web-based forms. Companies are using this Web-based
customer interaction to augment more traditional means of handling customer
service and commerce, such as telephone-based customer service. Rather than
replacing the technology systems designed to support telephone-based customer
service, companies are actively seeking ways to integrate their various forms of
customer interaction, such as Web communications, e-mail and the telephone.
Businesses are seeking solutions such as our products to coordinate these
various media and present a consistent interface to their customers for service
and commerce.
Below is a list of some of our customers since July 1, 1997. These
customers represent 65% of the aggregate revenue in fiscal year 1998 and the
nine-month period ended March 31, 1999.
- 3Com
- Bank of America
- Bell Advanced Communications
- Beyond.com
- Cigna
- Compaq
- Inacom
- KPMG Peat Marwick
- Microsoft
- Office Depot
- Provident Bank
- Sprint PCS
Silknet was incorporated in New Hampshire on March 6, 1995 and was
reincorporated in Delaware on February 25, 1999. Our principal executive offices
are located at 50 Phillippe Cote Street, Manchester, New Hampshire 03101, and
our telephone number is (603) 625-0070.
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THE OFFERING
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<S> <C>
Common stock offered........................................ 3,000,000 shares
Common stock to be outstanding after the offering........... 14,998,099 shares
Use of proceeds............................................. For general corporate purposes,
including working capital.
Nasdaq National Market symbol............................... SILK
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
Accordingly, accrued dividends on preferred stock are not included in the
calculation of pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------- ----------------------
1996 1997 1998 1998 1999
------ ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $ 266 $ 194 $ 3,647 $ 2,094 $ 9,161
Total cost of revenue........................ 141 341 1,386 919 2,533
Gross margin................................. 125 (147) 2,261 1,175 6,628
Total operating expenses..................... 583 2,545 8,398 5,418 12,967
Operating loss............................... (458) (2,692) (6,137) (4,243) (6,339)
Net loss..................................... (465) (2,753) (6,003) (4,173) (6,115)
Net loss attributable to common
stockholders............................... (465) (2,943) (6,906) (4,733) (7,634)
Basic and diluted net loss per share......... $(0.18) $ (1.15) $ (2.69) $ (1.85) $ (2.82)
Shares used in computing basic and diluted
net loss per share......................... 2,551 2,557 2,566 2,558 2,708
Unaudited pro forma basic and diluted net
loss per share............................. $ (0.76) $ (0.56) $ (0.57)
Shares used in computing unaudited pro forma
basic and diluted net loss per share....... 7,879 7,422 10,807
</TABLE>
The pro forma as adjusted balance sheet data as of March 31, 1999 gives
effect to the conversion of all outstanding preferred stock into common stock
and has been adjusted to give effect to the sale of 3,000,000 shares of common
stock offered hereby at the initial public offering price of $15.00 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
JUNE 30, ------------------------
------------------ PRO FORMA
1997 1998 ACTUAL AS ADJUSTED
------- ------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 4,752 $ 9,045 $ 11,126 $51,976
Working capital..................................... 4,155 8,472 10,876 51,726
Total assets........................................ 5,402 12,129 17,524 58,374
Note payable to bank................................ 115 222 122 122
Total convertible preferred stock................... 7,432 19,107 29,415 --
Total stockholders' equity (deficit)................ (2,834) (9,587) (16,878) 53,387
</TABLE>
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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.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING
HISTORY
MAY IMPEDE YOUR ABILITY TO
VALUE OUR BUSINESS AND ITS
FUTURE PROSPECTS Your evaluation of our business will be more
difficult because of our limited operating
history and could cause you to overpay for our
common stock. We commenced operations in March
1995 and we recorded our first license revenue
upon delivery of Silknet eService in a trial
version to customers in January 1997.
Accordingly, it is difficult to evaluate our
business and prospects. In addition, because we
are in an early stage of development in a new
and rapidly evolving market, our prospects are
difficult to predict and may change rapidly and
without warning.
WE HAVE INCURRED
SUBSTANTIAL
OPERATING LOSSES AND WE MAY
NOT BE PROFITABLE IN THE
FUTURE Since we began operations, we have incurred
substantial operating losses in every fiscal
period. We cannot be certain if or when we will
become profitable. Failure to achieve
profitability within the timeframe expected by
investors may adversely affect the market price
of our common stock. As a result of accumulated
operating losses, at March 31, 1999, we had an
accumulated deficit of $15.4 million. We have
generated relatively small amounts of revenue,
while increasing expenditures in all areas,
particularly in research and development and
sales and marketing, in order to execute our
business plan. Although we have experienced
revenue growth in recent periods, the growth
has been from a limited base of historical
revenue, and it is unlikely that such growth
rates are sustainable.
OUR QUARTERLY OPERATING
RESULTS
MAY FLUCTUATE BECAUSE WE
DEPEND ON A SMALL NUMBER OF
LARGE ORDERS We derive a significant portion of our software
license revenue in each quarter from a small
number of relatively large orders. Our
operating results for a particular fiscal
period could be materially adversely affected
if we are unable to complete one or more
substantial license sales planned for that
period. In each of the last eight quarters, we
had at least one customer that accounted for
more than 24% of total revenue in that quarter.
In addition, the purchase and implementation of
our products typically involve a significant
cost to our customers, including the purchase
of related hardware and software, as well as
training and integration costs. These
implementations also include substantial
commitment of resources by our customers or
their consultants over an extended period of
time. As a result, our sales cycle is
relatively long.
In addition, our services revenue, which is
largely correlated with our license revenue,
has fluctuated and may fluctuate in the future
due to significant consulting and
implementation services performed in a quarter.
Investors should not expect a
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commensurate increase in services revenue
between future quarters. See "Management's
Discussion and Analysis of Financial Condition
and Results of Operations."
DISAPPOINTING QUARTERLY
REVENUE
OR OPERATING RESULTS COULD
CAUSE
THE PRICE OF OUR COMMON
STOCK
TO FALL Our quarterly revenue and operating results are
difficult to predict and may fluctuate
significantly from quarter to quarter. If our
quarterly revenue or operating results fall
below the expectations of investors or
securities analysts, the price of our common
stock could fall substantially.
Our quarterly revenue may fluctuate as a result
of a variety of factors, including the
following:
- the market for interactive, Web-based
electronic business solutions is in an
early stage of development and it is
therefore difficult to accurately
predict customer demand; and
- the sales cycle for our products and
services varies substantially from
customer to customer, and we expect the
sales cycle to be long. As a result, we
have difficulty determining whether and
when we will receive license revenue
from a particular customer.
In addition, because our revenue from
implementation, maintenance and training
services is largely correlated with our license
revenue, a decline in license revenue could
also cause a decline in our services revenue in
the same quarter or in subsequent quarters.
Most of our expenses, such as employee
compensation and rent, are relatively fixed in
the short term. Moreover, our expense levels
are based, in part, on our expectations
regarding future revenue levels. As a result,
if revenue for a particular quarter is below
our expectations, we could not proportionately
reduce operating expenses for that quarter, and
therefore this revenue shortfall would have a
disproportionate effect on our expected
operating results for that quarter.
OUR BUSINESS WILL BE
ADVERSELY
AFFECTED IF WEB-BASED
ELECTRONIC BUSINESS
SOLUTIONS
ARE NOT WIDELY ADOPTED Our products address a new and emerging market
for Web-based, interactive electronic business
solutions. Therefore, our future success
depends substantially upon the widespread
adoption of the Web as a primary medium for
commerce and business applications. The failure
of this market to develop, or a delay in the
development of this market, would have a
material adverse effect on our business,
financial condition and operating results. The
Web has experienced, and is expected to
continue to experience, significant user and
traffic growth, which has, at times, caused
user frustration with slow access and download
times. The Web infrastructure may not be able
to support the demands placed on it by the
continued growth upon which our success
depends. Moreover, critical issues concerning
the commercial use of the Web, such as
security, reliability, cost, accessibility and
quality of service, remain unresolved and may
negatively affect the growth of Web use
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or the attractiveness of commerce and business
communication over the Web. In addition, the
Web could lose its viability due to delays in
the development or adoption of new standards
and protocols to handle increased activity or
due to increased government regulation and
taxation of Internet commerce.
GOVERNMENT LAWS AND
REGULATIONS COULD LIMIT THE
MARKET FOR OUR PRODUCTS AND
SERVICES AND ADVERSELY
AFFECT OUR
FINANCIAL CONDITION AND
OPERATING RESULTS Federal, state or foreign agencies may adopt
laws or regulations affecting the use of the
Web as a commercial medium. If enacted, these
laws or regulations could limit the market for
our products, which could materially adversely
affect our business, financial condition and
operating results. Although many of these laws
or regulations may not apply to our business
directly, we expect that laws and regulations
relating to user privacy, pricing, content and
quality of products and services could
indirectly affect our business. It is possible
that these laws or regulations could expose
companies involved in Web commerce to
liability, which could limit the growth of Web
commerce generally.
INTENSE COMPETITION FROM
OTHER
TECHNOLOGY COMPANIES MAY
ADVERSELY AFFECT OUR
FINANCIAL
CONDITION AND OPERATING
RESULTS The market for interactive, Web-based
electronic business solutions is intensely
competitive. If we are unable to compete
effectively, our business, financial condition
and operating results would be materially
adversely affected. Many of our current and
potential competitors have longer operating
histories, greater name recognition and
substantially greater financial, technical,
marketing, management, service, support and
other resources than we do. Therefore, they may
be able to respond more quickly than we can to
new or changing opportunities, technologies,
standards or customer requirements.
In addition, we expect that new competitors
will enter the market with competing products
as the size and visibility of the market
opportunity increases. We also expect that
competition will increase as a result of
software industry consolidations and formations
of alliances among industry participants.
Increased competition could result in pricing
pressures, reduced margins or the failure of
our products to achieve or maintain market
acceptance. See "Business -- Competition."
WE MAY NOT BE ABLE TO
DEVELOP
NEW PRODUCTS OR ENHANCE
EXISTING PRODUCTS ON A
TIMELY
BASIS To be competitive, we must develop and
introduce on a timely basis new products and
product enhancements which meet the needs of
companies seeking to deploy and manage
electronic business applications over the Web.
We have in the past failed to ship certain new
products or product enhancements by our planned
shipment date. If we fail to develop and
introduce new products and enhancements
successfully and on a timely basis, it could
have a material adverse effect on our business,
operating results and financial condition.
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FAILURE TO EXPAND OUR
RELATIONSHIPS WITH SYSTEMS
INTEGRATORS AND CONSULTING
FIRMS
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 and
consulting firms. A failure to do so could have
a material adverse effect on our business,
operating results and financial condition. We
rely on systems integrators and consulting
firms to recommend our products to their
clients and to install and support our products
for their clients. Systems integrators and
consulting firms may develop, market or
recommend software applications that compete
with our products. Moreover, if these firms
fail to implement our products successfully for
their clients, we may not have the resources to
implement our products on the schedule required
by the client, which could have a material
adverse effect on our business, operating
results and financial condition.
OUR FAILURE TO EXPAND OUR
DIRECT SALES FORCE AND
THIRD-PARTY DISTRIBUTION
CHANNELS WOULD IMPEDE OUR
REVENUE GROWTH AND
FINANCIAL
CONDITION
To increase our revenue, we must increase the
size of our direct sales force and the number
of our indirect marketing and distribution
partners, including software and hardware
vendors and resellers. A failure to do so could
have a material adverse effect on our business,
operating results and financial condition.
There is intense competition for sales
personnel in our business, and we may not be
successful in attracting, integrating,
motivating or retaining new personnel for these
positions. Our existing or future marketing and
distribution partners may choose to devote
greater resources to marketing and supporting
the products of competitors.
OUR FAILURE TO OPERATE OUR
PROFESSIONAL SERVICES
ORGANIZATION AT A PROFIT
WOULD
ADVERSELY AFFECT OUR
FINANCIAL
CONDITION Our failure to operate our professional
services organization at a profit could have a
material adverse effect on our business,
operating results and financial condition. To
gain initial acceptance of our products by
customers in our targeted industries, we assist
customers with the implementation of our
products, sometimes at a loss. To date, our
annual services costs for the organization have
been significantly higher than our services
revenue, and we expect that trend to continue
for the foreseeable future as we seek to
increase market acceptance of our products. We
cannot be certain that our professional
services organization will ever achieve or
sustain profitability.
OUR FAILURE TO MANAGE
PROPERLY
OUR RAPID GROWTH COULD
STRAIN
OUR RESOURCES AND ADVERSELY
AFFECT OUR BUSINESS Our failure to manage properly our rapid growth
could have a material adverse effect on the
quality of our products, our ability to retain
key personnel and our business, operating
results and financial condition. Our revenue
increased 148% in the quarter ended March 31,
1999 from the same period the year earlier.
From April 1, 1998 to March 31, 1999, the
number of our employees increased from 65 to
136. The rapid rate of our recent growth has
made management of that growth more difficult.
In addition, the proceeds of this offering will
be used in part to expand product offerings and
expand international operations and sales and
marketing capabilities. This additional growth
may further strain our management,
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financial and other resources. To manage future
growth effectively we must maintain and enhance
our financial and accounting systems and
controls, integrate new personnel and manage
expanded operations.
OUR FAILURE TO EXPAND AND
MANAGE OUR INTERNATIONAL
OPERATIONS WOULD ADVERSELY
AFFECT OUR REVENUE GROWTH
AND
FINANCIAL CONDITION We expect international revenue to account for
a significant percentage of total revenue in
the future and we believe that we must continue
to expand our international sales activities in
order to be successful. Our failure to expand
our international sales could have a material
adverse effect on our business, operating
results and financial condition. Our plans to
expand internationally may be adversely
affected by a number of risks, including:
- expenses associated with customizing
products for foreign countries;
- challenges inherent in managing
geographically dispersed operations;
- protectionist laws and business
practices that favor local competitors;
- dependence on local vendors;
- multiple, conflicting and changing
governmental laws and regulations; and
- foreign currency exchange rate
fluctuations.
Our international sales growth will be limited
if we are unable to:
- establish additional foreign operations;
- expand international sales channel
management and support organizations;
- hire additional personnel;
- customize products for local markets;
- develop relationships with international
service providers; or
- establish relationships with additional
distributors and systems integrators.
LOSS OF KEY PERSONNEL COULD
ADVERSELY AFFECT OUR
BUSINESS Our future success depends to a significant
degree on the skills, experience and efforts of
James C. Wood, our founder, Chairman of the
Board, President and Chief Executive Officer.
The loss of the services of Mr. Wood could have
a material adverse effect on our business,
operating results and financial condition. We
also depend on the ability of our executive
officers and other members of senior management
to work effectively as a team. The loss of one
or more of our executive officers and other
members of senior management could have a
material adverse effect on our business,
operating results and financial condition.
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WE MAY BE UNABLE TO HIRE
AND
RETAIN THE SKILLED
PERSONNEL WE
NEED TO SUCCEED Qualified personnel are in great demand
throughout the software industry. The demand
for qualified personnel is particularly acute
in the New England area, due to the large
number of software companies and the low
unemployment in the region. Our success depends
in large part upon our ability to attract,
train, motivate and retain highly skilled
employees, particularly marketing personnel,
software engineers and other senior personnel.
Our failure to attract and retain the highly-
trained technical personnel that are integral
to our product development, professional
services and support teams may limit the rate
at which we can develop new products or product
enhancements. This could have a material
adverse effect on our business, operating
results and financial condition.
WE MAY BE UNABLE TO PROTECT
OUR PROPRIETARY TECHNOLOGY
RIGHTS Our success depends to a significant degree
upon the protection of our software and other
proprietary technology rights. We rely on trade
secret, copyright and trademark laws and
confidentiality agreements with employees and
third-parties, all of which offer only limited
protection. Moreover, the laws of other
countries in which we market our products may
afford little or no effective protection of our
proprietary technology. The reverse
engineering, unauthorized copying or other
misappropriation of our proprietary technology
could enable third parties to benefit from our
technology without paying us for it. This could
have a material adverse effect on our business,
operating results and financial condition. If
we resort to legal proceedings to enforce our
intellectual property rights, the proceedings
could be burdensome and expensive and could
involve a high degree of risk. Further, names
such as eBusiness, eCommerce and eService are
becoming widely used and descriptive. As a
result, we do not expect to be able to prevent
third parties from using these names for
competing products. See
"Business -- Intellectual Property and
Proprietary Rights."
CLAIMS BY OTHER COMPANIES
THAT
OUR PRODUCTS INFRINGE THEIR
COPYRIGHTS OR PATENTS COULD
ADVERSELY AFFECT OUR
FINANCIAL
CONDITION If any of our products violate third party
proprietary rights, we may be required to
reengineer our products or seek to obtain
licenses from third parties to continue
offering our products without substantial
reengineering. Any efforts to reengineer our
products or obtain licenses from third parties
may not be successful and, in any case, would
substantially increase our costs and have a
material adverse effect on our business,
operating results and financial condition. We
do not conduct comprehensive patent searches to
determine whether the technology used in our
products infringes patents held by third
parties. In addition, product development is
inherently uncertain in a rapidly evolving
technological environment in which there may be
numerous patent applications pending, many of
which are confidential when filed, with regard
to similar
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<PAGE> 12
technologies. See "Business -- Intellectual
Property and Proprietary Rights."
OUR USE OF THE "SILKNET"
AND
"EBUSINESS" TRADEMARKS MAY
INFRINGE THE TRADEMARK
RIGHTS OF
OTHER COMPANIES Silknet's use of "eBusiness," as well as the
use of other names, may result in costly
litigation, divert management's attention and
resources, cause product shipment delays or
require Silknet to pay damages and/or to enter
into royalty or license agreements to continue
to use a product name. Silknet may be required
to stop using the name "eBusiness" or other
names currently used for its products. Any of
these events could have a material adverse
effect on our business, operating results and
financial condition.
We have applied for registration of some of our
trademarks in the United States, Canada and the
European Community. Most of these applications
have not been approved. Our applications for
the registration of "Silknet" and "Silknet"
combined with the Silknet logo were denied in
Canada because a company filed an earlier
application for the use of "Silk" in connection
with Internet information resource services.
Other companies have filed trademark
applications for marks similar to the names of
Silknet's products. For example, IBM has filed
a trademark application for "e-Business" for
use in creating, implementing and maintaining
Web sites and integration of computer systems
and networks. Silknet's use of "Silknet
eBusiness System" could infringe the rights of
IBM and other companies using a mark that
contains "eBusiness." See
"Business -- Intellectual Property and
Proprietary Rights."
WE MAY LOSE ACCESS TO
THIRD-PARTY TECHNOLOGY USED
IN
OUR PRODUCTS We incorporate into our products technology
licensed from third parties, such as Microsoft
Corporation. The loss of access to this
technology could result in delays in the
development and introduction of new products or
enhancements until equivalent or replacement
technology could be accessed, if available, or
developed internally, if feasible. These delays
could have a material adverse effect on our
business, operating results and financial
condition. It is possible that technology from
others will not be available to us on
commercially reasonable terms, if at all.
OUR BUSINESS COULD BE
ADVERSELY
AFFECTED IF OUR PRODUCTS
FAIL TO
PERFORM PROPERLY Software products as complex as ours may
contain undetected errors, or bugs, which
result in product failures, or otherwise fail
to perform in accordance with customer
expectations. Our products may be particularly
susceptible to bugs or performance degradation
because of the emerging nature of Web
technologies and the stress that may be placed
on our products by the full deployment of our
products over the Web to thousands of
end-users. Product performance problems could
result in loss of or delay in revenue, loss of
market share, failure to achieve market
acceptance, diversion of development
11
<PAGE> 13
resources or injury to our reputation, any of
which could have a material adverse effect on
our business, operating results and financial
condition. Prior to November 1998, we warranted
some of our products for five years, providing
customers a right to refund a portion of the
license fee if we are unable to correct an
error in the product. To date, no customer has
requested a refund under the warranty
provisions. However, if we are required to
refund significant portions of license fees,
our business, operating results and financial
condition could be materially adversely
affected.
WE COULD INCUR SUBSTANTIAL
COSTS AS A RESULT OF
PRODUCT
LIABILITY CLAIMS RELATING
TO OUR
CUSTOMERS' CRITICAL
BUSINESS
OPERATIONS Our products are critical to the operations of
our customers' businesses. If one of our
products fails, a customer may assert a claim
for substantial damages against us, regardless
of our responsibility for such failure. Product
liability claims could require us to spend
significant time and money in litigation or to
pay significant damages. Although we maintain
general liability insurance, including coverage
for errors and omissions, there can be no
assurance that such coverage will continue to
be available on reasonable terms or will be
available in amounts sufficient to cover one or
more large claims, or that the insurer will not
disclaim coverage as to any future claim.
WE MAY BE AFFECTED BY
UNEXPECTED YEAR 2000
TECHNOLOGY PROBLEMS Many existing computer systems and software
products do not properly recognize dates after
December 31, 1999. This Year 2000 problem could
result in miscalculations, data corruption,
system failures or disruptions of operations.
We are subject to potential Year 2000 problems
affecting our products, our customers' systems,
our internal systems and the systems of our
vendors, any of which could have a material
adverse effect on our business, operating
results and financial condition.
Changing purchasing patterns of customers
impacted by Year 2000 issues may result in
reduced resources available for purchases of
interactive electronic business solutions. In
addition, there can be no assurance that Year
2000 errors or defects will not be discovered
in our internal software systems and, if such
errors or defects are discovered, there can be
no assurance that the costs of making such
systems Year 2000 compliant will not be
material.
Year 2000 errors or defects in the internal
systems maintained by our vendors could require
us to incur significant unanticipated expenses
to remedy any problems or replace affected
vendors. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Year 2000 Readiness Disclosure."
RISKS ASSOCIATED WITH THIS OFFERING OF OUR COMMON STOCK
THE PRICE OF OUR COMMON
STOCK
AFTER THIS OFFERING MAY BE
LOWER
THAN THE PRICE YOU PAY The price of our common stock that will prevail
in the market after this offering may be higher
or lower than the price you pay. After this
offering, an active trading market in our stock
12
<PAGE> 14
might not develop or continue. If you purchase
shares of our common stock in this offering,
you will pay a price that was not established
in a competitive market. Rather, you will pay a
price that we negotiated with the
representatives of the underwriters based upon
several factors. See "Underwriting."
OUR COMMON STOCK IS
PARTICULARLY SUBJECT TO
VOLATILITY
BECAUSE OF THE INDUSTRY
THAT WE
ARE IN The stock market in general has recently
experienced extreme price and volume
fluctuations. In addition, the market prices of
securities of technology companies,
particularly Web-related companies, have been
extremely volatile, and have experienced
fluctuations that have often been unrelated or
disproportionate to the operating performance
of such companies. These broad market
fluctuations could adversely affect the market
price of our common stock.
THE SIGNIFICANT CONTROL
OVER
STOCKHOLDER VOTING MATTERS
WHICH MAY BE EXERCISED BY
OUR
EXECUTIVE OFFICERS AND
DIRECTORS
WILL DEPRIVE YOU OF THE
ABILITY
TO INFLUENCE CORPORATE
ACTIONS After this offering, our executive officers and
directors and their affiliates will together
control approximately 70.69% of the outstanding
common stock. As a result, these stockholders,
if they act together, will be able to control
all matters requiring stockholder approval,
including the election of directors and
approval of significant corporate transactions.
This concentration of ownership may have the
effect of delaying, preventing or deterring a
change in control of Silknet, could deprive our
stockholders of an opportunity to receive a
premium for their common stock as part of a
sale of Silknet and might affect the market
price of our common stock.
FUTURE SALES BY EXISTING
SECURITY HOLDERS COULD
DEPRESS
THE MARKET PRICE OF OUR
COMMON STOCK If our existing stockholders sell a large
number of shares of our common stock, the
market price of the common stock could decline
significantly. Moreover, the perception in the
public market that our existing stockholders
might sell shares of common stock could depress
the market price of the common stock.
Immediately after this offering, approximately
14,998,099 shares will be outstanding. Of these
shares, 178,733 shares will be available for
resale in the public market without restriction
immediately following this offering, all of
which shares are subject to lock-up agreements
restricting the sale of common stock for 180
days after the date of this prospectus. In
addition, 10,606,853 shares will be available
for resale in the public market without
restriction 90 days after the date of this
prospectus, of which 10,522,000 shares are
subject to lock-up agreements restricting the
sale of common stock for 180 days after the
date of this prospectus. The remaining
1,212,513 shares held by existing stockholders
become eligible for resale in the public market
at various dates thereafter, all of which
shares are subject to lock-up agreements
restricting the sale of common stock for 180
days after the date of this prospectus.
Some of our existing stockholders have the
right to require us to register their shares of
common stock with the Securities
13
<PAGE> 15
and Exchange Commission. If we register their
shares of common stock, they can freely sell
those shares in the public market.
After this offering, we intend to register
approximately 4,091,900 shares of our common
stock that we have issued or may issue under
our stock plans. Once we register these shares,
they can be freely sold in the public market
upon issuance, subject to the lock-up
agreements described above.
OUR BROAD DISCRETION IN
USING
THE PROCEEDS FROM THIS
OFFERING
MAY NEGATIVELY IMPACT OUR
FINANCIAL CONDITION Our decisions regarding the uses of the
proceeds of this offering could have a material
adverse effect on our business, operating
results and financial condition. We have not
identified specific uses for the proceeds from
this offering, and we will have broad
discretion in how we use them. In addition, we
are unable to determine how much of the
proceeds will be used for any identified
purpose because circumstances regarding our
planned uses of the proceeds may change. You
will not have the opportunity to evaluate the
economic, financial or other information on
which we base our decisions on how to use the
proceeds.
INVESTORS WILL EXPERIENCE
IMMEDIATE AND SUBSTANTIAL
DILUTION IN THE BOOK VALUE
OF
THEIR INVESTMENT If you purchase shares of our common stock in
this offering, you will experience immediate
and substantial dilution, in that the price you
pay will be substantially greater than the net
tangible book value per share of the shares you
acquire. This dilution is due in large part to
the fact that earlier investors in Silknet paid
substantially less than the public offering
price when they purchased their shares of
common stock. You will experience additional
dilution upon the exercise of outstanding stock
options or warrants to purchase common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance, and are identified by terminology such as "may,"
"will," "should," "expects," "scheduled," "plans," "intends," "anticipates,"
"believes," "estimates," "potential," or "continue" or the negative of such
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
under "Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking statements
after the date of this prospectus to conform such statements to actual results.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to Silknet from the issuance and sale of the 3,000,000
shares of common stock offered hereby are estimated to be approximately
$40,850,000, at the initial public offering price of $15.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full,
Silknet will receive an additional $6,277,500. Silknet intends to use the
proceeds for general corporate purposes, including approximately $8,000,000 for
product development, approximately $4,000,000 for expansion of its international
operations, and approximately $4,000,000 for expansion of its sales and
marketing capabilities, with the balance being used for working capital and
general corporate purposes. However, changing business conditions and unforeseen
circumstances could cause the actual amounts used for these purposes to vary
from these estimates. A portion of the proceeds may also be used to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. Silknet has no specific understandings, commitments
or agreements with respect to any such acquisition or investment. Pending such
uses, the proceeds of this offering will be invested in short-term,
interest-bearing, investment-grade securities, certificates of deposit or direct
or guaranteed obligations of the United States.
DIVIDEND POLICY
Silknet has never declared or paid any cash dividends on its capital stock
and does not anticipate paying cash dividends in the foreseeable future. Silknet
currently intends to retain future earnings, if any, to fund the expansion and
growth of its business. Payment of future dividends, if any, will be at the
discretion of Silknet's Board of Directors after taking into account various
factors, including Silknet's financial condition, operating results, current and
anticipated cash needs and plans for expansion. Under the terms of Silknet's
line of credit, there are certain restrictions on Silknet's ability to declare
and pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of Silknet as of March
31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to the conversion of all outstanding
shares of preferred stock into common stock; and
- on a pro forma as adjusted basis to reflect the sale by Silknet of
3,000,000 shares of common stock offered hereby at the initial public
offering price of $15.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
This information should be read in conjunction with Silknet's consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, excluding current portion...... $ 122 $ 122 $ 122
Convertible preferred stock, $.01 par value;
15,000,000 shares authorized:
Series A -- 2,364,584 shares designated, issued and
outstanding actual; none designated, issued and
outstanding pro forma and pro forma as
adjusted........................................ 2,860 -- --
Series B -- 2,500,000 shares designated, issued and
outstanding actual; none designated, issued and
outstanding pro forma and pro forma as
adjusted........................................ 5,934 -- --
Series C -- 3,089,157 shares designated, issued and
outstanding actual; none designated, issued and
outstanding pro forma and pro forma as
adjusted........................................ 11,753 -- --
Series D -- 1,205,913 shares designated, issued and
outstanding actual; none designated, issued and
outstanding pro forma and pro forma as
adjusted........................................ 8,868 -- --
-------- -------- --------
Total convertible preferred stock.......... 29,415 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock, $.01 par value; 50,000,000 shares
authorized, 2,838,445 shares issued and
outstanding actual; 11,998,099 shares issued and
outstanding pro forma; 14,998,099 shares issued
and outstanding pro forma as adjusted........... 28 120 150
Additional paid-in capital......................... 1,640 28,351 69,171
Accumulated dividends on preferred stock(1)........ (2,612) -- --
Deferred compensation.............................. (537) (537) (537)
Accumulated deficit................................ (15,397) (15,397) (15,397)
-------- -------- --------
Total stockholders' equity (deficit)................. $(16,878) 12,537 53,387
-------- -------- --------
Total capitalization................................. $ 12,659 $ 12,659 $ 53,509
======== ======== ========
</TABLE>
- ---------------
(1) Upon conversion of the convertible preferred stock, all accrued dividends
will be eliminated.
16
<PAGE> 18
DILUTION
The pro forma net tangible book value of Silknet at March 31, 1999 was
$12,537,000, or $1.04 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the conversion of all shares of preferred stock. After giving
effect to the sale of 3,000,000 shares of common stock offered hereby by Silknet
at the initial public offering price of $15.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses,
Silknet's pro forma net tangible book value as of March 31, 1999 would have been
approximately $53,387,000, or $3.56 per share. This represents an immediate
increase in pro forma net tangible book value of $2.52 per share to existing
stockholders and an immediate dilution of $11.44 per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $15.00
Pro forma net tangible book value per share at March 31,
1999................................................... $ 1.04
Increase attributable to this offering.................... 2.52
------
Pro forma net tangible book value per share after this offering..... $ 3.56
------
Net tangible book value dilution per share to new investors in this
offering.......................................................... $11.44
======
</TABLE>
The following table summarizes, as of March 31, 1999, on the pro forma
basis described above, the total number of shares purchased, the consideration
paid to Silknet and the average price per share paid by the existing
stockholders and by new investors purchasing shares of common stock in this
offering at the initial public offering price of $15.00 per share before
deducting the estimated underwriting discounts and commissions and offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 11,998,099 80.00% $27,357,058 37.81% $ 2.28
New investors........................ 3,000,000 20.00% $45,000,000 62.19% $15.00
---------- ----- ----------- ------
Totals..................... 14,998,099 100% $72,357,058 100%
========== ===== =========== ======
</TABLE>
As of March 31, 1999, there were
- 799,556 shares of common stock issuable upon exercise of outstanding
stock options, at a weighted average exercise price of $.50 per share;
- 1,049,526 shares of common stock available for issuance under Silknet's
1995 Employee Stock Option Plan and the 1999 Stock Option and Incentive
Plan; and
- 750,000 shares of common stock issuable under exercise of outstanding
warrants, at a weighted average exercise price of $1.80.
In addition, in February 1999 Silknet adopted the 1999 Employee Stock Purchase
Plan, under which 350,000 shares of common stock were reserved for issuance, and
the 1999 Non-Employee Director Stock Option Plan, under which 350,000 shares of
common stock were reserved for issuance. To the extent that these options or
warrants are exercised, there will be further dilution to new investors. See
"Management -- Stock Plans."
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with Silknet's consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus. The statement of operations
data for the years ended June 30, 1996, 1997 and 1998, and the nine months ended
March 31, 1999 and the balance sheet data as of June 30, 1997 and 1998 and March
31, 1999 are derived from, and are qualified by reference to, audited
consolidated financial statements included elsewhere in this prospectus. The
statement of operations data for the nine months ended March 31, 1998 are
derived from unaudited financial statements of Silknet appearing elsewhere in
this prospectus. The statement of operations data for the period from March 6,
1995, Silknet's date of inception, to June 30, 1995 and the balance sheet data
as of June 30, 1995 and 1996 are derived from unaudited consolidated financial
statements not included in this prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of Silknet's management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information set forth therein. The historical results
are not necessarily indicative of the operating results to be expected in the
future.
Accrued dividends of convertible preferred stock are not included in the
calculation of pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
MARCH 6, 1995 YEAR ENDED JUNE 30, MARCH 31,
(INCEPTION) TO --------------------------- ---------------------
JUNE 30, 1995 1996 1997 1998 1998 1999
----------------- ------ -------- ------- ----------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License................................ -- -- $ 75 $ 2,977 $ 1,727 $ 6,473
Services............................... -- $ 266 119 670 367 2,688
------ ------ ------- ------- ------- -------
Total revenue.................. -- 266 194 3,647 2,094 9,161
------ ------ ------- ------- ------- -------
Cost of revenue:
License................................ -- -- 29 32 19 265
Services............................... -- 141 312 1,354 900 2,268
------ ------ ------- ------- ------- -------
Total cost of revenue.......... -- 141 341 1,386 919 2,533
------ ------ ------- ------- ------- -------
Gross margin............................. -- 125 (147) 2,261 1,175 6,628
------ ------ ------- ------- ------- -------
Operating expenses:
Sales and marketing.................... -- 33 888 4,802 3,023 7,081
Research and development............... $ 26 120 961 2,409 1,596 3,713
General and administrative............. 35 430 696 1,187 799 2,173
------ ------ ------- ------- ------- -------
Total operating expenses....... 61 583 2,545 8,398 5,418 12,967
------ ------ ------- ------- ------- -------
Operating loss........................... (61) (458) (2,692) (6,137) (4,243) (6,339)
Interest income (expense), net........... -- (7) (61) 134 70 224
------ ------ ------- ------- ------- -------
Net loss................................. (61) (465) (2,753) (6,003) (4,173) (6,115)
Accrued dividends for preferred
stockholders........................... -- -- 190 903 560 1,519
------ ------ ------- ------- ------- -------
Net loss attributable to common
stockholders........................... $ (61) $ (465) $(2,943) $(6,906) $(4,733) $(7,634)
====== ====== ======= ======= ======= =======
Basic and diluted net loss per share
attributable to common stockholders.... $(0.02) $(0.18) $ (1.15) $ (2.69) $ (1.85) $ (2.82)
Shares used in computing basic and
diluted net loss per share attributable
to common stockholders................. 2,478 2,551 2,557 2,566 2,558 2,708
Unaudited pro forma basic and diluted net
loss per share......................... (0.76) (0.56) (0.57)
Shares used in computing unaudited pro
forma basic and diluted net loss per
share.................................. 7,879 7,422 10,807
</TABLE>
18
<PAGE> 20
The pro forma as adjusted balance sheet data as of March 31, 1999 gives
effect to the conversion of all outstanding preferred stock into common stock
upon the closing of this offering and has been adjusted to give effect to the
sale of 3,000,000 shares of common stock offered hereby at the initial public
offering price of $15.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
JUNE 30, -----------------------
-------------------------------- PRO FORMA
1995 1996 1997 1998 ACTUAL AS ADJUSTED
---- ----- ------- ------- -------- ------------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 17 $ 40 $ 4,752 $ 9,045 $ 11,126 $51,976
Working capital (deficit)...................... (28) (102) 4,155 8,472 10,876 51,726
Total assets................................... 64 170 5,402 12,129 17,524 58,374
Note payable to bank........................... -- -- 115 222 122 122
Total convertible preferred stock.............. -- -- 7,432 19,107 29,415 --
Total stockholders' equity (deficit)........... 19 (34) (2,834) (9,587) (16,878) 53,387
</TABLE>
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Silknet should be read in conjunction with "Selected
Consolidated Financial Data" and Silknet's consolidated financial statements and
notes thereto appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Silknet's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. In January 1997, Silknet recorded its
first license revenue upon delivery of the trial version of its initial product,
Silknet eService, to customers. Silknet commercially released Silknet eService
in July 1997, and since that time has introduced Silknet eBusiness, Silknet
eCommerce, and Silknet eService Commerce Edition.
Since the beginning of fiscal year 1997, Silknet's revenue was derived
principally from licenses for software products and from professional services
including consulting, training, implementation, technical support and
maintenance. Revenue from sales of licenses to use Silknet's software products
is recognized upon delivery of products to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. License or services revenue subject to a significant
acceptance clause is deferred until acceptance is received from the customer.
Revenue under arrangements where multiple products or services are sold together
under one contract is allocated to each element based on its relative fair
value, with these fair values being determined using the price charged when that
element is sold separately. For agreements with specified upgrade rights, the
revenue related to those upgrade rights is deferred until the specified upgrade
is delivered. Revenue for consulting and training services is recognized as
services are provided, and revenue for maintenance and post-contract customer
support services is recognized ratably over the term of the service agreement.
Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms. International revenue generated to date has been insignificant.
Silknet has only a limited operating history on which to base an evaluation
of its business and prospects. Silknet's prospects must be considered in light
of the risks and uncertainties encountered by companies in an early stage of
development in new and rapidly evolving markets. To address these risks, Silknet
must, among other things:
- develop new products and product enhancements more rapidly than its
competitors;
- attract, integrate, motivate and train qualified personnel;
- successfully implement its sales and marketing strategy; and
- expand relationships with implementation partners and grow its internal
services staff.
There can be no assurance that Silknet will succeed in addressing any or all of
these risks, and the failure to do so would have a material adverse effect on
Silknet's business, operating results and financial condition.
20
<PAGE> 22
Silknet has experienced substantial net losses since its inception, and as
of March 31, 1999, it had an accumulated deficit of $15.4 million. These net
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and the significant costs incurred in the development of its products
and in the establishment of its sales and marketing organization. Silknet
expects to increase its expenditures in all areas in order to execute its
business plan, particularly in research and development and sales and marketing.
The planned increase in sales and marketing expense will primarily result from
the hiring of additional sales force personnel and expansion of marketing
programs.
Although Silknet has experienced revenue growth in recent periods, there
can be no assurance that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results.
There can also be no assurance that Silknet will be able to continue to increase
its revenue or attain profitability or, if increases in revenue and
profitability are achieved, that they can be sustained. Silknet believes that
period-to-period comparisons of its historical operating results are not
meaningful and should not be relied upon as an indication of future performance.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenue of certain line items included in Silknet's statements of
operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, MARCH 31,
---------------------------- ---------------
1996 1997 1998 1998 1999
------ -------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Revenue:
License................................ -- 38.5% 81.6% 82.4% 70.7%
Services............................... 100.0% 61.5 18.4 17.6 29.3
------ -------- ------ ------ -----
Total revenue....................... 100.0 100.0 100.0 100.0 100.0
------ -------- ------ ------ -----
Cost of revenue:
License................................ -- 14.9 0.9 0.9 2.9
Services............................... 53.0 160.9 37.1 43.0 24.8
------ -------- ------ ------ -----
Total cost of revenue............... 53.0 175.8 38.0 43.9 27.7
------ -------- ------ ------ -----
Gross margin............................. 47.0 (75.8) 62.0 56.1 72.3
------ -------- ------ ------ -----
Operating expenses:
Sales and marketing.................... 12.4 458.4 131.7 144.3 77.3
Research and development............... 45.0 496.0 66.0 76.2 40.5
General and administrative............. 161.8 359.6 32.6 38.2 23.7
------ -------- ------ ------ -----
Total operating expenses............ 219.2 1,314.0 230.3 258.7 141.5
------ -------- ------ ------ -----
Operating loss........................... (172.2) (1,389.8) (168.3) (202.6) (69.2)
Interest income (expense), net........... (2.5) (31.1) 3.7 3.3 2.5
------ -------- ------ ------ -----
Net loss................................. (174.7)% (1,420.9)% (164.6)% (199.3)% (66.7)%
====== ======== ====== ====== =====
</TABLE>
21
<PAGE> 23
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUE
Total revenue increased to $9.2 million for the nine-month period ended
March 31, 1999 from $2.1 million for the nine-month period ended March 31, 1998.
License Revenue. License revenue increased to $6.5 million for the
nine-month period ended March 31, 1999 from $1.7 million for the nine-month
period ended March 31, 1998. The increase was primarily due to an increase in
the number of licenses sold for Silknet eService, and other new products
introduced and shipped during the nine months ended March 31, 1999. These new
products included Silknet eCommerce and Silknet eService Commerce Edition, both
released in January 1999, and new versions of Silknet eService and Silknet
eBusiness System, which were released in October 1998. Additionally, during the
nine-month period, revenue also increased due to Silknet's broader product
offerings and the related increase in the average selling prices of software
licenses.
Services Revenue. Services revenue increased to $2.7 million for the
nine-month period ended March 31, 1999 from $368,000 for the nine-month period
ended March 31, 1998. Of this increase, $1.0 million was attributable to a
consulting services project which was completed in March 1999 and $684,000 was
related to maintenance contracts sold to Silknet's new customers. The remaining
increase was related to additional training and consulting services sold to both
new and existing customers. The total number of customers increased to 34 as of
March 31, 1999 from 11 as of March 31, 1998.
COST OF REVENUE
Cost of License Revenue. Cost of license revenue includes royalties paid
to third parties under technology license arrangements. Cost of license revenue
increased to $265,000, or 4.1% of license revenue, for the nine-month period
ended March 31, 1999 from $19,000, or 1.1% of license revenue, for the
nine-month period ended March 31, 1998. The percentage increase was due to an
increase in royalty obligations to third parties whose products are incorporated
into Silknet products. Silknet anticipates that the cost of license revenue will
continue to increase in absolute dollars. Cost of license revenue as a percent
of license revenue has varied in the past due to the timing and volume of
product sales and the nature of royalty agreements in place at the time.
Cost of Services Revenue. Cost of services revenue consists primarily of
personnel costs. Cost of services revenue increased to $2.3 million, or 84.4% of
services revenue, for the nine-month period ended March 31, 1999 from $900,000,
or 244.9% of services revenue, for the nine-month period ended March 31, 1998.
The dollar increase resulted primarily from the hiring of additional employees
and the use of contractors to support increased customer demand for maintenance
and consulting services. The number of customer services employees increased to
21 as of March 31, 1999 from nine as of March 31, 1998, and Silknet anticipates
that it will continue to increase the number of customer service employees in
1999. The improvement in services gross margins to 15.6% for the nine-month
period ended March 31, 1999 from a negative margin of 144.9% for the nine-month
period ended March 31, 1998 was primarily attributable to the substantial growth
in consulting and maintenance revenue from Silknet's increased installed base.
Silknet realized negative margins on services revenue for several quarters prior
to the nine-month period ended March 31, 1999 due to insufficient revenue to
cover the cost of a growing service department. The continued improvement in
services gross margins is contingent upon the future demand for the services
offered by Silknet.
Overall gross margins are primarily affected by the mix of license revenue
and services revenue. Silknet historically has realized higher gross margins on
license revenue than on services revenue. If services revenue increases as a
percentage of total revenue, Silknet's overall gross margins may be adversely
affected.
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<PAGE> 24
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions and costs associated with marketing programs,
such as trade shows, seminars, public relations and new product launches. Sales
and marketing expenses increased to $7.1 million, or 77.3% of total revenue, for
the nine-month period ended March 31, 1999 from $3.0 million, or 144.4% of total
revenue, for the nine-month period ended March 31, 1998. The increase was
primarily attributable to an increase in the number of direct sales, pre-sales
support and marketing employees to 42 as of March 31, 1999 from 22 as of March
31, 1998. To a lesser extent, the increase was related to an increase in
marketing programs, including trade shows and public relations related to
product launch activities. Sales and marketing expenses may continue to increase
in absolute dollars as Silknet continues to expand its marketing programs and
its sales force to support product launches and international expansion.
Research and Development. Research and development expenses consist
primarily of employee salaries, fees for outside consultants and related costs
associated with the development of new products, the enhancement of existing
products, quality assurance, testing and documentation. Research and development
expenses increased to $3.7 million, or 40.5% of total revenue, for the
nine-month period ended March 31, 1999 from $1.6 million, or 76.2% of total
revenue, for the nine-month period ended March 31, 1998. The increase primarily
resulted from salaries associated with newly hired development personnel. The
number of research and development employees increased to 52 as of March 31,
1999 from 25 as of March 31, 1998 to support the development of new products.
Silknet anticipates that research and development expenses will continue to
increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting and insurance costs.
General and administrative expenses increased to $2.2 million, or 23.7% of total
revenue, for the nine-month period ended March 31, 1999 from $799,000, or 38.2%
of total revenue, for the nine-month period ended March 31, 1998. Substantially
all of the increase was due to salaries associated with newly hired personnel
and related costs required to manage Silknet's growth and facilities expansion.
The number of general and administrative employees increased to 21 as of March
31, 1999 from nine as of March 31, 1998. Silknet expects that its general and
administrative expenses will increase in absolute dollars as it continues to
expand its staffing to support expanded operations and facilities and incurs
expenses relating to its new responsibilities as a public company.
Interest Income (Expense), Net. Interest income increased to $249,000, or
2.7% of total revenue, for the nine-month period ended March 31, 1999, from
$97,000, or 4.6% of total revenue, for the nine-month period ended March 31,
1998. Interest income, net of interest expense, increased to $224,000, or 2.4%
of total revenue, for the nine-month period ended March 31, 1999 from $70,000,
or 3.3% of total revenue, for the nine-month period ended March 31, 1998. The
increase was primarily due to an increase in Silknet's average cash balances
related to capital financing activities.
Provision for Income Taxes. Silknet incurred aggregate operating losses of
$15.4 million from inception through March 31, 1999. Silknet has recorded a
valuation allowance for the full amount of its net deferred tax assets as the
future realization of the tax benefit is not sufficiently assured.
Net Loss. As a result of the factors discussed above, net loss increased
to $6.1 million for the nine-month period ended March 31, 1999 from a net loss
of $4.2 million for the nine-month period ended March 31, 1998.
YEARS ENDED JUNE 30, 1998 AND 1997
REVENUE
Silknet's total revenue increased to $3.6 million for the year ended June
30, 1998 from $194,000 for the year ended June 30, 1997.
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<PAGE> 25
License Revenue. License revenue increased to $3.0 million for the year
ended June 30, 1998 from $75,000 for the year ended June 30, 1997. The increase
was primarily due to an increase in the number of licenses sold for Silknet's
first product, Silknet eService, which was commercially released in July 1997,
and new versions of products introduced and shipped during the year ended June
30, 1998.
Services Revenue. Services revenue increased to $671,000 for the year
ended June 30, 1998 from $119,000 for the year ended June 30, 1997. The increase
related primarily to an increase in maintenance contracts and consulting
services sold to Silknet's new customers. The total number of customers
increased to 17 as of June 30, 1998 from two as of June 30, 1997.
COST OF REVENUE
Cost of License Revenue. Cost of license revenue increased to $32,000, or
1.1% of license revenue, for the year ended June 30, 1998 from $29,000, or 38.8%
of license revenue, for the year ended June 30, 1997. The improvement in license
gross margin to 98.9% for the year ended June 30, 1998 from 61.2% for the year
ended June 30, 1997 was primarily attributable to increased license revenue.
Cost of Services Revenue. Cost of services revenue increased to $1.4
million, or 201.9% of services revenue, for the year ended June 30, 1998 from
$312,000, or 261.7% of services revenue, for the year ended June 30, 1997. The
dollar increase resulted primarily from an increase in the numbers of services
employees to 12 as of June 30, 1998 from six as of June 30, 1997, as well as
hiring consultants to supplement Silknet's internal workforce. During the years
ended June 30, 1998 and 1997, Silknet realized negative margins on services
revenue as a result of Silknet increasing the number of services employees.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $4.8
million, or 131.7% of total revenue, for the year ended June 30, 1998 from
$888,000, or 458.4% of total revenue, for the year ended June 30, 1997. The
increase was primarily attributable to costs associated with an increase in
direct sales, pre-sales support and marketing employees to 25 as of June 30,
1998 from 10 as of June 30, 1997. Approximately $1.0 million of the remaining
increase was related to marketing programs, including trade shows and seminars
related to product launch activity during the year ended June 30, 1998.
Research and Development. Research and development expenses increased to
$2.4 million, or 66.0% of total revenue, for the year ended June 30, 1998 from
$961,000, or 496.0% of total revenue, for the year ended June 30, 1997. The
increase primarily resulted from an increase in the number of research and
development employees to 32 as of June 30, 1998 from 13 as of June 30, 1997 to
support the development of new products.
General and Administrative. General and administrative expenses increased
to $1.2 million, or 32.6% of total revenue, for the year ended June 30, 1998
from $697,000, or 359.6% of total revenue, for the year ended June 30, 1997.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to 11 as of June
30, 1998 from six as of June 30, 1997, and the related costs required to manage
Silknet's growth.
Interest Income (Expense), Net. Interest income increased to $173,000, or
4.8% of total revenue for the year ended June 30, 1998 from $49,000, or 25.3% of
total revenue for the year ended June 30, 1997. Interest income, net of interest
expense, increased to $134,000, or 3.7% of total revenue, for the year ended
June 30, 1998 from a net expense of $60,000, or 31.1% of total revenue, for the
year ended June 30, 1997. The increase was primarily due to an increase in
Silknet's average cash balances resulting from capital financing activities
combined with a decrease in Silknet's debt obligations.
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<PAGE> 26
Net Loss. As a result of the factors discussed above, net loss increased
to $6.0 million for the year ended June 30, 1998 from a net loss of $2.8 million
for the year ended June 30, 1997.
YEARS ENDED JUNE 30, 1997 AND 1996
REVENUE
Silknet's total revenue decreased to $194,000 for the year ended June 30,
1997 from $266,000 for the year ended June 30, 1996.
License Revenue. License revenue was $75,000 for the year ended June 30,
1997. The license revenue in fiscal 1997 was due to the introduction of
Silknet's first product, Silknet eService, which Silknet began shipping in a
trial version in January 1997.
Services Revenue. Services revenue decreased to $119,000 for the year
ended June 30, 1997 from $266,000 for the year ended June 30, 1996. This
decrease was due to Silknet shifting its efforts from providing custom
development Web-related consulting services to providing services related to its
new Silknet eService product.
COST OF REVENUE
Cost of License Revenue. Cost of license revenue was $29,000, or 38.8% of
license revenue, for the year ended June 30, 1997. For the year ended June 30,
1996, Silknet incurred no cost of license revenue.
Cost of Services Revenue. Cost of services revenue increased to $312,000,
or 261.7% of services revenue, for the year ended June 30, 1997 from $141,000,
or 53.0% of services revenue, for the year ended June 30, 1996. The increase
resulted primarily from an increase in the number of services employees to six
as of June 30, 1997 from one as of June 30, 1996.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $888,000,
or 458.4% of total revenue, for the year ended June 30, 1997 from $33,000, or
12.4% of total revenue, for the year ended June 30, 1996. The increase was
primarily attributable to costs associated with an increase in the number of
direct sales, pre-sales support and marketing employees to 10 as of June 30,
1997 from zero as of June 30, 1996. The remaining increase was related to a
substantial expansion in marketing programs, including trade shows and seminars
related to product launch activities.
Research and Development. Research and development expenses increased to
$961,000, or 496.0% of total revenue, for the year ended June 30, 1997 from
$120,000, or 45.0% of total revenue, for the year ended June 30, 1996. The
increase primarily resulted from an increase in the number of research and
development employees to 13 as of June 30, 1997 from four as of June 30, 1996.
General and Administrative. General and administrative expenses increased
to $697,000, or 359.6% of total revenue, for the year ended June 30, 1997 from
$431,000, or 161.8% of total revenue, for the year ended June 30, 1996.
Substantially all of the increase was due to salaries associated with an
increase in the number of general and administrative employees to six as of June
30, 1997 from two as of June 30, 1996, and the related costs required to manage
Silknet's growth.
Interest Income (Expense), Net. Interest income increased to $49,000, or
25.3% of total revenue, for the year ended June 30, 1997 from zero for the year
ended June 30, 1996. Interest expense, net of interest income, increased to
$60,000, or 31.1% of total revenue, for the year ended June 30, 1997 from
$7,000, or 2.5% of total revenue, for the year ended June 30, 1996. The increase
was primarily due to an increase in Silknet's average outstanding debt
obligations.
Net Loss. As a result of the factors discussed above, net loss increased
to $2.8 million for the year ended June 30, 1997 from a net loss of $465,000 for
the year ended June 30, 1996.
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<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of Silknet's unaudited quarterly
operating results for each of the eight quarters in the period ended March 31,
1999. This information has been derived from unaudited interim financial
statements that, in the opinion of management, have been prepared on a basis
consistent with the financial statements contained elsewhere in this prospectus
and include all adjustments, consisting of only normal recurring adjustments,
necessary for a fair statement of such information when read in conjunction with
Silknet's financial statements and notes thereto. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
--------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License...................... $ 50 $ 142 $ 366 $ 1,218 $ 1,250 $ 1,648 $ 2,040 $ 2,785
Services..................... 14 17 111 240 303 621 1,234 833
--------- ------- ------- ------- ------- ------- ------- -------
Total revenue.............. 64 159 477 1,458 1,553 2,269 3,274 3,618
--------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License...................... 19 1 4 13 14 92 91 82
Services..................... 152 237 337 327 453 538 981 749
--------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue...... 171 238 341 340 467 630 1,072 831
--------- ------- ------- ------- ------- ------- ------- -------
Gross margin................... (107) (79) 136 1,118 1,086 1,639 2,202 2,787
--------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.......... 503 832 982 1,209 1,779 1,892 2,343 2,846
Research and development..... 345 443 501 651 813 1,005 1,270 1,438
General and administrative... 259 172 322 306 388 630 660 883
--------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses... 1,107 1,447 1,805 2,166 2,980 3,527 4,273 5,167
--------- ------- ------- ------- ------- ------- ------- -------
Operating loss................. (1,214) (1,526) (1,669) (1,048) (1,894) (1,888) (2,071) (2,380)
Interest income, net........... 11 45 21 4 64 91 59 74
--------- ------- ------- ------- ------- ------- ------- -------
Net loss....................... $ (1,203) $(1,481) $(1,648) $(1,044) $(1,830) $(1,797) $(2,012) $(2,306)
========= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUE:
Revenue:
License...................... 78.1% 89.3% 76.7% 83.5% 80.5% 72.6% 62.3% 77.0%
Services..................... 21.9 10.7 23.3 16.5 19.5 27.4 37.7 23.0
--------- ------- ------- ------- ------- ------- ------- -------
Total revenue.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License...................... 29.7 0.6 0.8 0.9 0.9 4.1 2.8 2.3
Services..................... 237.5 149.1 70.7 22.4 29.2 23.7 29.9 20.7
--------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue...... 267.2 149.7 71.5 23.3 30.1 27.8 32.7 23.0
--------- ------- ------- ------- ------- ------- ------- -------
Gross margin................... (167.2) (49.7) 28.5 76.7 69.9 72.2 67.3 77.0
--------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.......... 785.9 523.3 205.9 82.9 114.6 83.4 71.6 78.6
Research and development..... 539.1 278.6 105.0 44.7 52.4 44.3 38.8 39.7
General and administrative... 404.7 108.2 67.5 21.0 25.0 27.7 20.2 24.4
--------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses... 1,729.7 910.1 378.4 148.6 192.0 155.4 130.6 142.7
--------- ------- ------- ------- ------- ------- ------- -------
Operating loss................. (1,896.9) (959.8) (349.9) (71.9) (122.1) (83.2) (63.3) (65.7)
Interest income, net........... 17.2 28.3 4.4 0.3 4.1 4.0 1.8 2.0
--------- ------- ------- ------- ------- ------- ------- -------
Net loss....................... (1,879.7)% (931.5)% (345.5)% (71.6)% (118.0)% (79.2)% (61.5)% (63.7)%
========= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Silknet has experienced significant fluctuations in revenues, expenses and
results of operations from quarter to quarter, and such fluctuations are likely
to continue. A significant portion of Silknet's
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<PAGE> 28
revenue has been generated from a limited number of customers and it is
difficult to predict the timing of future orders and shipment to these and other
customers. Silknet anticipates that its results of operations in any given
period will continue to depend to a significant extent upon sales to a small
number of customers.
Silknet has also experienced significant variations in its quarterly gross
margins. These fluctuations were caused by several factors. Silknet's gross
margins for license revenue have varied due to the volume of revenue, the timing
of recognition and the nature of related royalty arrangements. Silknet's gross
margins for services revenue have varied due to the volume of services revenue,
which is related to the changes in the installed customer base, and the timing
and number of additions in professional services personnel and compensation and
related costs.
Silknet's expenditures for research and development have varied from
quarter to quarter primarily as a result of the timing and number of additions
of personnel and related compensation costs. Silknet's sales and marketing and
general and administrative expenses have generally increased on a quarterly
basis primarily as a result of the timing and number of additions in personnel
and compensation and related costs and the timing, number and significance of
specific marketing and sales activities, such as trade shows and other
promotional activities.
In addition, a variety of factors, many of which are outside of Silknet's
control, may affect Silknet's quarterly operating results. These factors
include:
- the evolution of the market for interactive Web-based electronic business
solutions;
- market acceptance of Silknet's products;
- Silknet's success and timing in developing and introducing new products
and enhancements to existing products;
- market acceptance of products developed by competitors;
- changes in pricing policies by Silknet or its competitors;
- length of sales cycle;
- changes in customer buying patterns;
- market entry by new competitors;
- general economic conditions; and
- economic conditions specific to Internet-related industries.
Silknet's limited operating history and the undeveloped nature of the
market for interactive, Web-based electronic business solutions make predicting
future revenue difficult. Silknet's expense levels are based, in part, on its
expectations regarding future revenue increases, and to a large extent such
expenses are fixed, particularly in the short term. There can be no assurance
that Silknet's expectations regarding future revenue are accurate. Moreover,
Silknet may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to Silknet's expectations would likely cause significant
declines in Silknet's net income for that period.
Due to the foregoing factors, Silknet's operating results are difficult to
forecast. Silknet believes that period-to-period comparisons of its historical
operating results are not meaningful and should not be relied upon as an
indication of future performance. Also, Silknet's operating results may fall
below its expectations or the expectations of securities analysts or investors
in some future quarter. In such event, the market price of Silknet's common
stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Silknet has funded operations primarily through net
cash proceeds from private placements of preferred stock totaling $26.8 million
through March 31, 1999. As of March 31, 1999, Silknet had cash and cash
equivalents totaling $11.1 million.
27
<PAGE> 29
Cash used for operating activities for the nine-month period ended March
31, 1999 was $5.8 million, primarily due to a net loss of $6.1 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. Cash used for operating
activities for the year ended June 30, 1998 was $5.7 million, primarily due to a
net loss of $6.0 million and an increase in accounts receivable, partially
offset by increases in accounts payable, accrued expenses and deferred revenue.
Cash used for investing activities for the nine-month period ended March
31, 1999 and the year ended June 30, 1998 was $940,000 and $1.0 million,
respectively. Investing activities for the periods were primarily purchases of
equipment, consisting largely of computer servers, workstations and networking
equipment.
Cash provided by financing activities for the nine-month period ended March
31, 1999 and the year ended June 30, 1998 was $8.8 million and $11.0 million,
respectively, primarily due to the issuance of preferred stock for net proceeds
totaling $8.8 million and $10.8 million, respectively.
As of March 31, 1999 and June 30, 1998, Silknet's primary financial
commitments consisted of obligations outstanding under operating leases, and
notes payable under the equipment loan line of $256,000 and $471,000,
respectively.
In March 1999, Silknet entered into a new bank line of credit which allows
Silknet to borrow up to $3.0 million for working capital purposes and for the
issuance of letters of credit. The line of credit expires in March 2000. Amounts
available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate plus 0.5%. As of March 31,
1999, $3.0 million was available for borrowing and the bank's prime rate was
7.75%.
As of March 31, 1999, Silknet had net operating loss carryforwards of
approximately $13.8 million available for federal, state and foreign purposes to
reduce future taxable income expiring on various dates beginning in 2012. Under
the provisions of the Internal Revenue Code, certain substantial changes in
Silknet's ownership may have limited, or may limit in the future, the amount of
net operating loss carryforwards which could be utilized annually to offset
future taxable income.
Since its inception, Silknet has significantly increased its operating
expenses. Silknet anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that its
operating expenses and capital expenditures will constitute a material use of
Silknet's cash resources. In addition, Silknet may utilize cash resources to
fund acquisitions or investments in businesses, technologies, products or
services that are complementary to Silknet's business. Silknet believes that the
net proceeds of this offering will be sufficient to meet its anticipated cash
requirements for working capital and capital expenditures for at least 12
months. Thereafter, if cash generated from operations is insufficient to satisfy
Silknet's liquidity requirements, Silknet may seek to sell additional equity or
debt securities, or obtain additional credit facilities. The issuance of
additional equity or convertible debt securities could result in additional
dilution to Silknet's stockholders. See "Risk Factors -- Our broad discretion in
using the proceeds from this offering may negatively impact our financial
condition."
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
ready could result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
28
<PAGE> 30
The purchasing patterns of customers or potential customers may be affected
by Year 2000 issues as companies expend significant resources to make their
current systems Year 2000 ready. These expenditures may result in reduced funds
available for purchases of interactive, Web-based electronic business solutions,
which could have a material adverse effect on Silknet's business, operating
results and financial condition. Year 2000 complications may disrupt the
operations, viability or commercial acceptance of the Internet, which also could
have a material adverse impact on Silknet's business, operating results and
financial condition.
Silknet has conducted a review of its products, including the third-party
products embedded into the products, and believes that they are substantially
Year 2000 ready. Silknet expects that modifications with respect to any
remaining Year 2000 issues will be made by the end of calendar year 1999.
Nevertheless, there can be no assurances that the implementation of
modifications to any embedded products will not be delayed or that Silknet will
not experience unexpected Year 2000 problems with its products.
There is no assurance that other Web applications, database software or
computer hardware of Silknet's customers which interface with Silknet's products
and which may be necessary in order to use Silknet's products are Year 2000
ready. Therefore, there can also be no assurance that implementations of
Silknet's products on its customers' systems are, or will be, Year 2000 ready.
Silknet installed new internal software systems in July 1998, and it has
received written confirmations from software vendors that the software they
installed is Year 2000 ready. Based on the foregoing, Silknet currently has no
reason to believe that its internal software systems are not Year 2000 ready.
Silknet is in the process of obtaining written certifications from suppliers of
hardware systems to the effect that the hardware they provide are Year 2000
ready. These vendors are under no contractual obligation to provide written
certifications to Silknet. Failure of the internal hardware or software systems
to operate properly with regard to the Year 2000 and thereafter could require
Silknet to incur significant unanticipated expenses to remedy any problems or
replace affected vendors, and could have a material adverse effect on Silknet's
business, operating results and financial condition.
To date, Silknet has not incurred significant incremental costs in order to
comply with Year 2000 requirements for its products or internal systems, and
Silknet does not believe it will incur significant incremental costs in the
foreseeable future. Silknet has not currently developed a contingency plan for
unanticipated Year 2000 issues relating to its products. Silknet has identified
the mission critical functions for its internal systems and is in the process of
developing a contingency plan for unanticipated Year 2000 problems that arise
with respect to those functions, including the identification of replacement
products for third-party products that may fail. There can be no assurance that
Year 2000 issues will not be discovered in Silknet's products or internal
software systems and, if such issues are discovered, there can also be no
assurance that the costs of making such products and systems Year 2000 ready
will not have a material adverse effect on Silknet's business, operating results
and financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income." This
statement establishes standards for the reporting and display of comprehensive
income and its components. SFAS No. 130 is effective for Silknet's fiscal year
ending June 30, 1999 including interim periods for that year. Comprehensive
income consists of net income and foreign currency translation adjustments as
presented in the consolidated statements of convertible participating preferred
stock and stockholders' equity (deficit). Prior year financial statements have
been reclassified to conform to the SFAS No. 130 requirements. The adoption of
SFAS No. 130 has not affected and will not affect Silknet's financial position
or results of operations.
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<PAGE> 31
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. This statement changes the way
that public business enterprises report segment information, including financial
and descriptive information about their selected segment information. Under SFAS
No. 131, operating segments are defined as revenue-producing components of the
enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for Silknet's fiscal year ending June 30,
1999 and will not affect Silknet's financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other post retirement benefits and is
effective for Silknet's fiscal year ending June 30, 1999. SFAS No. 132 relates
to disclosure only and will not affect Silknet's financial position or results
of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Silknet does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
In February 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SoP 98-1 establishes the accounting for costs of software
products developed or purchased for internal use, including when such costs
should be capitalized. Silknet does not expect SoP 98-1, which is effective for
Silknet beginning July 1, 1999, to have a material effect on its financial
position or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SoP 98-5, "Reporting on the
Costs of Start-Up Activities." Start-up activities are defined broadly as those
one-time activities related to opening a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999 and Silknet does not
expect its adoption to have a material effect on its financial position or
results of operations.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SoP 97-2, "Software
Revenue Recognition," which provides guidance on the timing and amount of
revenue recognition when licensing, selling, leasing or otherwise marketing
computer software and related services. Subsequently, in March 1998, the FASB
approved SoP 98-4, "Deferral of the Effective Date of a Provision of SoP 97-2,
Software Revenue Recognition." SoP 98-4 provides for the one-year deferral of
certain provisions of SoP 97-2 pertaining to its requirements for what
constitutes vendor specific objective evidence of the fair value of multiple
elements included in an arrangement. In December 1998, the FASB approved SoP
98-9, "Modification of SoP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions," which will retain the limitations of SoP 97-2 on what
constitutes vendor-specific objective evidence of fair value. SoP 98-9 will be
effective for transactions entered into in fiscal years beginning after March
15, 1999. Silknet adopted SoP 97-2 for all transactions entered into after June
30, 1998. Based upon its interpretation of SoP 97-2, 98-4 and 98-9, Silknet
believes that its current revenue recognition policies and practices are
consistent with the provisions of the new guidance. Adoption of SoP 97-2 and SoP
98-4 did not have a material impact on Silknet's financial position or results
of operation. Silknet believes that the adoption of SoP 98-9 will not have a
material impact on Silknet's financial position or results of operations.
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BUSINESS
SILKNET
Silknet provides software that allows companies to offer their customers
personalized marketing, sales, electronic commerce and customer support services
through a single Web site interface tailored by that company to meet its
customer requirements. Silknet's products enable a company to deliver these
services to its customers over the Web through customer self-service and
immediate, direct collaboration among that company and its customers, partners,
vendors and suppliers. Silknet's products allow a company to coordinate its
interactions with customers by integrating a variety of communications media,
such as the Web, e-mail and the telephone. Silknet's software can capture and
consolidate data derived from all these sources and distribute it throughout a
company and to its partners to provide a single view of a customer. This
solution is more efficient for a company and also more efficient for its
customers, creating a competitive advantage for that company.
INDUSTRY BACKGROUND
The Web has experienced dramatic growth in recent years, both in the number
of users and as a means of conducting commercial transactions, and is expected
to continue to grow rapidly. According to a report by Forrester Research, the
value of goods bought and sold over the Web is expected to increase from $43
billion in 1998 to $1.3 trillion in 2003. The growth and accessibility of the
Web has created significant new opportunities for marketing, sales, electronic
commerce and customer support services for businesses.
Accompanying the growth in the use of the Web has been a trend toward
customer self-service. Just as consumers have extensively used automated teller
machines rather than using the services of a bank teller, the Web now allows a
wide range of businesses the ability to offer electronic self-service to their
customers. For example, consumers are now shopping for goods and services and
seeking answers to customer service questions on their own from their computers
at any hour of the day. Businesses have found that self-service and electronic
collaboration not only increase customer satisfaction, but also provide a
cost-effective way to offer products and services. The Gartner Group estimates
that by 2001 companies will receive 25% of all customer contacts and inquiries
over the Web and through e-mail messages and other Web-based forms.
While customer interaction conducted over the Web has grown significantly,
it is not likely to completely replace more traditional means of handling
customer service and commerce. For instance, many companies continue to rely
heavily on telephone-based customer service representatives. Rather than
replacing the technology systems designed to support these representatives,
companies are actively seeking ways to integrate their various forms of customer
interaction, such as Web communications, e-mail and the telephone. Currently,
many telephone customer service representatives have very limited access to
records of customer questions, service requests or complaints received
electronically. Businesses are attempting to integrate these various media to
present a consistent interface to their customers.
While the Web has the potential to enable individualized customer
self-service, collaboration and commerce, companies have been limited by early
electronic business software applications. These applications are often not
flexible, robust or scaleable enough to fully capitalize on the potential of the
Web. Many of these applications were designed using older technologies or first
generation Web technologies, which were limited in their ability to deliver
robust solutions over the Web. These applications typically restrict customer
self-service to a defined transaction available in a generic form to all
customers. They often fail to provide for real-time interaction with the
customer or access to other corporate data that would allow a company to tailor
a transaction to the needs of a specific customer. In addition, client/server
products were originally designed for an organization's internal
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use, and fail to provide the flexibility, functionality and scalability required
for electronic business over the Web.
Many companies have responded to these limitations by attempting to design
their own electronic business software applications. These internally-developed
systems are often based on older technologies or first generation Web
technologies. They are typically focused on a solution only from the company's,
and not the customer's, point of view and are designed to address a limited,
short-term need of the company. As a result, these applications are often not
flexible enough to meet the rapidly evolving demands of the company and its
customers, partners, vendors and suppliers. In addition, the cost, time, effort
and expertise required to develop and maintain a scaleable, robust business
software solution is often beyond the capabilities of in-house information
technology organizations and their consultants.
To realize the potential of the Web, companies must be able to offer
personalized marketing, sales, electronic commerce and customer support services
through a single, Web site interface tailored by that company to meet its
customer requirements. Electronic business software systems must provide
comprehensive, adaptable and scaleable solutions in a Web-based system
architecture. This architecture must allow a company to coordinate its
interactions with customers by integrating a variety of communications media,
such as the Web, e-mail and the telephone. Moreover, these software systems
should capture and consolidate data derived from a number of sources and enable
real-time collaboration and sharing of information throughout an organization
and with its customers, partners, vendors and suppliers.
THE SILKNET SOLUTION
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, Web site interface tailored by that company to meet its customer
requirements. Using Silknet's products, companies are able to:
- provide customers with a self-service capability to obtain a full range
of personalized services over the Web;
- deliver interactive commerce solutions that not only allow the electronic
sale of products, but also integrate the ongoing support and service of
those products on-line;
- coordinate interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone;
- provide a customer with personalized information and services based on
his or her preferences and prior interactions with that company;
- customize a browser-based interface that graphically utilizes windows
screen displays and icons to reflect their corporate image;
- collaborate with customers, partners, vendors and suppliers to solve
customer support problems, share information and conduct electronic
commerce; and
- capture, manage, publish and distribute real-time information throughout
the organization, including the marketing, sales, customer service,
billing, purchasing and product development departments.
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SILKNET'S STRATEGY
Silknet's goal is to continue to be a leading supplier of Web-based
electronic business and customer service software solutions. To achieve this
goal, key elements of Silknet's strategy include:
Target Companies in Specific Industries. Silknet will continue to focus on
providing solutions to the financial services, information technology and
telecommunications industries. These industries are characterized by the need to
provide customer service interaction among large numbers of geographically
dispersed customers, partners, vendors and suppliers. Silknet has also
identified other industries that have similar requirements, such as travel
services, manufacturing and retail distribution. Silknet plans to establish a
select number of reference accounts before expanding its marketing efforts in
those industries.
Expand Relationships with Implementation Partners. Silknet has established
relationships with large, international systems integrators and consulting
firms, such as Cambridge Technology Partners, Cap Gemini, Deloitte & Touche
Consulting Group/DRT Systems and KPMG Peat Marwick. Silknet plans to expand
these relationships to increase its capacity to both sell and implement its
products. Systems integrators and consulting firms have a strong influence on
software purchasing decisions within large companies, and they are seeking
interactive electronic business solutions that allow them to satisfy their
clients' needs more rapidly than they can through custom development. Silknet
believes that expanding its relationships with systems integrators and
consulting firms will enable Silknet to gain a greater share of emerging markets
more rapidly, while containing its sales, marketing and implementation costs.
Increase Direct Sales and Indirect Distribution Channels. Silknet's sales
and marketing strategy is to simultaneously expand its direct sales force and
expand relationships with technology vendors and resellers. As of March 31,
1999, Silknet had 14 quota-carrying sales representatives in 11 offices in North
America and the United Kingdom. Silknet plans to substantially increase the
number of direct field sales representatives by the end of calendar 1999.
Silknet also intends to expand its international direct sales force by
establishing sales and support operations in continental Europe and Japan and to
establish additional distribution partnerships throughout the world. In addition
to expanding its relationships with systems integrators and consulting firms,
Silknet plans to develop relationships with other third parties, including
leading software and hardware vendors that view Silknet's products as
complementary to their own product and service offerings.
Continue Technology Leadership. Silknet intends to continue to devote
substantial resources to the development of new and innovative products for
electronic business solutions and to continue to incorporate emerging Web
technologies. Silknet believes that the increasing demands for interactive
electronic business solutions will require an infrastructure that is adaptable,
extensible and interoperable. To meet these demands, Silknet has developed a
Web-based, multiple-component architecture that incorporates dynamic Hypertext
Markup Language, Extensible Markup Language, Java, Java Script and other leading
Internet technologies into its products. Silknet intends to continue its
leadership position in providing innovative products based on this architecture.
Expand its Suite of Electronic Business Solutions. Silknet plans to expand
its suite of products and services that enable companies to engage, integrate
and leverage their customers through self-service and interactive collaboration.
Many companies are seeking comprehensive electronic business solutions that meet
a broad range of needs, including providing marketing, sales, electronic
commerce and support services to their employees, customers, partners, vendors
and suppliers. Silknet intends to continue to develop additional applications
and features based on its existing Web-based architecture. For example, in the
second half of calendar 1999 Silknet plans to commercially release
SilkDataObjects, a product enhancement that will allow non-programmers to create
and integrate company-specific functionality with Silknet's products.
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PRODUCTS
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single Web site interface tailored by the company to meet its customer
requirements. Silknet's products enable a company to deliver these services to
its customers over the Web through real-time collaboration and customer
self-service. Silknet's products allow a company to coordinate its interactions
with customers by integrating a variety of communications media, such as the
Web, e-mail and the telephone. Silknet's software can capture and consolidate
data derived from all of these sources and distribute it throughout a company
and to its partners to provide a single view of a customer. Silknet's software
products include:
<TABLE>
<S> <C>
Silknet eBusiness System A set of applications and a Web-based platform on which
company-specific Web commerce applications can be created
and deployed.
Silknet eService A comprehensive customer service application that enables a
company to provide customer self-service and collaboration
using the Web, e-mail, the telephone and other messaging
media.
Silknet eCommerce An application to create an electronic storefront using
Microsoft's Site Server Commerce Edition engine combined
with the Silknet eBusiness System.
Silknet eService Commerce An application that integrates Silknet eService with Silknet
Edition eCommerce or third-party electronic commerce products,
enabling shopping, service and support through a single Web
interface.
</TABLE>
Silknet licenses its products on a per user basis. Silknet typically
charges a company from $500 to $2,500 for every private user, who is typically
an employee of that company, and from $1 to $10 for every anticipated public
user, who is typically a customer of that company. The per user charges
generally increase with the number of Silknet applications and functions
utilized by a company. For the first nine months of fiscal 1999, the average
license fee per customer was approximately $438,000.
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The following diagram illustrates the various components of the Silknet
product suite and how they interrelate:
[Graph]
[Graphical depiction of the Silknet product suite, how it integrates other
software systems and how it integrates communications among a company's
employees, customers, partners and vendors over a variety of media.]
SILKNET eBUSINESS SYSTEM
The Silknet eBusiness System is both a set of Web-based applications and an
expandable platform for building, deploying and adapting software applications.
This platform can service additional users by adding more hardware, allowing a
customer to service a growing customer base. Silknet's platform can also be
tailored and extended to add features and functionality to accommodate the way a
company does business as that company's business evolves. The Silknet eBusiness
System integrates personalized interactions, collaborations and transactions
over the Web among a company and its customers, partners, vendors and suppliers.
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With the Silknet eBusiness System, a customer can easily access information
from a company's marketing, sales, customer service, billing, purchasing and
product development departments. By deploying the Silknet eBusiness System, a
company can integrate its customers into an environment where customers can
collaborate directly and immediately with company representatives, suppliers and
partners. This process engages customers in an interactive, personalized
exchange to solve problems. It allows a company to leverage the customer's
individual knowledge to provide a more efficient and effective experience for
both the company and its customers. The Silknet eBusiness System employs an
easy-to-use interface that graphically utilizes windows, screen displays and
icons and features a set of components using Web-based browsers and search
engines that provide access to all Silknet applications and a company's other
Web-based solutions. The product integrates internal and external business
processes operating on both traditional mainframe and distributed, networked
computing systems with Silknet's Web-based infrastructure.
The Silknet eBusiness System includes the following applications and
features:
Personalization
The Personalization feature enables a company to provide a personalized Web
site interface for the customer to interact, collaborate and conduct business
over the Web. Using the Personalization feature, a company can:
- notify customers of product improvements, promotions and case updates,
and tailor information to the end-user's unique preferences;
- provide customers with a personalized view of all of their activity with
that company, including support requests, credit checking, sales
questions and order tracking; and
- make recommendations based on a customer's demographic profile,
preferences and history of service incidents, inquiries and purchases.
Knowledge Manager
The Knowledge Manager application captures, manages, publishes and
distributes corporate knowledge about its products and services. A company can
use this application to organize its corporate knowledge base on a secure
platform that is quickly accessible and easily usable by employees, customers,
partners, vendors and suppliers. Knowledge Manager provides companies with a
real-time, interactive environment in which to process and publish solutions to
common customer problems. Features of the Knowledge Manager application include:
- a multimedia platform supporting audio, video, graphics, diagrams, screen
displays and internal and external hyperlinks to the Web;
- the ability to render, publish and index multimedia solutions, in real
time, as a direct result of solving customers' problems or inquiries; and
- the storage of published solutions as business objects so they can be
combined with other business objects, such as customer profiles and case
histories.
Extranet Workflow
The Extranet Workflow application integrates internal and external business
processes with a Web interface, linking a company's legacy and client/server
systems within departments of a company to each other and to other employees,
customers, partners, vendors and suppliers. Once installed on the company's
server, this application allows these parties to participate in a cooperative
and efficient process to better service themselves. Unlike conventional workflow
systems, Extranet Workflow does not require a user agent to be installed on each
user's computer, thereby allowing the
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workflow system to be accessible to a large user base. Features of the Extranet
Workflow application include:
- a graphical user interface that enables users to establish business
processes within the software;
- automated and/or manual routing of tasks to the most appropriate groups
or individuals, including skills-based or availability-based task
assignment; and
- notifications of workflow events through e-mail, pager, Web site and
other channels.
Business Rules and Business Events
Combined with Extranet Workflow, the Business Rules and Business Events
features allow a company to modify the Silknet eBusiness System to fit its
needs, instead of modifying its business processes to fit the software.
Companies can define, categorize, assign and process business data, tasks and
events related to a specific customer relationship. After defining a business
event, a company can then communicate the appropriate response, or business
rule, to resolve the customer problem or inquiry. The Business Events feature
provides a mechanism for the Silknet eBusiness System to execute a Business Rule
when a customer operation is performed. For example, when a particular customer
request is received, if the system identifies the user as a very important
customer, the person responsible for the task might receive a page alerting him
to address the task.
The Silknet eBusiness System is shipped to a customer with a standard set
of business events. A company can customize and define its own business events
and business rules to the specialized needs of that company's business processes
and the unique character of its customer relationships. Using the Business Rules
and Business Events features, a company can:
- dynamically change business processes based on company or customer data;
- assign workflow tasks to individuals or groups; and
- notify individuals or groups of business events, using the Web, e-mail,
the telephone, a pager or other messaging media.
SilkDataObjects
Silknet is currently developing SilkDataObjects, an application written in
Extensible Markup Language that Silknet plans to include in the Silknet
eBusiness System. SilkDataObjects will enable companies to create customized
business objects that add company-specific functionality to the Silknet
eBusiness System platform, without the need for specialized programming skills.
Companies will be able to incorporate into the Silknet eBusiness System logic
and data from other software systems, allowing Silknet eBusiness System's
applications, such as Business Rules and Extranet Workflow, to respond
automatically to changes in these other software systems. This application is
scheduled for release in the second half of calendar 1999.
SILKNET eSERVICE
Introduced as Silknet's first product in July 1997, Silknet eService is a
comprehensive customer service application that enables a company to offer its
customers both self-service and assisted service over the Web. Silknet eService
is a software application built upon the Silknet eBusiness System framework. It
includes many of the features and applications contained in the Silknet
eBusiness
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System, such as Personalization, Knowledge Manager, Extranet Workflow and
Business Rules and Business Events, as well as the following:
Case Management
The Case Management application enables case creation and resolution,
workload management and user-defined workflows to support a company's internal
customer service process. Customer-specific profiles of cases allow customer
service representatives to view all information related to a specific customer.
With Case Management, cases can be organized by user-defined priorities for
purposes of assignment, workload management and reporting. Customer service
representatives can also vary customer interaction media, such as the Web,
e-mail and the telephone, to match customer response preferences. Features of
this application include:
- automatic display of customer case data on the user interface for
viewing, editing, tracking and routing;
- single-screen displays of a workload summary and real-time selection of
case views from a drop-down menu of choices;
- case creation, organization and resolution, and definition of case views
at the individual or system level;
- Web hyperlinks, images, video, audio, screen displays and other data
files to facilitate customer understanding; and
- case history analysis, assistance and contribution, reassignment and
escalation.
Web Communications
The Web Communications application enables multimedia collaboration over
the Web. This application allows a company to provide assisted service, in
addition to self-service, to its customers, partners, vendors and suppliers.
Features of the Web Communications application include:
- real-time chat and electronic white boards to help solve customer
problems;
- the ability to share graphics, screen displays and diagrams; and
- integration with Microsoft's NetMeeting to allow collaboration and video
conferencing among a company's service representatives and its customers,
partners, vendors and suppliers.
Call Center Integration
The Call Center Integration application provides customer service
representatives with a single interface to customer inquiries received over
various media, including the Web, e-mail and the telephone. This application
enables companies to capture and manage information from customer interactions
anywhere within the organization in a centralized case management system.
Customer service representatives can access customer information not only from
the call center, but also from their company's intranet to include data from
multiple departments, and from their company's extranet to include data from
customers, partners, vendors and suppliers. The Call Center Integration
application provides:
- high-volume call processing and problem resolution;
- single-screen displays of a customer's profile and case history;
- automatic case routing, queuing and escalation; and
- integration with third-party computer telephony software applications.
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e-Mail Response Management
The e-Mail Response Management application provides a tracking and routing
system to respond to large volumes of incoming customer e-mail. This application
enables customer service and sales representatives to manage both e-mail
received from, and e-mail sent to, customers. The e-Mail Response Management
application manages the e-mail queuing process by urgency, premium service,
escalation level, the response time guaranteed to the customer or other customer
response attributes. Features of this application include:
- automatic, personalized acknowledgment of e-mail;
- automatic routing and workflow regardless of method of communication; for
example, inquiries and cases received by e-mail are handled in the same
manner as those received over the Web or the telephone;
- pop-up messages alerting service or sales representatives, containing
customer name, case number, date and nature of customer inquiry;
- automatic tracking, saving and logging of each e-mail so that all
interaction becomes appended to the case history; and
- dynamic, real-time reporting so managers can assess volume and
performance.
Other Features of Silknet eService
Silknet eService also contains the following features that enable customer
self-service:
- InfoPath, a problem resolution tool that utilizes Extensible Markup
Language and Java as software development programming languages to
provide a series of natural language questions that help customers
identify symptoms and narrow the problem;
- a tool that allows customers to search a multimedia knowledge base using
simple English questions or commands; and
- FAQs, a listing of frequently asked questions which offers solutions to
common problems or answers to frequent inquiries and which allows
postings to the Web or intranet that can be linked to the multimedia
platform to provide graphical or audible solutions.
SILKNET eCOMMERCE
The Silknet eCommerce application combines Silknet eBusiness System and
Microsoft's Site Server Commerce Edition engine and enables a company to create
and manage an electronic storefront over the Web. Through the Silknet eBusiness
System platform, Silknet adds extranet workflow, object definition and
adaptability to Microsoft's Site Server Commerce Edition. The product provides
personalized shopping and promotion for both business-to-consumer and
business-to-business commerce. Features of the Silknet eCommerce application
include:
Site Builder Wizard
Site Builder Wizard is a step-by-step, graphical user interface that
assists a company in creating electronic stores or catalogs quickly and easily.
Site Builder Wizard helps a company establish cross-selling information, price
promotions, stores with multi-level departments, and products with varied
attributes.
Intelligent CrossSell
Intelligent CrossSell is an application that allows a company to run
promotions for products and to create cross-selling opportunities through the
promotions. It uses shopper trends and transaction information to recommend
products of interest to other customers. For the shopper, Intelligent CrossSell
enables customers to navigate a company's Web site to discover products of
interest to
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them. For a company, Intelligent CrossSell increases sales opportunities by
efficiently guiding customers to those products that they are most likely to
purchase during their visit.
Buy Now
Buy Now is an on-line, direct marketing tool that enables a company to
present product information and order forms, or capture customer profile
information, within a variety of on-line contexts, such as an on-line
advertising banner. A company can customize Buy Now to meet the needs of its
on-line marketing campaign.
Commerce Interchange Pipeline Manager
The Commerce Interchange Pipeline Manager allows a company to automate and
manage electronic inventory and purchasing communications with distributors,
resellers and suppliers. With this feature, different document formats for
purchase orders, invoices, receipts and shipping notices can be managed easily
for multiple trading partners.
Extranet Workflow
Used with the Silknet eBusiness System foundation, Microsoft's Site Server
Commerce Edition engine can be extended to include Extranet Workflow. With
Extranet Workflow, information or questions regarding orders, and the orders
themselves, may be routed throughout the organization through a workflow
determined by the company. Different workflows can be attributed in real time to
different order situations through the application of Silknet eBusiness's
Business Rules feature.
SILKNET eSERVICE COMMERCE EDITION
The Silknet eService Commerce Edition application integrates Silknet
eService with Silknet eCommerce or third-party electronic commerce products,
enabling shopping, service and support through a single Web site interface.
Silknet eService Commerce Edition creates a single, unified view of the customer
relationship and transactions, not only across departments, such as marketing,
sales, customer service, billing, purchasing and product development, but also
among partners, vendors and suppliers. Silknet eService Commerce Edition helps
companies and their customers manage the entire customer relationship, from
initial point of interest to shopping and buying, support and service, marketing
and follow-on purchases. Features of this application include:
- One Log-in -- allows customers to browse, purchase or obtain service from
a single Web site interface;
- One View -- integrates the purchase and support history of the customer,
allowing sales and service representatives to better respond to customer
problems and inquiries;
- Complete Contact -- allows sales and service representatives to include
in any customer interaction commerce-and service-related Web hyperlinks,
such as sales order, inquiry and trouble ticketing; and
- Total Solution -- enables service representatives to provide multimedia
service solutions in an electronic commerce transaction.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Silknet is a leader in the delivery of interactive, Web-based electronic
business solutions that use advanced, industry standard Web and distributed
object technologies. Silknet's applications are built on Microsoft Windows
Distributed InterNet Applications architecture, which includes technologies such
as Microsoft's Distributed Component Object Model and Microsoft's Transaction
Server. This architecture allows Silknet to provide future upgrades of highly
scaleable, multi-tier business applications for deployment over the Web or any
network, while preserving a company's investment in existing applications and
data. In addition, Silknet's products incorporate a graphical user interface
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that allows a company to create tailored applications for data model creation
and display, data object creation, workflow and business rules.
Silknet's products employ a standard, Web-designed architecture. Unlike a
client/server architecture, individual users simply need a browser to perform
any function available in the product. No software needs to be distributed to
any user, either within the organization or to customers, partners, vendors or
suppliers, making the software easier to implement, maintain and upgrade than
client/server solutions.
The multiple-component architecture of Silknet's products allows a company
to distribute the server side of the software across many different systems for
increased scalability and reliability. The customer side of the application,
which operates outside a company's firewall, or electronic security barrier, and
is open to the public, and the employee side of the application, which is
typically used within a company behind its firewall and is closed to public
access, operate on both Windows NT and UNIX platforms. Silknet's application
server runs on Windows NT only and uses Microsoft's Transaction Server and
Message Queue. Silknet is currently designing a UNIX version of its application
server. The database server uses either Oracle or Microsoft's SQL Server on a
Windows NT platform, and Oracle on a UNIX platform.
Silknet's products employ a component architecture to allow companies to
configure the solution to best fit their unique requirements without changing
the application's source code. This benefit reduces implementation time and
costs, and establishes a clear and consistent upgrade path for future releases
of Silknet software. It also enables Silknet to maintain and support a single
source code base for each application that addresses the varied needs of these
companies.
EXAMPLES OF SILKNET IMPLEMENTATIONS
The following examples illustrate how two companies are utilizing Silknet's
products.
Sprint PCS
Sprint PCS operates the largest 100% digital, 100% personal communication
services wireless network in the United States, serving more than 2.5 million
customers in over 4,000 cities and communities. Sprint PCS has built its entire
Web site on the Silknet eService Commerce Edition and has used this product to
integrate its Web site with its back-end systems. Sprint PCS incorporated
Silknet's solutions into two major initiatives: eCare and eStore. As part of its
eCare program, Sprint PCS is using the Silknet eService application to enable
customers to view and change their account information, review wireless usage
and invoice information, search multimedia knowledge bases and interact with
Sprint PCS service representatives on-line. As part of its eStore program,
Sprint PCS has deployed the Silknet eCommerce application to enable the company
to sell phones and services to new customers. The application allows the
customer to view various calling plan offerings and allows Sprint PCS to make
specific recommendations for purchasing phones and plans based on personal
preferences, profiles and customer history. Customers can also order equipment
and initiate service through the Web site, and the Silknet eService application
performs a credit check for Sprint PCS.
Microsoft
Microsoft uses the Silknet eService application to provide on-line service
to its more than 7,000 sales and customer support employees around the world.
Silknet eService is integrated with Microsoft's Windows NT security and exchange
profiles to minimize administration requirements and allow Silknet eService to
be seamlessly accessed by all users. Sales and customer support employees can
obtain answers to many questions about Microsoft's products on their own over
the Web. If an answer is not available through self-service, the employee can
submit a case inquiry, which is
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<PAGE> 43
automatically routed to the appropriate product management team, based on topic
and availability. The product management team responds to the case inquiry via
e-mail and the solution can be accessed on Microsoft's intranet by other sales
and customer support personnel. The messaging and escalation features within
Silknet eService are used to monitor and manage compliance with the internal
response standards maintained by Microsoft.
Although Sprint PCS and Microsoft consented to the inclusion of the
foregoing examples in this prospectus, these examples are not intended to be
endorsements by these companies of Silknet's products and services.
SALES AND MARKETING
Silknet sells its products primarily through a direct sales force and
through relationships with systems integrators and resellers. The sale of
Silknet's products is often an enterprise-wide decision by prospective
customers. The sales process generally ranges from three to nine months
depending on the level of education prospective customers need regarding the use
and benefits of Silknet's products. As of March 31, 1999, Silknet's direct sales
organization consisted of 12 employees located in 10 offices throughout North
America and two employees in an office in the United Kingdom. In addition,
Silknet had seven employees in North America and two employees in the United
Kingdom responsible for demonstrating its products and assisting the sales
organization.
A key element of Silknet's market penetration strategy is the formation of
relationships with industry leaders in various complementary areas. Silknet
believes these relationships increase Silknet's market exposure and presence,
generate qualified opportunities for Silknet to sell its products and assist
Silknet in implementing its products.
Silknet has established relationships with large, international systems
integrators and consulting firms, such as Cambridge Technology Partners, Cap
Gemini, Deloitte & Touche Consulting Group/ DRT Systems and KPMG Peat Marwick.
Silknet plans to expand these relationships to increase its capacity to both
sell and implement its products. Systems integrators and consulting firms have a
strong influence on software purchasing decisions within large companies, and
they are seeking interactive electronic business solutions that allow them to
satisfy their clients' needs more rapidly than they can through custom
development. Silknet believes that expanding its relationships with systems
integrators and consulting firms will enable Silknet to gain a greater share of
emerging markets more rapidly, while containing its sales, marketing and
implementation costs.
Silknet also has relationships with software and hardware vendors, such as
Hewlett-Packard, Calico Technology and AnswerSoft, that generally view Silknet's
products as complementary to their product and service offerings. These
relationships are intended to provide Silknet opportunities to penetrate an
emerging market where either additional vertical products or services are needed
to secure the sale, or an understanding or expertise in a particular vertical
market is needed to sell effectively. As of March 31, 1999, Silknet had six
employees devoted to developing corporate partnerships and strategic alliances.
Silknet's marketing organization utilizes a variety of programs to support
Silknet products. As of March 31, 1999, Silknet's marketing organization
consisted of 11 employees. Silknet's marketing programs include:
- market and product research and analysis;
- product and strategy updates with industry analysts;
- public relations activities and speaking engagements;
- direct mail and relationship marketing programs;
- telemarketing, seminars and trade shows;
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<PAGE> 44
- brochures, data sheets and white papers; and
- Web site marketing.
CUSTOMERS
Silknet has targeted and will continue to target the financial services,
information technology and telecommunications industries. Silknet also has
identified other industries, such as travel services, manufacturing and retail
distribution, which it plans to target. The following is a partial list of
Silknet's customers as of March 31, 1999:
3Com
Autodesk
Bank of America
Bell Advanced Communications
Beyond.com
Cigna
Compaq
GEAC Computer Corporation
Inacom Corp.
Insurance Holdings of America
KPMG Peat Marwick
MachOne Communications
Microsoft
Office Depot
PC Connection
Planet Direct
Policy Management Systems Corporation
Provident Bank
SBC Internet
Sitara Networks
Sprint PCS
The Travel Company
W.W. Grainger
SUPPORT AND PROFESSIONAL SERVICES
Silknet offers a broad range of support and training services to its
customers. Silknet believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation, customer
satisfaction and continued revenue growth.
Silknet provides implementation services to assist companies in optimizing
the benefits of Silknet's solutions. In addition, systems integrators and
consulting firms often help companies to implement Silknet's products. As of
March 31, 1999, Silknet had 17 employees dedicated to providing implementation
services. These employees often work closely with the staffs of third-party
systems integrators to train their consultants in the implementation of Silknet
software. A typical implementation engagement lasts three to six months and
involves the planning, configuration, testing and implementation of the
products. These services are generally billed on a per day basis. Silknet
believes that these implementation projects not only help ensure a company's
success with Silknet's products, but also allow Silknet consultants and systems
engineers to gain industry-specific knowledge that can be leveraged in future
projects and products.
Silknet's customers have a choice of support options depending on the level
of service desired. Silknet maintains a technical support hotline staffed by
engineers from 8:00 a.m. to 8:00 p.m., Eastern time, Monday through Friday, from
its corporate headquarters in Manchester, New Hampshire. Silknet uses the
Silknet eService application to track and manage its own customer service
inquiries and to provide 24-hour technical support. Silknet provides training in
the use of its products through classroom instruction at its Manchester, New
Hampshire corporate headquarters and at other training sites throughout North
America and in Europe. As of March 31, 1999, Silknet had three technical support
engineers.
RESEARCH AND DEVELOPMENT
Silknet devotes a substantial portion of its resources to developing new
products and product features, extending and improving its products and
technology, and researching new technological initiatives in the market for
Web-based, interactive electronic business solutions. This new and emerging
market is characterized by rapid technological change, new product introductions
and
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<PAGE> 45
enhancements, evolving industry standards and rapidly changing customer
requirements. The introduction of products incorporating new technologies and
the emergence of new industry standards could render existing products obsolete
and unmarketable. Silknet's future success will depend in part on its ability to
anticipate changes, enhance its current products, develop and introduce new
products that keep pace with technological advancements and address the
increasingly sophisticated needs of its customers. As an example of its
technology initiatives, Silknet is currently developing SilkDataObjects,
scheduled for release in the second half of calendar 1999. SilkDataObjects is an
application tool which enables a company, without the need of specialized
programming skills, to create customized business objects that add
company-specific functionality to the Silknet eBusiness System platform residing
on the company's Web site. Silknet is also working on a UNIX version of its
application server.
As of March 31, 1999, Silknet had 52 employees engaged in research and
development activities. Silknet's research and development expenditures for
fiscal year 1997 and 1998 and for the nine months ended March 31, 1999, were
approximately $961,000, $2.4 million and $3.7 million, respectively. Silknet
expects that it will continue to commit significant resources to research and
development in the future. To date, all research and development expenses have
been expensed as incurred. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
The market for Silknet's products is new and rapidly evolving, and is
expected to become increasingly competitive as current competitors expand their
product offerings and new companies enter the market. The principal competitive
factors in the Web-based, interactive electronic business solutions market
include:
- adherence to emerging Web-based technology standards;
- comprehensiveness of applications;
- adaptability, flexibility and scalability;
- real-time, interactive capability with customers, partners, vendors and
suppliers;
- integration with a variety of communications media;
- ease of use;
- ease of implementation;
- customer service and support; and
- price.
Although Silknet believes that it currently competes favorably with respect to
these factors, there can be no assurance that Silknet can maintain its
competitive position against current and potential competitors, especially those
with longer operating histories, greater name recognition and substantially
greater financial, technical, marketing, management, service, support and other
resources.
Silknet currently faces competition primarily from in-house and third-party
custom development efforts. Silknet expects that these solutions will continue
to be a principal source of competition for the foreseeable future.
Silknet's current competitors include a number of companies offering one or
more solutions for the electronic business solutions market, some of which are
directly competitive with Silknet's products. For example Silknet's competitors
include companies providing on-line customer management solutions, such as
BroadVision, Inc. and Smart Technologies, Inc., and client/server-based, call-
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<PAGE> 46
center customer service solutions, such as Siebel Systems, Inc., Vantive
Corporation, and Clarify, Inc. In addition, Silknet competes with providers of
stand-alone point solutions for e-mail response capabilities, such as Mustang
Software, Inc. and Kana Communications, Inc., and providers of stand-alone point
solutions for knowledge base applications, such as Inference Corporation and
Primus Knowledge Solutions, Inc.
Silknet also may face competition from systems integrators and consulting
firms which design and develop custom systems and perform custom integration.
Some of these firms may possess industry-specific expertise or reputations among
potential customers for offering enterprise solutions to electronic business
application needs. These systems integrators and consulting firms can be
resellers of Silknet's products and may engage in joint marketing and sales
efforts with Silknet. Silknet relies upon these firms for recommendations of
Silknet's products during the evaluation stage of the purchase process, as well
as for implementation and customer support services. These systems integrators
and consulting firms may have similar, and often more established, relationships
with Silknet's competitors, and there can be no assurance that these firms will
not develop, market or recommend competing software applications.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Silknet's success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Silknet relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Silknet also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Silknet's products, to
obtain and use information that Silknet regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
have a material adverse effect on Silknet's business, operating results and
financial condition.
In addition, the laws of some foreign countries do not protect Silknet's
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in these jurisdictions.
Litigation may be necessary in the future to enforce or defend Silknet's
intellectual property and proprietary rights, to protect Silknet's trade secrets
or to determine the validity and scope of the intellectual property and
proprietary rights of others. This litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of management and
technical resources, either of which could have a material adverse effect on
Silknet's business, operating results and financial condition.
Silknet attempts to avoid infringing known intellectual property and
proprietary rights of third parties in its product development efforts. However,
Silknet has not conducted and does not conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of them which are confidential when filed, with
regard to similar technologies. If Silknet were to discover that its products
violated third party proprietary rights, it may be liable for substantial
damages. In addition, Silknet may be required to reengineer its products or seek
to obtain licenses to continue offering such products, and there can be no
assurance that such efforts would be successful.
Silknet pursues the registration of some of its trademarks in the United
States and in other countries, although it has not yet secured registration of
most of its marks. Silknet has applications pending for trademark registrations
for "Silknet" and "Silknet" combined with the Silknet logo in the United States,
Canada and the European Union. Silknet's applications for the registration of
"Silknet" and "Silknet" combined with the Silknet logo were denied in Canada
because a company
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<PAGE> 47
filed an earlier application for the use of "Silk" in connection with Internet
information resource services.
Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed a trademark application
for "e-Business" for use in creating, implementing and maintaining Web sites and
integration of computer systems and networks. Silknet's use of Silknet eBusiness
System could infringe on the rights of IBM and other companies using a mark that
contains "eBusiness." Silknet's use of "eBusiness," as well as the use of other
names, may result in costly litigation, divert management's attention and
resources, cause product shipment delays or require Silknet to pay damages
and/or to enter into royalty or license agreements. There can be no assurance
that a license agreement would be available to Silknet on any commercially
reasonable terms, if at all, and Silknet may be required to stop using the name
"eBusiness" for its products. Further, because names such as eBusiness,
eCommerce and eService are becoming widely used and descriptive, Silknet does
not expect to be able to prevent third parties from using these names for
competing products.
Silknet currently licenses technology from third parties that it
incorporates into its products. For example, Silknet licenses Web information
server, transaction server and related technologies from Microsoft. There can be
no assurance that technology from these providers or others will continue to be
available to Silknet on commercially reasonable terms, if at all. The loss or
inability to access such technology could result in delays in development and
introduction of new products or enhancements by Silknet until equivalent or
replacement technology could be accessed, if available, or developed, if
feasible, by Silknet, which could have a material adverse effect on Silknet's
business, operating results and financial condition. Moreover, although Silknet
is generally indemnified against claims that technology licensed from third
parties infringes the intellectual property and proprietary rights of others,
such indemnification is not always available for all types of intellectual
property and proprietary rights and in some cases the scope of such
indemnification is limited. Even if Silknet receives broad indemnification,
third party indemnitors are not always well capitalized and may not be able to
indemnify Silknet in the event of infringement, resulting in substantial
exposure to Silknet. There can be no assurance that infringement or invalidity
claims arising from the incorporation of third party technology, and claims for
indemnification from Silknet's customers resulting from these claims, will not
be asserted or prosecuted against Silknet. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources in addition to potential product redevelopment costs and
delays, all of which could materially adversely affect Silknet's business,
operating results and financial condition.
EMPLOYEES
As of March 31, 1999, Silknet had 136 employees, 111 of whom were based at
Silknet's headquarters in Manchester, New Hampshire. None of Silknet's employees
is subject to a collective bargaining agreement. Silknet believes that its
relations with its employees are good.
FACILITIES
Silknet has one lease for approximately 44,092 square feet of space in an
office building in Manchester, New Hampshire, its headquarters. The lease
expires in December 2003, and Silknet has an option to extend the lease for an
additional five-year term. As of March 31, 1999, Silknet also leased office
space in 11 other cities for its sales and support personnel. Silknet believes
that these existing facilities are adequate to meet its current, foreseeable
requirements or that suitable additional or substitute space will be available
on commercially reasonable terms.
LEGAL PROCEEDINGS
Silknet is not a party to any material legal proceedings.
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<PAGE> 48
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The directors and executive officers of Silknet are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James C. Wood................. 42 Chairman of the Board, President and Chief Executive
Officer
Nigel K. Donovan.............. 43 Senior Vice President and Chief Operating Officer
Patrick J. Scannell, Jr. ..... 45 Vice President, Chief Financial Officer, Treasurer and
Secretary
Guy Bradley(1)................ 34 Director
Joo Hock Chua(1).............. 43 Director
John Doggett.................. 51 Director
Stanley Fung(2)............... 42 Director
Andrew Goldfarb(2)............ 31 Director
</TABLE>
- ---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Directors and Executive Officers
James C. Wood founded Silknet and has served as Chairman of the Board,
President and Chief Executive Officer since Silknet's inception in March 1995.
From January 1988 until November 1994, he served as President and Chief
Executive Officer of CODA Incorporated, a subsidiary of CODA Limited, a
financial accounting software company. Mr. Wood also served as a Director of
CODA Limited from November 1988 until November 1994.
Nigel K. Donovan has served as Silknet's Senior Vice President and Chief
Operating Officer since February 1999. From November 1995 to February 1999 he
served as Vice President -- Professional Services. From November 1996 to October
1998, he also served as Silknet's Treasurer and from May 1997 to October 1998 as
Silknet's Chief Financial Officer. In addition, Mr. Donovan served as director
from October 1996 to February 1999. From March 1988 until October 1995, Mr.
Donovan served as Vice President -- Professional Services at CODA Incorporated.
During the period from March 1988 until June 1994, Mr. Donovan also served as
Chief Financial Officer for CODA Incorporated.
Patrick J. Scannell, Jr. has served as Silknet's Chief Financial Officer
and Treasurer since November 1998 and was named Vice President and Secretary in
February 1999. From September 1992 until October 1998, Mr. Scannell served as
Executive Vice President, Chief Financial Officer and Treasurer of Applix, Inc.,
a customer interaction software company.
Guy Bradley has served as a director of Silknet since October 1996. Mr.
Bradley has been affiliated with CMG @Ventures since August 1994. He has been a
general partner or managing member of CMG @Ventures since January 1995. He was
Director of International Sales and Marketing for Booklink, Inc., an affiliate
of CMG @Ventures, from August 1994 to December 1994. From January 1994 to July
1994, Mr. Bradley was employed as a consultant by the Patricia Seybold Group.
Joo Hock Chua has served as director of Silknet since October 1998. Mr.
Chua has been a Vice President/Assistant General Manager at Vertex Management
(II) Pte Ltd since July 1995, a Senior Manager from July 1991 to June 1995 and a
Manager from June 1988 to June 1991. Mr. Chua is a director of Ultro
Technologies Ltd and ASA Ceramic Ltd, both publicly-listed in Singapore, and
several privately held companies in the US, Singapore and the People's Republic
of China.
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<PAGE> 49
John Doggett has served as a director of Silknet since October 1997. Since
October 1996, Mr. Doggett has been a Vice President at BancBoston Ventures Inc.
From 1991 to September 1996, Mr. Doggett served as Director of the Applied
Technology group at BankBoston, N.A.
Stanley Fung has served as a director of Silknet since October 1996. Mr.
Fung has been with Zero Stage Capital since 1992, as Managing Director since
December 1998, as General Partner from October 1994 to December 1998 and as Vice
President from April 1992 to October 1994. Mr. Fung is a director of RoweCom
Inc. and several privately-held companies.
Andrew Goldfarb has served as a director of Silknet since February 1999.
Since March 1997, Mr. Goldfarb has been a Managing Principal at JAFCO America
Ventures, Inc. Mr. Goldfarb was employed by Trans National Group, as Vice
President from August 1996 to March 1997, as director of Trans National
Ventures, the venture capital division of Trans National Group, from September
1994 to July 1996 and as Assistant Vice President from June 1993 to August 1994.
Other Key Employees
Eric Carlson has served as Silknet's Vice President and Chief Technology
Officer since February 1999, Chief Technology Officer since September 1996 and
Senior Programmer/Analyst from June 1995 to September 1996. From June 1994 to
June 1995, he served as Client/Server Technology Analyst at PC Connection, a
reseller of personal computer hardware and software. From 1991 to June 1994, Mr.
Carlson served as Programmer/Analyst and Network Administrator with Yankee Book
Peddler.
James P. Davis has served as Silknet's Vice President -- Business
Development since January 1997. From June 1990 to December 1996, Mr. Davis held
various senior management positions at CODA Incorporated, including Vice
President of Sales from January 1994 to December 1996 and acting President and
Chief Executive Officer from November 1994 to July 1995.
David B. Fowler has served as Silknet's Vice President -- Marketing since
April 1999. From April 1995 to March 1999, Mr. Fowler served as Vice
President -- Sales and Marketing for Gradient Technologies, a software company.
From December 1993 to March 1995, Mr. Fowler served as Vice President -- Sales
and Marketing for FTP Software.
V. Anthony Giannelli has served as Silknet's Vice
President -- International since October 1998, and from February 1998 to October
1998, he served as Silknet's Vice President -- Marketing. From November 1995 to
February 1998, Mr. Giannelli served as Vice President of Marketing and Business
Development of Applix, Inc. From May 1993 to October 1995, he served as Vice
President -- Marketing of Open Data Corporation, a software company.
Mark H. Green has served as Silknet's Vice President -- Sales since October
1997, and from November 1996 to October 1997, he served as Silknet's Director of
Sales. From June 1996 to November 1996, Mr. Green served as Alliance Manager for
i2 Technologies, a software company. From November 1991 to June 1996, Mr. Green
served as a sales representative with CODA Incorporated.
Patricia D. Stimpson has served as Silknet's Vice President -- Research and
Development since June 1997. From October 1996 to March 1997, Ms. Stimpson held
a variety of senior development positions at Lotus Development Corporation,
including Senior Director of Development of the Extended Enterprise Group from
December 1994 to October 1996, and Senior Director of Shared Components from
October 1992 to December 1994.
COMMITTEES OF THE BOARD OF DIRECTORS
The Silknet compensation committee consists of Messrs. Bradley and Chua. It
reviews and evaluates the salaries and incentive compensation of management and
key employees of Silknet and makes recommendations concerning these matters to
the Board of Directors. The Silknet compensation committee also administers
Silknet's stock option and stock purchase plans.
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<PAGE> 50
The Silknet audit committee consists of Messrs. Goldfarb and Fung. It
reviews the results and scope of audits and other services provided by Silknet's
independent public accountants and reviews Silknet's system of internal
accounting and financial controls. The Silknet audit committee also reviews such
other matters with respect to the accounting, auditing and financial reporting
practices and procedures of Silknet as it may find appropriate or may be brought
to its attention.
DIRECTOR COMPENSATION
Following the consummation of this offering, non-employee directors will be
reimbursed for their reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors. No director who is an employee of Silknet
will receive separate compensation for services rendered as a director.
Non-employee directors are also eligible for participation in Silknet's 1999
Non-Employee Director Stock Option Plan. See "Management -- Stock Plans."
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the total compensation
paid or accrued for the year ended June 30, 1998 for the named executive
officers of Silknet, including Silknet's Chief Executive Officer and the other
most highly compensated executive officer who was employed by Silknet at June
30, 1998. No long-term compensation was paid to the named executive officers
during the year ended June 30, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
NAME AND PRINCIPAL POSITION IN 1998 SALARY BONUS
- ----------------------------------- -------- -----
<S> <C> <C>
James C. Wood, Chairman of the Board, President and Chief
Executive Officer......................................... $140,881 --
Nigel K. Donovan, Vice President -- Professional Services
and Director.............................................. $120,750 --
</TABLE>
OPTION GRANTS
No stock options or stock appreciation rights were granted during the year
ended June 30, 1998 to the named executive officers.
YEAR-END OPTION TABLE
The following table sets forth information regarding exercisable and
unexercisable stock options held as of June 30, 1998 by each of the named
executive officers. No options were exercised by the named executive officers
during the year ended June 30, 1998. There was no public trading market for the
common stock as of June 30, 1998. The value of unexercised in-the-money options
has been calculated by determining the difference between the exercise price per
share payable upon exercise of such options and the initial public offering
price of $15.00.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James C. Wood............................. -- -- -- --
Nigel K. Donovan.......................... 329,415 105,235 $4,905,033 $1,557,024
</TABLE>
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<PAGE> 51
EMPLOYMENT AGREEMENTS
On April 13, 1999, Silknet entered into an employment agreement and a
noncompetition, confidentiality and inventions agreement with each of James C.
Wood, its Chairman of the Board, President and Chief Executive Officer, Nigel K.
Donovan, its Senior Vice President and Chief Operating Officer, and Patrick J.
Scannell, Jr., its Vice President, Chief Financial Officer, Treasurer and
Secretary. Each employment agreement provides for the payment of salary and
bonus, terminates on June 30, 2001 unless earlier terminated and may be extended
upon mutual agreement of the parties. In addition, each employment agreement
provides that if the employee is terminated without just cause, as defined in
each employment agreement, the employee will receive a severance payment equal
to twelve months salary. Finally, in the event of an acquisition, as defined in
each employment agreement, if the employee:
- is not offered employment by the acquiring corporation in a comparable
position and at a comparable salary; or
- is terminated at any time for other than just cause within twelve months
following the completion of the acquisition
the employee will receive a severance payment equal to twelve months salary and
all unvested options will accelerate and become exercisable for a period of six
months.
STOCK PLANS
Employee Stock Option Plan. The Silknet Employee Stock Option Plan, or
1995 Option Plan, was adopted by the Board of Directors on August 8, 1995 and
received stockholder approval on September 25, 1995. A total of 2,391,900 shares
of common stock have been reserved for issuance under the 1995 Option Plan.
Under the 1995 Option Plan, Silknet was authorized to grant options to purchase
shares of common stock intended to qualify as incentive stock options as defined
under Section 422 of the Internal Revenue Code of 1986, as amended, and
non-qualified stock options to officers and other employees of Silknet. Options
granted under the 1995 Option Plan are exercisable within ten years of the
original grant date and become exercisable pro rata on a monthly basis over a
period of four years from the date of grant. The 1995 Option Plan provides that
upon an acquisition intended to be accounted for as a pooling of interests, the
vesting of all options to purchase common stock will accelerate by a period of
one year. In addition, upon the termination of an employee without cause or for
good reason prior to the first anniversary of the completion of such an
acquisition, all options then outstanding under the 1995 Option Plan held by
that employee will immediately become exercisable. Finally, on the first year
anniversary of the completion of such an acquisition all options then
outstanding under the 1995 Option Plan will immediately become exercisable. An
option is not transferable by the recipient except by will or by the laws of
descent and distribution. As of March 31, 1999, options to purchase 2,342,386
shares had been granted under the 1995 Option Plan. Of that amount, options to
purchase 2,061,841 shares of Silknet common stock remain outstanding as of March
31, 1999 and are exercisable at prices ranging from $.02 per share to $7.32 per
share.
1999 Stock Option and Incentive Plan. Silknet's 1999 Stock Option and
Incentive Plan, or 1999 Option Plan, was adopted by the Board of Directors and
received stockholder approval in February 1999. A total of 1,000,000 shares of
common stock have initially been reserved for issuance under the 1999 Option
Plan. The 1999 Option Plan provides that the number of shares authorized for
issuance will automatically increase by 5% of the outstanding number of shares
of common stock on December 31, 1999, 2000 and 2001 up to a maximum of an
additional 2,500,000 shares of common stock. Under the terms of the 1999 Option
Plan, Silknet is authorized to grant incentive stock options as defined under
the Internal Revenue Code, non-qualified options, stock awards or opportunities
to
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<PAGE> 52
make direct purchases of common stock to employees, officers, directors,
consultants and advisors of Silknet and its subsidiaries.
The 1999 Option Plan is administered by the Silknet compensation committee.
The Silknet compensation committee selects the individuals to whom options will
be granted and determines the option exercise price and other terms of each
award, subject to the provisions of the 1999 Option Plan. The 1999 Option Plan
provides that upon an acquisition intended to be accounted for as a pooling of
interests, the vesting of all options to purchase common stock will accelerate
by a period of one year. In addition, upon the termination of an employee
without cause or for good reason prior to the first anniversary of the
completion of such an acquisition, all options then outstanding under the 1999
Option Plan held by that employee will immediately become exercisable. Finally,
on the first year anniversary of the completion of such an acquisition all
options then outstanding under the 1999 Option Plan will immediately become
exercisable. An option is not transferable by the recipient except by will or by
the laws of descent and distribution, or in the case of non-qualified stock
options, only to the extent set forth in the agreement relating to the
non-qualified stock option or by a valid domestic relations order. No options
may be exercised following termination of employment for cause. The term of the
1999 Option Plan is ten years, unless sooner terminated by vote of the Board of
Directors. As of March 31, 1999, no options had been granted under the 1999
Option Plan.
1999 Non-Employee Director Stock Option Plan. Silknet's 1999 Non-Employee
Director Stock Option Plan, or Director Plan, was adopted by the Board of
Directors and received stockholder approval in February 1999 and becomes
effective on the date on which Silknet's common stock is registered under the
Exchange Act. A total of 350,000 shares of common stock have been authorized for
issuance under the Director Plan.
The Director Plan is administered by the Silknet compensation committee.
Under the Director Plan, each non-employee director who is or becomes a member
of the Board of Directors is automatically granted on the date of which the
common stock becomes registered under the Exchange Act or, if not a director on
that date, the date first elected to the Board of Directors, an initial option
to purchase 10,000 shares of common stock. In addition, provided that the
director continues to serve as a member of the Board of Directors, each
non-employee director will be automatically granted on the third anniversary of
his or her initial option grant date and each three years thereafter an option
to purchase 10,000 shares of common stock. Provided that the director continues
to serve as a member of the Board of Directors, one-third of the shares included
in each grant will become exercisable on each of the first, second and third
anniversaries of the date of grant. If a director fails to attend at least 75%
of the Board of Directors meetings held in a fiscal year, that director will
forfeit his or her rights with respect to the option installment which vested on
the preceding vesting date, in proportion to the percentage of Board of
Directors meetings not attended. All options granted under the Director Plan
will have an exercise price equal to the fair market value of the common stock
on the date of grant and a term of ten years from the date of grant. Options may
not be transferred except by will or by the laws of descent and distribution or
by a domestic relations order. Unexercisable options terminate when the director
ceases to be a director for any reason other than death or permanent disability.
Exercisable options may be exercised at any time during the option term. In the
event that a director dies or is permanently disabled, any options that are not
exercisable will become exercisable and the optionee or his or her
representative, heir or legatee may exercise all options for a period of three
years. The term of the Director Plan is ten years, unless sooner terminated by
vote of the Board of Directors.
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<PAGE> 53
1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase Plan,
or Stock Purchase Plan, was adopted by the Board of Directors and received
stockholder approval in February 1999. The Stock Purchase Plan provides for the
issuance of up to an aggregate of 350,000 shares of common stock to
participating employees.
The Stock Purchase Plan is administered by the Silknet compensation
committee. All employees who have completed three months of employment with
Silknet and whose customary employment is more than 20 hours per week and for
more than five months in any calendar year are eligible to participate in the
Stock Purchase Plan. The right to purchase common stock under the Stock Purchase
Plan will be made available through a series of offerings. On the first day of
an offering period, Silknet will grant to each eligible employee who has elected
in writing to participate in the Stock Purchase Plan an option to purchase
shares of common stock. The employee will be required to authorize an amount,
between 1% and 10% of the employee's compensation, to be deducted from the
employee's pay during the offering period. On the last day of the offering
period, the employee will be deemed to have exercised the option, at the option
exercise price, to the extent of accumulated payroll deductions. Under the terms
of the Stock Purchase Plan, the option exercise price is an amount equal to 85%
of the fair market value of one share of common stock on either the first or
last day of the offering period, whichever is lower. No employee may be granted
an option that would permit the employee's rights to purchase common stock to
accrue in excess of $25,000 in any calendar year. The first offering period
under the Stock Purchase Plan will commence upon the initial offering of the
common stock to the public and continues through January 31, 2000. Thereafter,
the offering periods will begin on February 1 and August 1. Options granted
under the Stock Purchase Plan terminate upon an employee's voluntary withdrawal
from the plan at any time or upon termination of employment. No options have
been granted to date under the Stock Purchase Plan.
401(k) PLAN
Silknet maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. Under the 401(k) plan, a participant may contribute a
maximum of 20% of his or her pre-tax salary, commissions and bonuses through
payroll deductions, up to the statutorily prescribed annual limit of $10,000 in
calendar year 1999. The percentage elected by more highly compensated
participants may be required to be lower. In addition, at the discretion of the
Board of Directors, Silknet may make discretionary profit-sharing contributions
into the 401(k) plan for all eligible employees. During the year ended June 30,
1998, Silknet made no profit-sharing contributions to the 401(k) plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended June 30, 1998, the members of the Silknet
compensation committee were Messrs. Bradley, Doggett and Wood. Mr. Wood has
served as Silknet's Chairman of the Board, President and Chief Executive Officer
since March 1995. The Silknet compensation committee makes recommendations
concerning salaries and incentive compensation for employees of and consultants
to Silknet and administers and grants stock options under Silknet's stock option
plans. No executive officer of Silknet has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director or member of the Silknet compensation committee of Silknet.
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<PAGE> 54
CERTAIN TRANSACTIONS
ORGANIZATION OF SILKNET
In connection with its formation in 1995, Silknet issued and sold 2,500,000
shares of its common stock for an aggregate of $80,500 to its founder, James C.
Wood.
SALES OF STOCK
In July 1995, Silknet sold 50,000 shares of its common stock for an
aggregate of $50,000 to Mr. Nigel K. Donovan, currently Silknet's Senior Vice
President and Chief Operating Officer.
In October 1996, Silknet issued an aggregate of 2,364,584 shares of its
Series A preferred stock at $0.96 per share, for aggregate consideration of
$2,270,000. Of that amount, Silknet issued 1,302,084 shares of Series A
preferred stock to CMG @Ventures II LLC and 1,041,667 shares of Series A
preferred stock to Zero Stage Capital V, L.P. Mr. Guy Bradley, a director of
Silknet, is a managing member of CMG @Ventures II LLC. Mr. Stanley Fung, a
director of Silknet, is a managing partner of Zero Stage Capital V, L.P.
In June 1997, Silknet issued an aggregate of 2,500,000 shares of its Series
B preferred stock at a price of $2.00 per share, for aggregate consideration of
$5,000,000. Of that amount, Silknet issued 371,700 shares of Series B preferred
stock to CMG @Ventures II LLC, 371,700 shares of Series B preferred stock to
Zero Stage Capital V, L.P., 1,250,000 shares of Series B preferred stock to
BancBoston Ventures Inc., 400,000 shares of Series B preferred stock to Vertex
Investment (II) Ltd. and 100,000 shares of Series B preferred stock to HWH
Investment Pte Ltd. Mr. John Doggett, a director of Silknet, is Vice President
of BancBoston Ventures Inc. Mr. Joo Hock Chua, a director of Silknet, is Vice
President/Assistant General Manager of Vertex Management (II) Pte Ltd.
In May 1998, Silknet issued an aggregate of 3,081,657 shares of its Series
C preferred stock at a price of $3.498117 per share, for aggregate consideration
of $10,779,990. Of that amount, Silknet issued 857,604 shares of Series C
preferred stock to CMG @Ventures II LLC, 214,401 shares of Series C preferred
stock to Zero Stage Capital V, L.P., 285,868 shares of Series C preferred stock
to BancBoston Ventures Inc., 428,802 shares of Series C preferred stock to
Vertex Technology Fund Pte Ltd. and 571,736 shares of Series C preferred stock
to Intel Corporation. Vertex Technology Fund Pte Ltd., Vertex Investment (II)
Ltd. and HWH Investment Pte Ltd. are sometimes referred to as the Vertex
entities. Silknet also issued 28,587 shares of Series C preferred stock to JAFCO
Co., Ltd., 33,632 shares of Series C preferred stock to JAFCO R-3 Investment
Enterprise Partnership, 20,179 shares of Series C preferred stock to JAFCO JS-3
Investment Enterprise Partnership, 30,269 shares of Series C preferred stock to
JAFCO G-6(A) Investment Enterprise Partnership, 30,269 shares of Series C
preferred stock to JAFCO G-6(B) Investment Enterprise Partnership and 571,736
shares of Series C preferred stock to U.S. Information Technology No. 2
Investment Enterprise Partnership. All of the entities described in the
preceding sentence are sometimes referred to as the JAFCO entities. Mr. Andrew
Goldfarb, a director of Silknet, is a managing principal of JAFCO America
Ventures, Inc., a co-general partner of U.S. Technology. On June 26, 1998,
Silknet issued an additional 7,500 shares of Series C preferred stock to the
Zero Stage Individual Investor Group for aggregate consideration of $26,236, one
of the members of which is Mr. Stanley Fung, a director of Silknet.
On February 26, 1999, Silknet issued an aggregate of 1,205,913 shares of
Series D preferred stock at a price of $7.324109 per share, for aggregate
consideration of $8,832,238. Of that amount, Silknet issued 230,148 shares to
CMG @Ventures II LLC, 157,737 shares to BancBoston Ventures Inc., 12,625 shares
to JAFCO Co., Ltd., 50,498 shares to U.S. Technology, and 157 shares to Stanley
Fung, a director of Silknet.
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<PAGE> 55
As set forth in Silknet's Certificate of Incorporation, each share of
Series A preferred stock, Series B preferred stock, Series C preferred stock and
Series D preferred stock will automatically convert into one share of common
stock upon the closing of this offering.
In connection with the preferred stock financings, Silknet granted
registration rights to preferred stockholders. See "Description of Capital
Stock -- Registration Rights."
Silknet has license agreements with Planet Direct Corporation and
SalesLink. Silknet has received license and service fees from Planet Direct of
approximately $78,700 and license and service fees from SalesLink of
approximately $15,700. Planet Direct is a majority-owned subsidiary and
SalesLink is a wholly-owned subsidiary of CMG Information Services, Inc., which
through its venture capital operation, CMG @Ventures II LLC, owns 23.02% of the
outstanding common stock of Silknet. Mr. Guy Bradley, a managing member of CMG
@Ventures II LLC, is a director of Silknet.
ISSUANCE OF NOTES AND WARRANTS
In May 1996, Silknet issued one note in the principal amount of $125,000
and a warrant to purchase an aggregate of 125,000 shares of common stock at an
exercise price of $1.00 per share to Zero Stage Capital V, L.P. The warrant may
be exercised, in whole or in part, at any time or from time to time, until May
17, 2002. In July 1996, Silknet issued one note in the principal amount of
$125,000 and an additional warrant to purchase an aggregate of 125,000 shares of
common stock at an exercise price of $1.00 per share to Zero Stage Capital V,
L.P. This warrant may be exercised, in whole or in part, at any time or from
time to time until July 24, 2002. Each note was exchanged for shares of Series A
preferred stock in October 1996.
In June 1997, in connection with Silknet's issuance and sale of its Series
B preferred stock, Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $2.20 per share. One
warrant to purchase 250,000 shares of common stock was issued BancBoston
Ventures Inc., one warrant to purchase 80,000 shares of common stock was issued
to Vertex Investment (II) Ltd., one warrant to purchase 20,000 shares of common
stock was issued to HWH Investment Pte Ltd., one warrant to purchase 74,340
shares of common stock was issued to CMG @Ventures II LLC, and one warrant to
purchase 74,340 shares of common stock was issued to Zero Stage Capital V, L.P.
In addition, one warrant to purchase 1,320 shares of common stock was issued to
another investor who purchased Series B preferred stock. The six warrants may be
exercised, in whole or in part, at any time or from time to time, until June 11,
2003.
EMPLOYMENT AGREEMENTS
On April 13, 1999, Silknet entered into an employment agreement and a
noncompetition, confidentiality and inventions agreement with each of James C.
Wood, its Chairman of the Board, President and Chief Executive Officer, Nigel K.
Donovan, its Senior Vice President and Chief Operating Officer, and Patrick J.
Scannell, Jr., its Vice President, Chief Financial Officer, Treasurer and
Secretary.
Silknet believes that all transactions set forth above were made on terms
no less favorable to it than would have been obtained from unaffiliated third
parties. Silknet has adopted a policy whereby all future transactions between
Silknet and its officers, directors and affiliates will be on terms no less
favorable to Silknet than could be obtained from unaffiliated third parties and
will be approved by a majority of the disinterested members of Silknet's Board
of Directors.
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<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Silknet's common stock as of March 31, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, by:
- each person known by Silknet to be the beneficial owner of more than 1%
of its common stock;
- each named executive officer;
- each of Silknet's directors; and
- all executive officers and directors as a group.
Unless otherwise noted below, the address of each person listed on the table is
c/o Silknet Software, Inc., 50 Phillippe Cote Street, Manchester, New Hampshire
03101, and each person has sole voting and investment power over the shares
shown as beneficially owned except to the extent authority is shared by spouses
under applicable law and except as set forth in the footnotes to the table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The following are deemed to be beneficially
owned and outstanding for purposes of calculating the number of shares and the
percentage beneficially owned by that person or entity:
- shares of common stock issuable by Silknet to that person upon the
exercise of options which may be exercised within 60 days after March 31,
1999; and
- shares of common stock issuable by Silknet to that person upon the
exercise of warrants which may be exercised within 60 days after March
31, 1999.
However, these shares are not deemed to be beneficially owned and outstanding
for purposes of computing the percentage beneficially owned by any other person
or entity.
For purposes of calculating the percentage beneficially owned, the number
of shares deemed outstanding before the offering includes:
- 2,838,445 shares of common stock outstanding as of March 31, 1999;
- 9,159,654 shares of common stock issuable upon the conversion of
preferred stock; and
- the presently exercisable options and presently exercisable warrants held
by that person.
For purposes of calculating the percentage beneficially owned, the number of
shares deemed outstanding after the offering includes:
- all shares deemed to be outstanding before the offering; and
- 3,000,000 shares being sold in this offering, assuming no exercise of the
underwriters' over-allotment option.
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<PAGE> 57
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
James C. Wood(1)........................................... 2,366,100 19.72% 12.44%
Nigel K. Donovan........................................... 434,599 3.50% 2.82%
Guy Bradley(2)............................................. 2,835,876 23.49% 18.82%
Stanley Fung(3)............................................ 1,954,047 15.86% 12.75%
John Doggett(4)............................................ 1,943,605 15.87% 12.75%
Joo Hock Chua.............................................. -- -- --
Andrew Goldfarb............................................ -- -- --
CMG @Ventures II LLC....................................... 2,835,876 23.49% 18.82%
c/o CMG Information Services, Inc.
100 Brickstone Square, 5th Floor
Andover, MA 01810
Zero Stage Capital V, L.P. ................................ 1,952,108 15.84% 12.74%
101 Main Street
Kendall Square
Cambridge, MA 02142
BancBoston Ventures Inc. .................................. 1,943,605 15.87% 12.75%
175 Federal Street
10th Floor
Boston, MA 02110
The Vertex entities(5)..................................... 1,028,802 8.50% 6.81%
Three Lagoon Drive, Ste. 220
Redwood City, CA 94065
The JAFCO entities(6)...................................... 777,795 6.48% 5.19%
One Boston Place, Ste. 3320
Boston, MA 02108
Intel Corporation.......................................... 571,736 4.77% 3.81%
2200 Mission College Blvd.
Mail Stop SC4-210
Santa Clara, CA 95052
The Goldman Group, L.P..................................... 477,874 3.98% 3.19%
85 Broad Street
New York, NY 10004
KPMG LLP................................................... 136,536 1.14% *
3 Chestnut Ridge Road
Montvale, NJ 07645
Cambridge Technology Capital Fund I, L.P................... 136,536 1.14% *
11512 El Camino Real
San Diego, CA 92130
All executive officers and directors as a group (8
persons)(7).............................................. 9,549,852 73.08% 56.33%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 200,000 shares held in trust for Mr. Wood, 20,000 shares held in
trust for Mr. Donovan's two children, an aggregate of 7,500 shares held in
trust for the three children of Mr. James P. Davis, and 500,000 shares for
which Mr. Wood has voting power under a Voting Trust Agreement until the
completion of this offering. Mr. Wood disclaims beneficial ownership of all
such shares.
(2) Includes 2,761,536 shares held by CMG @Ventures II LLC. Also includes
74,340 shares of common stock issuable upon exercise of warrants held by
CMG @Ventures II LLC. Mr. Bradley is a managing member of CMG @Ventures II
LLC and may be deemed to share voting and investment power with respect to
all shares held by CMG @Ventures II LLC. Mr. Bradley disclaims beneficial
ownership of such shares.
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<PAGE> 58
(3) Includes 1,627,768 shares held by Zero Stage Capital V, L.P. Also includes
324,340 shares of common stock issuable upon exercise of warrants held by
Zero Stage Capital V, L.P. Mr. Fung is a managing partner of Zero Stage
Capital V, L.P. and may be deemed to share voting and investment power with
respect to all shares held by Zero Stage Capital V, L.P. Mr. Fung disclaims
beneficial ownership of such shares.
(4) Includes 1,693,605 shares held by BancBoston Ventures Inc. Also includes
250,000 shares of common stock issuable upon exercise of warrants held by
BancBoston Ventures Inc. Mr. Doggett is a Vice President of BancBoston
Ventures Inc. and may be deemed to share voting and investment power with
respect to all shares held by BancBoston Ventures Inc. Mr. Doggett
disclaims beneficial ownership of such shares.
(5) Includes 400,000 shares held by Vertex Investment (II) Ltd., 100,000 shares
held by HWH Investment Pte Ltd and 428,802 shares held by Vertex Technology
Fund Pte Ltd. Also includes 80,000 and 20,000 shares of common stock
issuable upon exercise of warrants held by Vertex Investment (II) Ltd. and
HWH Investment Pte Ltd. Vertex Management (II) Pte Ltd., of which Mr. Chua
is Vice President/Assistant General Manager, is the investment manager of
the Vertex entities and may be deemed to share voting and investment power
with respect to all shares held by the Vertex entities.
(6) Includes 41,212 shares held by JAFCO Ltd., 33,632 shares held by JAFCO R-3,
20,179 shares held by JAFCO JS-3, 30,269 shares held by JAFCO G-6(A),
30,269 shares held by JAFCO G-6(B) and 622,234 shares held by U.S.
Technology. JAFCO Ltd. is the general partner of JAFCO R-3, JAFCO JS-3,
JAFCO G6-A, JAFCO G6-B and U.S. Technology. JAFCO Ltd. is the general
partner of JAFCO R-3, JAFCO JS-3, JAFCO G-6(A) and JAFCO G-6(B) and may be
deemed to share voting and investment power with respect to such shares.
JAFCO America Ventures, Inc., of which Mr. Goldfarb is a managing
principal, is the general partner of U.S. Technology and may be deemed to
share voting and investment power with respect to such shares.
(7) See Notes 1 through 4.
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<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
In accordance with Silknet's Certificate of Incorporation as currently in
effect, Silknet's authorized capital stock consists of 50,000,000 shares of
common stock, with a par value of $.01 per share, and 15,000,000 shares of
preferred stock, with a par value of $.01 per share.
COMMON STOCK
As of March 31, 1999, there were 11,998,099 shares of common stock
outstanding and held of record by 85 stockholders, after giving effect to the
conversion of all outstanding shares of preferred stock upon the closing of this
offering. Based upon the number of shares outstanding as of March 31, 1999 and
giving effect to the issuance of the shares of common stock offered by Silknet
hereby, there will be 14,998,099 shares of common stock outstanding upon the
closing of this offering. In addition, as of March 31, 1999, there were
outstanding stock options for the purchase of a total of 2,342,386 shares of
common stock, and outstanding warrants for the purchase of a total of 750,000
shares of common stock.
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. The holders
of common stock are entitled to receive ratable such lawful dividends as may be
declared by the Board of Directors. However, such dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of Silknet, whether voluntary or involuntary, the holders of common
stock will be entitled to receive pro rata all of the remaining assets of
Silknet available for distribution to its stockholders. Any such pro rata
distribution would be subject to the rights of the holders of any outstanding
shares of preferred stock. The common stock has no preemptive, redemption,
conversion or subscription rights. The rights, powers, preferences and
privileges of holders of common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which Silknet may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by Delaware law, without further stockholder approval, to issue from time to
time up to 15,000,000 shares of preferred stock, in one or more series. The
Board of Directors is also authorized, subject to the limitations prescribed by
Delaware law, to establish the number of shares to be included in each series
and to fix the voting powers, preferences, qualifications and special or
relative rights or privileges of each series. The Board of Directors is
authorized to issue preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of common stock.
Silknet has currently designated four series of preferred stock. These
consist of 2,364,584 shares of Series A preferred stock, 2,500,000 shares of
Series B preferred stock, 3,089,157 shares of Series C preferred stock and
1,205,913 shares of Series D preferred stock. All outstanding shares of
preferred stock will be automatically converted into an aggregate of 9,159,654
shares of common stock upon the closing of this offering.
Silknet has no current plans to issue any preferred stock. However, the
issuance of preferred stock or of rights to purchase preferred stock could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of Silknet.
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WARRANTS
As of March 31, 1999, Silknet had outstanding eight warrants to purchase an
aggregate of 750,000 shares of common stock. The first warrant is to purchase an
aggregate of 125,000 shares at an exercise price of $1.00 per share, and is
exercisable, in whole or in part, at any time or from time to time, until May
17, 2002. The second warrant is to purchase an aggregate of 125,000 shares at an
exercise price of $1.00 per share and is exercisable, in whole or in part, at
any time or from time to time, until July 24, 2002. The other six warrants are
to purchase an aggregate of 500,000 shares of common stock at an exercise price
of $2.20 per share. These six warrants are currently exercisable, in whole or in
part, at any time or from time to time, until June 11, 2003. All of the eight
outstanding warrants contain certain protections against dilution resulting from
stock splits, stock dividends and similar events.
REGISTRATION RIGHTS
Under the terms of the Series C preferred stock purchase agreement dated as
of May 11, 1998 the Series C registration rights holders, including holders of
an aggregate of 7,953,741 shares of Series A, B and C preferred stock, which
will automatically convert into an aggregate of 7,953,741 shares of common stock
upon completion of this offering, and the holders of warrants exercisable for
500,000 shares of common stock, are entitled to certain rights with respect to
the registration of such shares under the Securities Act.
If Silknet proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders,
the Series C registration rights holders are entitled to notice of such
registration. The Series C registration rights holders are also entitled to
include their shares of common stock in such registration. However, in the event
of a registration in connection with an underwritten public offering of common
stock, the underwriters have the right, subject to certain conditions, to limit
the number of shares included in such registration.
The holders of at least 25% of the then-outstanding shares of common stock
held by all of the Series C registration rights holders are entitled, at any
time beginning at the earlier of 180 days after Silknet's initial underwritten
public offering or May 12, 2001, to request that Silknet file a registration
statement under the Securities Act covering the sale of some or all of the
shares held by the requesting holder or holders. Upon the receipt of such a
request, Silknet is required to use commercially reasonable efforts to effect
such registration. Silknet is not required to effect more than three such demand
registrations.
Once Silknet has qualified to use Form S-3 to register securities under the
Securities Act, the Series C registration rights holders have the right to
request that Silknet file a registration statement on Form S-3 or any successor
thereto for a public offering of all or any portion of their shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $1,000,000. Silknet shall not be required to effect a
registration in this manner more than once in any six-month period.
In general, all fees, costs and expenses of such registrations, other than
insurance costs and fees and disbursements of counsel to the selling
stockholders, will be borne by Silknet. Silknet has agreed to indemnify the
Series C registration rights holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any shares
of Series C registration rights holders are sold under the Securities Act.
Under the terms of the Series D preferred stock purchase agreement dated as
of February 26, 1999 the Series D registration rights holders, including holders
of an aggregate of 1,205,913 shares of Series D preferred stock, which will
automatically convert into an aggregate of 1,205,913 shares of
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<PAGE> 61
common stock upon completion of this offering, are entitled to certain rights
with respect to the registration of such shares under the Securities Act.
If, after 180 days have elapsed from the closing of this offering, Silknet
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders, the Series D
registration rights holders are entitled to notice of such registration. The
Series D registration rights holders are also entitled to include their shares
of common stock in such registration. However, in the event of a registration in
connection with an underwritten public offering of common stock, the
underwriters shall have the right, subject to certain conditions, to limit the
number of shares included in such registration.
The holders of at least 50% of the then-outstanding shares of common stock
held by all of the Series D registration rights holders are entitled, at any
time after 180 days have elapsed from the closing of this offering, but in no
event within 180 days of any registration of Silknet's securities, to request
that Silknet file a registration statement under the Securities Act covering the
sale of some or all of the shares held by the requesting holder or holders. Upon
the receipt of such a request, Silknet is required to use commercially
reasonable efforts to effect such registration. Silknet is not required to
effect more than one such demand registration.
Once Silknet has qualified to use Form S-3 to register securities under the
Securities Act, the Series D registration rights holders have the right to
request that Silknet file a registration statement on Form S-3 or any successor
thereto for a public offering of all or any portion of their shares, provided
that the reasonably anticipated aggregate price to the public of such offering
would not be less than $5,000,000. Silknet shall not be required to effect a
registration in this manner more than three times.
In general, all fees, costs and expenses of such registrations, other than
insurance costs and fees and disbursements of counsel to the selling
stockholders, will be paid by Silknet. Silknet has agreed to indemnify the
Series D registration rights holders against, and provide contribution with
respect to, certain liabilities relating to any registration in which any shares
of Series D registration rights holders are sold under the Securities Act.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF SILKNET'S CERTIFICATE OF INCORPORATION
AND BY-LAWS AND DELAWARE GENERAL CORPORATION LAW
Silknet's Certificate of Incorporation, Silknet's by-laws and the Delaware
General Corporation Law contain certain provisions that could be deemed to have
anti-takeover effects. These provisions could discourage, delay or prevent a
change in control of Silknet or an acquisition of Silknet at a price which many
stockholders may find attractive. The existence of these provisions could limit
the price that investors might be willing to pay in the future for shares of
Silknet's common stock.
Certificate of Incorporation and By-Laws
The Silknet by-laws provide that, except as otherwise provided by law or
the Certificate of Incorporation, newly created directorships resulting from an
increase in the authorized number of directors or vacancies on the Board of
Directors may be filled only by:
- by a majority of the directors then in office, though less than a quorum
is then in office; or
- by the sole remaining director.
These provisions prevent a stockholder from enlarging the Board of Directors and
filling the new directorships with such stockholder's own nominees without Board
of Directors approval.
These provisions of Silknet's by-laws may have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of Silknet, or
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<PAGE> 62
attempting to change the composition or policies of the Board, even though such
attempts might be beneficial to Silknet or its stockholders.
The Silknet by-laws provide that, unless otherwise prescribed by law or the
Certificate of Incorporation, only a majority of the Board of Directors, the
Chairman of the Board of Directors or the President is able to call a special
meeting of stockholders. The Certificate of Incorporation and the Silknet
by-laws also provide that, unless otherwise prescribed by law or the Certificate
of Incorporation, stockholder action may be taken only at a duly called and
convened annual or special meeting of stockholders and may not be taken by
written consent. These provisions, taken together, prevent stockholders from
forcing consideration by the stockholders of stockholder proposals over the
opposition of the Board of Directors, except at an annual meeting.
The Silknet by-laws also establish an advance notice procedure for
stockholders to make nominations of candidates for election as director, or to
bring other business before an annual meeting of stockholders of Silknet. Under
the notice procedure, notice of stockholder nominations or proposals to be made
at an annual or special meeting in lieu of an annual meeting generally must be
received by Silknet not less than 120 days nor more than 150 days prior to the
first anniversary of the date of the proxy statement delivered to the
stockholders in connection with the preceding year's annual meeting. However, if
the number of directors to be elected to the Board of Directors is increased and
there is no public announcement by Silknet naming all of the nominees for
director or specifying the size of the increased Board of Directors at least 70
days prior to the first anniversary of the preceding year's annual meeting, then
notice must be received not later than the 10th day following the earlier of the
day such notice was mailed or the day such public disclosure was made. The
notice will be timely only with respect to any director nominees for any
position caused by the increase in the Board of Directors. Notice of stockholder
nominations or proposals to be made at a special meeting called by the Board of
Directors for the purpose of electing one or more directors, other than a
special meeting in lieu of an annual meeting, must be received not earlier than
the 90th day prior to such special meeting nor later than the close of business
on the 60th day prior to such special meeting or the 10th day following the
earlier of the day such notice was mailed or the day such public disclosure was
made. These notices must contain certain prescribed information.
The notice procedure affords the Board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the Board of Directors, to
inform stockholders about such matters. The notice procedure also provides a
more orderly procedure for conducting annual meetings of stockholders. The
Silknet by-laws do not give the Board of Directors any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action. However, the notice procedure may prevent a contest for the election
of directors or the consideration of stockholder proposals. This could deter a
third party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal if the proper advance notice procedures
are not followed, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to Silknet and its stockholders.
Delaware General Corporation Law
Silknet is subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder.
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<PAGE> 63
Section 203 does not apply if:
- prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which 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 by persons who are
directors and also officers and 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
- at or subsequent to such time, 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 two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
The application of Section 203 may limit the ability of stockholders to approve
a transaction that they may deem to be in their best interests.
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 to or with the interested stockholder;
- subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity
or person beneficially owning 15% or more of the outstanding voting stock of the
corporation or is an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or person.
LIMITATION OF LIABILITY
Silknet's Certificate of Incorporation provides that no director of Silknet
shall be personally liable to Silknet or to its stockholders for monetary
damages for breach of fiduciary duty as a director, except that the limitation
shall not eliminate or limit liability to the extent that the elimination or
limitation of such liability is not permitted by the Delaware General
Corporation Law as the same exists or may hereafter be amended.
Silknet's Certificate of Incorporation further provides for the
indemnification of Silknet's directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, including
circumstances in which indemnification is otherwise discretionary. A principal
effect of these provisions is to limit or eliminate the potential liability of
Silknet's directors
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<PAGE> 64
for monetary damages arising from breaches of their duty of care, subject to
certain exceptions. These provisions may also shield directors from liability
under federal and state securities laws.
STOCK TRANSFER AGENT
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for Silknet's common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices from time to time. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock of Silknet in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of Silknet to raise equity capital in the future.
Based on shares outstanding at March 31, 1999, upon completion of this
offering Silknet will have outstanding an aggregate of 14,998,099 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
3,000,000 shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by an existing affiliate of Silknet as that term is defined
in Rule 144 under the Securities Act.
The remaining 11,998,099 shares of common stock held by existing
stockholders are restricted shares or are subject to the contractual
restrictions described below. Restricted shares may be sold in the public market
only if registered or if they qualify for an exception from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Of these restricted shares, 178,733 shares will be available
for resale in the public market in reliance on Rule 144(k), all of which shares
are subject to lock-up agreements described below. An additional 10,606,853
shares will be available for resale in the public market in reliance on Rule
144, of which 10,522,000 shares are subject to lock-up agreements. The remaining
1,212,513 shares become eligible for resale in the public market at various
dates thereafter, all of which shares are subject to lock-up agreements.
All of the officers and directors and certain stockholders and
optionholders of Silknet have signed lock-up agreements in favor of the
underwriters. As a result, these individuals and entities are not permitted to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock or publicly disclose the intention
to make any such offer, sale, pledge or disposal for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston. Credit Suisse First Boston currently has no plans to release any
portion of the securities subject to lock-up agreements. When determining
whether or not to release shares from the lock-up agreements, Credit Suisse
First Boston will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell a certain number of
shares within any three-month period. That certain number of shares cannot
exceed the greater of one percent of the number of shares of common stock then
outstanding, which will equal approximately 149,981 shares immediately after the
offering, or the
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<PAGE> 65
average weekly trading volume of the common stock on the Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about Silknet. Rule 144 also provides that affiliates of Silknet who
are selling shares of common stock that are not restricted shares must
nonetheless comply with the same restrictions applicable to restricted shares
with the exception of the holding period requirement.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
Silknet at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, these shares may therefore be sold immediately upon
the completion of this offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from Silknet by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Exchange Act. To be
eligible for resale under Rule 701, shares must have been issued in connection
with written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercise of such options,
including exercises after the date of this offering. Securities issued in
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than affiliates, subject only to the
manner of sale provisions of Rule 144, and by affiliates, under Rule 144 without
compliance with its one-year minimum holding period requirements.
Silknet has agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, for a period of 180 days after
the date of this prospectus, without the prior written consent of Credit Suisse
First Boston, subject to certain limited exceptions.
Following this offering, Silknet intends to file registration statements
under the Securities Act covering approximately 4,091,900 shares of common stock
issued upon the exercise of stock options, subject to outstanding options or
reserved for issuance under Silknet's 1995 Option Plan, 1999 Option Plan,
Director Plan and Stock Purchase Plan. Accordingly, shares registered under such
registration statements will, subject to Rule 144 provisions applicable to
affiliates, be available for sale in the open market, except to the extent that
such shares are subject to Silknet's vesting restrictions or the contractual
restrictions described above. See "Management -- Stock Plans."
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<PAGE> 66
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated May 5, 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, BancBoston Robertson Stephens Inc., NationsBanc
Montgomery Securities LLC and First Union Capital Markets Corp. are acting as
representatives, have severally but not jointly agreed to purchase from Silknet
the following respective number of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation................. 1,275,000
BancBoston Robertson Stephens Inc. .................... 637,500
NationsBanc Montgomery Securities LLC.................. 510,000
First Union Capital Markets Corp. ..................... 127,500
Dain Rauscher Wessels.................................. 50,000
First Albany Corporation............................... 50,000
Invemed Associates, Inc. .............................. 50,000
Kaufman Brothers, L.P. ................................ 50,000
Legg Mason Wood Walker, Incorporated................... 50,000
Needham & Company, Inc. ............................... 50,000
Charles Schwab & Co., Inc. ............................ 50,000
SG Cowen Securities Corporation........................ 50,000
C.E. Unterberg, Towbin................................. 50,000
---------
Total........................................ 3,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions and that the underwriters will be
obligated to purchase all of the shares of the common stock offered hereby
(other than those shares covered by the over-allotment option described below)
if any are purchased. The underwriting agreement provides that, in the event of
a default by an underwriter, in certain circumstances the purchase commitments
of non-defaulting underwriters may be increased or the underwriting agreement
may be terminated.
Silknet has granted to the underwriters an option expiring on the 30th day
after the date of this prospectus to purchase up to 450,000 additional shares of
common stock at the initial public offering price, less the underwriting
discounts and commissions, all as set forth on the cover page of this
prospectus. Such option may be exercised only to cover over-allotments in the
sale of shares of common stock. To the extent such option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
it was obligated to purchase pursuant to the underwriting agreement.
Silknet has been advised by the representatives that the underwriters
propose to offer the shares of common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and,
through the representatives, to certain dealers (who may include the
underwriters) at such price less a concession of $.63 per share, and the
underwriters and such dealers may allow a discount of $.10 per share on sales to
certain other dealers. After the offering, the public offering price and
concession and discount to dealers may be changed by the representatives.
The following table summarizes the compensation to be paid to the
underwriters by Silknet and the expenses payable by Silknet.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Silknet....................................... $1.05 $3,150,000 $3,622,500
Expenses payable by Silknet..................... $0.33 $1,000,000 $1,000,000
</TABLE>
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<PAGE> 67
The representatives have informed Silknet that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
Silknet, its officers and directors, and certain other existing
stockholders and optionholders of Silknet have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
or, in the case of Silknet, file with the Securities and Exchange Commission a
registration statement relating to, any shares of common stock or securities
exchangeable or exercisable for or convertible into shares of common stock or
publicly disclose the intention to do any of the foregoing without the prior
written consent of Credit Suisse First Boston for a period of 180 days after the
date of this prospectus, except under certain circumstances.
The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of the common stock for employees, directors and
certain other persons associated with Silknet who have expressed an interest in
purchasing such shares of common stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same basis as other
shares offered hereby.
Silknet has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the underwriters may be required to make in respect
thereof.
Silknet has listed the common stock on The Nasdaq Stock Market's National
Market under the symbol "SILK."
Prior to the offering, there has been no public market for the common
stock. The initial public offering price was determined by negotiation between
Silknet and the representatives. The principal factors considered in determining
the public offering price included:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, Silknet and the industry in which
it competes;
- an assessment of Silknet's management;
- the prospects for, and the timing of, future earnings of Silknet;
- the present state of Silknet's development and its current financial
condition;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of Silknet;
- market conditions for initial public offerings; and
- other relevant factors.
There can be no assurance that an active trading market will develop for the
common stock or that the common stock will trade in the market subsequent to the
offering at or above the initial public offering price.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of shares
of the common stock in the open market after the distribution has been completed
in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate when shares of
the common stock originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE> 68
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Silknet prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to Silknet and the dealer from whom
such purchase confirmation is received that:
- such purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws,
- where required by law, that such purchaser is purchasing as principal and
not as agent, and
- such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to the offering. Such a report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from Silknet. Only one such
report must be filed in respect of common stock acquired on the same date and
under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
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<PAGE> 69
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Silknet by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Silknet as of June 30, 1997 and 1998 and March
31, 1999 and for each of the three years in the period ended June 30, 1998 and
the nine-month period ended March 31, 1999, all of which are included in this
prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
CHANGE IN INDEPENDENT ACCOUNTANTS
On November 18, 1998, Silknet engaged PricewaterhouseCoopers LLP as its
independent accountants, to replace KPMG Peat Marwick LLP. The decision was made
by Silknet's Board of Directors, upon the recommendation of management, and was
not due to any disagreement with KPMG Peat Marwick LLP. During the fiscal years
ended June 30, 1998 and 1997 and the subsequent interim period immediately
preceding the date of this change, Silknet had no disagreements with KPMG Peat
Marwick LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused them to
make reference thereto in their report on Silknet's financial statements. The
reports of KPMG Peat Marwick LLP on Silknet's financial statements for fiscal
1996 and 1997 (the last fiscal year audited by KPMG Peat Marwick LLP) did not
contain any adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles.
ADDITIONAL INFORMATION
Silknet has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement. For further information
with respect to Silknet and the common stock, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of the contract
or document filed as an exhibit to the registration statement, and each such
statement is qualified in all respects by reference to such exhibit. Copies of
the registration statement may be examined without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of
all or any portion of the registration statement may be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, such as Silknet, that make electronic
filings with the Commission.
Silknet intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
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<PAGE> 70
SILKNET SOFTWARE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of June 30, 1997, 1998 and
March 31, 1999............................................ F-3
Consolidated Statements of Operations for the years ended
June 30, 1996, 1997, and 1998 and the nine months ended
March 31, 1998 (unaudited) and 1999....................... F-4
Consolidated Statements of Convertible Preferred Stock and
Stockholders' Equity (Deficit) for the years ended June
30, 1996, 1997 and 1998 and the nine months ended March
31, 1999.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1997 and 1998 and the nine months ended
March 31, 1998 (unaudited) and 1999....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and stockholders of
Silknet Software, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, convertible preferred stock and
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the consolidated financial position of Silknet Software, Inc.
("Silknet") at June 30, 1997 and 1998 and March 31, 1999 and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998 and the nine months ended March 31, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of Silknet's management. Our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP /s/ Pricewaterhouse Coopers LLP
Boston, Massachusetts -------------------------------
April 9, 1999
F-2
<PAGE> 72
SILKNET SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
----------- ----------- ------------ ------------
(NOTE B)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,751,988 $ 9,045,094 $ 11,125,729 $ 11,125,729
Accounts receivable, net of allowance for doubtful
accounts of $250,000 at March 31, 1999 actual and pro
forma................................................... 32,694 1,546,967 4,275,622 4,275,622
Prepaid expenses and other current assets................. 59,746 265,692 339,295 339,295
----------- ----------- ------------ ------------
Total current assets................................ 4,844,428 10,857,753 15,740,646 15,740,646
Property and equipment, net................................. 528,673 1,217,029 1,666,944 1,666,944
Other assets................................................ 28,824 54,149 116,490 116,490
----------- ----------- ------------ ------------
Total assets........................................ $ 5,401,925 $12,128,931 $ 17,524,080 $ 17,524,080
=========== =========== ============ ============
Current liabilities:
Note payable to bank, current portion..................... 153,855 248,725 133,334 133,334
Accounts payable.......................................... 264,107 207,256 564,561 564,561
Accrued expenses.......................................... 116,394 916,908 2,667,582 2,667,582
Deferred revenue.......................................... 154,586 1,013,183 1,499,352 1,499,352
----------- ----------- ------------ ------------
Total current liabilities........................... 688,942 2,386,072 4,864,829 4,864,829
Note payable to bank........................................ 115,392 222,222 122,222 122,222
Convertible preferred stock, $.01 par value; 15,000,000
shares authorized:
Series A;
Designated: 2,364,584 shares
Issued and outstanding: 2,364,584 shares (liquidation
value $2,878,610 at March 31, 1999)..................... 2,415,869 2,659,288 2,860,293 --
Series B;
Designated: 2,500,000 shares
Issued and outstanding: 2,500,000 shares (liquidation
value $5,943,656 at March 31, 1999)..................... 5,015,982 5,518,585 5,933,610 --
Series C;
Designated: 3,089,157 shares
Issued and outstanding: 3,089,157 shares (liquidation
value $11,786,132 at March 31, 1999).................... -- 10,929,494 11,752,489 --
Series D;
Designated: 1,205,913 shares
Issued and outstanding: 1,205,913 shares (liquidation
value $8,912,091 at March 31, 1999)..................... -- -- 8,868,316 --
----------- ----------- ------------ ------------
Total convertible preferred stock................... 7,431,851 19,107,367 29,414,708 --
----------- ----------- ------------ ------------
Commitments and contingencies (Note J)
Stockholders' equity (deficit):
Common stock, $.01 par value;
Authorized: 50,000,000 shares
Issued and outstanding: 2,557,900, 2,627,625 and
2,838,445 shares at June 30, 1997, 1998 and March 31,
1999, respectively, and 11,998,099 shares on a pro forma
basis................................................... 25,579 26,276 28,384 119,981
Additional paid-in capital.................................. 818,462 887,489 1,640,106 28,351,192
Accumulated dividends on
preferred stock........................................... (190,214) (1,093,147) (2,612,025) --
Deferred compensation....................................... (209,016) (125,409) (537,461) (537,461)
Other comprehensive income.................................. -- -- (113) (113)
Accumulated deficit......................................... (3,279,071) (9,281,939) (15,396,570) (15,396,570)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit).................................... (2,834,260) (9,586,730) (16,877,679) 12,537,029
----------- ----------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)......................................... $ 5,401,925 $12,128,931 $ 17,524,080 $ 17,524,080
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 73
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, MARCH 31,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License..................... -- $ 74,638 $ 2,976,938 $ 1,726,708 $ 6,472,880
Services.................... $ 266,266 119,071 670,517 367,593 2,688,288
--------- ----------- ----------- ----------- -----------
Total revenue....... 266,266 193,709 3,647,455 2,094,301 9,161,168
Cost of revenue:
License..................... -- 28,940 32,480 18,840 265,350
Services.................... 140,992 311,626 1,353,603 900,368 2,267,715
--------- ----------- ----------- ----------- -----------
Total cost of
revenue.......... 140,992 340,566 1,386,083 919,208 2,533,065
--------- ----------- ----------- ----------- -----------
Gross margin.................. 125,274 (146,857) 2,261,372 1,175,093 6,628,103
Operating expenses:
Sales and marketing......... 33,085 888,017 4,802,243 3,023,354 7,081,287
Research and development.... 119,721 960,845 2,408,723 1,595,439 3,713,032
General and
administrative........... 430,786 696,579 1,187,275 799,326 2,172,732
--------- ----------- ----------- ----------- -----------
Total operating
expenses......... 583,592 2,545,441 8,398,241 5,418,119 12,967,051
--------- ----------- ----------- ----------- -----------
Operating loss................ (458,318) (2,692,298) (6,136,869) (4,243,026) (6,338,948)
Interest income (expense),
net......................... (6,708) (60,206) 134,001 70,052 224,317
Net loss...................... (465,026) (2,752,504) (6,002,868) (4,172,974) (6,114,631)
Accrued dividends for
preferred stockholders...... -- 190,214 902,933 560,027 1,518,878
--------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders......... $(465,026) $(2,942,718) $(6,905,801) $(4,733,001) $(7,633,509)
========= =========== =========== =========== ===========
Basic and diluted net loss per
share....................... $ (0.18) $ (1.15) $ (2.69) $ (1.85) $ (2.82)
Shares used in computing basic
and diluted net loss
per share................... 2,550,781 2,557,153 2,566,258 2,557,900 2,707,616
Unaudited pro forma basic and
diluted net loss per
share....................... $ (0.76) $ (0.56) $ (0.57)
Shares used in computing
unaudited pro forma basic
and diluted net loss per
share....................... 7,879,405 7,422,484 10,806,595
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 74
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND
1998 AND THE NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DIVIDENDS ON
----------------------- ------------------- PAID-IN PREFERRED DEFERRED
SHARES VALUE SHARES VALUE CAPITAL STOCK COMPENSATION
--------- ----------- --------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995........ 2,500,000 $25,000 $ 55,500
Issuance of common stock....... 55,000 550 54,450
Capital contribution by
founder...................... 124,500
Issuance of common stock
purchase warrants............ 46,967
Deferred compensation related
to grant of stock options.... 536,207 $ (536,207)
Amortization of deferred
compensation................. 185,204
Net loss.......................
--------- ----------- --------- ------- ---------- -----------
Balance at June 30, 1996........ 2,555,000 25,550 817,624 (351,003)
Issuance of common stock....... 2,900 29 2,871
Issuance of Series A
Convertible Participating
Preferred Stock, net of
offering costs............... 2,364,584 $ 2,251,683
Issuance of Series B
Convertible Participating
Preferred Stock net of
offering costs............... 2,500,000 4,989,954
Issuance of common stock
purchase warrants............ 46,967
Stock options cancelled........ (49,000) 49,000
Amortization of deferred
compensation................. 92,987
Accrued dividends for preferred
stockholders................. 190,214 $ (190,214)
Net loss.......................
--------- ----------- --------- ------- ---------- ----------- -----------
Balance at June 30, 1997........ 4,864,584 7,431,851 2,557,900 25,579 818,462 (190,214) (209,016)
Issuance of common stock....... 69,725 697 69,027
Issuance of Series C
Convertible Participating
Preferred Stock, net of
offering costs............... 3,089,157 10,772,583
Amortization of deferred
compensation................. 83,607
Accrued dividends for preferred
stockholders................. 902,933 (902,933)
Net loss.......................
--------- ----------- --------- ------- ---------- ----------- -----------
Balance at June 30, 1998........ 7,953,741 19,107,367 2,627,625 26,276 887,489 (1,093,147) (125,409)
Issuance of common stock....... 210,820 2,108 246,263
Issuance of Series D
Convertible Preferred Stock,
net of offering costs........ 1,205,913 8,788,463
Deferred compensation related
to grant of stock options.... 513,076 (513,076)
Stock options cancelled........ (6,722) 6,722
Amortization of deferred
compensation................. 94,302
Accrued dividends for preferred
stockholders................. 1,518,878 (1,518,878)
Net loss.......................
Other comprehensive income.....
--------- ----------- --------- ------- ---------- ----------- -----------
Balance at March 31, 1999....... 9,159,654 $29,414,708 2,838,445 $28,384 $1,640,106 $(2,612,025) $ (537,461)
========= =========== ========= ======= ========== =========== ===========
<CAPTION>
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME DEFICIT EQUITY (DEFICIT)
------------- ------------ ----------------
<S> <C> <C> <C>
Balance at June 30, 1995........ $ (61,541) $ 18,959
Issuance of common stock....... 55,000
Capital contribution by
founder...................... 124,500
Issuance of common stock
purchase warrants............ 46,967
Deferred compensation related
to grant of stock options....
Amortization of deferred
compensation................. 185,204
Net loss....................... (465,026) (465,026)
------------ ------------
Balance at June 30, 1996........ (526,567) (34,396)
Issuance of common stock....... 2,900
Issuance of Series A
Convertible Participating
Preferred Stock, net of
offering costs...............
Issuance of Series B
Convertible Participating
Preferred Stock net of
offering costs...............
Issuance of common stock
purchase warrants............ 46,967
Stock options cancelled........
Amortization of deferred
compensation................. 92,987
Accrued dividends for preferred
stockholders................. (190,214)
Net loss....................... (2,752,504) (2,752,504)
------------ ------------
Balance at June 30, 1997........ (3,279,071) (2,834,260)
Issuance of common stock....... 69,724
Issuance of Series C
Convertible Participating
Preferred Stock, net of
offering costs...............
Amortization of deferred
compensation................. 83,607
Accrued dividends for preferred
stockholders................. (902,933)
Net loss....................... (6,002,868) (6,002,868)
------------ ------------
Balance at June 30, 1998........ (9,281,939) (9,586,730)
Issuance of common stock....... 248,371
Issuance of Series D
Convertible Preferred Stock,
net of offering costs........
Deferred compensation related
to grant of stock options....
Stock options cancelled........
Amortization of deferred
compensation................. 94,302
Accrued dividends for preferred
stockholders................. (1,518,878)
Net loss....................... (6,114,631) (6,114,631)
Other comprehensive income..... $ (113) (113)
------ ------------ ------------
Balance at March 31, 1999....... $ (113) $(15,396,570) $(16,877,679)
====== ============ ============
</TABLE>
- -------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 75
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, MARCH 31,
------------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(465,026) $(2,752,504) $(6,002,868) $(4,172,974) $(6,114,631)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 24,598 187,449 339,397 205,684 501,493
Provision for doubtful accounts.............. -- -- -- -- 250,000
Loss (gain) on disposal of equipment......... -- -- 4,318 -- (11,433)
Amortization of deferred compensation........ 185,204 92,987 83,607 55,739 94,302
Stock issued for services.................... 5,000 2,900 -- -- --
Changes in operating assets and liabilities:
Accounts receivable........................ (55,365) 22,671 (1,514,273) (308,550) (2,978,655)
Prepaid and other current assets........... (5,199) (22,500) (205,946) (205,161) (73,603)
Other assets............................... -- (59,746) (25,325) (19,701) (62,341)
Accounts payable........................... (3,063) 231,647 (56,851) 99,627 357,305
Accrued expenses........................... 12,347 94,546 800,514 366,635 1,750,674
Deferred revenue........................... -- 154,586 858,597 679,047 486,169
--------- ----------- ----------- ----------- -----------
Net cash used in operating activities... (301,504) (2,047,964) (5,718,830) (3,299,654) (5,800,720)
Cash flows from investing activities:
Purchase of property and equipment............. (46,162) (554,844) (1,058,671) (489,278) (951,907)
Proceeds from dispositions of property and
equipment.................................... -- -- 26,600 -- 11,433
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities... (46,162) (554,844) (1,032,071) (489,278) (940,474)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 50,000 -- 69,724 -- 248,371
Proceeds from capital contributions............ 124,500 -- -- -- --
Proceeds from issuance of notes payable and
warrants..................................... 261,117 510,000 400,000 400,000 --
Payments on notes payable...................... (64,541) (187,329) (198,300) (115,392) (215,391)
Proceeds from issuance of preferred stock, net
of issuance costs............................ -- 6,991,637 10,772,583 -- 8,788,463
--------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities............................ 371,076 7,314,308 11,044,007 284,608 8,821,443
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... 23,410 4,711,500 4,293,106 (3,504,324) 2,080,249
Effect of exchange rate changes on cash and cash
equivalents.................................... -- -- -- -- 386
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at beginning of
period......................................... 17,078 40,488 4,751,988 4,751,988 9,045,094
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period....... $ 40,488 $ 4,751,988 $ 9,045,094 $ 1,247,664 $11,125,729
========= =========== =========== =========== ===========
Supplemental schedule of cash flow information:
Interest paid.................................. $ 6,708 $ 15,201 $ 39,438 $ 26,534 $ 24,476
========= =========== =========== =========== ===========
Supplemental schedule of non-cash financing
activity:
Settlement of debt through issuance of Series A
Convertible Participating Preferred Stock.... -- $ 250,000 -- -- --
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 76
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF THE BUSINESS:
Silknet provides software that allows companies to offer their customers
personalized marketing, sales, electronic commerce and customer support services
through a single Web site interface tailored by the company to meet its customer
requirements. Silknet's products enable a company to deliver these services to
its customers over the Web through customer self-service and immediate, direct
collaboration among the company and its customers, partners, vendors and
suppliers. Silknet's products allow a company to coordinate its interactions
with customers by integrating a variety of communications media, such as the
Web, e-mail and the telephone. Silknet's software can capture and consolidate
data derived from all these sources and distribute it throughout a company and
to its partners to provide a single view of a customer. This solution is more
efficient for a company and also more efficient for its customers, creating a
competitive advantage for that company.
Silknet is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth and
commercial acceptance of the Internet, dependence on principal products and
third party technology, new product development, new product introductions and
other activities of competitors, dependence on key personnel, reliance on a
limited number of distributors, international expansion, lengthening sales cycle
and limited operating history.
Silknet has also experienced substantial net losses since its inception
and, as of March 31, 1999, had an accumulated deficit of $15,396,570. Such
losses and accumulated deficit resulted from Silknet's lack of substantial
revenue and significantly increased costs incurred in the development of
Silknet's products and in the preliminary establishment of Silknet's
infrastructure. For the foreseeable future, Silknet expects to continue to
experience significant growth in its operating expenses in order to execute its
current business plan, particularly research and development and sales and
marketing expenses. As a result, Silknet's business plan indicates that
additional financing would be required to support its planned expenditures. In
the event that an initial public offering is not completed on a timely basis,
Silknet believes that these additional funds, along with available bank lines of
credit, would be sufficient to fund operations through at least the next 12
months.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Silknet and
its wholly-owned subsidiaries. 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the valuation of deferred tax assets.
Cash and Cash Equivalents
Silknet considers money market mutual funds and all short-term investments
with original maturities of three months or less at the date of purchase to be
cash equivalents. Silknet invests its
F-7
<PAGE> 77
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
excess cash in money market funds and short-term investments which management
believes are subject to minimal market and credit risk.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, generally three years, using the straight-line method.
Upon sale or retirement, the asset cost and related accumulated depreciation are
removed from the respective accounts, and any related gain or loss is reflected
in operations. Repair and maintenance costs are expensed as incurred.
Income Taxes
Silknet accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled.
Fair Value of Financial Instruments
The carrying amounts of Silknet's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximate their fair values at March 31, 1999.
Revenue Recognition
Silknet recognizes revenue from software licenses upon delivery to
customers provided no significant post-delivery obligations or uncertainties
remain and collection of the related receivable is probable. License or services
revenue subject to a significant acceptance clause is deferred until acceptance
is received from the customer. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until the specified upgrade is delivered. Training and
consulting services revenue is recognized as services are provided and revenue
for maintenance and post-contract customer support services is recognized
ratably over the term of the service agreement.
Concentrations of Credit Risk and Significant Customers
A potential exposure to Silknet is a concentration of credit risk in trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed, although collateral generally is
not required. As of June 30, 1997, four customers accounted for 44%, 29%, 17%
and 10% of accounts receivable, while three customers accounted for 34%, 25% and
11% of accounts receivable as of June 30, 1998, and three customers accounted
for 21%, 11% and 10% of accounts receivable as of March 31, 1999. In addition,
four customers accounted for 34%, 27%, 16% and 14% of total revenue for the year
ended June 30, 1997, while five customers accounted for 20%, 14%, 11%, 10% and
10% of total revenue for the year ended June 30, 1998, and two customers
accounted for 29% and 10% of total revenue for the nine months ended March 31,
1999.
F-8
<PAGE> 78
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development and Software Development Costs
Costs incurred in the research and development of Silknet's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed") and capitalized thereafter.
Costs eligible for capitalization have been insignificant.
Accounting for Stock-Based Compensation
Silknet accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of Silknet's common stock at the date of grant. Silknet has adopted
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation,"
through disclosure only (Note I). All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
Unaudited Interim Financial Statements
In the opinion of Silknet's management, the March 31, 1998 unaudited
interim financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for that period.
Unaudited Pro Forma Balance Sheet
Upon the closing of Silkent's anticipated initial public offering, all of
the outstanding shares of Series A Convertible Participating Preferred Stock,
Series B Convertible Participating Preferred Stock, Series C Convertible
Participating Preferred Stock and Series D Convertible Preferred Stock
(collectively "Preferred Stock") will automatically convert into 9,159,654
shares of common stock. These conversions have been reflected in the unaudited
pro forma balance sheet as of March 31, 1999.
Net Loss Per Share and Pro Forma Net Loss per Share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of shares
of common stock outstanding. Net loss used in the calculation is increased by
the accrued dividends for the Preferred Stock outstanding in each year. Diluted
loss per share does not differ from basic loss per share since potential common
shares from conversion of preferred stock, stock options and warrants are
anti-dilutive for all periods presented and are therefore excluded from the
calculation. During the years ended June 30, 1996, 1997, and 1998 and the nine
months ended March 31, 1999, options to purchase 670,400, 1,220,158, 1,506,092
and 2,061,841 shares of common stock, respectively, Preferred Stock convertible
into 0, 4,864,584, 7,953,741 and 9,159,654 shares of common stock, respectively,
and warrants for 125,000, 750,000, 750,000 and 750,000 shares of common stock,
respectively, were not included in the computation of diluted earnings per share
since their inclusion would be antidilutive. Pro forma basic and diluted net
loss per share have been calculated assuming the conversion of all outstanding
shares of Preferred Stock into common stock, as if the shares had converted
immediately upon their
F-9
<PAGE> 79
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issuance. Accordingly, net loss has not been increased for the accrued dividends
for Preferred Stock in the calculation of pro forma net loss per share.
Stock Split
In February 1999, Silknet reincorporated from New Hampshire to Delaware. In
connection with the reincorporation, Silknet effected a one-for-two exchange of
all common and preferred stock and assigned a par value of $.01 per share to the
common stock. Additionally, Silknet increased the number of shares of authorized
common stock to 50,000,000 and authorized preferred stock to 15,000,000. All
references to shares and per share amounts in the financial statements and
related footnotes have been adjusted to reflect the exchange and the new par
value for all periods presented.
Comprehensive Income
On July 1, 1998, Silknet adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components. SFAS No. 130 is effective for Silknet's fiscal year ending June
30, 1999 including interim periods for that year. Comprehensive income consists
of net income and foreign currency translation adjustments and is presented in
the consolidated statement of convertible preferred stock and stockholders'
equity (deficit). Prior year financial statements have been reclassified to
conform to the SFAS No. 130 requirements. The adoption of SFAS 130 has not
affected and will not affect Silknet's financial position or results of
operations.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement changes the way that public business enterprises
report segment information, including financial and descriptive information
about their selected segment information. Under SFAS No. 131, operating segments
are defined as revenue-producing components of the enterprise which are
generally used internally for evaluating segment performance. SFAS No. 131 is
effective for Silknet's fiscal year ending June 30, 1999 and will not affect
Silknet's financial position or results of operations.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits and is
effective for Silknet's fiscal year ending June 30, 1999. SFAS No. 132 relates
to disclosure only and will not affect Silknet's financial position or results
of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Silknet does not expect SFAS No. 133 to have a material effect on its
financial position or results of operations.
F-10
<PAGE> 80
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. Silknet does not expect
SoP 98-1, which is effective for Silknet beginning July 1, 1999, to have a
material effect on its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for Silknet beginning July 1, 1999 and Silknet does not
expect its adoption to have a material effect on its financial position or
results of operations.
In October 1997, the AcSEC of the American Institute of Certified Public
Accountants issued SoP 97-2, "Software Revenue Recognition," which provides
guidance on the timing and amount of revenue recognition when licensing,
selling, leasing or otherwise marketing computer software and related services.
Subsequently, in March 1998, the FASB approved SoP 98-4, "Deferral of the
Effective Date of a Provision of SoP 97-2, Software Revenue Recognition." SoP
98-4 provides for the one-year deferral of certain provisions of SoP 97-2
pertaining to its requirements for what constitutes vendor specific objective
evidence of the fair value of multiple elements included in an arrangement. In
December 1998, the FASB approved SoP 98-9, "Modification of SoP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions," which will retain
the limitations of SoP 97-2 on what constitutes vendor-specific objective
evidence of fair value. SoP 98-9 will be effective for transactions entered into
in fiscal years beginning after March 15, 1999. Silknet adopted SoP 97-2 for all
transactions entered into after June 30, 1998. Based upon its interpretation of
SoP 97-2, 98-4 and 98-9, Silknet believes that its current revenue recognition
policies and practices are consistent with the provisions of the new guidance.
Adoption of SoP 97-2 and SoP 98-4 did not have a material impact on Silknet's
financial position or results of operation. Silknet believes that the adoption
of SoP 98-9 will not have a material impact on Silknet's financial position or
results of operations.
C. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at:
<TABLE>
<CAPTION>
JUNE 30,
---------------------- MARCH 31,
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Computer..................................... $ 399,444 $1,032,015 $1,805,761
Furniture and fixtures....................... 243,215 525,104 569,553
Leasehold improvements....................... 6,833 102,650 235,853
--------- ---------- ----------
649,492 1,659,769 2,611,167
Less accumulated depreciation and
amortization............................... (120,819) (442,740) (944,223)
--------- ---------- ----------
Total.............................. $ 528,673 $1,217,029 $1,666,944
========= ========== ==========
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1996, 1997
and 1998 and the nine months ended March 31, 1999 was $24,598, $93,515, $339,397
and $501,493, respectively.
F-11
<PAGE> 81
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
D. ACCRUED EXPENSES:
Accrued expenses consist of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Commissions, bonuses and other incentives.... $334,198 $ 682,835
Vacation..................................... $ 33,190 196,037 343,027
Royalties.................................... 7,480 15,420 100,000
Professional services........................ 14,000 72,000 312,883
Marketing.................................... -- 74,041 388,473
Sales tax.................................... 11,475 112,823 381,812
Other........................................ 50,249 112,389 458,552
-------- -------- ----------
Total.............................. $116,394 $916,908 $2,667,582
======== ======== ==========
</TABLE>
E. INCOME TAXES:
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Organizational and start-up costs,
capitalized for tax............... $ 12,157 $ 8,318 $ 5,438
Fixed assets......................... (11,340) (36,711) (47,785)
Accrued expenses..................... 22,210 96,951 234,051
Deferred compensation................ 112,028 145,696 183,671
Research and experimentation
credit............................ 36,902 36,902 36,902
Allowance for doubtful accounts...... -- -- 100,675
Net operating loss carryforwards..... 1,023,217 2,996,487 4,846,756
----------- ----------- -----------
1,195,174 3,247,643 5,359,708
Less valuation allowance.......... (1,195,174) (3,247,643) (5,359,708)
----------- ----------- -----------
Net deferred tax assets...... -- -- --
=========== =========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, Silknet considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that Silknet has incurred net
losses to date and expects to experience net losses in the near future, there is
substantial doubt about whether Silknet will have sufficient future taxable
income necessary to utilize the deferred tax assets over the periods which the
deferred tax assets are deductible for federal and state income tax purposes. As
a result, a 100% valuation allowance has been applied against Silknet net
deferred tax assets.
F-12
<PAGE> 82
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reconciles the difference between the federal statutory rate
and Silknet's effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, NINE MONTHS
----------------------------------- ENDED
1996 1997 1998 MARCH 31, 1999
--------- --------- ----------- --------------
<S> <C> <C> <C> <C>
U.S. federal statutory rate............. $(156,409) $(935,851) $(2,040,975) $(2,078,975)
State income taxes, net................. (27,355) (22,034) (28,006) (56,437)
Research and experimentation tax
credit................................ -- (36,902) -- --
Other................................... 257 2,316 16,512 23,347
Change in valuation allowance........... 183,507 992,471 2,052,469 2,112,065
--------- --------- ----------- -----------
-- -- -- --
========= ========= =========== ===========
</TABLE>
At March 31, 1999, Silknet has net operating loss carryforwards of
approximately $13,816,000 for federal, state, and foreign income tax purposes
which expire beginning in 2012. Under the provisions of the Internal Revenue
Code, certain substantial changes in Silknet's ownership may have limited, or
may limit in the future, the amount of net operating loss and research and
experimentation credit carryforwards which could be utilized annually to offset
future taxable income and income tax liabilities. The amount of any annual
limitation is determined based upon Silknet's value prior to an ownership
change.
F. LINES OF CREDIT AND NOTES PAYABLE:
Lines of Credit
During 1996, Silknet maintained a $125,000 line of credit with a bank.
Interest on the borrowings were at the bank's prime rate (8.25% at June 30,
1996) plus 2%. Borrowings outstanding under the line totaled $71,576 at June 30,
1996. This line of credit was repaid and terminated in 1997.
During March 1997, Silknet entered into an equipment loan agreement under
which Silknet may borrow up to $300,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 24-month period, commencing
on April 30, 1997. The facility bears interest at the bank's prime rate (7.75%
at March 31, 1999) plus 2%. Borrowings under the facility are collateralized by
all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity with which Silknet has been in
compliance. This line of credit was repaid and terminated in 1999.
During December 1997, Silknet entered into an equipment loan agreement
under which Silknet may borrow up to $400,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period, commencing
on March 31, 1998. The facility bears interest at the bank's prime rate (7.75%
at March 31, 1999) plus 1%. Borrowings under the facility are collateralized by
all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity with which Silknet has been in
compliance. At March 31, 1999, the balance outstanding totaled $255,556.
During March 1999, Silknet entered into a new bank line of credit which
allows Silknet to borrow up to $3.0 million for working capital purposes and for
the issuance of letters of credit. The line of credit expires in March 2000.
Amounts available under the line of credit are a function of
F-13
<PAGE> 83
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eligible accounts receivable and bear interest at the bank's prime rate (7.75%
at March 31, 1999) plus 0.5%. Borrowings under the line of credit are
collateralized by all assets of Silknet. Silknet is required to meet certain
minimum financial covenants for tangible net worth and liquidity with which
Silknet has been in compliance. At March 31, 1999, there were no amounts
outstanding under the line of credit.
At March 31, 1999, payments of principal and interest on existing debt were
due as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30,
1999 (three months ending June 30, 1999)............ $ 38,740
2000................................................ 147,685
2001................................................ 91,943
--------
Total payments...................................... 278,368
Less amounts representing interest.................. 22,812
--------
Total debt............................................ $255,556
Less current portion.................................. 133,334
--------
$122,222
========
</TABLE>
Notes Payable
During May 1996, Silknet entered into a Note and Warrant Purchase Agreement
with a private investor. Under the agreement, Silknet may borrow up to $250,000
and must issue warrants to purchase 250,000 shares of Silknet's common stock at
$1.00 per share. In May 1996, Silknet issued a demand subordinated note payable
under the agreement in the amount of $125,000 in exchange for cash and issued a
warrant to purchase 125,000 shares of Silknet's common stock at $1.00 per share.
This warrant expires in May 2002. In July 1996, Silknet issued another demand
subordinated note payable under the agreement in the amount of $125,000 in
exchange for cash and an additional warrant to purchase 125,000 shares of
Silknet's common stock at $1.00 per share. This warrant expires in July 2002
(Note G). The fair value of each warrant at the time of issuance was estimated
to be approximately $47,000, which was recorded as additional paid-in capital
and reduced the carrying value of the debt. The fair value was estimated using
the Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 0%, risk free interest rate of 6.5% and an expected life of 5
years. The discount on each note of $47,000 was amortized over the estimated
life of the note of six months.
In November 1996, Silknet repaid the full amount due under each demand
subordinated note by issuing 268,388 shares of Series A Convertible
Participating Preferred Stock (Note H). No gain or loss was recognized on the
exchange.
G. COMMON STOCK WARRANTS:
During May 1996, Silknet issued a warrant to purchase 125,000 shares of
common stock at $1.00 per share in connection with the first draw of $125,000
under a bridge loan agreement with Zero Stage Capital V, L.P. During July 1996,
Silknet issued an additional warrant to purchase 125,000 shares of common stock
in connection with the second draw of $125,000 under the bridge loan agreement
with Zero Stage Capital V, L.P. (Note F). The total consideration received under
each
F-14
<PAGE> 84
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issuance was allocated between the note and the warrants based upon their
relative fair values at the date of issuance. The estimated fair value at the
time of issuance assigned to each issue of the warrants was approximately
$47,000 and was recorded as additional paid-in capital, thus reducing the
carrying value of the debt. The discount on the note of $94,000 was amortized
over the estimated life of the note of six months. One warrant expires in May
2002 and the other expires in July 2002.
During 1997, in connection with the issuance of the Series B Convertible
Participating Preferred Stock, Silknet issued warrants to purchase 500,000
shares of common stock at $2.20 per share. The warrants expire in June 2003. The
estimated fair value of the warrants at the time of issuance using the
Black-Scholes model was insignificant.
H. CONVERTIBLE PREFERRED STOCK:
In October 1996, Silknet issued 2,364,584 shares of Series A Convertible
Participating Preferred Stock ("Series A Preferred Stock") at $0.96 per share to
private investors for total consideration of $2,251,683 (net of offering costs
of $18,317). Of the total consideration, $250,000 was paid by one investor
through the cancellation of demand subordinated notes payable issued by Silknet
(Note F).
The Series A Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $0.96 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any other class of preferred stock or on any class of common
stock. The Series A Preferred Stock is convertible at any time by the holders,
at the then applicable conversion rate adjusted from time to time (one to one on
the date of issuance). The Series A Preferred Stock is redeemable at the option
of the holder beginning in May 2003 if Silknet has not made a qualified initial
public offering of its common stock, as defined. Upon liquidation, holders of
Series A Preferred Stock are entitled to receive, out of funds then generally
available, $0.96 per share, plus any accrued and unpaid dividends, thereon.
Following payment to holders of all other classes of preferred stock subordinate
to the Series A Preferred Stock, holders of Series A Preferred Stock are then
entitled to share in remaining available funds on an "as-if converted" basis
with holders of common stock.
In June 1997, the Company issued 2,500,000 shares of Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") at $2.00 per share to
private investors for total consideration of $4,989,954 (net of offering costs
of $10,046).
The Series B Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $2.00 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any class of common stock. The Series B Preferred Stock is
convertible at any time by the holders, at the then applicable conversion rate
as adjusted from time to time (one to one on the date of issuance). The Series B
Preferred Stock is redeemable at the option of the holder beginning in May 2003
if Silknet has not made a qualified initial public offering of its common stock,
as defined. Upon liquidation, holders of Series B Preferred Stock are entitled
to receive, out of funds then generally available, $2.00 per share, plus any
accrued and unpaid dividends, thereon. Following payment to holders of all other
classes of preferred stock subordinate to the Series B Preferred Stock, holders
of Series B Preferred Stock are then entitled to share in remaining available
funds on an "as if converted" basis with holders of common stock.
In May 1998, Silknet issued 3,089,157 shares of Series C Convertible
Participating Preferred Stock ("Series C Preferred Stock") at $3.498117 per
share to private investors for total consideration of $10,772,583 (net of
offering costs of $33,642).
F-15
<PAGE> 85
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series C Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $3.498117 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any class of common stock. The Series C Preferred
Stock is convertible at any time by the holders, at the then applicable
conversion rate as adjusted from time to time (one to one on the date of
issuance). The Series C Preferred Stock is redeemable at the option of the
holder beginning in May 2003 if Silknet has not made a qualified initial public
offering of its common stock, as defined. Upon liquidation, holders of Series C
Preferred Stock are entitled to receive, out of funds then generally available,
$3.498117 per share, plus all accrued and unpaid dividends thereon. Following
payment to holders of all other classes of preferred stock subordinate to the
Series C Preferred Stock, holders of Series C Preferred Stock are then entitled
to share in remaining available funds on an "as if converted" basis with holders
of common stock.
In February 1999, Silknet issued 1,205,913 shares of Series D Convertible
Preferred Stock ("Series D Preferred Stock") at $7.324109 per share to private
investors for total consideration of $8,788,463 (net of offering costs of
$43,775).
The Series D Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $7.324109 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any other classes of common stock. The Series D
Preferred Stock is convertible at any time by the holders, at the then
applicable conversion rate as adjusted from time to time (one to one on the date
of issuance). The Series D Preferred Stock is redeemable at the option of the
holder beginning in February 2004 if Silknet has not made a qualified initial
public offering of its common stock, as defined. Upon liquidation, holders of
Series D Preferred Stock are entitled to receive, out of funds then generally
available, $7.324109 per share, plus all accrued and unpaid dividends.
Upon the closing of the anticipated public offering, all outstanding shares
of Preferred Stock will automatically convert into shares of common stock as
follows:
<TABLE>
<CAPTION>
SHARES OF
SERIES COMMON STOCK
- ------ ------------
<S> <C>
Series A Preferred Stock.......................... 2,364,584
Series B Preferred Stock.......................... 2,500,000
Series C Preferred Stock.......................... 3,089,157
Series D Preferred Stock.......................... 1,205,913
---------
9,159,654
=========
</TABLE>
I. STOCK OPTIONS:
The 1999 Stock Option and Incentive Plan (the "1999 Option Plan") was
adopted by the Board of Directors and received stockholder approval in February
1999. A total of 1,000,000 shares of common stock have initially been reserved
for issuance under the 1999 Option Plan. The 1999 Option Plan provides that the
number of shares authorized for issuance will automatically increase by 5% of
the outstanding number of shares of common stock on December 31, 1999, 2000 and
2001 up to a maximum of an additional 2,500,000 shares of common stock. Under
the terms of the 1999 Option Plan, Silknet is authorized to grant incentive
stock options as defined under the Internal Revenue Code, non-qualified options,
stock awards or opportunities to make direct purchases of common stock
F-16
<PAGE> 86
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to employees, officers, directors, consultants and advisors of Silknet and its
subsidiaries. The 1999 Option Plan is administered by the Silknet Compensation
Committee. The Silknet Compensation Committee selects the individuals to whom
options will be granted and determines the option exercise price and other terms
of each award, subject to the provisions of the 1999 Option Plan. Options
granted under the 1999 Option Plan will expire on a date determined by the
Compensation Committee, not to exceed 10 years. As of March 31, 1999, no awards
had been granted under the 1999 Option Plan.
The 1999 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors and received stockholder approval in February
1999 and becomes effective on the date on which Silknet's common stock is
registered under the Exchange Act. A total of 350,000 shares of common stock
have been authorized for issuance under the Director Plan. The Director Plan is
administered by the Silknet Compensation Committee. Under the Director Plan,
each non-employee director who is or becomes a member of the Board of Directors
is automatically granted on the date which the common stock becomes registered
under the Exchange Act or, if not a director on that date, the date first
elected to the Board of Directors, an initial option to purchase 10,000 shares
of common stock. In addition, provided that the director continues to serve as a
member of the Board of Directors, each non-employee director will be
automatically granted on the third anniversary of his or her initial option
grant date and each three years thereafter an option to purchase 10,000 shares
of common stock. Provided that the director continues to serve as a member of
the Board of Directors, one-third of the shares included in each grant will
become exercisable on each of the first, second and third anniversaries of the
date of grant. If a director fails to attend at least 75% of the Board of
Directors meetings held in a fiscal year, that director will forfeit his or her
rights with respect to the option installment which vested on the preceding
vesting date, in proportion to the percentage of Board of Directors meetings not
attended. All options granted under the Director Plan will have an exercise
price equal to the fair market value of the common stock on the date of grant
and a term of ten years from the date of grant. To date, no options have been
granted under the Director Plan.
Silknet also has an Employee Stock Option Plan (the "1995 Option Plan")
which provides for the issuance of options to purchase up to 2,391,900 shares of
Silknet's common stock to eligible employees, officers, directors, consultants
and advisors of Silknet. As of March 31, 1999, options to purchase 2,342,386
shares of Silknet common stock had been granted under the 1995 Option Plan.
Under the 1995 Option Plan, the Board of Directors may award incentive and
non-qualified stock options. Stock options entitle the holder to purchase common
stock from Silknet for a specified exercise price, during a period specified by
the applicable option agreement. Generally, the options vest over four years.
Incentive stock options may not be granted with an exercise price less than the
fair market value of Silknet's common stock at the date of grant or for a term
exceeding ten years. The exercise price of each non-qualified stock option shall
be specified by the Board of Directors.
F-17
<PAGE> 87
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the years ended June 30, 1996, 1997 and 1998 and
the nine months ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE EXERCISE PRICE
EQUALS GRANT LESS THAN GRANT
DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE TOTAL
---------------------- ---------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- --------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at June 30,
1995..................... 6,250 $1.00 62,500 $0.02 68,750 $0.11
Granted.................... 174,250 1.00 484,650 0.02 658,900 0.28
Cancelled.................. (7,250) 1.00 (50,000) 0.02 (57,250) 0.14
--------- ----- ------- ----- --------- -----
Outstanding at June 30,
1996..................... 173,250 1.00 497,150 0.02 670,400 0.27
Granted.................... 634,500 1.00 -- -- 634,500 1.00
Cancelled.................. (84,742) 1.00 -- -- (84,742) 1.00
--------- ----- ------- ----- --------- -----
Outstanding at June 30,
1997..................... 723,008 1.00 497,150 0.02 1,220,158 0.60
Granted.................... 400,375 1.04 -- -- 400,375 1.04
Exercised.................. (69,725) 1.00 -- -- (69,725) 1.00
Cancelled.................. (44,716) 1.04 -- -- (44,716) 1.04
--------- ----- ------- ----- --------- -----
Outstanding at June 30,
1998..................... 1,008,942 1.01 497,150 $0.02 1,506,092 0.69
Granted.................... 595,775 1.75 290,100 2.90 885,875 2.13
Exercised.................. (210,820) 1.18 -- -- (210,820) 1.18
Cancelled.................. (115,399) 1.60 (3,907) 1.75 (119,306) 1.61
--------- ----- ------- ----- --------- -----
Outstanding at March 31,
1999..................... 1,278,498 1.27 783,343 1.08 2,061,841 1.20
========= ===== ======= ===== ========= =====
</TABLE>
As of March 31, 1999, 1,049,526 shares were available for grant under the 1999
Option Plan and 1995 Option Plan.
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED-
REMAINING AVERAGE
NUMBER CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) OF SHARES PRICE
- -------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
$0.02............................. 497,150 6.4 446,523 $0.02
1.00............................. 807,132 7.9 297,890 1.00
1.75............................. 673,809 9.4 55,143 1.75
5.50............................. 73,375 9.9 -- --
7.32............................. 10,375 10.0 -- --
--------- ---- ------- -----
$0.02-7.32........................ 2,061,841 8.1 799,556 $0.50
========= ==== ======= =====
</TABLE>
Silknet records deferred compensation for options issued with exercise
prices below the estimated fair value of common stock. Deferred compensation is
amortized and recorded as compensation expense ratably over the vesting period
of the options. Compensation expense of $185,204, $92,287,
F-18
<PAGE> 88
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$83,607, and $94,302 was recognized during the years ended June 30, 1996, 1997,
and 1998 and the nine months ended March 31, 1999, respectively.
Silknet applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans. Silknet has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no
compensation expense has been recognized for the stock option plans as
calculated under SFAS 123.
Had compensation cost for Silknet's stock option plan been determined based
on the fair value at the grant date for awards in 1996, 1997 and 1998 and the
nine months ended March 31, 1999, consistent with the provisions of SFAS 123,
Silknet's net loss and basic and diluted net loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------------- MARCH 31,
1996 1997 1998 1999
--------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Net loss -- as reported.......... $(465,026) $(2,942,718) $(6,905,801) $(7,633,509)
Net loss -- pro forma............ (748,254) (3,119,757) (7,090,358) (7,937,142)
Basic and diluted net loss per
share -- as reported........... $ (0.18) $ (1.15) $ (2.69) $ (2.82)
Basic and diluted net loss per
share -- pro forma............. $ (0.29) $ (1.22) $ (2.76) $ (2.93)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in each of the following periods:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- MARCH 31,
1996 1997 1998 1999
--------- ------- ------- -----------
<S> <C> <C> <C> <C>
Dividend yield.......................... 0% 0% 0% 0%
Expected volatility..................... 0% 0% 0% 0%
Risk free interest rate................. 6.5% 6.0% 5.5% 5.5%
Expected lives.......................... 4.5 years 5 years 5 years 5 years
</TABLE>
The weighted average grant date fair values using the Black-Scholes option
pricing model were:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED
----------------------- MARCH 31,
1996 1997 1998 1999
----- ----- ----- -----------
<S> <C> <C> <C> <C>
Exercise price equals grant date stock fair
value....................................... $0.35 $0.35 $0.37 $ 0.57
Exercise price less than grant date stock fair
value....................................... $0.99 -- -- $ 2.72
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
F-19
<PAGE> 89
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 23, 1999, the Board of Directors adopted the 1999 Employee
Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan allows for the
issuance of 350,000 shares of Silknet's common stock to eligible employees.
Under the Purchase Plan, Silknet is authorized to make a series of offerings
during which employees may purchase shares of common stock through payroll
deductions made over the term of the offering. The per-share purchase price at
the end of each offering is equal to 85% of the fair market value of the common
stock at the beginning or end of the offering period (as defined by the Purchase
Plan), whichever is lower. The first offering period of the Purchase Plan will
commence immediately upon the initial public offering of the common stock to the
public and shall end on January 31, 2000.
J. COMMITMENTS AND CONTINGENCIES:
Silknet leases office space and equipment under non-cancelable operating
leases extending through December 2003. Certain of these leases contain renewal
options and provisions that adjust the lease payment based upon change in the
consumer price index and require Silknet to pay operating costs, including
property taxes, insurance and maintenance. Rent expense under non-cancelable
operating leases totaled $13,523, $82,819, $291,733 and $429,936 for the years
ended June 30, 1996, 1997 and 1998 and the nine months ended March 31, 1999,
respectively.
The following is a schedule of future minimum lease payments on
noncancelable operating leases at March 31, 1999:
Fiscal Years ending June 30:
<TABLE>
<S> <C>
1999 (three months ending June 30, 1999).......... $155,528
2000.............................................. 611,312
2001.............................................. 600,512
2002.............................................. 586,609
2003.............................................. 508,662
Thereafter........................................ 254,331
</TABLE>
K. EMPLOYEE BENEFIT PLAN:
Silknet maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. All Silknet employees are eligible to participate in the
401(k) plan. Under the 401(k) plan, a participant may contribute a maximum of
20% of his or her pre-tax salary, commissions and bonuses through payroll
deductions (up to the statutorily prescribed annual limit of $10,000 in 1998) to
the 401(k) plan. The percentage elected by more highly compensated participants
may be required to be lower. In addition, at the discretion of the Board of
Directors, Silknet may make discretionary profit-sharing contributions into the
401(k) plan for all eligible employees. To date, Silknet has made no
profit-sharing contributions to the 401(k) plan.
L. RELATED PARTY TRANSACTIONS:
During the years ended June 30, 1997 and 1998 and the nine months ended
March 31, 1999, Silknet recognized license and services revenue from
transactions with affiliated companies of $30,725, $55,600 and $14,109,
respectively. Additionally, Silknet recognized license and service revenue from
transactions with an investor of $862,333 during the nine months ended March 31,
1999.
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[Silknet Software, Inc. LOGO]
