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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1999
REGISTRATION NO. 333-73295
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
SILKNET SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7372 02-0478949
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
-------------------------
SILKNET SOFTWARE, INC.
50 PHILLIPPE COTE STREET
MANCHESTER, NEW HAMPSHIRE 03101 (603) 625-0070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
JAMES C. WOOD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
SILKNET SOFTWARE, INC.
50 PHILLIPPE COTE STREET
MANCHESTER, NEW HAMPSHIRE 03101
(603) 625-0070
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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JOHN HESSION, ESQ. PATRICK J. RONDEAU, ESQ.
BRIAN D. GOLDSTEIN, ESQ. HALE AND DORR LLP
TESTA, HURWITZ & THIBEAULT, LLP 60 STATE STREET
125 HIGH STREET BOSTON, MASSACHUSETTS 02109
BOSTON, MASSACHUSETTS 02110 (617) 526-6000
(617) 248-7000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value....................... 3,450,000 $12.00 $41,400,000 $11,509.20(2)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Previously paid $9,591.00. Other expenses of the offering aggregate $988,491
and are itemized under Item 13 of Part II of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 14, 1999
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. The initial public offering
price is expected to be between $10.00 and $12.00 per share. Silknet will be
listing 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.
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SILKNET
------------- ------------- -------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 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 , 1999
<PAGE> 4
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.
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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................................. 19
BUSINESS.................................................... 30
MANAGEMENT.................................................. 46
CERTAIN TRANSACTIONS........................................ 51
PRINCIPAL STOCKHOLDERS...................................... 53
DESCRIPTION OF CAPITAL STOCK................................ 56
SHARES ELIGIBLE FOR FUTURE SALE............................. 61
UNDERWRITING................................................ 63
NOTICE TO CANADIAN RESIDENTS................................ 65
LEGAL MATTERS............................................... 66
EXPERTS..................................................... 66
CHANGE IN INDEPENDENT ACCOUNTANTS........................... 66
ADDITIONAL INFORMATION...................................... 66
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
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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 , 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.
2
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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 the 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 the 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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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 an assumed initial public offering price of $11.00 per
share, after deducting estimated underwriting discounts and commissions and
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 $41,476
Working capital..................................... 4,155 8,472 10,876 41,226
Total assets........................................ 5,402 12,129 17,524 47,874
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) 42,887
</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
WE HAVE A LIMITED OPERATING
HISTORY ON WHICH TO
EVALUATE
OUR PROSPECTS We commenced operations in March 1995 and we
recorded our first license revenue upon
delivery of Silknet eService in beta version to
customers in January 1997. Accordingly, we have
only a limited operating history on which you
can base your evaluation of 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 30% 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 commensurate
increase in services revenue between future
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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, many of which are
outside our control, 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.
CONTINUED ADOPTION OF
WEB-BASED ELECTRONIC
BUSINESS
SOLUTIONS IS NECESSARY FOR
OUR
FUTURE GROWTH 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 or the
attractiveness of commerce and business
communication
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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 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.
WE FACE SIGNIFICANT
COMPETITION
FROM OTHER TECHNOLOGY
COMPANIES 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.
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
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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 ABILITY TO INCREASE
REVENUES
DEPENDS ON OUR ABILITY TO
EXPAND OUR DIRECT SALES
FORCE
AND THIRD-PARTY
DISTRIBUTION
CHANNELS 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.
GROWTH OF PRODUCT REVENUE
IS
DEPENDENT ON OUR
PROFESSIONAL
SERVICES ORGANIZATION,
WHICH IS
CURRENTLY OPERATING AT A
LOSS 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. A failure to do so could
have a material adverse effect on our business,
operating results and financial condition.
OUR FAILURE TO PROPERLY
MANAGE
RAPID GROWTH COULD STRAIN
OUR
RESOURCES AND ADVERSELY
AFFECT
OUR BUSINESS We have been experiencing a period of rapid
growth that has been placing a significant
strain on our resources. 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, 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. Any failure to do so 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.
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OUR ABILITY TO INCREASE
REVENUE
DEPENDS ON OUR ABILITY TO
EXPAND AND MANAGE OUR
INTERNATIONAL OPERATIONS 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 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.
Even if we are able to successfully expand our
international operations, we cannot be certain
that we will be able to maintain or increase
international market demand for our products.
However, 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.
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.
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
9
<PAGE> 13
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."
OTHER COMPANIES MAY CLAIM
THAT OUR PRODUCTS INFRINGE
THEIR
COPYRIGHTS OR PATENTS 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, and such efforts may not be
successful. 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 technologies. See
"Business -- Intellectual Property and
Proprietary Rights."
10
<PAGE> 14
OUR USE OF THE "SILKNET"
AND "EBUSINESS" TRADEMARKS MAY
INFRINGE THE TRADEMARK
RIGHTS OF OTHER COMPANIES 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." 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" 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. 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 resources
or injury to our reputation, any of which could
have a material adverse effect on our business,
operating results and
11
<PAGE> 15
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 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 Prior to this offering, there has been no
public market for our common stock. After this
offering, an active trading market in our stock
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
12
<PAGE> 16
of the underwriters based upon several factors.
See "Underwriting." 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.
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.
OUR EXECUTIVE OFFICERS AND
DIRECTORS WILL EXERCISE
SIGNIFICANT CONTROL OVER
STOCKHOLDER VOTING MATTERS 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 and Exchange
Commission. If we register their shares of
13
<PAGE> 17
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.
WE WILL HAVE BROAD
DISCRETION IN USING
THE PROCEEDS FROM
THIS OFFERING 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> 18
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
$30,350,000 million, at an assumed initial public offering price of $11.00 per
share, after deducting estimated underwriting discounts and commissions and
offering expenses. If the underwriters' over-allotment option is exercised in
full, Silknet will receive an additional $4,702,500 million. Silknet intends to
use the proceeds for general corporate purposes, including working capital,
product development and expansion of its international operations and sales and
marketing capabilities. 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> 19
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 an assumed initial
public offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and 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 58,671
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 42,887
-------- -------- --------
Total capitalization........................................ $ 12,659 $ 12,659 $ 43,009
======== ======== ========
</TABLE>
- ---------------
(1) Upon conversion of the convertible preferred stock, all accrued dividends
will be eliminated.
16
<PAGE> 20
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 an assumed initial public offering price of $11.00 per share and after
deducting estimated underwriting discounts and commissions and offering
expenses, Silknet's pro forma net tangible book value as of March 31, 1999 would
have been approximately $42,887,000, or $2.86 per share. This represents an
immediate increase in pro forma net tangible book value of $1.82 per share to
existing stockholders and an immediate dilution of $8.14 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..................... $11.00
Pro forma net tangible book value per share at March 31,
1999................................................... $ 1.04
Increase attributable to this offering.................... 1.82
------
Pro forma net tangible book value per share after this offering..... $ 2.86
------
Net tangible book value dilution per share to new investors in this
offering.......................................................... $ 8.14
======
</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 an assumed initial public offering price of $11.00 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% $27,107,058 45.10% $ 2.26
New investors........................ 3,000,000 20.00% $33,000,000 54.90% $11.00
---------- ----- ----------- ------
Totals..................... 14,998,099 100% $60,108,058 100%
========== ===== =========== ======
</TABLE>
As of March 31, 1999, there were (a) 799,556 shares of common stock
issuable upon exercise of outstanding stock options, at a weighted average
exercise price of $.50 per share; (b) 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 (c) 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, pursuant to which 350,000 shares of common stock were reserved for
issuance, and the 1999 Non-Employee Director Stock Option Plan, pursuant to
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> 21
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 (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>
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 an assumed initial
public offering price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and 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 $41,476
Working capital (deficit)................................... (28) (102) 4,155 8,472 10,876 41,226
Total assets................................................ 64 170 5,402 12,129 17,524 47,874
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) 42,887
</TABLE>
18
<PAGE> 22
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 beta 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.
19
<PAGE> 23
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>
20
<PAGE> 24
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 $678,000 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.
21
<PAGE> 25
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 43 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 20 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.
22
<PAGE> 26
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.
23
<PAGE> 27
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 beta
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.
24
<PAGE> 28
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
25
<PAGE> 29
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.
26
<PAGE> 30
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 -- We will have broad
discretion in using the proceeds from this offering."
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.
27
<PAGE> 31
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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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 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.
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 the 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 the 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 a
scaleable, extensible platform for building, deploying and adapting software
applications. The Silknet eBusiness System integrates personalized interactions,
collaborations and transactions over the Web among a company and its customers,
partners, vendors and suppliers.
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
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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
shots 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. The Sprint PCS web site is located at
http://www.sprintpcs.com.
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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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.
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 seven employees. Silknet's marketing programs include:
- product and strategy updates with industry analysts;
- public relations activities and speaking engagements;
- direct mail and relationship marketing programs;
- telemarketing, seminars and trade shows;
- brochures, data sheets and white papers; and
- Web site marketing.
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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 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
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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-
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-
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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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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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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 1996. 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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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 1994 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
November 1996. 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> 51
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 Silknet's Chief Executive
Officer and the other most highly compensated executive officer who was employed
by Silknet at June 30, 1998 (collectively, the "named executive officers"). 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 an assumed initial public
offering price of $11.00.
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 $3,587,373 $1,136,084
</TABLE>
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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.
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 make direct purchases of common stock to employees, officers, directors,
consultants and advisors of Silknet and its subsidiaries.
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<PAGE> 53
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 pursuant to 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. To date, no options have been granted under to 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
pursuant to 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.
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.
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<PAGE> 54
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, 1999. 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.
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.
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<PAGE> 55
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. Donnovan, 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. (together, with Vertex Investment (II) Ltd. and
HWH Investment Pte Ltd., the "Vertex Entities"), and 571,736 shares of Series C
preferred stock to Intel Corporation. Silknet also issued 28,587 shares of
Series C preferred stock to JAFCO Co., Ltd. ("JAFCO Ltd"), 33,632 shares of
Series C preferred stock to JAFCO R-3 Investment Enterprise Partnership ("JAFCO
R-3"), 20,179 shares of Series C preferred stock to JAFCO JS-3 Investment
Enterprise Partnership ("JAFCO JS-3"), 30,269 shares of Series C preferred stock
to JAFCO G-6(A) Investment Enterprise Partnership ("JAFCO G-6(A)"), 30,269
shares of Series C preferred stock to JAFCO G-6(B) Investment Enterprise
Partnership ("JAFCO G-6(B)") and 571,736 shares of Series C preferred stock to
U.S. Information Technology No. 2 Investment Enterprise Partnership ("U.S.
Technology") (together, 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.
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."
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<PAGE> 56
Silknet has two license agreements with Planet Direct Corporation and
SalesLink covering an aggregate amount of $83,800 in fees paid to Silknet.
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 23.06% 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.
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.
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: (a) each
person known by Silknet to be the beneficial owner of more than 1% of its common
stock; (b) each named executive officer; (c) each of Silknet's directors; and
(d) 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 Phillipe Cote Street, Manchester, New Hampshire 03101, and each person
has sole voting and investment power over the shares shown as
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<PAGE> 57
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 pursuant to
options which may be exercised within 60 days after March 31, 1999; and
- shares of common stock issuable by Silknet to that person pursuant to
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: (a) 2,838,445 shares
of common stock outstanding as of March 31, 1999; (b) 9,159,654 shares of common
stock issuable upon the conversion of preferred stock; and (c) 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: (a) all shares deemed to be
outstanding before the offering and (b) 3,000,000 shares being sold in this
offering, assuming no exercise of the underwriters' over-allotment option.
<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
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
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 (a) 200,000 shares held in trust for Mr. Wood, of which Mr. Wood
is the sole trustee; (b) 20,000 shares held in trust for Mr. Donovan's two
children, of which Mr. Wood is the sole trustee; (c) an aggregate of 7,500
shares held in trust for the three children of Mr. James P. Davis, of which
Mr. Wood is the sole trustee; and (d) 500,000 shares for which Mr. Wood has
voting power pursuant to 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.
(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
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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<PAGE> 60
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 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 (together,
the "Series C Registration Rights Holders") 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 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 common stock upon completion of this
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<PAGE> 61
offering (the "Series D Registration Rights Holders"), 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
of 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
(as 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.
Upon completion of this offering (based on shares outstanding at March 31,
1999), 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 pursuant to
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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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom Credit
Suisse First Boston, 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.............................
BancBoston Robertson Stephens Inc. ....................
NationsBanc Montgomery Securities LLC..................
First Union Capital Markets Corp. .....................
Total........................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain conditions precedent 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 $ per share, and the
underwriters and such dealers may allow a discount of $ 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.......................................
Expenses payable by Silknet.....................
</TABLE>
The representatives have informed Silknet that they do not expect
discretionary sales by the underwriters to exceed 5% of the shares being offered
hereby.
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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 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 will be listing 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 will be determined by negotiation
between Silknet and the representatives. The principal factors considered in
determining the public offering price will include:
- 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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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 (1) 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, (2) where required
by law, that such purchaser is purchasing as principal and not as agent, and (3)
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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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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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. To date, no awards have been
granted under the 1999 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.
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. Under the 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.
F-20
<PAGE> 90
[Silknet Software, Inc. LOGO]
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,509
NASD filing fee............................................. 4,640
Nasdaq National Market listing fee.......................... 90,500
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 280,000
Accounting fees and expenses................................ 220,000
Transfer agent and registrar fees and expenses.............. 5,000
Miscellaneous............................................... 213,351
----------
Total............................................. $1,000,000
==========
</TABLE>
- ---------------
Silknet will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and Silknet's Certificate of
Incorporation and by-laws provide for indemnification of Silknet's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of Silknet and, with respect to any criminal action or proceeding,
actions that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to Silknet's Certificate of Incorporation and by-laws filed as
Exhibits 3.01 and 3.02 hereto, respectively.
The Underwriting Agreement provides that the underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of Silknet against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
In addition, Silknet has an existing directors and officers liability
insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement,
Silknet has issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock.
In October 1996, Silknet issued and sold an aggregate of 2,900 shares of
common stock for services valued at $2,900.
In October 1996, Silknet issued and sold an aggregate of 2,364,584 shares
of its Series A preferred stock for an aggregate of $2,270,000.
In June 1997, Silknet issued and sold an aggregate of 2,500,000 shares of
its Series B preferred stock for an aggregate of $5,000,000.
II-1
<PAGE> 92
In May 1998, Silknet issued and sold an aggregate of 3,081,657 shares of
its Series C preferred stock for an aggregate of $10,779,989.74. In June 1998,
Silknet sold an additional 7,500 shares of Series C preferred stock for an
aggregate purchase price of $26,235.88.
In February 1999, Silknet issued and sold an aggregate of 1,205,913 shares
of its Series D preferred stock for an aggregate purchase price of
$8,832,238.26.
Each share of Silknet's Series A, Series B, Series C and Series D preferred
stock will automatically convert into one share of common stock upon the closing
of this offering.
(b) Issuances 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. In July 1996, Silknet issued an additional
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.
In June 1997 Silknet issued six warrants to purchase an aggregate of
500,000 shares of common stock at an exercise price of $2.20 per share.
(c) Exercises of Stock Options
From January 1996 to March 1999, Silknet issued 280,545 shares of common
stock at exercise prices ranging from $1.00 to $1.75 for an aggregate purchase
price of $318,095 pursuant to exercise of employee options.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of the exercise of options to purchase common stock,
Rule 701 under the Securities Act. All of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
II-2
<PAGE> 93
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01+ Certificate of Incorporation of Silknet.
3.02 By-laws, as amended, of Silknet.
4.01 Specimen Certificate for shares of Silknet's Common Stock.
4.02+ Description of Capital Stock (contained in the Certificate
of Incorporation filed as Exhibit 3.01).
4.03+ Form of Warrant Agreement dated as of May 17, 1996 between
Silknet and Zero Stage Capital V, L.P.
4.04+ Form of Warrant Agreement dated as of June 11, 1997 between
Silknet and certain investors.
5.01 Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01* Employee Stock Option Plan, as amended.
10.02*+ 1999 Stock Option and Incentive Plan.
10.03*+ 1999 Non-Employee Director Stock Option Plan.
10.04* 1999 Employee Stock Purchase Plan, as amended.
10.05+ Registration Rights Provisions contained in the Series C
Preferred Stock Purchase Agreement dated as of May 12, 1998
between Silknet and the purchasers named therein.
10.06+ Registration Rights Provisions contained in the Series D
Preferred Stock Purchase Agreement dated as of February 26,
1999 between Silknet and the purchasers named therein.
10.07+ Lease Agreement between Silknet and 1848 Associates dated
December 30, 1996, as amended December 15, 1997, November 1,
1998 and January 1, 1999.
10.08+ Loan and Modification Agreement dated March 2, 1999 by and
between Silknet and Silicon Valley Bank.
10.09+ Loan and Security Agreement dated March 5, 1997 by and
between Silknet and Silicon Valley Bank, as amended pursuant
to a Loan Modification Agreement dated December 1, 1997.
10.10* Employment Agreement dated April 13, 1999 by and between the
Company and James C. Wood.
10.11* Employment Agreement dated April 13, 1999 by and between the
Company and Nigel K. Donovan.
10.12* Employment Agreement dated April 13, 1999 by and between the
Company and Patrick J. Scannell, Jr.
16.01+ Letter from KPMG Peat Marwick dated March 3, 1999.
21.01+ Subsidiaries.
23.01 Consent of Testa, Hurwitz & Thibeault, LLP (contained in
Exhibit 5.01).
23.02+ Consent of PricewaterhouseCoopers LLP.
23.03 Consent of Aberdeen Group, Inc.
24.01+ Power of Attorney.
27.01 Financial Data Schedule.
</TABLE>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Previously filed.
II-3
<PAGE> 94
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective; and (3) that for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment to the Registration Statement (File
No. 333-73295) to be signed on its behalf by the undersigned, thereunto duly
authorized, in Manchester, New Hampshire on
April 14, 1999.
SILKNET SOFTWARE, INC.
By: /s/ JAMES C. WOOD
------------------------------------
James C. Wood
President, Chief Executive Officer
and Chairman of the Board
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
* President, Chief Executive Officer and April 14, 1999
- ------------------------------------------ Chairman of the Board (Principal
James C. Wood Executive Officer)
* Vice President, Chief Financial April 14, 1999
- ------------------------------------------ Officer, Treasurer and Secretary
Patrick J. Scannell, Jr. (Principal Financial and Accounting
Officer)
* Director April 14, 1999
- ------------------------------------------
Stanley Fung
* Director April 14, 1999
- ------------------------------------------
Guy Bradley
* Director April 14, 1999
- ------------------------------------------
John Doggett
* Director April 14, 1999
- ------------------------------------------
Joo Hock Chua
* Director April 14, 1999
- ------------------------------------------
Andrew Goldfarb
*By: /s/ JAMES C. WOOD
------------------------------------
James C. Wood
as Attorney-in-Fact
</TABLE>
II-5
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.01 Form of Underwriting Agreement.
3.01+ Certificate of Incorporation of Silknet.
3.02 By-laws, as amended, of Silknet.
4.01 Specimen Certificate for shares of Silknet's Common Stock.
4.02+ Description of Capital Stock (contained in the Certificate
of Incorporation filed as Exhibit 3.01).
4.03+ Form of Warrant Agreement dated as of May 17, 1996 between
Silknet and Zero Stage Capital V, L.P.
4.04+ Form of Warrant Agreement dated as of June 11, 1997 between
Silknet and certain investors.
5.01 Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01* Employee Stock Option Plan, as amended.
10.02*+ 1999 Stock Option and Incentive Plan.
10.03*+ 1999 Non-Employee Director Stock Option Plan.
10.04* 1999 Employee Stock Purchase Plan, as amended.
10.05+ Registration Rights Provisions contained in the Series C
Preferred Stock Purchase Agreement dated as of May 12, 1998
between the Company and the purchasers named therein.
10.06+ Registration Rights Provisions contained in the Series D
Preferred Stock Purchase Agreement dated as of February 26,
1999 between Silknet and the purchasers named therein.
10.07+ Lease Agreement between Silknet and 1848 Associates dated
December 30, 1996, as amended December 15, 1997, November 1,
1998 and January 1, 1999.
10.08+ Loan and Modification Agreement dated March 2, 1999 by and
between Silknet and Silicon Valley Bank.
10.09+ Loan and Security Agreement dated March 5, 1997 by and
between Silknet and Silicon Valley Bank, as amended pursuant
to a Loan Modification Agreement dated December 1, 1997.
10.10* Employment Agreement dated April 13, 1999 by and between the
Company and James C. Wood.
10.11* Employment Agreement dated April 13, 1999 by and between the
Company and Nigel K. Donovan.
10.12* Employment Agreement dated April 13, 1999 by and between the
Company and Patrick J. Scannell, Jr.
16.01+ Letter from KPMG Peat Marwick dated March 3, 1999.
21.01+ Subsidiaries
23.01 Consent of Testa, Hurwitz & Thibeault, LLP (contained in
Exhibit 5.01).
23.02+ Consent of PricewaterhouseCoopers LLP.
23.03 Consent of Aberdeen Group, Inc.
24.01+ Power of Attorney.
27.01 Financial Data Schedule.
</TABLE>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
+ Previously filed.
<PAGE> 1
Exhibit 1.01
________ SHARES
SILKNET SOFTWARE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
___________, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
BancBoston Robertson Stephens
NationsBanc Montgomery Securities LLC
First Union Capital Markets Corp.
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. Silknet Software, Inc., a Delaware corporation
("COMPANY"), proposes to issue and sell _______ shares ("FIRM SECURITIES") of
its Common Stock, $.01 par value per share ("SECURITIES"), and also proposes to
issue and sell to the Underwriters, at the option of the Underwriters, an
aggregate of not more than ________ additional shares ("OPTIONAL SECURITIES") of
its Securities as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "OFFERED SECURITIES". The Company
hereby agrees with the several Underwriters named in Schedule A hereto
("UNDERWRITERS") as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
<PAGE> 2
(a) A registration statement (No. 333-73295) relating to the
Offered Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("COMMISSION") and either (i) has been
declared effective under the Securities Act of 1933 ("ACT") and is not proposed
to be amended or (ii) is proposed to be amended by amendment or post-effective
amendment. If such registration statement ("INITIAL REGISTRATION STATEMENT") has
been declared effective, either (i) an additional registration statement
("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may
have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(B)")
under the Act and, if so filed, has become effective upon filing pursuant to
such Rule and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule 462(b)
and will become effective upon filing pursuant to such Rule and upon such filing
the Offered Securities will all have been duly registered under the Act pursuant
to the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial registration
statement or if an additional registration statement has been filed and the
Company does not propose to amend it, and if any post-effective amendment to
either such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment (if any)
to each such registration statement has been declared effective by the
Commission or has become effective upon filing pursuant to Rule 462(c) ("RULE
462(C)") under the Act or, in the case of the additional registration statement,
Rule 462(b). For purposes of this Agreement, "EFFECTIVE TIME" with respect to
the initial registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement means (i) if
the Company has advised the Representatives that it does not propose to amend
such registration statement, the date and time as of which such registration
statement, or the most recent post-effective amendment thereto (if any) filed
prior to the execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule 462(c), or
(ii) if the Company has advised the Representatives that it proposes to file an
amendment or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by such amendment
or post-effective amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed prior to
the execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "EFFECTIVE TIME" with respect to
such additional registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule 462(b).
"EFFECTIVE DATE" with respect to the initial registration statement or the
additional registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its Effective Time,
including all information
2
<PAGE> 3
contained in the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions of the
Form on which it is filed and including all information (if any) deemed to be a
part of the initial registration statement as of its Effective Time pursuant to
Rule 430A(b) ("RULE 430A(B)") under the Act, is hereinafter referred to as the
"INITIAL REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including all
information (if any) deemed to be a part of the additional registration
statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter
referred to as the "ADDITIONAL REGISTRATION STATEMENT". The Initial Registration
Statement and the Additional Registration Statement are herein referred to
collectively as the "REGISTRATION STATEMENTS" and individually as a
"REGISTRATION STATEMENT". The form of prospectus relating to the Offered
Securities, as first filed with the Commission pursuant to and in accordance
with Rule 424(b) ("RULE 424(B)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter referred to as
the "PROSPECTUS". No document has been or will be prepared or distributed in
reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (i) on the Effective Date
of the Initial Registration Statement, the Initial Registration Statement
conformed in all material respects to the requirements of the Act and the rules
and regulations of the Commission ("RULES AND REGULATIONS") and did not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, (ii) on the Effective Date of the Additional Registration Statement
(if any), each Registration Statement conformed, or will conform, in all
material respects to the requirements of the Act and the Rules and Regulations
and did not include, or will not include, any untrue statement of a material
fact and did not omit, or will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein not misleading and
(iii) on the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration Statement
each conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects, to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is subsequent to the
execution
3
<PAGE> 4
and delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the Prospectus
will conform in all material respects to the requirements of the Act and the
Rules and Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and no Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the only such
information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus; the merger of Silknet Software, Inc., a
New Hampshire corporation, into the Company was duly and validly consummated;
and the Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification and the
failure to be so qualified would have a material adverse effect on the condition
(financial or other), business, prospects, properties or results of operations
of the Company and its subsidiaries, taken as whole ("MATERIAL ADVERSE EFFECT").
(d) Each subsidiary of the Company has been duly incorporated and
is an existing corporation in good standing under the laws of the jurisdiction
of its incorporation, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and each
subsidiary of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its ownership
or lease of property or the conduct of its business requires such qualification
and the failure to be so qualified would have a Material Adverse Effect; all of
the issued and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and nonassessable; and
the capital stock of each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and defects.
(e) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding shares
of capital stock of the Company are, and, when the Offered Securities have been
delivered and paid for in accordance with this Agreement on each Closing Date
(as defined below), such Offered Securities will have been, validly issued,
fully paid and nonassessable and will conform to the description thereof
contained in the Prospectus; and the stockholders of the Company have no
preemptive rights with
4
<PAGE> 5
respect to the Securities. The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. There are no outstanding
options, warrants or other rights granted to or by the Company to purchase
Securities or other securities of the Company other than as described in the
Prospectus.
(f) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that would give
rise to a valid claim against the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with this offering.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in the
securities registered pursuant to a Registration Statement or in any securities
being registered pursuant to any other registration statement filed by the
Company under the Act.
(h) The Offered Securities have been approved for listing on
Nasdaq Stock Market's National Market, subject to notice of issuance.
(i) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement in connection
with the issuance and sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and such as may be required under
state securities laws.
(j) The execution, delivery and performance of this Agreement, and
the issuance and sale of the Offered Securities, will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any statute, any rule, regulation or order of any governmental agency or
body or any court, domestic or foreign, having jurisdiction over the Company or
any subsidiary of the Company or any of their properties, or (ii) any agreement
or instrument to which the Company or any such subsidiary is a party or by which
the Company or any such subsidiary is bound or to which any of the properties of
the Company or any such subsidiary is subject and that is material to the
Company and its subsidiaries, taken as a whole, or (iii) the charter or by-laws
of the Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as contemplated by
this Agreement.
5
<PAGE> 6
(k) This Agreement has been duly authorized, executed and
delivered by the Company.
(l) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and all other
properties and assets owned by them which is material to the business of the
Company and its subsidiaries, taken as a whole, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and except
as disclosed in the Prospectus, the Company and its subsidiaries hold any leased
real or personal property under valid and enforceable leases with no exceptions
that would materially interfere with the use made or to be made thereof by them.
(m) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental agencies
or bodies necessary to conduct the business now operated by them and have not
received any notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate have
a Material Adverse Effect.
(n) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that might
have a Material Adverse Effect.
(o) Except as disclosed in the Prospectus, (i) the Company and
each of its subsidiaries have the right to use all trademarks, trade names,
trade secrets, servicemarks, inventions, patent rights, mask works, copyrights,
licenses, software code, audiovisual works, formats, algorithms and underlying
data required to operate its business as presently being conducted and proposed
to be conducted as described in the Prospectus, (ii) the Company and each of its
subsidiaries have all required approvals and governmental authorizations now
used in, or which are necessary for fulfillment of their respective obligations
or the conduct of, their respective businesses as now conducted or proposed to
be conducted as described in the Prospectus, except where the failure to have
such approvals or authorizations do not have a Material Adverse Effect and (iii)
neither the Company nor any of its subsidiaries is knowingly infringing any
trademark, trade name rights, patent rights, mask works, copyrights, licenses,
trade secret, servicemarks or other similar rights of others, and there is no
claim being made against the Company or any of its subsidiaries regarding
trademark, trade name, patent, mask work, copyright, license, trade secret or
other infringement or assertion of intellectual property rights which could have
a Material Adverse Effect. The Company has agreements in place with each
employee, consultant or other person or party engaged by the Company or any
subsidiary providing for
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the assignment to the Company or any of its subsidiaries, as the case may be, of
all intellectual property and exploitation rights in the work performed and the
protection of the trade secrets and confidential information of the Company,
each of its subsidiaries and of third parties which have been developed by such
person for or on behalf of the Company or any of its subsidiaries. The
description of the Company's Year 2000 readiness under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Readiness Disclosure" in the Prospectus is accurate and complete in all
material respects.
(p) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is knowingly in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL
LAWS"), owns or knowingly operates any real property contaminated with any
substance that is subject to any environmental laws, is liable for any off-site
disposal or contamination pursuant to any environmental laws, or is subject to
any claim relating to any environmental laws, which violation, contamination,
liability or claim would individually or in the aggregate have a Material
Adverse Effect; and the Company is not aware of any pending investigation which
might lead to such a claim.
(q) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that, if determined adversely
to the Company or any of its subsidiaries, would individually or in the
aggregate have a Material Adverse Effect, or would materially and adversely
affect the ability of the Company to perform its obligations under this
Agreement, or which are otherwise material in the context of the sale of the
Offered Securities; and no such actions, suits or proceedings have been
threatened or, to the Company's knowledge, are contemplated.
(r) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, and such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied on a consistent basis.
(s) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties or
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results of operations of the Company and its subsidiaries taken as a whole, and,
except as disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock.
(t) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds thereof
as described in the Prospectus, will not be an "investment company" as defined
in the Investment Company Act of 1940.
(u) The Company and each of its subsidiaries has filed all
foreign, federal, state and local tax returns that are required to be filed or
has requested extensions thereof (except in any case in which the failure so to
file would not have a Material Adverse Effect) and the Company and each of its
subsidiaries has paid all material taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any of the
foregoing is due and payable, except for any such assessment, fine or penalty
that is currently being contested in good faith or as described in or
contemplated by the Registration Statement or the Prospectus.
(v) PricewaterhouseCoopers LLP, who have audited the financial
statements filed with the Commission as part of each Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations. The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; and (iii) access to assets is permitted only
in accordance with management's general or specific authorization.
(w) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(x) The Company and each of its subsidiaries are in compliance in
all material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company or any of its subsidiaries would have any
liability; the Company and each of its subsidiaries have not incurred and do not
expect to incur liability under (i) Title IV of ERISA with respect to
termination of,
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or withdrawal from, any "pension plan" or (ii) Section 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder ("CODE"); and each "pension plan" for which
the Company and each of its subsidiaries would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified in all
material respect and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
(y) Except as set forth in each Registration Statement and the
Prospectus, there are no agreements, claims, payments, issuances, arrangements
or understandings, whether oral or written, for services in the nature of
finder's, consulting or origination fees with respect to the sale of the Offered
Securities or any other arrangements, agreements, understandings, payments or
issuance with respect to the Company or any of its officers, directors,
shareholders, partners, employees, subsidiaries or affiliates that may affect
the Underwriters' compensation as determined by the National Association of
Securities Dealers, Inc. (the "NASD").
(z) Except as set forth in each Registration Statement and the
Prospectus, no officer, director or shareholder of the Company or any
"affiliate" or "associate" (as these terms are defined in Rule 405 under the
Act) of any of the foregoing persons or entities has or has had, either directly
or indirectly (i) an interest in any person or entity that (x) furnishes or
sells services or products which are furnished or sold or that are proposed to
be furnished or sold by the Company, or (y) purchases from or sells or furnishes
to the Company any goods or services, or (ii) a beneficial interest in any
contract or agreement to which the Company is a party or by which it may be
bound or affected. Except as set forth in each Registration Statement and the
Prospectus under the caption "Certain Transactions" and "Management", there are
no existing or proposed agreements, arrangements, understandings or
transactions, between or among the Company and any officer, director, principal
shareholder of the Company or any partner, affiliate or associate of any of the
foregoing persons or entities.
(aa) The minute books of the Company made available to the
Underwriters contain a complete summary of all meetings and actions of the
directors and shareholders of the Company (including its predecessor New
Hampshire corporation) since the time of its incorporation and reflect
accurately and fairly in all respects all transactions referred to in such
minutes.
3. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to sell
to the Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Company, at a purchase price of $_______ per share, the
respective
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numbers of shares of Firm Securities set forth opposite the names of the
Underwriters in Schedule A hereto.
The Company will deliver the Firm Securities to the Representatives for
the accounts of the Underwriters, at the office of Testa, Hurwitz & Thibeault
LLP, against payment of the purchase price in Federal (same day) funds by
official bank check or checks or wire transfer to an account at a bank
acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn to the
order of ______________, at 9:30 A.M., New York time, on ________________, or at
such other time not later than seven full business days thereafter as CSFBC and
the Company determine, such time being herein referred to as the "FIRST CLOSING
DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934,
the First Closing Date (if later than the otherwise applicable settlement date)
shall be the settlement date for payment of funds and delivery of securities for
all the Offered Securities sold pursuant to the offering. The certificates for
the Firm Securities so to be delivered will be in definitive form, in such
denominations and registered in such names as CSFBC requests and will be made
available for checking and packaging at such location as CSFBC shall reasonably
request at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. The Company
agrees to sell to the Underwriters the number of shares of Optional Securities
specified in such notice and the Underwriters agree, severally and not jointly,
to purchase such Optional Securities. Such Optional Securities shall be
purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Securities set forth opposite such Underwriter's name
bears to the total number of shares of Firm Securities (subject to adjustment by
CSFBC to eliminate fractions) and may be purchased by the Underwriters only for
the purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and delivered.
The right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional
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Securities being purchased on each Optional Closing Date to the Representatives
for the accounts of the several Underwriters, at the office of Testa, Hurwitz &
Thibeault LLP, against payment of the purchase price therefor in Federal (same
day) funds by official bank check or checks or wire transfer to an account at a
bank acceptable to CSFBC drawn to the order of ____________. The certificates
for the Optional Securities being purchased on each Optional Closing Date will
be in definitive form, in such denominations and registered in such names as
CSFBC requests upon reasonable notice prior to such Optional Closing Date and
will be made available for checking and packaging at such location as CSFBC
shall reasonably request at a reasonable time in advance of such Optional
Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule
424(b) not later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business day after
the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to Rule
424(b). If the Effective Time of the Initial Registration Statement is prior to
the execution and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities under the
Act but the Effective Time thereof has not occurred as of such execution and
delivery, the Company will file the additional registration statement or, if
filed, will file a post-effective amendment thereto with the Commission pursuant
to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time,
on the date of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make such
filing at such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not effect
such amendment or supplementation without CSFBC's consent, which consent shall
not
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be unreasonably withheld; and the Company will also advise CSFBC promptly of the
effectiveness of each Registration Statement (if its Effective Time is
subsequent to the execution and delivery of this Agreement) and of any amendment
or supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect of a
Registration Statement and will use its best efforts to prevent the issuance of
any such stop order and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to, nor the
Underwriters' delivery of, any such amendment or supplement shall constitute a
waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability
Date (as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (five of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M.,
New York time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial Registration
Statement. All other documents shall be so furnished as soon as available. The
Company will pay the expenses of printing and distributing to the Underwriters
all such documents.
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(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates and
will continue such qualifications in effect so long as required for the
distribution; provided, however, that the Company shall not be obliged to file
any general consent to service of process or to qualify as a foreign corporation
or as a securities dealer in any jurisdiction or to subject itself to taxation
in respect of doing business in any jurisdiction in which it is not otherwise so
subject.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a copy
of its annual report to stockholders for such year; and the Company will furnish
to the Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other publicly available information concerning the Company as CSFBC
may reasonably request.
(h) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including without limitation (i) any
filing fees and other expenses (including fees and disbursements of counsel)
incurred in connection with qualification of the Offered Securities for sale
under the laws of such jurisdictions as CSFBC designates and the printing of
memoranda relating thereto, (ii) the filing fee incident to, and the reasonable
fees and disbursements of counsel to the Underwriters in connection with, the
review by the NASD of the Offered Securities, (iii) any travel expenses of the
Company's officers and employees and any other expenses of the Company in
connection with attending or hosting meetings with prospective purchasers of the
Offered Securities and (iv) expenses incurred in distributing preliminary
prospectuses and the Prospectus (including any amendments and supplements
thereto) to the Underwriters.
(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except for issuances of
Securities pursuant to the conversion of convertible securities or the exercise
of warrants or options, in each case outstanding on the date hereof, grants of
director and employee stock options pursuant to the terms of a plan in effect on
the date hereof, or issuances of Securities pursuant to the exercise of such
options.
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6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Representatives shall have received from
PricewaterhouseCoopers LLP a letter dated the date hereof and each Closing Date,
in form and substance satisfactory to the Representatives, together with signed
or reproduced copies of such letter for each of the Underwriters containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain information contained in each Registration Statement and the Prospectus.
In the event that the letters referred to above set forth any changes in capital
stock, increases in short-term or long-term debt or decreases in net current
assets, net assets, revenues, net income or net income per share as reflected on
the most recently available financial statements not included in the Prospectus
as compared to the corresponding date or period of the prior year and as
compared to the most recent date and the most recent period of corresponding
length included in the financial statements included in the Prospectus, it shall
be a further condition to the obligations of the Underwriters that (i) such
letters shall be accompanied by a written explanation of the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (ii) such changes, decreases or increases do not, in the sole
judgment of the Representatives, make it impractical or inadvisable to proceed
with the purchase and delivery of the Offered Securities as contemplated by such
Registration Statement, as amended as of the date hereof.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or such later date as shall have been consented to by CSFBC. If
the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the
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Commission in accordance with the Rules and Regulations and Section 5(a) of this
Agreement. Prior to such Closing Date, no stop order suspending the
effectiveness of a Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or, to the knowledge of
the Company or the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other), business,
properties or results of operations of the Company or its subsidiaries taken as
one enterprise which, in the judgment of a majority in interest of the
Underwriters including the Representatives, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public offering or
the sale of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities of the Company by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company (other
than an announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock Exchange, or
any setting of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or
New York authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Offered
Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Testa, Hurwitz & Thibeault LLP, counsel for the Company, to the
effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in [California, Connecticut,
Georgia, Illinois, New Hampshire, Texas and Washington], which are the only
jurisdictions in which the Company maintains an office or owns or leases real
property;
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(ii) The Offered Securities delivered on such Closing Date
and all other outstanding shares of the Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and conform
in all material respects to the description thereof contained in the Prospectus;
the Company has authorized and outstanding capital stock as set forth under the
caption "Capitalization" in the Prospectus as of the date specified therein; the
certificates for the Offered Securities, assuming they are in the form filed
with the Commission, are in due and proper form; and no stockholder of the
Company has any preemptive rights with respect to the Securities pursuant to the
Delaware General Corporation Law, the Company's Certificate of Incorporation,
By-laws, or to such counsel's knowledge, any agreement with the Company;
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or other securities
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such capital stock;
(iv) There are no contracts, agreements or understandings
known to such counsel between the Company and any person granting such person
the right to require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the Company
under the Act which have not been waived;
(v) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the transactions
contemplated by this Agreement in connection with the issuance or sale of the
Offered Securities by the Company, except such as have been obtained and made
under the Act (except that such counsel need express no opinion as to state
securities laws);
(vi) The execution, delivery and performance of this
Agreement by the Company and the issuance and sale of the Offered Securities
will not result in (a) a material breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any rule, regulation
or order of any governmental agency or body or any court having jurisdiction
over the Company or any subsidiary of the Company or any of their properties
(except that such counsel need express no opinion as to state securities laws),
or any agreement or
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instrument known to such counsel to which the Company or any such subsidiary is
a party or by which the Company or any such subsidiary is bound or to which any
of the properties of the Company or any such subsidiary is subject, which is
material to the business of the Company and its subsidiaries, taken as a whole,
or (b) a breach or violation of the charter or by-laws of the Company or any
such subsidiary; and the Company has the corporate power and authority to
authorize, issue and sell the Offered Securities as contemplated by this
Agreement;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became effective under
the Act as of the date and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to the subparagraph of
Rule 424(b) specified in such opinion on the date specified therein or was
included in the Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the knowledge of such counsel after due
inquiry, no stop order suspending the effectiveness of a Registration Statement
or any part thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Act, and each
Registration Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates, complied as to form in
all material respects with the requirements of the Act and the Rules and
Regulations; such counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective date or as
of such Closing Date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such Closing
Date, contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and the
descriptions in the Registration Statements and Prospectus of United States
statutes, legal and governmental proceedings and contracts and other documents
are accurate in all material respects and fairly present the information
required to be shown; it being understood that such counsel need express no
opinion as to the financial statements or schedules or other financial data
contained in the Registration Statements or the Prospectus;
(viii) This Agreement has been duly authorized, executed and
delivered by the Company.
(ix) All of the Offered Securities have been duly
authorized for quotation on the Nasdaq National Market, subject to official
notice of issuance;
17
<PAGE> 18
(x) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment company" as
defined in the Investment Company Act of 1940, as amended; and
(xi) Such counsel does not know of any legal or
governmental proceedings or investigations pending or threatened to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are required to be described
in any Registration Statement or the Prospectus and are not described therein or
any statutes, regulations, contracts or other documents that are required to be
described in any Registration Statement or the Prospectus or to be filed as
exhibits to any Registration Statement that are not described therein or filed
as required.
With respect to subparagraph (vii) of paragraph (d) above, Testa,
Hurwitz & Thibeault, LLP may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification.
(e) The Representatives shall have received from Hale and Dorr
LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the incorporation of the Company, the validity of the
Offered Securities delivered on such Closing Date, the Registration Statements,
the Prospectus and other related matters as the Representatives may require, and
the Company shall have furnished to such counsel such documents as they request
for the purpose of enabling them to pass upon such matters. In rendering such
opinion, Hale and Dorr LLP may rely as to the incorporation of the Company upon
the opinion of Testa, Hurwitz & Thibeault, LLP.
(f) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time the Prospectus was printed and distributed to any Underwriter;
and, subsequent to the date of the most recent
18
<PAGE> 19
financial statements in the Prospectus, there has been no material adverse
change, nor any development or event involving a prospective material adverse
change, in the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries taken as a whole except as set
forth in or contemplated by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated such
Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred to in
such subsection will be a date not more than three days prior to such Closing
Date for the purposes of this subsection.
(h) The Representatives shall have received from all officers and
directors of the Company and holders of Common Stock, securities convertible
into Common Stock and options to purchase Common Stock (except those listed in
Schedule B) an agreement ("LOCK-UP AGREEMENT") dated on or before the date of
this Agreement to the effect that, for a period of 180 days after the date on
which shares of Securities are first sold by the Underwriters to the public
pursuant to a Registration Statement, such person will not, without the prior
written consent of CSFBC, offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of Securities or securities
convertible into or exchangeable or exercisable for any shares of Securities or
publicly disclose the intention to make any such offer, sale, pledge or
disposition.
If any of the conditions hereinabove provided for in this Section 6 shall not
have been fulfilled when and as required by this Agreement to be fulfilled, the
obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the First Closing Date and each Optional Closing Date.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as the Representatives reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder,
whether in respect of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter,
its partners, directors and officers and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act, against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
19
<PAGE> 20
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in or omission
or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (b) below; and provided,
further, that with respect to any untrue statement or alleged untrue statement
in or omission or alleged omission from any preliminary prospectus, the
indemnity agreement set forth in this Section 7(a) shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased the Offered Securities concerned, to
the extent that a prospectus relating to such Offered Securities was required to
be delivered by such Underwriter under the Act in connection with such purchase
and any such loss, claim, damage or liability of such Underwriter results from
the fact that there was not sent or given to such person, at or prior to the
written confirmation of the sale of such Offered Securities to such person, a
copy of the Prospectus if the Company had previously furnished copies thereof to
such Underwriter and the Prospectus corrected such untrue statement or alleged
untrue statement or omission or alleged omission.
(b) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if any
who controls the Company within the meaning of Section 15 of the Act, against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in
20
<PAGE> 21
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein, and will reimburse any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred, it being understood and agreed that the only such
information furnished by any Underwriter consists of the following information
in the Prospectus furnished on behalf of each Underwriter: (i) the table under
the first paragraph under the caption "Underwriting," (ii) the concession and
reallowance figures appearing in the fourth paragraph under the caption
"Underwriting," (iii) the information contained in the sixth and eighth,
paragraphs under the caption "Underwriting," and (iv) the information set forth
under the caption "Notice to Canadian Residents."
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under subsection (a) or (b) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (b) above. In case any such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with the consent
of the indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(d) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company on the one
21
<PAGE> 22
hand and the Underwriters on the other from the offering of the Securities or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or
22
<PAGE> 23
any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Company for the purchase of such Offered
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by such Closing Date, the non-defaulting Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the Offered Securities that such defaulting Underwriters
agreed but failed to purchase on such Closing Date. If any Underwriter or
Underwriters so default and the aggregate number of shares of Offered Securities
with respect to which such default or defaults occur exceeds 10% of the total
number of shares of Offered Securities that the Underwriters are obligated to
purchase on such Closing Date and arrangements satisfactory to CSFBC and the
Company for the purchase of such Offered Securities by other persons are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company, except
as provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriters is not consummated for any reason other than solely because
of the termination of this Agreement pursuant to Section 8 or the occurrence of
any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company
will reimburse the Underwriters for all out-of-pocket expenses (including fees
and disbursements of
23
<PAGE> 24
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Silknet Software, Inc.,
50 Phillippe Cote Street, Manchester, NH 03101; Attention: Chief Financial
Officer; provided, however, that any notice to an Underwriter pursuant to
Section 7 will be mailed, delivered or telegraphed and confirmed to such
Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
24
<PAGE> 25
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SILKNET SOFTWARE, INC.
By______________________________
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BancBoston Robertson Stephens
NationsBanc Montgomery Securities LLC
First Union Capital Markets Corp.
Acting on behalf of themselves and as the
Representatives of the several Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By_______________________________
25
<PAGE> 26
SCHEDULE A
UNDERWRITER NUMBER OF
FIRM SECURITIES
Credit Suisse First Boston Corporation
BancBoston Robertson Stephens
NationsBanc Montgomery Securities LLC
First Union Capital Markets Corp.
-------------------
Total ===================
26
<PAGE> 27
SCHEDULE B
27
<PAGE> 1
EXHIBIT 3.02
SILKNET SOFTWARE, INC.
(a Delaware Corporation)
BY-LAWS
Initially Adopted: February 23, 1999
<PAGE> 2
ARTICLE I......................................................................1
MEETINGS OF STOCKHOLDERS.......................................................1
Section 1. Place of Meetings................................................1
Section 2. Annual Meeting...................................................1
Section 3. Special Meetings.................................................1
Section 4. Notice of Meetings...............................................2
Section 5. Voting List......................................................2
Section 6. Quorum...........................................................2
Section 7. Adjournments.....................................................3
Section 8. Action at Meetings...............................................3
Section 9. Voting and Proxies...............................................3
Section 10. Action Without Meeting..........................................4
Section 11. Introduction of Business at Meetings............................4
ARTICLE II.....................................................................7
DIRECTORS......................................................................7
Section 1. Number, Election, Tenure and Qualification.......................7
Section 2. Enlargement......................................................7
Section 3. Vacancies........................................................7
Section 4. Resignation and Removal..........................................7
Section 5. General Powers...................................................8
Section 6. Chairman of the Board............................................8
Section 7. Place of Meetings................................................8
Section 8. Regular Meetings.................................................8
Section 9. Special Meetings.................................................8
Section 10. Quorum, Action at Meeting, Adjournments.........................8
Section 11. Action by Consent...............................................9
Section 12. Telephonic Meetings.............................................9
Section 13. Committees......................................................9
Section 14. Compensation...................................................10
ARTICLE III...................................................................10
OFFICERS......................................................................10
Section 1. Enumeration.....................................................10
Section 2. Election........................................................10
Section 3. Tenure..........................................................10
Section 4. President.......................................................11
Section 5. Vice-Presidents.................................................11
Section 6. Secretary.......................................................11
Section 7. Assistant Secretaries...........................................12
Section 8. Treasurer.......................................................12
Section 9. Assistant Treasurers............................................12
Section 10. Bond...........................................................12
ARTICLE IV....................................................................13
NOTICES.......................................................................13
Section 1. Delivery........................................................13
Section 2. Waiver of Notice................................................13
ARTICLE V.....................................................................13
INDEMNIFICATION...............................................................13
Section 1. Actions other than by or in the Right of the Corporation........13
Section 2. Actions by or in the Right of the Corporation...................14
(i)
<PAGE> 3
Section 3. Success on the Merits...........................................14
Section 4. Specific Authorization..........................................14
Section 5. Advance Payment.................................................14
Section 6. Non-Exclusivity.................................................15
Section 7. Insurance.......................................................15
Section 8. Continuation of Indemnification and Advancement of Expenses.....15
Section 9. Severability....................................................15
Section 10. Intent of Article..............................................15
ARTICLE VI....................................................................15
CAPITAL STOCK.................................................................15
Section 1. Certificates of Stock...........................................15
Section 2. Lost Certificates...............................................16
Section 3. Transfer of Stock...............................................16
Section 4. Record Date.....................................................16
Section 5. Registered Stockholders.........................................17
ARTICLE VII...................................................................17
CERTAIN TRANSACTIONS..........................................................17
Section 1. Transactions with Interested Parties............................17
Section 2. Quorum..........................................................18
ARTICLE VIII..................................................................18
GENERAL PROVISIONS............................................................18
Section 1. Dividends.......................................................18
Section 2. Reserves........................................................18
Section 3. Checks..........................................................18
Section 4. Fiscal Year.....................................................18
Section 5. Seal............................................................18
Section 6. Time Periods....................................................19
ARTICLE IX....................................................................19
AMENDMENTS....................................................................19
Section 1. By the Board of Directors.......................................19
Section 2. By the Stockholders.............................................19
Addendum
Register of Amendments to the By-Laws
(ii)
<PAGE> 4
* * * * *
BY-LAWS
* * * * *
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders shall be
held at such place within or without the State of Delaware as may be fixed from
time to time by the Board of Directors or the Chief Executive Officer, or if not
so designated, at the registered office of the Corporation.
Section 2. ANNUAL MEETING. Unless directors are elected by written
consent in lieu of an annual meeting as permitted by law and these By-Laws, an
annual meeting of stockholders shall be held at such date and time as shall be
designated from time to time by the Board of Directors or the Chief Executive
Officer (which date shall not be a legal holiday in the place where the meeting
is to be held), at which meeting the stockholders shall elect by a plurality
vote a board of directors and shall transact such other business as may be
properly brought before the meeting. If no annual meeting is held in accordance
with the foregoing provisions, the Board of Directors shall cause the meeting to
be held as soon thereafter as convenient, which meeting shall be designated a
special meeting in lieu of annual meeting.
Section 3. SPECIAL MEETINGS. At any time prior to the date on which the
Common Stock of the Corporation becomes registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), special meetings of the
stockholders, for any purpose or purposes, may, unless otherwise prescribed by
statute or by the certificate of incorporation, be called by the Board of
Directors or the Chief Executive Officer and shall be called by the Chief
Executive Officer or Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the Corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting. On or after the date on which the Common Stock
of the Corporation becomes registered under the Exchange Act, special meetings
of the stockholders maybe called at any time by the chairman of the Board (if
any), a majority of the Board of Directors, or the Chief Executive Officer.
Nothwithstanding any other provisions of law and notwithstanding the fact that a
lesser percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five percent (75%) of the votes which all (with all clauses
of capital stock voting together as a single class) the stockholders would be
entitled to cast at any annual election of directors shall be required to amend
or repeal, or to adopt any provision inconsistent with this Section 3 of Article
I. Business transacted at any special meeting shall be limited to matters
relating to the purpose or purposes stated in the notice of meeting.
<PAGE> 5
Section 4. NOTICE OF MEETINGS. Except as otherwise provided by law,
written notice of each meeting of stockholders, annual or special, stating the
place, date and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be given not less
than ten (10) or more than sixty (60) days before the date of the meeting, to
each stockholder entitled to vote at such meeting. If mailed, notice is given
when deposited in the United States first-class mail postage prepaid, directed
to the stockholder at his or her address as it appears on the records of the
Corporation.
Section 5. VOTING LIST. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city or town
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. This list shall preemptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 6. QUORUM. The holders of a majority of the shares of the
capital stock of the Corporation issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum at
all meetings of the stockholders for the transaction of business, except as
otherwise provided by statute, the Certificate of Incorporation or these
By-Laws. Where a separate vote by a class or classes is required, one-third of
the outstanding shares of such class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter. Shares held by brokers which such brokers
are prohibited from voting (pursuant to their discretionary authority on behalf
of beneficial owners of such shares who have not submitted a proxy with respect
to such shares) on some or all of the matters before the stockholders, but which
shares would otherwise be entitled to vote at the meeting ("Broker Non-Votes")
shall be counted, for the purpose of determining the presence or absence of a
quorum, both (a) toward the total voting power of the shares of capital stock of
the Corporation and (b) as being represented by proxy. If a quorum has been
established for the purpose of conducting the meeting, a quorum shall be deemed
to be present for the purpose of all votes to be conducted at such meeting,
provided that where a separate vote by a class or classes, or series thereof, is
required, a majority of the voting power of the shares of such class or classes,
or series, present in person or represented by proxy shall constitute a quorum
entitled to take action with respect to that vote on that matter. If no quorum
shall be present or represented at any meeting of stockholders, such meeting may
be adjourned in accordance with Section 7 hereof, until a quorum shall be
present or represented.
Section 7. ADJOURNMENTS. Any meeting of stockholders may be adjourned
from time to time to any other time and to any other place at which a meeting of
stockholders may be held under these By-Laws, which time and place shall be
announced at the meeting, by a majority of
-2-
<PAGE> 6
the stockholders present in person or represented by proxy at the meeting and
entitled to vote (whether or not a quorum is present), or, if no stockholder is
present or represented by proxy, by any officer entitled to preside at or to act
as Secretary of such meeting, without notice other than announcement at the
meeting. At such adjourned meeting, any business may be transacted which might
have been transacted at the original meeting, provided that a quorum either was
present at the original meeting or is present at the adjourned meeting. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 8. ACTION AT MEETINGS. When a quorum is present at any meeting,
the affirmative vote of the holders of a majority of the stock present in person
or represented by proxy, entitled to vote and voting on the matter (or where a
separate vote by a class or classes is required, the affirmative vote of the
majority of shares of such class or classes present in person or represented by
proxy at the meeting) shall decide any matter (other than the election of
Directors) brought before such meeting, unless the matter is one upon which by
express provision of law, the Certificate of Incorporation or these By-Laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such matter. The stock of holders who abstain from
voting on any matter shall be deemed not to have been voted on such matter.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting, entitled to vote and voting on
the election of Directors.
Section 9. VOTING AND PROXIES. Unless otherwise provided in the
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote for each share of capital stock having
voting power held of record by such stockholder. Each stockholder entitled to
vote at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may authorize another person or persons to
act for such stockholder by written proxy, executed by such stockholder or his
or her authorized agent or by a transmission permitted by law and delivered to
the Secretary of the Corporation, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission created pursuant to this Section 9 may be substituted or
used in lieu of the original writing or transmission for any and all purposes
for which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or reproduction shall be a complete
reproduction of the entire original writing or transmission.
Section 10. ACTION WITHOUT MEETING. At any time prior to the date on
which the Common Stock of the Corporation becomes registered under the Exchange
Act, any action required to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be (1) signed and dated by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted and (2) delivered to
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the Corporation within sixty days of the earliest dated consent by delivery to
its registered office in the State of Delaware (in which case delivery shall be
by hand or by certified or registered mail, return receipt requested), its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. On or after the date on which the Common Stock of
the Corporation becomes registered under the Exchange Act, stockholders of the
Corporation may not take any action by written consent in lieu of a meeting.
Notwithstanding any other provision of law and notwithstanding the fact that a
lesser percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five percent (75%) of the votes which all (with all classes
of capital stock voting together as a single class) stockholders would be
entitled to cast at any annual election of directors shall be required to amend
or repeal, or to adopt any provision inconsistent with, this Section 10 of
Article I.
Section 11. INTRODUCTION OF BUSINESS AT MEETINGS. On or after the
date on which the Common Stock of the Corporation becomes registered under the
Exchange Act, the provisions of this Section 11 shall apply.
A. ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of
notice provided for in this Section 11, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this
Section 11.
(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause
(c) of paragraph (A)(1) of this Section 11, the stockholder must have
given timely notice thereof in writing to the Secretary of the
Corporation and such other business must otherwise be a proper matter
for stockholder action. To be timely, a stockholder's notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the one hundred
twentieth (120th) day nor earlier than the close of business on the one
hundred fiftieth (150th) day prior to the first anniversary of the date
of the proxy statement delivered to stockholders in connection with the
preceding year's annual meeting; provided, however, that if either (i)
the date of the annual meeting is more than thirty (30) days before or
more than sixty (60) days after such an anniversary date or (ii) no
proxy statement was delivered to stockholders in connection with the
preceding year's annual meeting, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than
the close of business on the later of the sixtieth (60th) day prior to
such annual meeting or the close of business on the tenth (10th) day
following the day on
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which public announcement of the date of such meeting is first made by
the Corporation. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
reelection as a director, all information relating to such person that
is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act (including such person's written
consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (b) as to any other business that
the stockholder proposes to bring before the meeting, a brief
description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c)
as to the stockholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made (i) the name
and address of such stockholder, as they appear on the Corporation's
books, and of such beneficial owner and (ii) the class and number of
shares of capital stock of the Corporation that are owned beneficially
and held of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 11 to the contrary, in the event that
the number of directors to be elected to the Board of Directors of the
Corporation is increased and there is no public announcement by the
Corporation naming all of the nominees for director or specifying the
size of the increased Board of Directors at least seventy (70) days
prior to the first anniversary of the preceding year's annual meeting
(or, if the annual meeting is held more than thirty (30) days before or
sixty (60) days after such anniversary date, at least seventy (70) days
prior to such annual meeting), a stockholder's notice required by this
Section 11 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the
Corporation not later than the close of business on the tenth (10th)
day following the day on which such public announcement is first made
by the Corporation.
B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business
shall be conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the Corporation's notice of
meeting. Nominations of persons for election to the Board of Directors
may be made at a special meeting of stockholders at which directors are
to be elected pursuant to the Corporation's notice of meeting (a) by or
at the direction of the Board of Directors or (b) provided that the
Board of Directors has determined that directors shall be elected at
such meeting, by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice of the special
meeting, who shall be entitled to vote at the meeting and who complies
with the notice procedures set forth in this Section 11. If the
Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such
stockholder may nominate a person or persons (as the case may be), for
election to such position(s) as specified in the Corporation's notice
of meeting, if the stockholder's notice required by paragraph (A)(2) of
this Section 11 shall be delivered to the Secretary
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at the principal executive offices of the Corporation not earlier than
the ninetieth (90th) day prior to such special meeting nor later than
the later of (x) the close of business on the sixtieth (60th) day prior
to such special meeting or (y) the close of business on the tenth
(10th) day following the day on which public announcement is first made
of the date of such special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.
C. GENERAL.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Section 11. Except as
otherwise provided by law, the Certificate of Incorporation or these
By-Laws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 11 and, if any
proposed nomination or business is not in compliance herewith, to
declare that such defective proposal or nomination shall be
disregarded.
(2) For purposes of this Section 11, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and
Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
(3) Notwithstanding the foregoing provisions of this Section
11, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect
to the matters set forth herein. Nothing in this Section 11 shall be
deemed to affect any rights (i) of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8
under the Exchange Act or (ii) of the holders of any series of
Preferred Stock to elect directors under specified circumstances.
ARTICLE II
DIRECTORS
Section 1. NUMBER, ELECTION, TENURE AND QUALIFICATION. The number of
Directors which shall constitute the whole board shall be not less than one;
provided, however, that on or after the date on which the Common Stock of the
Corporation becomes registered under the Exchange Act, the number of Directors
shall not be less than three. Within such limit, the number of Directors shall
be determined by resolution of the Board of Directors or by the stockholders at
the annual meeting or at any special meeting of stockholders. The number of
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Directors may be decreased at any time and from time to time by a majority of
the Directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
Directors. The directors shall be elected at the annual meeting or at any
special meeting of stockholders, or by written consent in lieu of an annual or
special meeting of the stockholders, subject to the provisions of Article I,
Section 10 of these By-Laws, (provided, however, that if such consent is less
than unanimous, such action by written consent may be in lieu of holding an
annual meeting only if all of the directorships to which directors could be
elected at an annual meeting held at the effective time of such action are
vacant and are filled by such action), except as provided in section 3 of this
Article, and each director elected shall hold office until his successor is
elected and qualified, unless sooner displaced. Directors need not be
stockholders.
Section 2. ENLARGEMENT. The number of the Board of Directors may be
increased at any time by vote of a majority of the Directors then in office.
Section 3. VACANCIES. Vacancies and newly created Directorships
resulting from any increase in the authorized number of Directors may be filled
by a majority of the Directors then in office, though less than a quorum, or by
a sole remaining director, and the Directors so chosen shall hold office until
the next annual election and until their successors are duly elected and shall
qualify, unless sooner displaced. If there are no Directors in office, then an
election of Directors may be held in the manner provided by statute. In the
event of a vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law or these By-Laws, may exercise the powers of the full
board until the vacancy is filled.
Section 4. RESIGNATION AND REMOVAL. Any Director may resign at any time
upon written notice to the Corporation at its principal place of business or to
the Chief Executive Officer or Secretary. Such resignation shall be effective
upon receipt unless it is specified to be effective at some other time or upon
the happening of some other event. Any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of Directors, unless otherwise
specified by law or the certificate of incorporation.
Section 5. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors, which may exercise all powers of the
Corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these By-Laws directed or required to be
exercised or done by the stockholders.
Section 6. CHAIRMAN OF THE BOARD. If the Board of Directors appoints a
Chairman of the Board, he shall, when present, preside at all meetings of the
stockholders and the Board of Directors. He shall perform such duties and
possess such powers as are customarily vested in the office of the Chairman of
the Board or as may be vested in him by the Board of Directors.
Section 7. PLACE OF MEETINGS. The Board of Directors may hold meetings,
both regular and special, either within or without the State of Delaware.
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Section 8. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time to
time be determined by the board; provided that any director who is absent when
such a determination is made shall be given prompt notice of such determination.
A regular meeting of the Board of Directors may be held without notice
immediately after and at the same place as the annual meeting of stockholders.
Section 9. SPECIAL MEETINGS. Special meetings of the board may be
called by the Chief Executive Officer, the Chairman of the Board (if any) or on
the written request of two (2) or more Directors, or by one Director in the
event that there is only one Director in office. Two (2) days' notice to each
Director, either personally or by telegram, cable, telecopy, electronic mail,
commercial delivery service, telex or similar means sent to his business or home
address, or three (3) days' notice by written notice deposited in the mail,
shall be given to each director by the Secretary or by the officer or one of the
Directors calling the meeting. A notice or waiver of notice of a meeting of the
Board of Directors need not specify the purposes of the meeting.
Section 10. QUORUM, ACTION AT MEETING, ADJOURNMENTS. At all meetings of
the Board a majority of Directors then in office, but in no event less than one
third of the entire Board, shall constitute a quorum for the transaction of
business and the act of a majority of the Directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by law or by the Certificate of
Incorporation. For purposes of this section, the term "entire Board" shall mean
the number of Directors last fixed by the stockholders or Directors, as the case
may be, in accordance with law and these By-Laws; provided, however, that if
less than all the number so fixed of Directors were elected, the "entire Board"
shall mean the greatest number of Directors so elected to hold office at any one
time pursuant to such authorization. If a quorum shall not be present at any
meeting of the Board of Directors, a majority of the Directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 11. ACTION BY CONSENT. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board of Directors or committee.
Section 12. TELEPHONIC MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, members of the Board of Directors
or of any committee thereof may participate in a meeting of the Board of
Directors or of any committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
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Section 13. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
Board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members of such committee present at any meeting and not disqualified
from voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at such
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to (a) adopting, amending or repealing the By-Laws of the Corporation or any of
them or (b) approving or adopting, or recommending to the stockholders any
action or matter expressly required by law to be submitted to stockholders for
approval. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and make such reports
to the Board of Directors as the Board of Directors may request. Except as the
Board of Directors may otherwise determine, any committee may make rules for the
conduct of its business, but unless otherwise provided by the Directors or in
such rules, its business shall be conducted as nearly as possible in the same
manner as is provided in these By-Laws for the conduct of its business by the
Board of Directors. One-third (1/3) of the members of any committee shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 14. COMPENSATION. Unless otherwise restricted by the
Certificate of incorporation or these By-Laws, the Board of Directors shall have
the authority to fix from time to time the compensation of Directors. The
Directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and the performance of their responsibilities as
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors and/or a stated salary as director. No such payment shall
preclude any director from serving the Corporation or its parent or subsidiary
corporations in any other capacity and receiving compensation therefor. The
Board of Directors may also allow compensation for members of special or
standing committees for service on such committees.
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ARTICLE III
OFFICERS
Section 1. ENUMERATION. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a President, a Secretary and a Treasurer
and such other officers with such titles, terms of office and duties as the
Board of Directors may from time to time determine, including a chairman of the
board, one or more Vice-Presidents, and one or more Assistant Secretaries and
assistant Treasurers. If authorized by resolution of the Board of Directors, the
Chief Executive Officer may be empowered to appoint from time to time Assistant
Secretaries and assistant Treasurers. Any number of offices may be held by the
same person, unless the certificate of incorporation or these By-Laws otherwise
provide.
Section 2. ELECTION. The Board of Directors at its first meeting after
each annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer. Other officers may be appointed by the Board of Directors at such
meeting, at any other meeting, or by written consent.
Section 3. TENURE. The officers of the Corporation shall hold office
until their successors are chosen and qualify, unless a different term is
specified in the vote choosing or appointing him, or until his earlier death,
resignation or removal. Any officer elected or appointed by the Board of
Directors or by the Chief Executive Officer may be removed at any time, with or
without cause, by the affirmative vote of a majority of the Board of Directors
or a committee duly authorized to do so, except that any officer appointed by
the Chief Executive Officer may also be removed at any time, with or without
cause, by the Chief Executive Officer. Any vacancy occurring in any office of
the Corporation may be filled by the Board of Directors, at its discretion. Any
officer may resign by delivering his written resignation to the Corporation at
its principal place of business or to the Chief Executive Officer or the
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event. Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his or her resignation or removal, or any right to damages
on account of such removal, whether his or her compensation be by the month or
by the year or otherwise, unless such compensation is expressly provided in a
duly authorized written agreement with the Corporation.
Section 4. PRESIDENT. The President shall be the Chief Executive
Officer unless the Board of Directors otherwise provides. If no Chief Executive
Officer shall have been appointed by the Board of Directors, all references
herein to the "Chief Executive Officer" shall be to the President. The President
shall, unless there is no Chairman of the Board or that the Chairman or Vice
Chairman, if any, are not available, and unless the Board of Directors provides
otherwise in a specific instance or generally, preside at all meetings of the
stockholders and the Board of Directors, have general and active management of
the business of the Corporation and see that all orders and resolutions of the
Board of Directors are carried into effect. The President shall execute bonds,
mortgages, and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation.
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Section 5. VICE-PRESIDENTS. In the absence of the President or in the
event of his or her inability or refusal to act, the Vice-President, or if there
be more than one Vice-President, the Vice-Presidents in the order designated by
the Board of Directors or the Chief Executive Officer (or in the absence of any
designation, then in the order determined by their tenure in office) shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The
Vice-Presidents shall perform such other duties and have such other powers as
the Board of Directors or the Chief Executive Officer may from time to time
prescribe.
Section 6. SECRETARY. The Secretary shall have such powers and perform
such duties as are incident to the office of Secretary. The Secretary shall
maintain a stock ledger and prepare lists of stockholders and their addresses as
required and shall be the custodian of corporate records. The Secretary shall
attend all meetings of the Board of Directors and all meetings of the
stockholders and record all the proceedings of the meetings of the Corporation
and of the Board of Directors in a book to be kept for that purpose and shall
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be from time to time prescribed by the Board of Directors or Chief
Executive Officer, under whose supervision the Secretary shall be. The Secretary
shall have custody of the corporate seal of the Corporation and the Secretary,
or an assistant Secretary, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by his or her
signature or by the signature of such assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his or her signature.
Section 7. ASSISTANT SECRETARIES. The assistant Secretary, or if there
be more than one, the assistant secretaries in the order determined by the Board
of Directors, the Chief Executive Officer or the Secretary (or if there be no
such determination, then in the order determined by their tenure in office),
shall, in the absence of the Secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the Secretary
and shall perform such other duties and have such other powers as the Board of
Directors, the Chief Executive Officer or the Secretary may from time to time
prescribe. In the absence of the Secretary or any assistant Secretary at any
meeting of stockholders or Directors, the person presiding at the meeting shall
designate a temporary or acting Secretary to keep a record of the meeting.
Section 8. TREASURER. The Treasurer shall perform such duties and shall
have such powers as may be assigned to him or her by the Board of Directors or
the Chief Executive Officer. In addition, the Treasurer shall perform such
duties and have such powers as are incident to the office of Treasurer. The
Treasurer shall have the custody of the corporate funds
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and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. He shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the Chief Executive Officer and the Board of Directors, when the Chief Executive
Officer or Board of Directors so requires, an account of all his or her
transactions as Treasurer and of the financial condition of the Corporation.
Section 9. ASSISTANT TREASURERS. The assistant Treasurer, or if there
shall be more than one, the assistant Treasurers in the order determined by the
Board of Directors, the Chief Executive Officer or the Treasurer (or if there be
no such determination, then in the order determined by their tenure in office),
shall, in the absence of the Treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the Treasurer
and shall perform such other duties and have such other powers as the Board of
Directors, the Chief Executive Officer or the Treasurer may from time to time
prescribe.
Section 10. BOND. If required by the Board of Directors, any officer
shall give the Corporation a bond in such sum and with such surety or sureties
and upon such terms and conditions as shall be satisfactory to the Board of
Directors, including without limitation a bond for the faithful performance of
the duties of his office and for the restoration to the Corporation of all
books, papers, vouchers, money and other property of whatever kind in his
possession or under his control and belonging to the Corporation.
ARTICLE IV
NOTICES
Section 1. DELIVERY. Whenever, under the provisions of law, or of the
certificate of incorporation or these By-Laws, written notice is required to be
given to any director or stockholder, such notice may be given by mail,
addressed to such director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Unless written notice by mail is required by law, written notice
may also be given by telegram, cable, telecopy, commercial delivery service,
telex or similar means, addressed to such director or stockholder at his address
as it appears on the records of the corporation, in which case such notice shall
be deemed to be given when delivered into the control of the persons charged
with effecting such transmission, the transmission charge to be paid by the
Corporation or the person sending such notice and not by the addressee. Oral
notice or other in-hand delivery (in person or by telephone) shall be deemed
given at the time it is actually given.
Section 2. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of law or of the Certificate of Incorporation or of
these By-Laws, a waiver thereof in
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writing, signed by the person or persons entitled to said notice, whether before
or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
INDEMNIFICATION
Section 1. ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.
The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe such person's conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
Section 2. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable unless and only to the extent that the Court of Chancery
of the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
of the State of Delaware or such other court shall deem proper.
Section 3. SUCCESS ON THE MERITS. To the extent that any person
described in Section 1 or 2 of this Article V has been successful on the merits
or otherwise in defense of any
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<PAGE> 17
action, suit or proceeding referred to in said Sections, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 4. SPECIFIC AUTHORIZATION. Any indemnification under Section 1
or 2 of this Article V (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of any person described in said Sections is proper in the
circumstances because he has met the applicable standard of conduct set forth in
said Sections. Such determination shall be made (1) by the Board of Directors by
a majority vote of Directors who were not parties to such action, suit or
proceeding (even though less than a quorum), or (2) if there are no
disinterested Directors or if a majority of disinterested Directors so directs,
by independent legal counsel (who may be regular legal counsel to the
Corporation) in a written opinion, or (3) by the stockholders of the
Corporation.
Section 5. ADVANCE PAYMENT. Expenses incurred in defending a pending or
threatened civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of any person
described in said Section to repay such amount if it shall ultimately be
determined that he or she is not entitled to indemnification by the Corporation
as authorized in this Article V.
Section 6. NON-EXCLUSIVITY. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other Sections of this Article
V shall not be deemed exclusive of any other rights to which those provided
indemnification or advancement of expenses may be entitled under any By-Law,
agreement, vote of stockholders or disinterested Directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
Section 7. INSURANCE. The Board of Directors may authorize, by a vote
of the majority of the full board, the Corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article V.
Section 8. CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article V shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 9. SEVERABILITY. If any word, clause or provision of this
Article V or any award made hereunder shall for any reason be determined to be
invalid, the provisions hereof shall not otherwise be affected thereby but shall
remain in full force and effect.
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<PAGE> 18
Section 10. INTENT OF ARTICLE. The intent of this Article V is to
provide for indemnification and advancement of expenses to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware. To the
extent that such Section or any successor section may be amended or supplemented
from time to time, this Article V shall be amended automatically and construed
so as to permit indemnification and advancement of expenses to the fullest
extent from time to time permitted by law.
ARTICLE VI
CAPITAL STOCK
Section 1. CERTIFICATES OF STOCK. Every holder of stock in the
Corporation shall be entitled to have a certificate, signed by, or in the name
of the Corporation by, the Chairman or Vice-chairman of the Board of Directors
(if any), or the President or a Vice-President and the Treasurer or an assistant
Treasurer, or the Secretary or an assistant Secretary of the Corporation,
certifying the number of shares owned by such holder in the Corporation. Any or
all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue. Certificates may be issued for partly
paid shares and in such case upon the face or back of the certificates issued to
represent any such partly paid shares, the total amount of the consideration to
be paid therefor, and the amount paid thereon shall be specified. Each
certificate for shares of stock which are subject to any restriction on transfer
pursuant to the Certificate of Incorporation, the By-Laws, applicable securities
laws or any agreement among any number of shareholders or among such holders and
the Corporation shall have conspicuously noted on the face or back of such
certificate either the full text of such restriction or a statement of the
existence of such restriction.
Section 2. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to give
reasonable evidence of such loss, theft or destruction, to advertise the same in
such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed or the issuance of such new certificate.
Section 3. TRANSFER OF STOCK. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares, duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and proper evidence of compliance with other
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<PAGE> 19
conditions to rightful transfer, it shall be the duty of the Corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books.
Section 4. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which shall not be more than sixty (60)
days nor less then ten (10) days before the date of such meeting. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting. If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. In order that the Corporation may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date is fixed, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by statute,
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation as provided
in Section 10 of Article I. If no record date is fixed and prior action by the
Board of Directors is required, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the date on which the Board of Directors adopts the
resolution taking such prior action. In order that the Corporation may determine
the stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise
any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted, and which shall be not more than sixty (60) days prior
to such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
Section 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
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<PAGE> 20
ARTICLE VII
CERTAIN TRANSACTIONS
Section 1. TRANSACTIONS WITH INTERESTED PARTIES. No contract or
transaction between the Corporation and one or more of its Directors or
officers, or between the Corporation and any other corporation, partnership,
association, or other organization in which one or more of its Directors or
officers are Directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the board or committee thereof
which authorizes the contract or transaction or solely because his or their
votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested Directors, even though the disinterested
Directors be less than a quorum; or
(b) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof, or the stockholders.
Section 2. QUORUM. Common or interested Directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, if any, may be declared by the Board of Directors at any regular or
special meeting or by written consent, pursuant to law. Dividends may be paid in
cash, in property, or in shares of the capital stock, subject to the provisions
of the certificate of incorporation.
Section 2. RESERVES. The Directors may set apart out of any funds of
the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve.
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<PAGE> 21
Section 3. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 5. SEAL. The Board of Directors may, by resolution, adopt a
corporate seal. The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the Board
of Directors.
Section 6. TIME PERIODS. In applying any provision of these By-Laws
that requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
ARTICLE IX
AMENDMENTS
Section 1. BY THE BOARD OF DIRECTORS. Except as is otherwise set forth
in these By-Laws, these By-Laws may be altered, amended or repealed, or new
by-laws may be adopted, by the affirmative vote of a majority of the directors
present at any regular or special meeting of the Board of Directors at which a
quorum is present.
Section 2. BY THE STOCKHOLDERS. Except as otherwise set forth in these
By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be
adopted by the affirmative vote of the holders of a majority of the votes cast
at any regular meeting of stockholders, or at any special meeting of
stockholders, after the determination of a quorum, provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been stated
in the notice of such special meeting.
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<PAGE> 22
Register of Amendments to the By-Laws
<TABLE>
<CAPTION>
Date Section Affected Change
---- ---------------- ------
<S> <C> <C>
April 1, 1999 Art. III, Section 4 deleted in its entirety and replaced
</TABLE>
<PAGE> 1
Exhibit 4.01
SILKNET SOFTWARE, INC. transferable only on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued under and subject to the laws of the state of Delaware and to
the Certificate of Incorporation and By-Laws of the Corporation, all as in
effect from time to time. This Certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Vice President, Chief Financial Officer President
and Treasurer and Chief Executive Officer
SILKNET SOFTWARE, INC.
The Corporation is authorized to issue more than one class of stock. Upon
written request, made by the holder of this Certificate, the Corporation will
furnish to such holder without charge a copy of the full text of the
preferences, voting powers, qualifications and special and relative rights of
the shares of each class authorized to be issued, as set forth in the
Certificate of Incorporation, as amended.
For value received, _____________________________ hereby sell, assign and
transfer unto _____________________________ shares of the capital stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ________________________________ Attorney to transfer the said stock on
the books of the within named Corporation with full power of substitution in the
premises.
Dated_____________________________
________________________________________________
Notice: The signature to this assignment must correspond
with the name as written upon the face of the
certificate in every particular without alteration
or enlargement or any change whatever.
Signature(s) Guaranteed: The signature(s) should be guaranteed by an
eligible guarantor institution (banks,
stockbrokers, savings and loan associations and
credit unions with membership in an approved
signature guarantee medallion program), pursuant
to S.E.C. Rule 17Ad-15.
<PAGE> 1
Exhibit 5.01
April 14, 1999
Silknet Software, Inc.
50 Phillippe Cote Street
Manchester, New Hampshire 03101
RE: Registration Statement on Form S-1
Pursuant to Rule 462(b)
----------------------------------
Ladies and Gentlemen:
This opinion relates to an aggregate of 3,450,000 shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Silknet Software, Inc.
(the "Company"), which are the subject matter of a Registration Statement on
Form S-1 with the Securities and Exchange Commission (the "Commission") as filed
on March 3, 1999, as amended by Amendment No. 1 to Form S-1 Registration
Statement as filed with the Commission on March 4, 1999, as further amended by
Amendment No. 2 to Form S-1 Registration Statement as filed with the Commission
on April 14, 1999 (the "Registration Statement").
The 3,450,000 shares of Common Stock covered by the Registration
Statement consist of 3,000,000 shares being sold by the Company and an
additional 450,000 shares subject to an over-allotment option (the
"Over-Allotment Option") granted by the Company to the underwriters to be named
in the prospectus (the "Prospectus") incorporated by reference in the
Registration Statement.
Based upon such investigation as we have deemed necessary, we are of
the opinion that when the shares of Common Stock to be sold by the Company
pursuant to the Prospectus have been issued and paid for in accordance with the
terms described in the Prospectus, such shares of Common Stock will have been
validly issued and will be fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.01 to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Legal Matters."
Very truly yours,
/s/ TESTA, HURWITZ & THIBEAULT, LLP
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE> 1
EXHIBIT 10.01
SILKNET SOFTWARE, INC.
EMPLOYEE STOCK OPTION PLAN
--------------------------
THIS EMPLOYEE STOCK OPTION PLAN (this "PLAN"), dated August 8, 1995
(the "EFFECTIVE DATE"), established by and for the benefit of Silknet Software,
Inc., a New Hampshire corporation (the "COMPANY").
RECITALS:
--------
This Plan is intended to provide employees of Company, and its
parent and subsidiary corporations (each, a "RELATED CORPORATION"), if any, with
opportunities to purchase stock in Company pursuant to options granted under
this Plan. Certain of those options may qualify as "incentive stock options"
("ISO" or "ISOS") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "CODE"), and certain of those options may not qualify as ISOs and
thereby be treated as nonqualified options ("NQO" or "NQOS"). Both ISOs and NQOs
are referred to in this Plan individually as an "OPTION" and collectively as
"OPTIONS".
1. SHARES SUBJECT TO PLAN.
(a) The maximum aggregate number of shares (the "SHARES") of Company's
common stock, no par value per share (the "STOCK"), for which Options may be
granted under this Plan is Two Million Three Hundred Ninety-One Thousand Nine
Hundred (2,391,900) (the "AGGREGATE NUMBER OF SHARES"). The Aggregate Number of
Shares is subject to adjustment pursuant to the provisions of Section 6(f).
(b) The Board of Directors of Company (the "BOARD"), shall make such
Shares available from authorized but unissued shares of Stock.
2. ELIGIBILITY. The persons eligible to be granted Options under this
Plan shall consist of such employees of Company and its Related Corporations, if
any, as may be designated from time to time by the Board. Such eligible
employees may include employees who are also officers, directors, or
shareholders of Company or its Related Corporations, if any, and/or employees
who have previously been granted one or more Options under this Plan.
3. ADMINISTRATION OF PLAN.
(a) This Plan shall be supervised and administered by the Board.
Without limiting the generality of the foregoing, the Board shall, subject to
the provisions of this Plan, have the authority to determine:
<PAGE> 2
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(i) the employees of Company or its Related Corporations, if
any, to whom Options may be granted;
(ii) the time or times at which options may be granted;
(iii) the option price of the Shares subject to each Option;
(iv) whether each Option granted shall be an ISO or an NQO;
(v) the time or times when each Option shall be exercisable
and the manner of exercise; and
(vi) what restrictions, if any, shall be imposed on the Shares
subject to each Option and the nature of any such
restrictions.
(b) The Board shall be responsible for interpreting and construing the
provisions of this Plan, and the Board may adopt, amend, and rescind such rules
and regulations for the administration of this Plan as the Board may deem
necessary or desirable.
(c) No member of the Board shall vote on the grant of an Option to such
member or any other decision taken by the Board with respect to any Option
granted to such member; provided, that any such member may (i) be counted in
determining the existence of a quorum at any meeting of the Board during which
action is taken with respect to any Option granted to such member, and (ii) sign
a consent vote signed by all of the members of the Board.
(d) All actions taken by the Board in the administration of this Plan
shall be final and binding on all interested persons. No director or officer of
Company or any Related Corporation shall be liable for any action or
determination made in good faith with respect to this Plan or any Option granted
under this Plan.
4. ISO PROVISIONS. To the extent that the following provisions are
necessary in order to qualify an Option as an "incentive stock option" under the
Code, and then only to the extent of such necessity, each Employee Stock Option
Agreement (as defined in Section 5) covering an ISO granted by Company shall
include the following provisions:
(a) Each ISO must be granted within ten (10) years from the Effective
Date.
(b) No ISO shall be exercisable after the expiration of ten (10) years
from the date such ISO is granted.
<PAGE> 3
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(c) The option price of each Share under each ISO shall not be less
than the Fair Market Value (as defined below) of such Share at the time such ISO
is granted. For purposes hereof, the "FAIR MARKET VALUE" of a Share shall, if
the Stock is publicly traded, be determined as of the last business day for
which the prices or quotes discussed in this sentence are available prior to the
date such ISO is granted and shall mean (i) the average (on that date) of the
high and low per share prices of the Stock on the principal national securities
exchange on which the Stock is traded, if the Stock is then traded on a national
securities exchange; or (ii) the last reported sale price per share (on that
date) of the Stock on the NASDAQ National Market List, if the Stock is not then
traded on a national securities exchange; or (iii) the closing per share bid
price (or average of bid prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Stock is not reported
on the NASDAQ National Market List. However, if the Stock is not publicly traded
at the time an Option is granted under this Plan, Fair Market Value shall be
deemed to be the per share fair value of the Stock as determined by the Board
after taking into consideration all factors which it deems appropriate
(including, without limitation, any recent sale and offer prices of the Stock in
private transactions negotiated at arm's length).
(d) Notwithstanding the provisions of subsections (b) and (c) above, in
the case of an ISO to be granted to an employee who, applying the rules of
attribution set forth in Section 424(d) of the Code, owns shares of Stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of Company (or, if applicable, of the Related Corporation who
employs such employee), (i) the per share option price shall not be less than
one hundred ten percent (110%) of the per share Fair Market Value of the Stock
at the time such ISO is granted, and (ii) the ISO shall not be exercisable after
the expiration of five (5) years from the date such ISO is granted.
(e) No ISO shall be transferable by the optionee otherwise than by will
or the laws of descent and distribution, and each ISO shall be exercisable,
during the optionee's lifetime, only by the optionee.
5. EMPLOYEE STOCK OPTION AGREEMENT. The grant of each Option shall be
evidenced by the execution and delivery by Company and the optionee of an option
agreement ("EMPLOYEE STOCK OPTION AGREEMENT") containing such terms and
conditions, subject to the provisions of this Plan, as may be determined by the
Board or by one or more officers of Company designated by the Board. Without
limiting the generality of the foregoing:
(a) the provisions of the Employee Stock Option Agreements need not be
the same;
<PAGE> 4
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(b) the provisions of this Plan (including, without limitation, Section
4) shall not prohibit the inclusion of other restrictions or more restrictive
provisions in the Employee Stock Option Agreement for any Option; and
(c) the provisions of Section 4 shall not prohibit the inclusion of one
or more of the restrictions set forth therein in the Employee Stock Option
Agreement for any NQO (or, in the event that at the time of the grant of an
Option intended to qualify as an "incentive stock option" under the Code any
such restriction is not required by the Code, for any such option).
6. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to any Option granted to such optionee under this
Plan shall, subject to the provisions of Section 7 and except as may otherwise
be specifically provided in the Employee Stock Option Agreement relating to such
Option, be adjusted as follows:
(a) If the outstanding shares of Stock shall be subdivided or combined
into a greater or smaller number of shares or if Company shall issue any shares
of Stock as a stock dividend on its outstanding Stock, the number of shares of
Stock deliverable upon the exercise of such Option shall be proportionately
increased or decreased (as the case may be), and appropriate adjustments shall
be made in the option price per share to reflect such subdivision, combination,
or stock dividend. Such changes shall be made in such manner as the Board may
reasonably determine to be equitable, and any such changes so made by the Board
shall be final and binding upon such optionee.
(b) In the event of a merger, consolidation, acquisition,
recapitalization, or other reorganization involving Company pursuant to which
securities of Company or of another corporation are issued with respect to the
outstanding shares of the Stock, the optionee, upon exercising such Option,
shall be entitled to receive for the option price paid upon such exercise the
securities the optionee would have received if the optionee had exercised such
Option immediately prior to such event.
(c) In the event of the sale of all or substantially all of the assets
of Company, the dissolution of Company, or the adoption of a plan of liquidation
of Company, such option will terminate immediately prior to the consummation of
the proposed action or at such other time and subject to such other conditions
as shall be determined by the Board.
(d) Except as expressly provided in this Section, no issuance by
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of the Shares subject to any
Options granted under this Plan. Furthermore,
<PAGE> 5
-5-
no adjustments shall be made for dividends paid in cash or in property other
than securities of company.
(e) No fractional shares shall be issued under this Plan, and the
optionee shall receive from Company cash in lieu of any such fractional shares.
(f) Upon the happening of any of the events described in subsections
(a) or (b) above, the Aggregate Number of Shares shall also be appropriately
adjusted.
(g) If any employee owning restricted Shares obtained by exercise of an
Option granted under this Plan receives additional shares or other securities in
connection with a transaction described in subsections (a) or (b) above as a
result of owning such restricted Shares, then, unless otherwise determined by
the Board, such additional shares or other securities shall be subject to all of
the terms, conditions, and restrictions applicable to the restricted Shares with
respect to which such additional shares or other securities were issued.
7. ACCELERATION OF OPTION EXERCISE DATE UPON ACQUISITION.
(a) CONSEQUENCES OF AN ACQUISITION.
(i) ACQUISITION INTENDED TO BE ACCOUNTED FOR AS
A POOLING-OF-INTERESTS. Upon the consummation of an Acquisition intended to be
accounted for as a pooling of interests: (x) all outstanding Options shall
remain the obligation of the Company or be assumed by the surviving or acquiring
entity, and there shall be automatically substituted for the shares of Stock
then subject to such Options the consideration payable with respect to the
outstanding shares of Stock in connection with the Acquisition and (y) the
vesting provisions of all Options shall become accelerated by an amount which
represents twenty-five percent (25%) of the remaining unvested portion of any
outstanding Options. In addition to the foregoing, on the first yearly
anniversary of the consummation of the Acquisition, with respect to employees
who remain employees of the Company or the surviving or acquiring entity
immediately following the consummation of the Acquisition and who continuously
remain as such through first anniversary of the consummation of the Acquisition,
on such first anniversary date, all Options then outstanding shall become
immediately exercisable in full and will terminate, to the extent unexercised,
on their scheduled expiration date. In the event that any such employee who
remains an employee of the Company or the acquiring or surviving entity
immediately following the consummation of the Acquisition is terminated "WITHOUT
CAUSE" (as defined below) or terminates his or her own employment "FOR GOOD
REASON" (as defined below) prior to the first anniversary of the consummation of
the Acquisition, then the foregoing sentence shall be deemed to be immediately
applicable to such employee on such termination date.
Notwithstanding the foregoing paragraph, as to any employee, the
remaining unvested portion of any Option held by such person shall become vested
and exercisable in the event of an Acquisition to be treated as a pooling of
interests, if the acceleration of such vesting is otherwise set forth in any
employment offer letter, employment agreement, option agreement or other
agreement with such person and such offer or agreement is executed at the time
of, or reasonably contemporaneous with, the initial employment of the employee.
It shall be deemed to be a constructive termination "WITHOUT CAUSE" or
"FOR GOOD REASON" if: (i) the optionee's responsibilities and executive
authority are reduced or diluted in any material way without the Participant's
written consent; (ii) the optionee's annual salary or bonus arrangement is
reduced in any material way without written consent; (iii) the optionee is
relocated to another office or facility to a location outside of a radius of 25
miles from any Company facility at which the optionee was employed at the time
of the Acquisition and without the optionee's written consent; (iv) there occurs
a termination of optionee's rights to any benefits to which he is entitled to or
a reduction in scope or value thereof without the prior written consent of the
optionee; (v) there occurs an Acquisition, unless the successor to which all or
a significant portion of the Company's business and/or assets have been
transferred (directly or by operation of law) shall have assumed all duties and
obligations of the Company under this Plan.
(ii) ACQUISITION INTENDED TO BE ACCOUNTED FOR
UNDER THE PURCHASE METHOD. Unless otherwise expressly provided in the applicable
Option, upon the occurrence of an Acquisition intended to be accounted for under
the purchase method, the Board or the board of directors of the surviving or
acquiring entity (as used in this Section 7(a)(ii), also the "BOARD"), shall, as
to outstanding Options (on the same basis or on different bases, as the Board
shall specify), make appropriate provision for the continuation of such Options
by the Company or the assumption of such Options by the surviving or acquiring
entity and by substituting on an equitable basis for the shares then subject to
such Options either (A) the consideration payable with respect to the
outstanding shares of Stock in connection with the Acquisition, (B) shares of
stock of the surviving or acquiring corporation or (C) such other securities as
the Board deems appropriate, the fair market value of which (as determined by
the Board in its sole discretion) shall not materially differ from the fair
market value of the shares of Stock subject to such Options immediately
preceding the Acquisition. In addition to or in lieu of the foregoing, with
respect to outstanding Options, the Board may, upon written notice to the
affected optionees, provide that one or more Options must be exercised, to the
extent then exercisable or to be exercisable as a result of the Acquisition,
within a specified number of days of the date of such notice, at the end of
which period such Options shall terminate; or terminate one or more Options in
exchange for a cash payment equal to the excess of the fair market value (as
determined by the Board in its sole discretion) of the shares subject to such
Options (to the extent then exercisable or to be exercisable as a result of the
Acquisition) over the exercise price thereof.
The Board or the board of directors of any entity assuming the
obligations of the Company hereunder, may, as to outstanding Options, also take
one or more of the following actions: (i) accelerate the date of exercise of
such Options or of any installment of any such Options; or (ii) terminate all
Options in exchange for the right to participate in any stock option or other
employee benefit plan of any successor corporation.
The foregoing provisions are subject in all instances to the approval
of the Board and any accounting considerations for any acquisition which is
intended to be treated as a "pooling of interests" transaction pursuant to the
Accounting Principles Board (APB) Opinion No. 16, if any discretionary action by
the Board of Directors would otherwise violate the accounting rules for
treatment of the Acquisition as a "pooling of interests" under APB No. 16.
b. ACQUISITION DEFINED. An "ACQUISITION" shall mean: (x) any
merger, consolidation or purchase of outstanding capital stock of the Company
after which the voting securities of the Company outstanding immediately prior
thereto represent (either by remaining outstanding or by being converted into
voting securities of the surviving or acquiring entity) less than 50% of the
combined voting power of the voting securities of the Company or such surviving
or acquiring entity outstanding immediately after such event (other than as a
result of a financing transaction); or (y) any sale of all or substantially all
of the capital stock or assets of the Company (other than in a spin-off or
similar transaction).
c. POOLING-OF-INTERESTS ACCOUNTING. If the Company proposes to
engage in an Acquisition intended to be accounted for as a pooling-of-interests,
and in the event that the provisions of this Plan or of any Option hereunder, or
any actions of the Board taken in connection with such Acquisition, are
determined by the Company's or the acquiring company's independent public
accountants to cause such Acquisition to fail to be accounted for as a
pooling-of-interests, then such provisions or actions shall be amended or
rescinded by the Board, without the consent of any optionee, to be consistent
with pooling-of-interests accounting treatment for such Acquisition.
d. PARACHUTE PAYMENTS AND PARACHUTE AWARDS. Notwithstanding the
provisions of Section 7(a)(i), if, in connection with an Acquisition described
therein, a tax under Section 4999 of the Code would be imposed on the
Participant (after taking into account the exceptions set forth in Sections
280G(b)(4) and 280G(b)(5) of the Code), then the number of Options which shall
become exercisable, realizable or vested as provided in such section shall be
reduced (or delayed), to the minimum extent necessary, so that no such tax would
be imposed on the optionee (the Options not becoming so accelerated, realizable
or vested, the "PARACHUTE OPTIONS"); provided, however, that if the "AGGREGATE
PRESENT VALUE" of the Parachute Options would exceed the tax that, but for this
sentence, would be imposed on the optionee under Section 4999 of the Code in
connection with the Acquisition, then the Options shall become immediately
exercisable, realizable and vested without regard to the provisions of this
sentence. For purposes of the preceding sentence, the "AGGREGATE PRESENT VALUE"
of an Option shall be calculated on an after-tax basis (other than taxes imposed
by Section 4999 of the Code) and shall be based on economic principles rather
than the principles set forth under Section 280G of the Code and the regulations
promulgated thereunder. All determinations required to be made under this
Section 7(d) shall be made by the Company.
e. AMENDMENT OF AWARDS. The Board may amend, modify or terminate
any outstanding Option including, but not limited to, substituting therefor
another Option of the same or a different type, changing the date of exercise or
realization, and converting an ISO to a NQO, provided that, except as otherwise
provided in Section 7(c), the optionee's consent to such action shall be
required unless the Board determines that the action, taking into account any
related action, would not materially and adversely affect the optionee.
f. CONDITIONS ON DELIVERY OF STOCK. The Company will not be
obligated to deliver any shares of Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Option have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the optionee has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
g. ACCELERATION. The Board may at any time provide that any
Options shall become immediately exercisable in full or in part, or otherwise
realizable in full or in part, as the case may be, despite the fact that the
foregoing actions may (i) cause the application of Sections 280G and 4999 of the
Code if a change in control of the Company occurs, or (ii) disqualify all or
part of the Option as an ISO.
8. EMPLOYMENT STATUS. Nothing in this Plan shall be deemed to confer
upon any optionee any right with respect to employment or continued employment
by Company or any Related Corporation for any period of time. Neither the grant
of any Option or the exercise thereof shall interfere in any way with the right
of Company or any Related Corporation at any time to terminate the employment of
any optionee.
9. EXPIRATION OR TERMINATION OF OPTIONS. If any Option granted under
this Plan shall expire or terminate for any reason without having been exercised
in full or shall cease for any reason to be exercisable in whole or in part,
then the unpurchased Shares subject to such Option shall again be available for
grants of Options under this Plan.
10. AMENDMENT, SUSPENSION, TERMINATION, OR WAIVER. The Board may at any
time amend, suspend, or terminate this Plan or waive the benefit of any of the
rights afforded to Company under any Option granted pursuant to this Plan;
provided, that the Board may not increase the Aggregate Number
<PAGE> 6
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of Shares unless such increase is approved by the shareholders of Company within
twelve (12) months after the Board adopts a resolution authorizing such
increase.
11. CONVERSION OF ISOS. The Board, in its sole discretion following
receipt of a written request by any optionee, may take such actions as may be
necessary to convert any outstanding ISO (or any remaining installment or other
portion thereof) previously granted to such optionee into an NQO at any time
prior to the expiration of such ISO, regardless of whether the optionee is an
employee of Company or a Related Corporation at the time of such conversion.
Such actions may include, but not be limited to, extending the exercise period
or reducing the exercise price of the appropriate installments) of such Option.
At the time of such conversion, the Board may impose such conditions on the
exercise of any resulting NQO as the Board in its discretion may determine, so
long as such conditions are not inconsistent with this Plan. Nothing in this
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into NQOs, and no such conversion shall occur unless and until the
Board takes appropriate action.
12. APPLICATION OF FUNDS. The proceeds received by Company from the
sale of Shares pursuant to Options granted under this Plan shall be used for
Company's general corporate purposes.
13. GOVERNMENTAL REGULATION. Company's obligation to sell and deliver
Shares under this Plan or under any Employee Stock Option Agreement is subject
to Company obtaining all required approvals of all governmental authorities
having jurisdiction over the authorization, issuance, or sale of such Shares.
14. GOVERNING LAW. This Plan, and all Employee Stock Option Agreements
executed and delivered pursuant hereto, shall be governed by and construed in
accordance with the laws of the State of New Hampshire.
15. DURATION OF PLAN. This Plan shall terminate at the expiration of
ten (10) years from the Effective Date unless this Plan is sooner terminated by
the Board. Any Option outstanding under this Plan at the time of the termination
or suspension of this Plan shall remain in effect until such Option shall have
been exercised or shall have expired in accordance with the terms and conditions
of the Employee Stock Option Agreement relating to such Option.
****
Register of Amendments
Date Section Affected Change
- ---- ---------------- ------
April 1, 1999 1 Revised par value and shares
authorized to be issued
under the Plan
April 13, 1999 7 Deleted in its entirety
and replaced
<PAGE> 1
EXHIBIT 10.04
SILKNET SOFTWARE, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
ARTICLE 1 - PURPOSE.
This 1999 Employee Stock Purchase Plan (the "Plan") is intended to
encourage stock ownership by all eligible employees of Silknet Software, Inc.
(the "Company"), a Delaware corporation, and its participating subsidiaries (as
defined in Article 17) so that they may share in the growth of the Company by
acquiring or increasing their proprietary interest in the Company. This Plan is
designed to encourage eligible employees to remain in the employ of the Company
and its participating subsidiaries. This Plan is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423(b) of the
Internal Revenue Code of 1986, as amended (the "Code").
ARTICLE 2 - ADMINISTRATION OF THE PLAN.
This Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). The Committee shall consist of not
less than two non-employee members of the Company's Board of Directors. The
Board of Directors may from time to time remove members from, or add members to,
the Committee. Vacancies on the Committee, howsoever caused, shall be filled by
the Board of Directors. The Committee may select one of its members as Chairman,
and shall hold meetings at such times and places as it may determine. Acts by a
majority of the Committee, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee.
The interpretation and construction by the Committee of any provisions
of this Plan or of any option granted under it, shall be final, unless otherwise
determined by the Board of Directors. The Committee may from time to time adopt
such rules and regulations for carrying out this Plan as it may deem best,
provided that any such rules and regulations shall be applied on a uniform basis
to all employees under the Plan. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith
with respect to this Plan or any option granted under it.
In the event the Board of Directors fails to appoint or refrains from
appointing a Committee, the Board of Directors shall have all power and
authority to administer this Plan. In such event, the word "Committee" wherever
used herein shall be deemed to mean the Board of Directors. The Compensation
Committee of the Board of Directors may also administer this Plan.
<PAGE> 2
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ARTICLE 3 - ELIGIBLE EMPLOYEES.
All employees of the Company or any of its participating subsidiaries whose
customary employment is more than twenty (20) hours per week and for more than
five (5) months in any calendar year and who have completed at least three (3)
months of employment with the Company or its participating subsidiaries shall be
eligible to receive options under this Plan to purchase common stock of the
Company, and all eligible employees shall have the same rights and privileges
hereunder. Persons who are eligible employees on the first business day of any
Payment Period (as defined in Article 5) shall receive their options as of such
day. Persons who become eligible employees after any date on which options are
granted under this Plan shall be granted options on the first day of the next
succeeding Payment Period on which options are granted to eligible employees
under this Plan. Directors who are not employees of the Company shall not be
eligible to receive options under the Plan. In no event, however, may an
employee be granted an option if such employee, immediately after the option was
granted, would be treated as owning stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Company or of any parent corporation or subsidiary corporation, as the terms
"parent corporation" and "subsidiary corporation" are defined in Section 424(e)
and (f) of the Code. For purposes of determining stock ownership under this
paragraph, the rules of Section 424(d) of the Code shall apply, and stock which
the employee may purchase under outstanding options shall be treated as stock
owned by the employee.
ARTICLE 4 - STOCK SUBJECT TO THE PLAN.
The stock subject to the options under this Plan shall be shares of the
Company's authorized but UNISSUED Common Stock, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may be
issued pursuant to this Plan is 350,000 (after giving effect to a 1-for-2
reverse stock split in connection with the Company's reincorporation from the
State of New Hampshire to the State of Delaware), subject to adjustment as
provided in Article 12. If any option granted under this Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part, the unpurchased shares
subject thereto shall again be available under this Plan.
ARTICLE 5 - EFFECTIVENESS; PAYMENT PERIOD AND STOCK OPTIONS.
The first Payment Period during which payroll deductions will be
accumulated under this Plan shall commence immediately upon the initial offering
of the Common Stock to the public (the "Offering"), and shall end on December
31, 1999 (the "First Payment Period"). For the remainder of the duration of this
Plan, Payment Periods shall consist of the six-month periods commencing on
February 1 and August 1 and ending on June 30 and December 31 of each calendar
year.
Twice each year, on the first business day of each Payment Period, the
Company will grant to each eligible employee who is then a participant in this
Plan an option to purchase on the
<PAGE> 3
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last day of such Payment Period, at the Option Price hereinafter provided for, a
maximum of five hundred (500) shares, on condition that such employee remains
eligible to participate in this Plan throughout the remainder of such Payment
Period. The participant shall be entitled to exercise the option so granted only
to the extent of the participant's accumulated payroll deductions on the last
day of such Payment Period. If the participant's accumulated payroll deductions
on the last day of the Payment Period would enable the participant to purchase
more than 500 shares except for the 500-share limitation, the excess of the
amount of the accumulated payroll deductions over the aggregate purchase price
of the 500 shares shall be promptly refunded to the participant by the Company,
without interest. The option price per share for each Payment Period shall be
the lesser of (i) 85% of the average market price of the Common Stock on the
first business day of the Payment Period and (ii) 85% of the average market
price of the Common Stock on the last business day of the Payment Period, in
either event rounded up to avoid fractions of a dollar other than 1/4, 1/2 and
3/4 (the "Option Price"). Notwithstanding the foregoing, with regard to the
First Payment Period, the Option Price shall be calculated as the lesser of (i)
85% of the price per share at which the Common Stock is sold to the underwriters
upon the Offering, without regard to any applicable discounts or commissions
provided to such underwriters, and (ii) 85% of the average market price of the
Common Stock on the last business day of the First Payment Period. The foregoing
limitation on the number of shares subject to options and the Option Price shall
be subject to adjustment as provided in Article 12.
For purposes of this Plan, the term "average market price" on any date
means (i) the average (on that date) of the high and low prices of the Common
Stock on the principal national securities exchange on which the Common Stock is
traded, if the Common Stock is then traded on a national securities exchange; or
(ii) the last reported sale price (on that date) of the Common Stock on the
Nasdaq Market, if the Common Stock is not then traded on a national securities
exchange; or (iii) the average of the closing bid and asked prices last quoted
(on that date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the Nasdaq Market; or (iv) if
the Common Stock is not publicly traded, the fair market value of the Common
Stock as determined by the Committee after taking into consideration all factors
which it deems appropriate, including, without limitation, recent sale and offer
prices of the Common Stock in private transactions negotiated at arm's length.
For purposes of this Plan, the term "business day" means a day on which
there is trading on the Nasdaq Market or the aforementioned national securities
exchange, whichever is applicable pursuant to the preceding paragraph; and if
neither is applicable, a day that is not a Saturday, Sunday or legal holiday in
the Commonwealth of Massachusetts.
No employee shall be granted an option which permits the employee's
right to purchase stock under this Plan, and under all other Section 423(b)
employee stock purchase plans of the Company and any parent or subsidiary
corporations, to accrue at a rate which exceeds $25,000 of fair market value of
such stock (determined on the date or dates that options on such stock were
granted) for each calendar year in which such option is outstanding at any time.
The purpose of the limitation in the preceding sentence is to comply with
Section 423(b)(8) of the Code. If the participant's accumulated payroll
deductions on the last day of the Payment Period would otherwise enable the
participant to purchase Common Stock in excess of the Section 423(b)(8)
<PAGE> 4
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limitation described in this paragraph, the excess of the amount of the
accumulated payroll deductions over the aggregate purchase price of the shares
actually purchased shall be promptly refunded to the participant by the Company,
without interest.
ARTICLE 6 - EXERCISE OF OPTION.
Each eligible employee who continues to be a participant in this Plan
on the last day of a Payment Period shall be deemed to have exercised his or her
option on such date and shall be deemed to have purchased from the Company such
number of full shares of Common Stock reserved for the purpose of this Plan as
the participant's accumulated payroll deductions on such date will pay for at
the Option Price, subject to the 500-share limit of the option and the Section
423(b)(8) limitation described in Article 5. If the individual is not a
participant on the last day of a Payment Period, then he or she shall not be
entitled to exercise his or her option and the amount of his or her payroll
deduction shall be refundable. Only full shares of Common Stock may be purchased
under this Plan. Unused payroll deductions remaining in a participant's account
at the end of a Payment Period by reason of the inability to purchase a
fractional share shall be carried forward to the next Payment Period.
ARTICLE 7 - AUTHORIZATION FOR ENTERING THE PLAN.
An employee may elect to enter this Plan by filling out, signing and
delivering to the Company an authorization:
A. Stating the percentage to be deducted regularly from the employee's
pay;
B. Authorizing the purchase of stock for the employee in each Payment
Period in accordance with the terms of this Plan; and
C. Specifying the exact name or names in which stock purchased for the
employee is to be issued as provided under Article 11 hereof.
Such authorization must be received by the Company at least ten (10)
business days before the first day of the next succeeding Payment Period and
shall take effect only if the employee is an eligible employee on the first
business day of such Payment Period.
Unless a participant files a new authorization or withdraws from this
Plan, the deductions and purchases under the authorization the participant has
on file under this Plan will continue from one Payment Period to succeeding
Payment Periods as long as this Plan remains in effect.
The Company will accumulate and hold for each participant's account the
amounts deducted from his or her pay. No interest will be paid on these amounts.
<PAGE> 5
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ARTICLE 8 - MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS.
An employee may authorize payroll deductions in an amount (expressed as
a whole percentage) not less than one percent (1%) but not more than ten percent
(10%) of the employee's total compensation including base pay or salary
(excluding overtime, bonuses or commissions).
ARTICLE 9 - CHANGE IN PAYROLL DEDUCTIONS.
Deductions may not be increased or decreased during a Payment Period.
However, a participant may withdraw in full from this Plan.
ARTICLE 10 - WITHDRAWAL FROM THE PLAN.
A participant may withdraw from this Plan (in whole but not in part) at
any time prior to the last day of a Payment Period by delivering a withdrawal
notice to the Company, in which event the Company will promptly refund the
entire balance of the employee's deductions not previously used to purchase
stock under this Plan.
To re-enter this Plan, an employee who has previously withdrawn must
file a new authorization at least ten (10) business days before the first day of
the next Payment Period in which he or she wishes to participate. The employee's
re-entry into this Plan becomes effective at the beginning of such Payment
Period, provided that he or she is an eligible employee on the first business
day of the Payment Period.
ARTICLE 11 - ISSUANCE OF STOCK.
Certificates for stock issued to participants shall be delivered as
soon as practicable after each Payment Period by the Company's transfer agent.
Stock purchased under this Plan shall be issued only in the name of the
participant, or if the participant's authorization so specifies, in the name of
the participant and another person of legal age as joint tenants with rights of
survivorship.
ARTICLE 12 - ADJUSTMENTS.
Upon the happening of any of the following described events, a
participant's rights to options granted under this Plan shall be adjusted as
hereinafter provided:
A. In the event that the shares of Common Stock shall be subdivided or
combined into a greater or smaller number of shares or if, upon a
reorganization, split-up, liquidation, recapitalization or the like of the
Company, the shares of Common Stock shall be exchanged for other
securities of the Company, each participant shall be entitled, subject to
the conditions herein stated, to purchase such number of shares of Common
Stock or amount of other securities of the Company as were exchangeable
for the number of shares of Common Stock that such participant would have
been entitled to purchase except for
<PAGE> 6
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such action, and appropriate adjustments shall be made in the purchase
price per share to reflect such subdivision, combination or exchange; and
B. In the event the Company shall issue any of its shares as a stock
dividend upon, or with respect to, the shares of stock of the class which
shall at the time be subject to options hereunder, each participant upon
exercising such an option shall be entitled to receive (for the purchase
price paid upon such exercise) the shares as to which the participant is
exercising his or her option and, in addition thereto (at no additional
cost), such number of shares of the class or classes in which such stock
dividend or dividends were declared or paid, and such amount of cash in
lieu of fractional shares, as is equal to the number of shares thereof and
the amount of cash in lieu of fractional shares, respectively, which the
participant would have received if the participant had been the holder of
the shares as to which the participant is exercising his or her option at
all times between the date of the granting of such option and the date of
its exercise.
Upon the happening of any of the foregoing events, the class and
aggregate number of shares set forth in Article 4 hereof which are subject to
options which have been or may be granted under this Plan and the limitations
set forth in the second paragraph of Article 5 shall also be appropriately
adjusted to reflect the events specified in paragraphs A and B above.
Notwithstanding the foregoing, any adjustments made pursuant to paragraphs A or
B shall be made only after the Committee, based on advice of counsel for the
Company, determines whether such adjustments would constitute a "modification"
(as that term is defined in Section 424 of the Code). If the Committee
determines that such adjustments would constitute a modification, it may refrain
from making such adjustments.
If the Company is to be consolidated with or acquired by another entity
in a merger, a sale of all or substantially all of the Company's assets or
otherwise (an "Acquisition"), the Committee or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor Board")
shall, with respect to options then outstanding under this Plan, either (i) make
appropriate provision for the continuation of such options by arranging for the
substitution on an equitable basis for the shares then subject to such options
either (a) the consideration payable with respect to the outstanding shares of
the Common Stock in connection with the Acquisition, (b) shares of stock of the
successor corporation, or a parent or subsidiary of such corporation, or (c)
such other securities as the Successor Board deems appropriate, the fair market
value of which shall not materially exceed the fair market value of the shares
of Common Stock subject to such options immediately preceding the Acquisition;
or (ii) terminate each participant's options in exchange for a cash payment
equal to the excess of (a) the fair market value on the date of the Acquisition
of the number of shares of Common Stock that the participant's accumulated
payroll deductions as of the date of the Acquisition could purchase, at an
option price determined with reference only to the first business day of the
applicable Payment Period and subject to the 500-share, Code Section 423(b)(8)
and fractional-share limitations on the amount of stock a participant would be
entitled to purchase, over (b) the result of multiplying such number of shares
by such option price.
<PAGE> 7
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The Committee or Successor Board shall determine the adjustments to be
made under this Article 12, and its determination shall be conclusive.
ARTICLE 13 - NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS.
An employee's rights under this Plan are the employee's alone and may
not be transferred or assigned to, or availed of by, any other person other than
by will or the laws of descent and distribution. Any option granted under this
Plan to an employee may be exercised, during the employee's lifetime, only by
the employee.
ARTICLE 14 - TERMINATION OF EMPLOYEE'S RIGHTS.
Whenever a participant ceases to be an eligible employee because of
retirement, voluntary or involuntary termination, resignation, layoff,
discharge, death or for any other reason, his or her rights under this Plan
shall immediately terminate, and the Company shall promptly refund, without
interest, the entire balance of his or her payroll deduction account under this
Plan. Notwithstanding the foregoing, eligible employment shall be treated as
continuing intact while a participant is on military leave, sick leave or other
bona fide leave of absence, for up to 90 days, or, if longer than 90 days, for
so long as the participant's right to re-employment is guaranteed either by
statute or by contract.
If a participant's payroll deductions are interrupted by any legal
process, a withdrawal notice will be considered as having been received from the
participant on the day the interruption occurs.
ARTICLE 15 - TERMINATION AND AMENDMENTS TO PLAN.
Unless terminated sooner as provided below, this Plan shall terminate
on December 31, 2009. This Plan may be terminated at any time by the Company's
Board of Directors but such termination shall not affect options then
outstanding under this Plan. It will terminate in any case when all or
substantially all of the unissued shares of stock reserved for the purposes of
this Plan have been purchased. If at any time shares of stock reserved for the
purpose of this Plan remain available for purchase but not in sufficient number
to satisfy all then unfilled purchase requirements, the available shares shall
be apportioned among participants in proportion to the amount of payroll
deductions accumulated on behalf of each participant that would otherwise be
used to purchase stock, and this Plan shall terminate. Upon such termination or
any other termination of this Plan, all payroll deductions not used to purchase
stock will be refunded, without interest.
The Committee or the Board of Directors may from time to time adopt
amendments to this Plan provided that, without the approval of the stockholders
of the Company, no amendment may (i) increase the number of shares that may be
issued under this Plan; (ii) change the class of employees eligible to receive
options under this Plan, if such action would be treated as the adoption of a
new plan for purposes of Section 423(b) of the Code; or (iii) cause Rule 16b-3
under the Securities Exchange Act of 1934 to become inapplicable to this Plan.
<PAGE> 8
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ARTICLE 16 - LIMITS ON SALE OF STOCK PURCHASED UNDER THE PLAN.
This Plan is intended to provide shares of Common Stock for investment
and not for resale. The Company does not, however, intend to restrict or
influence any employee in the conduct of his or her own affairs. An employee
may, therefore, sell stock purchased under this Plan at any time the employee
chooses, subject to compliance with any applicable Federal or state securities
laws and subject to any restrictions imposed under Article 21 to ensure that tax
withholding obligations are satisfied. THE EMPLOYEE ASSUMES THE RISK OF ANY
MARKET FLUCTUATIONS IN THE PRICE OF THE STOCK.
ARTICLE 17 - PARTICIPATING SUBSIDIARIES.
The term "participating subsidiary" shall mean any present or future
subsidiary of the Company, as that term is defined in Section 424(f) of the
Code, which is designated from time to time by the Board of Directors to
participate in this Plan. The Board of Directors shall have the power to make
such designation before or after this Plan is approved by the stockholders.
ARTICLE 18 - OPTIONEES NOT STOCKHOLDERS.
Neither the granting of an option to an employee nor the deductions
from his or her pay shall constitute such employee a stockholder of the shares
covered by an option until such shares have been actually purchased by the
employee.
ARTICLE 19 - APPLICATION OF FUNDS.
The proceeds received by the Company from the sale of Common Stock
pursuant to options granted under this Plan will be used for general corporate
purposes.
ARTICLE 20 - NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
By electing to participate in this Plan, each participant agrees to
notify the Company in writing immediately after the participant transfers Common
Stock acquired under this Plan, if such transfer occurs within two years after
the first business day of the Payment Period in which such Common Stock was
acquired. Each participant further agrees to provide any information about such
a transfer as may be requested by the Company or any subsidiary corporation in
order to assist it in complying with the tax laws. Such dispositions generally
are treated as "disqualifying dispositions" under Sections 421 and 424 of the
Code, which have certain tax consequences to participants and to the Company and
its participating subsidiaries.
ARTICLE 21 - WITHHOLDING OF ADDITIONAL INCOME TAXES.
By electing to participate in this Plan, each participant acknowledges
that the Company and its participating subsidiaries are required to withhold
taxes with respect to the amounts deducted from the participant's compensation
and accumulated for the benefit of the participant
<PAGE> 9
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under this Plan, and each participant agrees that the Company and its
participating subsidiaries may deduct additional amounts from the participant's
compensation, when amounts are added to the participant's account, used to
purchase Common Stock or refunded, in order to satisfy such withholding
obligations. Each participant further acknowledges that when Common Stock is
purchased under this Plan the Company and its participating subsidiaries may be
required to withhold taxes with respect to all or a portion of the difference
between the fair market value of the Common Stock purchased and its purchase
price, and each participant agrees that such taxes may be withheld from
compensation otherwise payable to such participant. It is intended that tax
withholding will be accomplished in such a manner that the full amount of
payroll deductions elected by the participant under Article 7 will be used to
purchase Common Stock. However, if amounts sufficient to satisfy applicable tax
withholding obligations have not been withheld from compensation otherwise
payable to any participant, then, notwithstanding any other provision of this
Plan, the Company may withhold such taxes from the participant's accumulated
payroll deductions and apply the net amount to the purchase of Common Stock,
unless the participant pays to the Company, prior to the exercise date, an
amount sufficient to satisfy such withholding obligations. Each participant
further acknowledges that the Company and its participating subsidiaries may be
required to withhold taxes in connection with the disposition of stock acquired
under this Plan and agrees that the Company or any participating subsidiary may
take whatever action it considers appropriate to satisfy such withholding
requirements, including deducting from compensation otherwise payable to such
participant an amount sufficient to satisfy such withholding requirements or
conditioning any disposition of Common Stock by the participant upon the payment
to the Company or such subsidiary of an amount sufficient to satisfy such
withholding requirements.
ARTICLE 22 - GOVERNMENTAL REGULATIONS.
The Company's obligation to sell and deliver shares of Common Stock
under this Plan is subject to the approval of any governmental authority
required in connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to this Plan. For example, the Company may be required to
identify shares of Common Stock issued under this Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
ARTICLE 23 - GOVERNING LAW.
The validity and construction of this Plan shall be governed by the
laws of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
* * * *
Register of Amendments
Date Section Affected Change
- ---- ---------------- ------
April 13, 1999 Art.V Change commencement date
of each payment period from
January 1 and July 1 to
February 1 and August 1
<PAGE> 1
Exhibit 10.10
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made of this 13th day of April, 1999, by and
between James C. Wood (the "Employee"), and SILKNET SOFTWARE, INC., a Delaware
corporation located at 50 Phillippe Cote Street, Manchester, New Hampshire 03101
(the "COMPANY").
WHEREAS, the Board of Directors of the Company believes it to be to its
advantage to ensure that the Employee continues to render services to the
Company as hereinafter provided; and
WHEREAS, the Employee's managerial position requires that he be trusted
with extensive confidential information and trade secrets of the Company and
that he develop a thorough and comprehensive knowledge of all details of the
Company's business;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the mutual
covenants and obligations herein contained, the parties hereto agree as follows:
1. TITLE; POSITION AND RESPONSIBILITIES. Employee shall initially serve
as the Chairman of the Board, President and Chief Executive Officer of the
Company, and the Employee shall exercise such powers and comply with and perform
such directions and duties regarding the business and affairs of the Company as
may from time to time be vested in or given to him by the Board of Directors of
the Company and shall use diligent efforts to improve and extend the business of
the Company. The Employee shall at all times report to, and his activities shall
at all times be subject to the direction and control of the Board of Directors.
The Employee agrees to devote substantially all of his available business time,
attention and services to the discharge of such duties for the best interest of
the Company.
2. COMPENSATION: SALARY, BONUSES AND OTHER BENEFITS. During the term of
this Agreement, the Company shall pay the Employee the following compensation,
including the following annual salary, bonuses and other fringe benefits:
(A) SALARY. In consideration of the services to be rendered by the
Employee to the Company, the Company will pay to the Employee for the year
ending June 30, 2000, an annualized salary of $200,000. Such annual salary shall
be payable in conformity with the Company's customary practices for executive
compensation as such practices shall be established or modified from time to
time (but no less than monthly). Salary payments shall be subject to all
applicable federal and state withholding, payroll and other taxes, in accordance
with law. The salary for subsequent years during the term of this Agreement
shall be reviewed annually by the Board of Directors; provided, however, the
salary payable hereunder shall at no time be less than the salary set forth
above for the year ending June 30, 2000.
(B) FRINGE BENEFITS. The Employee will also be entitled to be
promptly reimbursed for all of his business-related travel, lodging and
entertainment expenses in accordance with the Company's prevailing policy for
employees. The Employee will be entitled to participate on the same basis with
all other officers and employees of the Company in the Company's standard
benefits package made generally available to all other officers and employees of
the Company, as may be adopted, modified to discontinued from time to time by
the Company.
<PAGE> 2
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(C) VACATION. Employee shall be entitled to a paid vacation (taken
consecutively or in segments) of four (4) weeks during each fiscal year,
adjusted pro rata for any partial fiscal year during the term hereof. Such
vacation may be taken at such times as is reasonably prudent and consistent with
the proper and diligent performance by the Employee of his duties and
responsibilities hereunder.
(D) BONUS. For the year ending June 30, 1999, the Employee shall be
entitled to receive a bonus of not less than $50,000 and not more than
$100,000. Such bonus shall be determined by the Board of Directors, based on
goals, milestones and objectives established by the Employee and the Board of
Directors from time to time. Any bonus shall be subject to all applicable
federal and state withholding, payroll and other taxes.
3. ANNUAL PERFORMANCE REVIEW. Commencing August 1, 1999 and during the
months of August and May thereafter during the term of this Agreement, the Board
of Directors and the Employee shall in good faith review the performance by, and
the compensation payable to, the Employee for the then current year and the
proposed performance by, and compensation to, the Employee for the then
forthcoming year.
4. TERM. The term of this Agreement shall commence on the date first
above written and shall terminate on the earlier to occur of (i) June 30, 2001,
(ii) the death, physical incapacity or mental incompetence of the Employee, or
(iii) the occurrence of any of the circumstances described in Section 5 hereof
(the "EXPIRATION DATE"). After June 30, 2001, such employment may be extended
for successive twelve-month periods upon approval by the Board of Directors and
the Employee, subject to earlier termination as provided herein. Prior to June
30, 2001, the Company and the Employee agree, subject to the prior termination
of this Agreement, to discuss mutually agreeable terms of a new employment
agreement. If such terms cannot be agreed to by June 30, 2001, this Agreement
shall automatically expire on June 30, 2001.
5. TERMINATION. The Employee's term of employment under this Agreement
may be earlier terminated as follows:
(A) AT THE EMPLOYEE'S OPTION: The Employee may terminate his
employment, without cause, at any time upon at least sixty (60) days' advance
written notice to the Company.
(B) AT THE ELECTION OF THE COMPANY FOR JUST CAUSE. The Company may,
immediately and unilaterally, terminate the Employee's employment hereunder for
"just cause" at any time during the term of this Agreement Termination of the
Employee's employment by the Company shall constitute a termination for "just
cause" under this Section 5(B) if such termination is for one or more of the
following causes: (i) the failure of Employee to render services to the Company
in accordance with his assigned duties consistent with this Agreement, and such
failure of performance continues for a period of more than 30 days after written
notice thereof has been provided to the Employee; (ii) willful misconduct or
gross negligence of the Employee in connection with the performance of his
assigned duties; (iii) the conviction of the Employee of a felony; (iv)
disloyalty, breach of fiduciary duty or breach of the material terms of this
Agreement; (v) the commission by Employee of an act of fraud, embezzlement or an
act of deliberate disregard of the rules or policies of the Company which
results in loss, damage or injury to the Company or adversely affects the
business activities, reputation, goodwill or image of the Company; (vi) the
unauthorized disclosure or misappropriation by Employee of any trade secret or
confidential information of the Company or any of its clients or customers,
which results in damage or injury to the Company or adversely affects the
business activities, reputation, goodwill or image of the Company or its clients
or customers; or (vii) the commission by Employee of an act which constitutes
unfair competition with the Company or which induces any employee or customer of
the Company to break a contract with the Company.
After notice of termination for just cause has been delivered to the
Employee, the Employee shall be entitled to have the grounds for termination of
employment reviewed by the Board of Directors, provided such entitlement to
review shall not serve to extend the date upon which the termination of
<PAGE> 3
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employment shall become effective. In making any determination under this
Section, the Board of Directors shall act fairly and in utmost good faith and
shall give the Employee an opportunity to appear and be heard at a meeting of
the Board of Directors or any committee thereof and present evidence on his
behalf.
In the event of any such termination for "just cause," the Employee
shall be entitled to accrued and unpaid salary and vacation through the
termination date and no other payments.
(C) AT THE ELECTION OF THE COMPANY FOR REASONS OTHER THAN JUST
CAUSE. The Company may, immediately and unilaterally, terminate the Employee's
employment hereunder at any time during the term of this Agreement for other
than "just cause" by giving thirty (30) days' advance written notice to the
Employee of the Company's election to terminate. During such thirty-day period,
the Employee will be available on a full-time basis for the benefit of the
Company to assist the Company in matters relating to the transition of a new,
successor officer of the Company. In the event the Company exercises its right
to terminate the Employee under this Section 5(C), the Company agrees to pay the
Employee a severance or termination payment of twelve months' salary at the then
current rate, payable in the same manner as such salary was payable during the
term of the Employee's employment. Such severance payment shall be payable on a
monthly basis for the twelve (12) months following the Employee's termination
and shall be subject to all applicable federal and state taxes. In the event of
a termination under this Section 5(C), the Company may, at its option, retain
the Employee as a consultant on terms mutually agreed between the Company and
the Employee. All such payments made pursuant to this Section 5(C) or Section
5(D), shall be conditioned upon the receipt by the Company of a signed release
in a form acceptable to the Company's counsel releasing the Company from any and
all actions or causes of actions, suits, debts, claims, complaints, contracts,
controversies, agreements, promises, damages, judgments and demands whatsoever,
in law or in equity, whether existing or contingent, known or unknown,
pertaining to the Employee's employment by the Company or termination of such
employment.
It shall be deemed to be a constructive termination by the Company for
other than "just cause" if: (i) the Employee's responsibilities and executive
authority are reduced or diluted in any material way without the Employee's
written consent; or (ii) the Employee is relocated to another Company office or
facility to a location outside of a radius of 25 miles from the Company's
current Manchester, New Hampshire, facility and without the Employee's written
consent.
(D) TERMINATION BECAUSE OF ACQUISITION OF THE COMPANY. The
provisions of this Section shall apply if the Employee's employment is
terminated because of any decision by the Board of Directors of the Company (or
following completion of the Acquisition (as defined below) the surviving
corporation) in connection with a consolidation, merger, or sale of all, or
substantially all, of the assets or capital stock of the Company, or other
business combination in which the Company is the target in any business
combination (an "Acquisition"). In the event of the completion of an
Acquisition, if the Employee is not offered employment by the acquiring
corporation in a comparable position, at a comparable salary, or is terminated
for other than "just cause" ("just cause" as defined in Section 5(B) hereof),
then the Company or the acquiring corporation, as the case may be, shall be
obligated to pay the Employee a severance payment of twelve months' salary at
the then current monthly rate, payable in the same manner as such salary was
payable during the term of the Employee's employment, together with medical and
health insurance benefits as set forth in Section 2(B). If the Employee is
offered employment by the acquiring corporation in a comparable position, and at
a comparable salary, neither the Company nor the acquiring corporation shall be
obligated to provide the severance payment described in this Section 6(D).
Anything contained in this Section 6(D) to the contrary notwithstanding, the
Employee shall not be entitled to any severance
<PAGE> 4
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or other termination benefit if the Employee has either (i) terminated such
employment voluntarily, or (ii) has been terminated by the Company or any
acquiring corporation for "just cause" pursuant to Section 5(B). In the event of
an Acquisition, if the Employee is not offered employment at the surviving
corporation (under the terms described above) or is otherwise terminated at any
time within twelve (12) months of the completion of an Acquisition for other
than "just cause," then all remaining unvested stock options held by the
Employee shall become immediately vested and exercisable upon any such
termination, such options to be exercisable for a period of six (6) months
following any effective date of termination.
6. NONCOMPETITION, CONFIDENTIALITY AND INVENTIONS AGREEMENT. In
connection with his employment by the Company pursuant to the terms of this
Agreement, the Employee shall execute the Noncompetition, Confidentiality and
Inventions Agreement attached hereto as Exhibit A, the terms and conditions of
which are incorporated herein by reference. The Noncompetition, Confidentiality
and Inventions Agreement is sometimes referred to herein as the "Ancillary
Agreement."
7. GOVERNING LAW; INJUNCTIVE RELIEF. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of New
Hampshire and shall be deemed to be performable in the State of New Hampshire.
The Employee acknowledges that the breach or threatened breach of any of the
provisions of this Agreement would give rise to irreparable injury to Company
which injury would be inadequately compensable in money damages. Accordingly,
Company may seek and obtain a restraining order and/or injunction prohibiting
the breach or threatened breach of any provision, requirement or covenant of
this Agreement, in addition to and not in limitation of any other legal remedies
which may be available. The Employee further acknowledges and agrees that the
agreements set out above are necessary for the protection of Company's
legitimate goodwill and business interests and are reasonable in scope, duration
and content.
8. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement or the Ancillary Agreement for any reason shall be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement or the
Ancillary Agreement, but this Agreement or the Ancillary Agreement, as the case
may be, shall be construed, revised, modified and reformed to the maximum extent
possible to effect the purposes set forth herein and in the Ancillary Agreement.
9. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the
rights and remedies of any provision hereof may be waived, only in accordance
with this Section. No modification or waiver by the Company shall be effective
without the consent of the Employee and at least a majority of the Board of
Directors (excluding the Employee, if the Employee is a director) then in office
at the time of such modification or waiver. No waiver by either party of any
breach by the other party of any provision hereof shall be deemed to be a waiver
of any later or other breach thereof or as a waiver of any other provision of
this Agreement. This Agreement and the Ancillary Agreement set forth all of the
terms of the understandings between the parties with reference to the subject
matter set forth herein and may not be waived, changed, discharged or terminated
orally or by any course of dealing between the parties, but only by an
instrument in writing signed by the party against whom any waiver, change,
discharge or termination is sought.
10. ASSIGNMENT. The Employee acknowledges that the services to be
rendered by him are unique and personal in nature. Accordingly, the Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. The rights and obligations of the Company under this Agreement
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of the Company, including any successor to the Company's capital stock
or assets by reason of any sale of
<PAGE> 5
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stock or assets, merger, sale or other form of business combination.
11. ARBITRATION. Any controversy, dispute, claim or breach arising out
of or relating to this Agreement shall be submitted for settlement to an
arbitrator agreed upon by the parties. The decision of such arbitrator shall be
final and binding on the parties. If the parties cannot agree upon an
arbitrator, the controversy, claim or breach shall be referred to the American
Arbitration Association with a request that the Association appoint an
arbitrator. Such arbitration shall be held in Concord or Manchester, New
Hampshire, in accordance with the rules and practices of the American
Arbitration Association pertaining to single-party arbitration then in effect,
and the judgment upon the award rendered shall be entered by consent in any
court having jurisdiction. The prevailing party shall be entitled to recover all
costs and expenses associated with any arbitration (including attorneys' fees);
and if no party prevails, each party shall be responsible for its own expenses.
12. INTEGRATION. This Agreement and the Ancillary Agreement set forth
all of the terms of the understandings between the parties and supersede any
other understandings, discussions or agreements among the parties with reference
to the subject matter set forth herein.
13. INTERPRETATION. The language of all parts of this Agreement shall
in all cases be construed as a whole according to its fair meaning and not
strictly for or against either of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
SILKNET SOFTWARE, INC. EMPLOYEE:
BY: ____________________________ _____________________________
TITLE: _________________________
<PAGE> 6
Exhibit A
SILKNET SOFTWARE, INC.
NONCOMPETITION, NONDISCLOSURE AND INVENTIONS AGREEMENT
(FOR OFFICERS AND KEY EMPLOYEES)
The undersigned, __________________________ in consideration for and as
a condition of my continued employment as an employee (the "EMPLOYEE") of
SILKNET SOFTWARE, INC. (the "COMPANY"), hereby agrees with the Company as
follows:
1. NONCOMPETITION COVENANT. During the period of employment as an
officer and/or key employee of the Company, the Employee will devote his
available business time and best efforts to promoting and advancing the business
of the Company. During the period of employment and for a period of one (1) year
after termination of such employment (for any reason whatsoever), the Employee
agrees that he will not, whether alone or as a partner, officer, director,
consultant, agent, employee or stockholder of any company or other commercial
enterprise, engage in any business or other commercial activity which is or may
be competitive with the products and services being designed, conceived,
marketed, distributed or developed by the Company at the time of termination of
such employment. The foregoing prohibition shall not prevent employment or
engagement by any company or business organization, or any division thereof, not
substantially engaged in the business of developing, designing or marketing
software that allows companies to offer personalized marketing, sales,
electronic commerce and customer support services through a Web site interface
(the "Business"), as long as the activities of any such employment or
engagement, in any capacity, does not involve work on matters directly related
to the products or services being developed, to practice, distributed or
marketed by the Company at the time of any termination of employment. The
foregoing restriction shall not prohibit Employee from owning securities of any
publicly traded company that is engaged in the Business as long as Employee does
not own at any time more than three percent (3%) of such class of equity
securities of such company.
2. NONSOLICITATION. During the period of employment by the Company and
for a period of one (1) year after termination of such employment (for any
reason), the Employee will not directly or indirectly either for himself or for
any other commercial enterprise, solicit, divert or take away or attempt to
solicit, divert or take away, any of the Company's customers, business or
prospective customers in existence at the time of termination of such
employment. For purposes of this Agreement, "prospective customers" shall
include those customers being solicited by the Company at the time of the
Employee's termination. During such employment with the Company and for a period
of one (1) year thereafter, the Employee will not solicit or discuss with any
employee of the Company the employment of such Company employee by any
commercial enterprise, other than for the benefit of the Company, nor recruit,
attempt to recruit, hire, or attempt to hire any such Company employee other
than on behalf of the Company.
3. NONDISCLOSURE OBLIGATION. The Employee will not at any time, whether
during or after the termination of employment, for any reason whatsoever (other
that to promote and advance the business of the Company), reveal to any person
or entity (both commercial and non-commercial) any of the trade secrets or
confidential business information concerning the Company: including its research
and development activities; product designs, prototypes and technical
specifications; show-how and know-how; marketing plans and strategies; pricing
and costing policies; customer and supplier lists and accounts; or nonpublic
financial information of the Company so far as they have come or may come to
<PAGE> 7
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the Employee's knowledge, except as may be required in the ordinary course of
performing his duties as an employee of the Company. This restriction shall not
apply to: (i) information that may be disclosed generally or is in the public
domain through no fault of the Employee; (ii) information received from a third
party outside the Company that was disclosed without a breach of any
confidentiality obligation; (iii) information approved for release by written
authorization of the Company; or (iv) information that may be required by law or
an order of any court, agency or proceeding to be disclosed. The Employee shall
keep secret all matters of such nature entrusted to him and shall not use or
disclose any such information for the benefit of any third party in any manner
which may injure or cause loss to the Company, whether directly or indirectly.
4. ASSIGNMENT OF INVENTIONS. The Employee expressly understands and
agrees that any and all right or interest he obtains in any designs, trade
secrets, technical specifications and technical date, know-how and show-how,
customer and vendor lists, marketing plans, pricing policies, inventions,
concepts, ideas, expressions, discoveries, improvements and patent or patent
rights which are authored, conceived, devised, developed, reduced to practice,
or otherwise obtained by him during the term of this Agreement which relate to
or arise out of his employment with the Company are expressly regarded as "works
for hire" (the "INVENTIONS"). The Employee hereby assigns to the Company the
sole and exclusive right to such Inventions. The Employee agrees that he will
promptly disclose to the Company any and all such Inventions, and that, upon
request of the Company, the Employee will execute and deliver any and all
documents or instruments and take any other action which the Company shall deem
necessary to assign to and vest completely in the Company, to perfect trademark,
copyright and patent protection with respect to, or to otherwise protect the
Company's trade secrets and proprietary interest in such Inventions. The
obligations of the Employee under this Section shall continue beyond the
termination of the Employee's employment with respect to such Inventions
conceived of, reduced to practice, or developed by the Employee during the term
of this Agreement. The Company agrees to pay any and all copyright, trademark
and patent fees and expenses or other costs incurred by the Employee for any
assistance rendered to the Company pursuant to this Section.
The Employee's obligation to assign Inventions shall not apply to any
invention about which the Employee can prove that: (i) it was developed entirely
on the Employee's own time and effort; (ii) no equipment, supplies, facility,
trade secrets or confidential information of the Company was used in its
development; (iii) it does not relate to the business of the Company or to the
Company's actual or anticipated research and development activities; and (iv) it
does not result from any work performed by the Employee for the Company.
5. ABSENCE OF CONFLICTING AGREEMENTS. The Employee understands the
Company does not desire to acquire from him any trade secrets, know-how or
confidential business information that he may have acquired from others. The
Employee represents that he is not bound by any agreement or any other existing
or previous business relationship which conflicts with or prevents the full
performance of the Employee's duties and obligations to the Company during the
course of employment.
6. REMEDIES UPON BREACH. The Employee agrees that any breach of this
Agreement by the Employee could cause irreparable damage to the Company. The
Company shall have, in addition to any and all remedies of law, the right to an
injunction or other equitable relief to prevent any violation of the Employee's
obligations hereunder.
7. MISCELLANEOUS. Any waiver by the Company of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach hereof. If one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to
<PAGE> 8
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scope, activity or subject matter so as to be unenforceable at law, such
provision(s) shall be construed and reformed by the appropriate judicial body by
limiting and reducing it (or them), so as to be enforceable to the maximum
extent compatible with the applicable law as it shall then appear. The
obligations of the Employee under this Agreement shall survive the termination
of the Employee's relationship with the Company regardless of the manner of such
termination. All covenants and agreements hereunder shall inure to the benefit
of and be enforceable by the successors of the Company. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
New Hampshire. The Employee understands that this Agreement does not create an
obligation on the part of the Company to continue the Employee's employment with
the Company. The Employee is employed as an employee "at will."
The Employee recognizes and agrees that the enforcement of this
Agreement is necessary to ensure the preservation, protection and continuity of
the confidential business information, trade secrets and goodwill of the
Company. The Employee agrees that, due to the proprietary nature of the
Company's business, the restrictions set forth in Sections 1, 2, 3 and 4 of this
Agreement are reasonable as to duration and scope.
IN WITNESS WHEREOF, the undersigned Employee and the Company have
executed this Agreement as of this 13th day of April, 1999.
SILKNET SOFTWARE, INC. EMPLOYEE:
By:________________________ ________________________________
SIGNATURE OF EMPLOYEE
Title:_____________________ ________________________________
PRINT NAME OF EMPLOYEE
<PAGE> 1
Exhibit 10.11
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made of this 13th day of April, 1999, by and
between Nigel K. Donovan (the "EMPLOYEE"), and SILKNET SOFTWARE, INC., a
Delaware corporation located at 50 Phillippe Cote Street, Manchester, New
Hampshire 03101 (the "COMPANY").
WHEREAS, the Board of Directors and the Chief Executive Officer of the
Company believes it to be to its advantage to ensure that the Employee continues
to render services to the Company as hereinafter provided; and
WHEREAS, the Employee's managerial position requires that he be trusted
with extensive confidential information and trade secrets of the Company and
that he develop a thorough and comprehensive knowledge of all details of the
Company's business;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the mutual
covenants and obligations herein contained, the parties hereto agree as follows:
1. TITLE; POSITION AND RESPONSIBILITIES. Employee shall initially serve
as the Senior Vice President and Chief Operating Officer of the Company, and the
Employee shall exercise such powers and comply with and perform such directions
and duties regarding the business and affairs of the Company as may from time to
time be vested in or given to him by the Board of Directors or the Chief
Executive Officer of the Company and shall use diligent efforts to improve and
extend the business of the Company. The Employee shall at all times report to,
and his activities shall at all times be subject to the direction and control of
the Board of Directors or the Chief Executive Officer. The Employee agrees to
devote substantially all of his available business time, attention and services
to the discharge of such duties for the best interest of the Company.
2. COMPENSATION: SALARY, BONUSES AND OTHER BENEFITS. During the term of
this Agreement, the Company shall pay the Employee the following compensation,
including the following annual salary and other fringe benefits:
(A) SALARY. In consideration of the services to be rendered by the
Employee to the Company, the Company will pay to the Employee for the year
ending June 30, 2000, an annualized salary of $180,000. Such annual salary shall
be payable in conformity with the Company's customary practices for executive
compensation as such practices shall be established or modified from time to
time (but no less than monthly). Salary payments shall be subject to all
applicable federal and state withholding, payroll and other taxes, in accordance
with law. The salary for subsequent years during the term of this Agreement
shall be reviewed annually by the Board of Directors or the Chief Executive
Officer; provided, however, the salary payable hereunder shall at no time be
less than the salary set forth above for the year ending June 30, 2000.
(B) FRINGE BENEFITS. The Employee will also be entitled to be
promptly reimbursed for all of his business-related travel, lodging and
entertainment expenses in accordance with the Company's prevailing policy for
employees. The Employee will be entitled to participate on the same basis with
all other officers and employees of the Company in the Company's standard
benefits package made generally available to all other officers and employees of
the Company, as may be adopted, modified to discontinued from time to time by
the Company.
<PAGE> 2
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(C) VACATION. Employee shall be entitled to a paid vacation (taken
consecutively or in segments) of four (4) weeks during each fiscal year,
adjusted pro rata for any partial fiscal year during the term hereof. Such
vacation may be taken at such times as is reasonably prudent and consistent with
the proper and diligent performance by the Employee of his duties and
responsibilities hereunder.
(D) BONUS. For the year ending June 30, 1999, the Employee shall be
entitled to receive a bonus of not less than $50,000 and not more than
$100,000. Such bonus shall be determined by the Board of Directors or Chief
Executive Officer, based on goals, milestones and objectives established by the
Employee and the Board of Directors or Chief Executive Officer from time to
time. Any bonus shall be subject to all applicable federal and state
withholding, payroll and other taxes.
3. ANNUAL PERFORMANCE REVIEW. Commencing August 1, 1999 and during the
months of August and May thereafter during the term of this Agreement, the Board
of Directors or the Chief Executive Officer and the Employee shall in good faith
review the performance by, and the compensation payable to, the Employee for the
then current year and the proposed performance by, and compensation to, the
Employee for the then forthcoming year.
4. TERM. The term of this Agreement shall commence on the date first
above written and shall terminate on the earlier to occur of (i) June 30, 2001,
(ii) the death, physical incapacity or mental incompetence of the Employee, or
(iii) the occurrence of any of the circumstances described in Section 5 hereof
(the "EXPIRATION DATE"). After June 30, 2001, such employment may be extended
for successive twelve-month periods upon approval by the Board of Directors or
the Chief Executive Officer and the Employee, subject to earlier termination as
provided herein. Prior to June 30, 2001, the Company and the Employee agree,
subject to the prior termination of this Agreement, to discuss mutually
agreeable terms of a new employment agreement. If such terms cannot be agreed to
by June 30, 2001, this Agreement shall automatically expire on June 30, 2001.
5. TERMINATION. The Employee's term of employment under this Agreement
may be earlier terminated as follows:
(A) AT THE EMPLOYEE'S OPTION: The Employee may terminate his
employment, without cause, at any time upon at least sixty (60) days' advance
written notice to the Company.
(B) AT THE ELECTION OF THE COMPANY FOR JUST CAUSE. The Company may,
immediately and unilaterally, terminate the Employee's employment hereunder for
"just cause" at any time during the term of this Agreement Termination of the
Employee's employment by the Company shall constitute a termination for "just
cause" under this Section 5(B) if such termination is for one or more of the
following causes: (i) the failure of Employee to render services to the Company
in accordance with his assigned duties consistent with this Agreement, and such
failure of performance continues for a period of more than 30 days after written
notice thereof has been provided to the Employee; (ii) willful misconduct or
gross negligence of the Employee in connection with the performance of his
assigned duties; (iii) the conviction of the Employee of a felony; (iv)
disloyalty, breach of fiduciary duty or breach of the material terms of this
Agreement; (v) the commission by Employee of an act of fraud, embezzlement or an
act of deliberate disregard of the rules or policies of the Company which
results in loss, damage or injury to the Company or adversely affects the
business activities, reputation, goodwill or image of the Company; (vi) the
unauthorized disclosure or misappropriation by Employee of any trade secret or
confidential information of the Company or any of its clients or customers,
which results in damage or injury to the Company or adversely affects the
business activities, reputation, goodwill or image of the Company or its clients
or customers; or (vii) the commission by Employee of an act which constitutes
unfair competition with the Company or which induces any employee or customer of
the Company to break a contract with the Company.
After notice of termination for just cause has been delivered to the
Employee, the Employee shall be entitled to have the grounds for termination of
employment reviewed by the Board of Directors
<PAGE> 3
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or the Chief Executive Officer, provided such entitlement to review shall not
serve to extend the date upon which the termination of employment shall become
effective. In making any determination under this Section, the Board of
Directors or the Chief Executive Officer shall act fairly and in utmost good
faith and shall give the Employee an opportunity to appear and be heard and
present evidence on his behalf.
In the event of any such termination for "just cause," the Employee
shall be entitled to accrued and unpaid salary and vacation through the
termination date and no other payments.
(C) AT THE ELECTION OF THE COMPANY FOR REASONS OTHER THAN JUST
CAUSE. The Company may, immediately and unilaterally, terminate the Employee's
employment hereunder at any time during the term of this Agreement for other
than "just cause" by giving thirty (30) days' advance written notice to the
Employee of the Company's election to terminate. During such thirty-day period,
the Employee will be available on a full-time basis for the benefit of the
Company to assist the Company in matters relating to the transition of a new,
successor officer of the Company. In the event the Company exercises its right
to terminate the Employee under this Section 5(C), the Company agrees to pay the
Employee a severance or termination payment of twelve months' salary at the then
current rate, payable in the same manner as such salary was payable during the
term of the Employee's employment. Such severance payment shall be payable on a
monthly basis for the twelve (12) months following the Employee's termination
and shall be subject to all applicable federal and state taxes. In the event of
a termination under this Section 5(C), the Company may, at its option, retain
the Employee as a consultant on terms mutually agreed between the Company and
the Employee. All such payments made pursuant to this Section 5(C) or Section
5(D), shall be conditioned upon the receipt by the Company of a signed release
in a form acceptable to the Company's counsel releasing the Company from any and
all actions or causes of actions, suits, debts, claims, complaints, contracts,
controversies, agreements, promises, damages, judgments and demands whatsoever,
in law or in equity, whether existing or contingent, known or unknown,
pertaining to the Employee's employment by the Company or termination of such
employment.
It shall be deemed to be a constructive termination by the Company for
other than "just cause" if: (i) the Employee's responsibilities and executive
authority are reduced or diluted in any material way without the Employee's
written consent; or (ii) the Employee is relocated to another Company office or
facility to a location outside of a radius of 25 miles from the Company's
current Manchester, New Hampshire, facility and without the Employee's written
consent.
(D) TERMINATION BECAUSE OF ACQUISITION OF THE COMPANY. The
provisions of this Section shall apply if the Employee's employment is
terminated because of any decision by the Board of Directors of the Company (or
following completion of the Acquisition (as defined below), the surviving
corporation) in connection with a consolidation, merger, or sale of all, or
substantially all, of the assets or capital stock of the Company, or other
business combination in which the Company is the target in any business
combination (an "Acquisition"). In the event of the completion of an
Acquisition, if the Employee is not offered employment by the acquiring
corporation in a comparable position, at a comparable salary, or is terminated
for other than "just cause" ("just cause" as defined in Section 5(B) hereof),
then the Company or the acquiring corporation, as the case may be, shall be
obligated to pay the Employee a severance payment of twelve months' salary at
the then current monthly rate, payable in the same manner as such salary was
payable during the term of the Employee's employment, together with medical and
health insurance benefits as set forth in Section 2(B). If the Employee is
offered employment by the acquiring corporation in a comparable position, and at
a comparable salary, neither the Company nor the acquiring corporation shall be
obligated to provide the severance payment described in this Section 6(D).
<PAGE> 4
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Anything contained in this Section 6(D) to the contrary notwithstanding, the
Employee shall not be entitled to any severance or other termination benefit if
the Employee has either (i) terminated such employment voluntarily, or (ii) has
been terminated by the Company or any acquiring corporation for "just cause"
pursuant to Section 5(B). In the event of an Acquisition, if the Employee is not
offered employment at the surviving corporation (under the terms described
above) or is otherwise terminated at any time within twelve (12) months of the
completion of an Acquisition for other than "just cause," then all remaining
unvested stock options held by the Employee shall become immediately vested and
exercisable upon any such termination, such options to be exercisable for a
period of six (6) months following any effective date of termination.
.
6. NONCOMPETITION, CONFIDENTIALITY AND INVENTIONS AGREEMENT. In
connection with his employment by the Company pursuant to the terms of this
Agreement, the Employee shall execute the Noncompetition, Confidentiality and
Inventions Agreement attached hereto as Exhibit A, the terms and conditions of
which are incorporated herein by reference. The Noncompetition, Confidentiality
and Inventions Agreement is sometimes referred to herein as the "Ancillary
Agreement."
7. GOVERNING LAW; INJUNCTIVE RELIEF. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of New
Hampshire and shall be deemed to be performable in the State of New Hampshire.
The Employee acknowledges that the breach or threatened breach of any of the
provisions of this Agreement would give rise to irreparable injury to Company
which injury would be inadequately compensable in money damages. Accordingly,
Company may seek and obtain a restraining order and/or injunction prohibiting
the breach or threatened breach of any provision, requirement or covenant of
this Agreement, in addition to and not in limitation of any other legal remedies
which may be available. The Employee further acknowledges and agrees that the
agreements set out above are necessary for the protection of Company's
legitimate goodwill and business interests and are reasonable in scope, duration
and content.
8. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement or the Ancillary Agreement for any reason shall be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement or the
Ancillary Agreement, but this Agreement or the Ancillary Agreement, as the case
may be, shall be construed, revised, modified and reformed to the maximum extent
possible to effect the purposes set forth herein and in the Ancillary Agreement.
9. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the
rights and remedies of any provision hereof may be waived, only in accordance
with this Section. No modification or waiver by the Company shall be effective
without the consent of the Employee and the Chief Executive Officer or a
majority of the Board of Directors (excluding the Employee, if the Employee is a
director) then in office at the time of such modification or waiver. No waiver
by either party of any breach by the other party of any provision hereof shall
be deemed to be a waiver of any later or other breach thereof or as a waiver of
any other provision of this Agreement. This Agreement and the Ancillary
Agreement set forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between the
parties, but only by an instrument in writing signed by the party against whom
any waiver, change, discharge or termination is sought.
10. ASSIGNMENT. The Employee acknowledges that the services to be
rendered by him are unique and personal in nature. Accordingly, the Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. The rights and obligations of the Company under this Agreement
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of the Company, including any successor to the Company's capital stock
or assets by reason of any sale of
<PAGE> 5
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stock or assets, merger, sale or other form of business combination.
11. ARBITRATION. Any controversy, dispute, claim or breach arising out
of or relating to this Agreement shall be submitted for settlement to an
arbitrator agreed upon by the parties. The decision of such arbitrator shall be
final and binding on the parties. If the parties cannot agree upon an
arbitrator, the controversy, claim or breach shall be referred to the American
Arbitration Association with a request that the Association appoint an
arbitrator. Such arbitration shall be held in Concord or Manchester, New
Hampshire, in accordance with the rules and practices of the American
Arbitration Association pertaining to single-party arbitration then in effect,
and the judgment upon the award rendered shall be entered by consent in any
court having jurisdiction. The prevailing party shall be entitled to recover all
costs and expenses associated with any arbitration (including attorneys' fees);
and if no party prevails, each party shall be responsible for its own expenses.
12. INTEGRATION. This Agreement and the Ancillary Agreement set forth
all of the terms of the understandings between the parties and supersede any
other understandings, discussions or agreements among the parties with reference
to the subject matter set forth herein.
13. INTERPRETATION. The language of all parts of this Agreement shall
in all cases be construed as a whole according to its fair meaning and not
strictly for or against either of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
SILKNET SOFTWARE, INC. EMPLOYEE:
BY: ____________________________ _____________________________
TITLE: _________________________
<PAGE> 6
Exhibit A
SILKNET SOFTWARE, INC.
NONCOMPETITION, NONDISCLOSURE AND INVENTIONS AGREEMENT
(FOR OFFICERS AND KEY EMPLOYEES)
The undersigned, __________________________ in consideration for and as
a condition of my continued employment as an employee (the "EMPLOYEE") of
SILKNET SOFTWARE, INC. (the "COMPANY"), hereby agrees with the Company as
follows:
1. NONCOMPETITION COVENANT. During the period of employment as an
officer and/or key employee of the Company, the Employee will devote his
available business time and best efforts to promoting and advancing the business
of the Company. During the period of employment and for a period of one (1) year
after termination of such employment (for any reason whatsoever), the Employee
agrees that he will not, whether alone or as a partner, officer, director,
consultant, agent, employee or stockholder of any company or other commercial
enterprise, engage in any business or other commercial activity which is or may
be competitive with the products and services being designed, conceived,
marketed, distributed or developed by the Company at the time of termination of
such employment. The foregoing prohibition shall not prevent employment or
engagement by any company or business organization, or any division thereof, not
substantially engaged in the business of developing, designing or marketing
software that allows companies to offer personalized marketing, sales,
electronic commerce and customer support services through a Web site interface
(the "Business"), as long as the activities of any such employment or
engagement, in any capacity, does not involve work on matters directly related
to the products or services being developed, to practice, distributed or
marketed by the Company at the time of any termination of employment. The
foregoing restriction shall not prohibit Employee from owning securities of any
publicly traded company that is engaged in the Business as long as Employee does
not own at any time more than three percent (3%) of such class of equity
securities of such company.
2. NONSOLICITATION. During the period of employment by the Company and
for a period of one (1) year after termination of such employment (for any
reason), the Employee will not directly or indirectly either for himself or for
any other commercial enterprise, solicit, divert or take away or attempt to
solicit, divert or take away, any of the Company's customers, business or
prospective customers in existence at the time of termination of such
employment. For purposes of this Agreement, "prospective customers" shall
include those customers being solicited by the Company at the time of the
Employee's termination. During such employment with the Company and for a period
of one (1) year thereafter, the Employee will not solicit or discuss with any
employee of the Company the employment of such Company employee by any
commercial enterprise, other than for the benefit of the Company, nor recruit,
attempt to recruit, hire, or attempt to hire any such Company employee other
than on behalf of the Company.
3. NONDISCLOSURE OBLIGATION. The Employee will not at any time, whether
during or after the termination of employment, for any reason whatsoever (other
that to promote and advance the business of the Company), reveal to any person
or entity (both commercial and non-commercial) any of the trade secrets or
confidential business information concerning the Company: including its research
and development activities; product designs, prototypes and technical
specifications; show-how and know-how; marketing plans and strategies; pricing
and costing policies; customer and supplier lists and accounts; or nonpublic
financial information of the Company so far as they have come or may come to
<PAGE> 7
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the Employee's knowledge, except as may be required in the ordinary course of
performing his duties as an employee of the Company. This restriction shall not
apply to: (i) information that may be disclosed generally or is in the public
domain through no fault of the Employee; (ii) information received from a third
party outside the Company that was disclosed without a breach of any
confidentiality obligation; (iii) information approved for release by written
authorization of the Company; or (iv) information that may be required by law or
an order of any court, agency or proceeding to be disclosed. The Employee shall
keep secret all matters of such nature entrusted to him and shall not use or
disclose any such information for the benefit of any third party in any manner
which may injure or cause loss to the Company, whether directly or indirectly.
4. ASSIGNMENT OF INVENTIONS. The Employee expressly understands and
agrees that any and all right or interest he obtains in any designs, trade
secrets, technical specifications and technical date, know-how and show-how,
customer and vendor lists, marketing plans, pricing policies, inventions,
concepts, ideas, expressions, discoveries, improvements and patent or patent
rights which are authored, conceived, devised, developed, reduced to practice,
or otherwise obtained by him during the term of this Agreement which relate to
or arise out of his employment with the Company are expressly regarded as "works
for hire" (the "INVENTIONS"). The Employee hereby assigns to the Company the
sole and exclusive right to such Inventions. The Employee agrees that he will
promptly disclose to the Company any and all such Inventions, and that, upon
request of the Company, the Employee will execute and deliver any and all
documents or instruments and take any other action which the Company shall deem
necessary to assign to and vest completely in the Company, to perfect trademark,
copyright and patent protection with respect to, or to otherwise protect the
Company's trade secrets and proprietary interest in such Inventions. The
obligations of the Employee under this Section shall continue beyond the
termination of the Employee's employment with respect to such Inventions
conceived of, reduced to practice, or developed by the Employee during the term
of this Agreement. The Company agrees to pay any and all copyright, trademark
and patent fees and expenses or other costs incurred by the Employee for any
assistance rendered to the Company pursuant to this Section.
The Employee's obligation to assign Inventions shall not apply to any
invention about which the Employee can prove that: (i) it was developed entirely
on the Employee's own time and effort; (ii) no equipment, supplies, facility,
trade secrets or confidential information of the Company was used in its
development; (iii) it does not relate to the business of the Company or to the
Company's actual or anticipated research and development activities; and (iv) it
does not result from any work performed by the Employee for the Company.
5. ABSENCE OF CONFLICTING AGREEMENTS. The Employee understands the
Company does not desire to acquire from him any trade secrets, know-how or
confidential business information that he may have acquired from others. The
Employee represents that he is not bound by any agreement or any other existing
or previous business relationship which conflicts with or prevents the full
performance of the Employee's duties and obligations to the Company during the
course of employment.
6. REMEDIES UPON BREACH. The Employee agrees that any breach of this
Agreement by the Employee could cause irreparable damage to the Company. The
Company shall have, in addition to any and all remedies of law, the right to an
injunction or other equitable relief to prevent any violation of the Employee's
obligations hereunder.
7. MISCELLANEOUS. Any waiver by the Company of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach hereof. If one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to
<PAGE> 8
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scope, activity or subject matter so as to be unenforceable at law, such
provision(s) shall be construed and reformed by the appropriate judicial body by
limiting and reducing it (or them), so as to be enforceable to the maximum
extent compatible with the applicable law as it shall then appear. The
obligations of the Employee under this Agreement shall survive the termination
of the Employee's relationship with the Company regardless of the manner of such
termination. All covenants and agreements hereunder shall inure to the benefit
of and be enforceable by the successors of the Company. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
New Hampshire. The Employee understands that this Agreement does not create an
obligation on the part of the Company to continue the Employee's employment with
the Company. The Employee is employed as an employee "at will."
The Employee recognizes and agrees that the enforcement of this
Agreement is necessary to ensure the preservation, protection and continuity of
the confidential business information, trade secrets and goodwill of the
Company. The Employee agrees that, due to the proprietary nature of the
Company's business, the restrictions set forth in Sections 1, 2, 3 and 4 of this
Agreement are reasonable as to duration and scope.
IN WITNESS WHEREOF, the undersigned Employee and the Company have
executed this Agreement as of this 13th day of April, 1999.
SILKNET SOFTWARE, INC. EMPLOYEE:
By:___________________________ ________________________________
SIGNATURE OF EMPLOYEE
Title:________________________ ________________________________
PRINT NAME OF EMPLOYEE
<PAGE> 1
Exhibit 10.12
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made of this 13th day of April, 1999, by and
between Patrick J. Scannell, Jr. (the "EMPLOYEE"), and SILKNET SOFTWARE, INC., a
Delaware corporation located at 50 Phillippe Cote Street, Manchester, New
Hampshire 03101 (the "COMPANY").
WHEREAS, the Board of Directors and the Chief Executive Officer of the
Company believes it to be to its advantage to ensure that the Employee continues
to render services to the Company as hereinafter provided; and
WHEREAS, the Employee's managerial position requires that he be trusted
with extensive confidential information and trade secrets of the Company and
that he develop a thorough and comprehensive knowledge of all details of the
Company's business;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the mutual
covenants and obligations herein contained, the parties hereto agree as follows:
1. TITLE; POSITION AND RESPONSIBILITIES. Employee shall initially serve
as the Vice President, Chief Financial Officer, Treasurer and Secretary of the
Company, and the Employee shall exercise such powers and comply with and perform
such directions and duties regarding the business and affairs of the Company as
may from time to time be vested in or given to him by the Board of Directors or
the Chief Executive Officer of the Company and shall use diligent efforts to
improve and extend the business of the Company. The Employee shall at all times
report to, and his activities shall at all times be subject to the direction and
control of the Board of Directors or the Chief Executive Officer. The Employee
agrees to devote substantially all of his available business time, attention and
services to the discharge of such duties for the best interest of the Company.
2. COMPENSATION: SALARY, BONUSES AND OTHER BENEFITS. During the term of
this Agreement, the Company shall pay the Employee the following compensation,
including the following annual salary and other fringe benefits:
(A) SALARY. In consideration of the services to be rendered by the
Employee to the Company, the Company will pay to the Employee for the year
ending June 30, 2000, an annualized salary of $175,000. Such annual salary shall
be payable in conformity with the Company's customary practices for executive
compensation as such practices shall be established or modified from time to
time (but no less than monthly). Salary payments shall be subject to all
applicable federal and state withholding, payroll and other taxes, in accordance
with law. The salary for subsequent years during the term of this Agreement
shall be reviewed annually by the Board of Directors or the Chief Executive
Officer; provided, however, the salary payable hereunder shall at no time be
less than the salary set forth above for the year ending June 30, 2000.
(B) FRINGE BENEFITS. The Employee will also be entitled to be
promptly reimbursed for all of his business-related travel, lodging and
entertainment expenses in accordance with the Company's prevailing policy for
employees. The Employee will be entitled to participate on the same basis with
all other officers and employees of the Company in the Company's standard
benefits package made generally available to all other officers and employees of
the Company, as may be adopted, modified to discontinued from time to time by
the Company.
<PAGE> 2
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(C) VACATION. Employee shall be entitled to a paid vacation (taken
consecutively or in segments) of four (4) weeks during each fiscal year,
adjusted pro rata for any partial fiscal year during the term hereof. Such
vacation may be taken at such times as is reasonably prudent and consistent with
the proper and diligent performance by the Employee of his duties and
responsibilities hereunder.
(D) BONUS. For the year ending June 30, 1999, the Employee shall be
entitled to receive a bonus of not less than $50,000 and not more than
$100,000. Such bonus shall be determined by the Board of Directors or Chief
Executive Officer, based on goals, milestones and objectives established by the
Employee and the Board of Directors or Chief Executive Officer from time to
time. Any bonus shall be subject to all applicable federal and state
withholding, payroll and other taxes.
3. ANNUAL PERFORMANCE REVIEW. Commencing August 1, 1999 and during the
months of August and May thereafter during the term of this Agreement, the Board
of Directors or the Chief Executive Officer and the Employee shall in good faith
review the performance by, and the compensation payable to, the Employee for the
then current year and the proposed performance by, and compensation to, the
Employee for the then forthcoming year.
4. TERM. The term of this Agreement shall commence on the date first
above written and shall terminate on the earlier to occur of (i) June 30, 2001,
(ii) the death, physical incapacity or mental incompetence of the Employee, or
(iii) the occurrence of any of the circumstances described in Section 5 hereof
(the "EXPIRATION DATE"). After June 30, 2001, such employment may be extended
for successive twelve-month periods upon approval by the Board of Directors or
the Chief Executive Officer and the Employee, subject to earlier termination as
provided herein. Prior to June 30, 2001, the Company and the Employee agree,
subject to the prior termination of this Agreement, to discuss mutually
agreeable terms of a new employment agreement. If such terms cannot be agreed to
by June 30, 2001, this Agreement shall automatically expire on June 30, 2001.
5. TERMINATION. The Employee's term of employment under this Agreement
may be earlier terminated as follows:
(A) AT THE EMPLOYEE'S OPTION: The Employee may terminate his
employment, without cause, at any time upon at least sixty (60) days' advance
written notice to the Company.
(B) AT THE ELECTION OF THE COMPANY FOR JUST CAUSE. The Company may,
immediately and unilaterally, terminate the Employee's employment hereunder for
"just cause" at any time during the term of this Agreement Termination of the
Employee's employment by the Company shall constitute a termination for "just
cause" under this Section 5(B) if such termination is for one or more of the
following causes: (i) the failure of Employee to render services to the Company
in accordance with his assigned duties consistent with this Agreement, and such
failure of performance continues for a period of more than 30 days after written
notice thereof has been provided to the Employee; (ii) willful misconduct or
gross negligence of the Employee in connection with the performance of his
assigned duties; (iii) the conviction of the Employee of a felony; (iv)
disloyalty, breach of fiduciary duty or breach of the material terms of this
Agreement; (v) the commission by Employee of an act of fraud, embezzlement or an
act of deliberate disregard of the rules or policies of the Company which
results in loss, damage or injury to the Company or adversely affects the
business activities, reputation, goodwill or image of the Company; (vi) the
unauthorized disclosure or misappropriation by Employee of any trade secret or
confidential information of the Company or any of its clients or customers,
which results in damage or injury to the Company or adversely affects the
business activities, reputation, goodwill or image of the Company or its clients
or customers; or (vii) the commission by Employee of an act which constitutes
unfair competition with the Company or which induces any employee or customer of
the Company to break a contract with the Company.
After notice of termination for just cause has been delivered to the
Employee, the Employee shall be entitled to have the grounds for termination of
employment reviewed by the Board of Directors
<PAGE> 3
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or the Chief Executive Officer, provided such entitlement to review shall not
serve to extend the date upon which the termination of employment shall become
effective. In making any determination under this Section, the Board of
Directors or the Chief Executive Officer shall act fairly and in utmost good
faith and shall give the Employee an opportunity to appear and be heard and
present evidence on his behalf.
In the event of any such termination for "just cause," the Employee
shall be entitled to accrued and unpaid salary and vacation through the
termination date and no other payments.
(C) AT THE ELECTION OF THE COMPANY FOR REASONS OTHER THAN JUST
CAUSE. The Company may, immediately and unilaterally, terminate the Employee's
employment hereunder at any time during the term of this Agreement for other
than "just cause" by giving thirty (30) days' advance written notice to the
Employee of the Company's election to terminate. During such thirty-day period,
the Employee will be available on a full-time basis for the benefit of the
Company to assist the Company in matters relating to the transition of a new,
successor officer of the Company. In the event the Company exercises its right
to terminate the Employee under this Section 5(C), the Company agrees to pay the
Employee a severance or termination payment of twelve months' salary at the then
current rate, payable in the same manner as such salary was payable during the
term of the Employee's employment. Such severance payment shall be payable on a
monthly basis for the twelve (12) months following the Employee's termination
and shall be subject to all applicable federal and state taxes. In the event of
a termination under this Section 5(C), the Company may, at its option, retain
the Employee as a consultant on terms mutually agreed between the Company and
the Employee. All such payments made pursuant to this Section 5(C) or Section
5(D), shall be conditioned upon the receipt by the Company of a signed release
in a form acceptable to the Company's counsel releasing the Company from any and
all actions or causes of actions, suits, debts, claims, complaints, contracts,
controversies, agreements, promises, damages, judgments and demands whatsoever,
in law or in equity, whether existing or contingent, known or unknown,
pertaining to the Employee's employment by the Company or termination of such
employment.
It shall be deemed to be a constructive termination by the Company for
other than "just cause" if: (i) the Employee's responsibilities and executive
authority are reduced or diluted in any material way without the Employee's
written consent; or (ii) the Employee is relocated to another Company office or
facility to a location outside of a radius of 25 miles from the Company's
current Manchester, New Hampshire, facility and without the Employee's written
consent.
(D) TERMINATION BECAUSE OF ACQUISITION OF THE COMPANY. The
provisions of this Section shall apply if the Employee's employment is
terminated because of any decision by the Board of Directors of the Company (or
following completion of the Acquisition (as defined below), the surviving
corporation) in connection with a consolidation, merger, or sale of all, or
substantially all, of the assets or capital stock of the Company, or other
business combination in which the Company is the target in any business
combination (an "Acquisition"). In the event of the completion of an
Acquisition, if the Employee is not offered employment by the acquiring
corporation in a comparable position, at a comparable salary, or is terminated
for other than "just cause" ("just cause" as defined in Section 5(B) hereof),
then the Company or the acquiring corporation, as the case may be, shall be
obligated to pay the Employee a severance payment of twelve months' salary at
the then current monthly rate, payable in the same manner as such salary was
payable during the term of the Employee's employment, together with medical and
health insurance benefits as set forth in Section 2(B). If the Employee is
offered employment by the acquiring corporation in a comparable position, and at
a comparable salary, neither the Company nor the acquiring corporation shall be
obligated to provide the severance payment described in this Section 6(D).
<PAGE> 4
-4-
Anything contained in this Section 6(D) to the contrary notwithstanding, the
Employee shall not be entitled to any severance or other termination benefit if
the Employee has either (i) terminated such employment voluntarily, or (ii) has
been terminated by the Company or any acquiring corporation for "just cause"
pursuant to Section 5(B). In the event of an Acquisition, if the Employee is not
offered employment at the surviving corporation (under the terms described
above) or is otherwise terminated at any time within twelve (12) months of the
completion of an Acquisition for other than "just cause," then all remaining
unvested stock options held by the Employee shall become immediately vested and
exercisable upon any such termination, such options to be exercisable for a
period of six (6) months following any effective date of termination.
6. NONCOMPETITION, CONFIDENTIALITY AND INVENTIONS AGREEMENT. In
connection with his employment by the Company pursuant to the terms of this
Agreement, the Employee shall execute the Noncompetition, Confidentiality and
Inventions Agreement attached hereto as Exhibit A, the terms and conditions of
which are incorporated herein by reference. The Noncompetition, Confidentiality
and Inventions Agreement is sometimes referred to herein as the "Ancillary
Agreement."
7. GOVERNING LAW; INJUNCTIVE RELIEF. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of New
Hampshire and shall be deemed to be performable in the State of New Hampshire.
The Employee acknowledges that the breach or threatened breach of any of the
provisions of this Agreement would give rise to irreparable injury to Company
which injury would be inadequately compensable in money damages. Accordingly,
Company may seek and obtain a restraining order and/or injunction prohibiting
the breach or threatened breach of any provision, requirement or covenant of
this Agreement, in addition to and not in limitation of any other legal remedies
which may be available. The Employee further acknowledges and agrees that the
agreements set out above are necessary for the protection of Company's
legitimate goodwill and business interests and are reasonable in scope, duration
and content.
8. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement or the Ancillary Agreement for any reason shall be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement or the
Ancillary Agreement, but this Agreement or the Ancillary Agreement, as the case
may be, shall be construed, revised, modified and reformed to the maximum extent
possible to effect the purposes set forth herein and in the Ancillary Agreement.
9. WAIVERS AND MODIFICATIONS. This Agreement may be modified, and the
rights and remedies of any provision hereof may be waived, only in accordance
with this Section. No modification or waiver by the Company shall be effective
without the consent of the Employee and the Chief Executive Officer or a
majority of the Board of Directors (excluding the Employee, if the Employee is a
director) then in office at the time of such modification or waiver. No waiver
by either party of any breach by the other party of any provision hereof shall
be deemed to be a waiver of any later or other breach thereof or as a waiver of
any other provision of this Agreement. This Agreement and the Ancillary
Agreement set forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between the
parties, but only by an instrument in writing signed by the party against whom
any waiver, change, discharge or termination is sought.
10. ASSIGNMENT. The Employee acknowledges that the services to be
rendered by him are unique and personal in nature. Accordingly, the Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. The rights and obligations of the Company under this Agreement
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of the Company, including any successor to the Company's capital stock
or assets by reason of any sale of
<PAGE> 5
-5-
stock or assets, merger, sale or other form of business combination where the
Company is not the surviving entity.
11. ARBITRATION. Any controversy, dispute, claim or breach arising out
of or relating to this Agreement shall be submitted for settlement to an
arbitrator agreed upon by the parties. The decision of such arbitrator shall be
final and binding on the parties. If the parties cannot agree upon an
arbitrator, the controversy, claim or breach shall be referred to the American
Arbitration Association with a request that the Association appoint an
arbitrator. Such arbitration shall be held in Concord or Manchester, New
Hampshire, in accordance with the rules and practices of the American
Arbitration Association pertaining to single-party arbitration then in effect,
and the judgment upon the award rendered shall be entered by consent in any
court having jurisdiction. The prevailing party shall be entitled to recover all
costs and expenses associated with any arbitration (including attorneys' fees);
and if no party prevails, each party shall be responsible for its own expenses.
12. INTEGRATION. This Agreement and the Ancillary Agreement set forth
all of the terms of the understandings between the parties and supersede any
other understandings, discussions or agreements among the parties with reference
to the subject matter set forth herein.
13. INTERPRETATION. The language of all parts of this Agreement shall
in all cases be construed as a whole according to its fair meaning and not
strictly for or against either of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
SILKNET SOFTWARE, INC. EMPLOYEE:
BY: ____________________________ _____________________________
TITLE: _________________________
<PAGE> 6
Exhibit A
SILKNET SOFTWARE, INC.
NONCOMPETITION, NONDISCLOSURE AND INVENTIONS AGREEMENT
(FOR OFFICERS AND KEY EMPLOYEES)
The undersigned, __________________________ in consideration for and as
a condition of my continued employment as an employee (the "EMPLOYEE") of
SILKNET SOFTWARE, INC. (the "COMPANY"), hereby agrees with the Company as
follows:
1. NONCOMPETITION COVENANT. During the period of employment as an
officer and/or key employee of the Company, the Employee will devote his
available business time and best efforts to promoting and advancing the business
of the Company. During the period of employment and for a period of one (1) year
after termination of such employment (for any reason whatsoever), the Employee
agrees that he will not, whether alone or as a partner, officer, director,
consultant, agent, employee or stockholder of any company or other commercial
enterprise, engage in any business or other commercial activity which is or may
be competitive with the products and services being designed, conceived,
marketed, distributed or developed by the Company at the time of termination of
such employment. The foregoing prohibition shall not prevent employment or
engagement by any company or business organization, or any division thereof, not
substantially engaged in the business of developing, designing or marketing
software that allows companies to offer personalized marketing, sales,
electronic commerce and customer support services through a Web site interface
(the "Business"), as long as the activities of any such employment or
engagement, in any capacity, does not involve work on matters directly related
to the products or services being developed, to practice, distributed or
marketed by the Company at the time of any termination of employment. The
foregoing restriction shall not prohibit Employee from owning securities of any
publicly traded company that is engaged in the Business as long as Employee does
not own at any time more than three percent (3%) of such class of equity
securities of such company.
2. NONSOLICITATION. During the period of employment by the Company and
for a period of one (1) year after termination of such employment (for any
reason), the Employee will not directly or indirectly either for himself or for
any other commercial enterprise, solicit, divert or take away or attempt to
solicit, divert or take away, any of the Company's customers, business or
prospective customers in existence at the time of termination of such
employment. For purposes of this Agreement, "prospective customers" shall
include those customers being solicited by the Company at the time of the
Employee's termination. During such employment with the Company and for a period
of one (1) year thereafter, the Employee will not solicit or discuss with any
employee of the Company the employment of such Company employee by any
commercial enterprise, other than for the benefit of the Company, nor recruit,
attempt to recruit, hire, or attempt to hire any such Company employee other
than on behalf of the Company.
3. NONDISCLOSURE OBLIGATION. The Employee will not at any time, whether
during or after the termination of employment, for any reason whatsoever (other
that to promote and advance the business of the Company), reveal to any person
or entity (both commercial and non-commercial) any of the trade secrets or
confidential business information concerning the Company: including its research
and development activities; product designs, prototypes and technical
specifications; show-how and know-how; marketing plans and strategies; pricing
and costing policies; customer and supplier lists and accounts; or nonpublic
financial information of the Company so far as they have come or may come to
<PAGE> 7
-2-
the Employee's knowledge, except as may be required in the ordinary course of
performing his duties as an employee of the Company. This restriction shall not
apply to: (i) information that may be disclosed generally or is in the public
domain through no fault of the Employee; (ii) information received from a third
party outside the Company that was disclosed without a breach of any
confidentiality obligation; (iii) information approved for release by written
authorization of the Company; or (iv) information that may be required by law or
an order of any court, agency or proceeding to be disclosed. The Employee shall
keep secret all matters of such nature entrusted to him and shall not use or
disclose any such information for the benefit of any third party in any manner
which may injure or cause loss to the Company, whether directly or indirectly.
4. ASSIGNMENT OF INVENTIONS. The Employee expressly understands and
agrees that any and all right or interest he obtains in any designs, trade
secrets, technical specifications and technical date, know-how and show-how,
customer and vendor lists, marketing plans, pricing policies, inventions,
concepts, ideas, expressions, discoveries, improvements and patent or patent
rights which are authored, conceived, devised, developed, reduced to practice,
or otherwise obtained by him during the term of this Agreement which relate to
or arise out of his employment with the Company are expressly regarded as "works
for hire" (the "INVENTIONS"). The Employee hereby assigns to the Company the
sole and exclusive right to such Inventions. The Employee agrees that he will
promptly disclose to the Company any and all such Inventions, and that, upon
request of the Company, the Employee will execute and deliver any and all
documents or instruments and take any other action which the Company shall deem
necessary to assign to and vest completely in the Company, to perfect trademark,
copyright and patent protection with respect to, or to otherwise protect the
Company's trade secrets and proprietary interest in such Inventions. The
obligations of the Employee under this Section shall continue beyond the
termination of the Employee's employment with respect to such Inventions
conceived of, reduced to practice, or developed by the Employee during the term
of this Agreement. The Company agrees to pay any and all copyright, trademark
and patent fees and expenses or other costs incurred by the Employee for any
assistance rendered to the Company pursuant to this Section.
The Employee's obligation to assign Inventions shall not apply to any
invention about which the Employee can prove that: (i) it was developed entirely
on the Employee's own time and effort; (ii) no equipment, supplies, facility,
trade secrets or confidential information of the Company was used in its
development; (iii) it does not relate to the business of the Company or to the
Company's actual or anticipated research and development activities; and (iv) it
does not result from any work performed by the Employee for the Company.
5. ABSENCE OF CONFLICTING AGREEMENTS. The Employee understands the
Company does not desire to acquire from him any trade secrets, know-how or
confidential business information that he may have acquired from others. The
Employee represents that he is not bound by any agreement or any other existing
or previous business relationship which conflicts with or prevents the full
performance of the Employee's duties and obligations to the Company during the
course of employment.
6. REMEDIES UPON BREACH. The Employee agrees that any breach of this
Agreement by the Employee could cause irreparable damage to the Company. The
Company shall have, in addition to any and all remedies of law, the right to an
injunction or other equitable relief to prevent any violation of the Employee's
obligations hereunder.
7. MISCELLANEOUS. Any waiver by the Company of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach hereof. If one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to
<PAGE> 8
-3-
scope, activity or subject matter so as to be unenforceable at law, such
provision(s) shall be construed and reformed by the appropriate judicial body by
limiting and reducing it (or them), so as to be enforceable to the maximum
extent compatible with the applicable law as it shall then appear. The
obligations of the Employee under this Agreement shall survive the termination
of the Employee's relationship with the Company regardless of the manner of such
termination. All covenants and agreements hereunder shall inure to the benefit
of and be enforceable by the successors of the Company. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
New Hampshire. The Employee understands that this Agreement does not create an
obligation on the part of the Company to continue the Employee's employment with
the Company. The Employee is employed as an employee "at will."
The Employee recognizes and agrees that the enforcement of this
Agreement is necessary to ensure the preservation, protection and continuity of
the confidential business information, trade secrets and goodwill of the
Company. The Employee agrees that, due to the proprietary nature of the
Company's business, the restrictions set forth in Sections 1, 2, 3 and 4 of this
Agreement are reasonable as to duration and scope.
IN WITNESS WHEREOF, the undersigned Employee and the Company have
executed this Agreement as of this 13th day of April, 1999.
SILKNET SOFTWARE, INC. EMPLOYEE:
By:_______________________________ ________________________________
SIGNATURE OF EMPLOYEE
Title:____________________________ ________________________________
PRINT NAME OF EMPLOYEE
<PAGE> 1
EXHIBIT 23.03
April 13, 1999
Silknet Software, Inc.
50 Phillippe Cote Street
Manchester, New Hampshire 03101
Ladies and Gentlemen:
The undersigned hereby acknowledges and consents to the use of its name
and the following quote:
"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.",
for use by Silknet Software, Inc. (the "Company") in the Company's registration
statement and prospectus, in a format substantially as shown in Exhibit A
attached, to be filed with the U.S. Securities and Exchange Commission
("Prospectus") and in any related preliminary Prospectus, or final Prospectus
which may be distributed to the public from time to time.
The undersigned also consents to the filing by the Company of this
consent letter, as required by the rules of the Securities and Exchange
Commission.
By: /s/ Christopher Fletcher
_________________________________
Name: Christopher Fletcher
_______________________________
Title: Research Director
______________________________
Name of Company: Aberdeen Group, Inc.
____________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SILKNET
SOFTWARE INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001079451
<NAME> SILKNET SOFTWARE INC.
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 11,126
<SECURITIES> 0
<RECEIVABLES> 4,526
<ALLOWANCES> 250
<INVENTORY> 0
<CURRENT-ASSETS> 15,741
<PP&E> 2,611
<DEPRECIATION> 944
<TOTAL-ASSETS> 17,524
<CURRENT-LIABILITIES> 4,865
<BONDS> 0
0
29,415
<COMMON> 28
<OTHER-SE> (16,849)
<TOTAL-LIABILITY-AND-EQUITY> 17,524
<SALES> 6,473
<TOTAL-REVENUES> 9,161
<CGS> 265
<TOTAL-COSTS> 2,533
<OTHER-EXPENSES> 12,967
<LOSS-PROVISION> 250
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<INCOME-PRETAX> (6,115)
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<INCOME-CONTINUING> (6,115)
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