<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
SILKNET SOFTWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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:
<TABLE>
<S> <C>
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. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value $34,500,000 $9,591.00
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</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares of common stock being registered and the proposed maximum offering
price per share are not included in this table. Estimated solely for the
purpose of calculating the registration fee in accordance with Rule 457(a)
under the Securities Act of 1933.
-------------------------
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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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND 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 MARCH 3, 1999
SHARES
[SILKNET LOGO]
COMMON STOCK
------------------
All of the shares of common stock being sold are being offered by Silknet. Prior
to this offering, there has been no public market for the common stock. The
initial public offering price is expected to be between $ and
$ per share. Application has been made to list 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
additional shares of common stock to cover over-allotments of shares.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS SILKNET
------------- ------------- -------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total..................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999, against payment in immediately available funds.
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> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 5
USE OF PROCEEDS............................................. 16
DIVIDEND POLICY............................................. 16
CAPITALIZATION.............................................. 17
DILUTION.................................................... 18
SELECTED CONSOLIDATED FINANCIAL DATA........................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 20
BUSINESS.................................................... 31
MANAGEMENT.................................................. 48
CERTAIN TRANSACTIONS........................................ 53
PRINCIPAL STOCKHOLDERS...................................... 55
DESCRIPTION OF CAPITAL STOCK................................ 57
SHARES ELIGIBLE FOR FUTURE SALE............................. 62
UNDERWRITING................................................ 65
NOTICE TO CANADIAN RESIDENTS................................ 67
LEGAL MATTERS............................................... 68
EXPERTS..................................................... 68
CHANGE IN INDEPENDENT ACCOUNTANTS........................... 68
ADDITIONAL INFORMATION...................................... 68
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
------------------------
Until (25 days after the commencement of this offering), 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
<PAGE> 4
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 pursuant to 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 personalized marketing,
sales, electronic commerce and customer support services through a single,
company-tailored Web site interface. Our products enable a company to deliver
these services to its customers over the Web through real-time collaboration and
customer self-service. 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.
Our customers include:
- 3Com
- Bank of America
- Bell Advanced Communications
- Cigna
- Compaq
- Inacom
- KPMG Peat Marwick
- Microsoft
- 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.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................................ shares
Common Stock to be outstanding after the offering........... shares
Use of proceeds............................................. For general corporate purposes,
including working capital.
Proposed 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>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------- ------------------
1996 1997 1998 1997 1998
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $ 266 $ 194 $ 3,647 $ 636 $ 5,544
Total cost of revenue.......................... 141 341 1,386 579 1,703
Gross margin................................... 125 (147) 2,261 57 3,841
Total operating expenses....................... 583 2,545 8,398 3,252 7,800
Operating loss................................. (458) (2,692) (6,137) (3,195) (3,959)
Net loss....................................... (465) (2,753) (6,003) (3,130) (3,809)
Net loss attributable to common stockholders... (465) (2,943) (6,906) (3,181) (4,722)
Basic and diluted net loss per share........... $(0.18) $ (1.15) $ (2.69) $ (1.24) $ (1.76)
Shares used in computing basic and diluted net
loss per share............................... 2,551 2,557 2,566 2,558 2,675
Unaudited pro forma basic and diluted net loss
per share.................................... $(0.18) $ (0.63) $ (0.76) $ (0.42) $ (0.36)
Shares used in computing unaudited pro forma
basic and diluted net loss per share......... 2,551 4,398 7,879 7,422 10,629
</TABLE>
The pro forma as adjusted balance sheet data as of December 31, 1998 gives
effect to the conversion of all outstanding preferred stock into common stock
and has been adjusted to give effect to the sale of shares of
common stock offered hereby at an assumed initial public offering price of
$ per share, after deducting estimated underwriting discounts and
commissions and offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
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 $ 4,585 $
Working capital..................................... 4,155 8,472 4,477
Total assets........................................ 5,402 12,129 10,598
Note payable to bank................................ 115 222 156 156
Total convertible participating preferred stock..... 7,432 19,107 20,021 --
Total stockholders' equity (deficit)................ (2,834) (9,587) (14,168)
</TABLE>
4
<PAGE> 6
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 December 31, 1998, we had
an accumulated deficit of $13.1 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
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) and a
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 increased
significantly between the quarter ended
September 30, 1998 and the quarter ended
December 31, 1998, primarily due to significant
consulting and implementation services
performed for one customer. Investors should
not expect a commensurate increase in services
revenue between future quarters. See
5
<PAGE> 7
"Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OUR QUARTERLY OPERATING
RESULTS
MAY FAIL TO MEET
EXPECTATIONS
OF INVESTORS OR SECURITIES
ANALYSTS 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.
OUR BUSINESS DEPENDS ON THE
DEVELOPMENT OF A NEW MARKET
AND THE CONTINUED GROWTH
AND COMMERCIAL ACCEPTANCE
OF THE WEB Our products address a new and emerging market
for Web-based, interactive electronic business
solutions. 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. Our future success also depends
substantially upon the widespread adoption of
the Web as a primary medium for commerce and
business applications. If the Web does not
continue to increase in importance as a
commercial medium, our business, operating
results and financial condition would be
materially adversely affected. 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
6
<PAGE> 8
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 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.
We expect that additional 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.
New technologies will likely increase the
competitive pressures that we face. The
development of competing technologies by market
participants or the emergence of new industry
standards may adversely affect our competitive
position. As a result of these and other
factors, we may not be able to compete
effectively with current or future competitors,
which would have a material adverse effect on
our business, operating results and financial
condition. See "Business -- Competition."
7
<PAGE> 9
OUR SUCCESS DEPENDS ON OUR
ABILITY TO EXPAND
RELATIONSHIPS
WITH SYSTEMS INTEGRATORS
AND
CONSULTING FIRMS To increase our revenue and implementation
capabilities, we must develop and expand
relationships with systems integrators and
consulting firms. A failure to do so could have
a material adverse effect on our business,
operating results and financial condition. We
rely on systems integrators and consulting
firms to recommend our products to their
clients and to install and support our products
for their clients. Systems integrators and
consulting firms may develop, market or
recommend software applications that compete
with our products. Moreover, if these firms
fail to implement our products successfully for
their clients, we may not have the resources to
implement our products on the schedule required
by the client, which could have a material
adverse effect on our business, operating
results and financial condition.
OUR SUCCESS 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.
OUR SUCCESS DEPENDS ON OUR
ABILITY TO ACHIEVE
PROFITABILITY
WITHIN OUR PROFESSIONAL
SERVICES
ORGANIZATION To date, our annual services costs have been
significantly higher than our services revenue,
and we expect that trend to continue for the
foreseeable future. We cannot be certain that
our professional services business will ever
achieve or sustain profitability, and a failure
to do so could have a material adverse effect
on our business, operating results and
financial condition. To gain initial acceptance
of our products by customers in our targeted
industries, we have assisted, and plan to
continue to assist, customers with the
implementation of our products, sometimes
without compensation for some services on
particular implementations.
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 PROPERLY MANAGE
GROWTH COULD ADVERSELY
AFFECT
OUR BUSINESS We have been experiencing a period of rapid
growth that has been placing a significant
strain on all of our resources. Our revenue
increased 587% in the quarter ended December
31,
8
<PAGE> 10
1998 from the same period the year earlier.
From January 1, 1998 to December 31, 1998, the
number of our employees increased from 55 to
108. 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.
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. We do not have
employment agreements with any of our executive
officers, and 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 MUST HIRE AND RETAIN
SKILLED PERSONNEL IN A
TIGHT
LABOR MARKET Qualified personnel are in great demand
throughout the software industry. The demand
for qualified personnel is particularly acute
in the New England area, due to the large
number of software companies and the low
unemployment in the region. Our success depends
in large part upon our ability to attract,
train, motivate and retain highly skilled
employees, particularly sales and marketing
personnel, software engineers and other senior
personnel. Our failure to attract and retain
the highly-trained technical personnel that are
integral to our direct sales, product
development, professional services and support
teams may limit the rate at which we can
generate sales and develop new products or
product enhancements. This could have a
material adverse effect on our business,
operating results and financial condition.
OUR SUCCESS DEPENDS ON OUR
ABILITY 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
9
<PAGE> 11
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 WE INFRINGE THEIR
INTELLECTUAL PROPERTY OR
PROPRIETARY RIGHTS 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.
We have applied for registration of some of our
trademarks in the United States, Canada and the
European Community. None of these applications
has 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. We
have filed an appeal, but there can be no
assurance that we will be able to register the
trademark "Silknet" in Canada.
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."
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 perform-
10
<PAGE> 12
ance 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. 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. 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 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 BE SUBJECT TO
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.
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 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 SUCCESS 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;
11
<PAGE> 13
- 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.
International operations are generally subject
to 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;
- foreign currency exchange rate
fluctuations; and
- political and economic instability.
WE MAY BE SUBJECT TO RISKS
ASSOCIATED WITH FUTURE
ACQUISITIONS In the future, we may pursue acquisitions to
obtain products, services and technologies that
we believe will complement or enhance our
current product or services offerings. At
present, we have no agreements or other
arrangements with respect to any acquisition.
An acquisition may not produce the revenue,
earnings or business synergies that we
anticipated, and an acquired product, service
or technology might not perform as we expected.
If we pursue any acquisition, our management
could spend a significant amount of time and
effort in identifying and completing the
acquisition and may be distracted from the
operations of our business. If we complete an
acquisition, we would probably have to devote a
significant amount of management resources to
integrating the acquired business with our
existing business, and that integration may not
be successful.
To pay for an acquisition, we might use capital
stock or cash, including proceeds of this
offering. Alternatively, we might borrow money
from a bank or other lender. If we use capital
stock, our stockholders would experience
dilution of their ownership interests. If we
use cash or debt financing, our financial
liquidity will be reduced.
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,
12
<PAGE> 14
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 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.
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.
Recently, when the market price of a stock has
been volatile, holders of that stock have
occasionally instituted securities class action
litigation against the company that issued the
stock. If any of our stockholders brought such
a lawsuit against us, even if the lawsuit is
without merit, we could incur substantial costs
defending the lawsuit. The lawsuit could also
divert the time and attention of our
management.
13
<PAGE> 15
OUR EXECUTIVE OFFICERS AND
DIRECTORS WILL EXERCISE
SIGNIFICANT CONTROL OVER
SILKNET After this offering, our executive officers and
directors and their affiliates will together
control approximately % 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.
CERTAIN PROVISIONS OF OUR
CHARTER AND OF DELAWARE LAW
MAKE A TAKEOVER OF SILKNET
MORE DIFFICULT Our corporate documents and Delaware law
contain provisions that might enable our
management to resist a takeover of Silknet.
These provisions might discourage, delay or
prevent a change in the control of Silknet or a
change in our management. These provisions
could also discourage proxy contests and make
it more difficult for you and other
stockholders to elect directors and take other
corporate actions. The existence of these
provisions could limit the price that investors
might be willing to pay in the future for
shares of common stock and could deprive our
stockholders of an opportunity to receive a
premium for their common stock as part of a
sale of Silknet. See "Description of Capital
Stock-Anti-Takeover Effects of Provisions of
Silknet's Certificate of Incorporation and
By-laws and Delaware Law."
FUTURE SALES BY EXISTING
SECURITY HOLDERS COULD
DEPRESS
THE MARKET PRICE OF THE
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
shares (including the shares being
sold in this offering) will be outstanding. Of
these shares, shares will be available for
resale in the public market without restriction
immediately following this offering. Of the
additional shares of our common stock
which will be outstanding, approximately
shares will become eligible for sale in the
public market (subject to compliance with Rule
144 in certain cases) upon the expiration of
"lock-up" agreements with the Underwriters 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
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
14
<PAGE> 16
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. 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.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to Silknet from the issuance and sale of the
shares of common stock offered hereby are estimated to be
approximately $ million (approximately $ million if the
underwriters' over-allotment option is exercised in full), at an assumed initial
public offering price of $ per share, after deducting estimated underwriting
discounts and commissions and offering expenses. 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."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization of Silknet as of December
31, 1998:
- 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
shares of common stock offered hereby at an assumed
initial public offering price of $ 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>
DECEMBER 31, 1998
-----------------------------------------
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............. $ 156 $ 156 $156
Convertible participating preferred stock, $.01 par value
(1):
Series A -- 2,364,584 shares authorized, issued and
outstanding actual; none authorized, issued and
outstanding pro forma and pro forma as adjusted......... 2,781 -- --
Series B -- 2,500,000 shares authorized, issued and
outstanding actual; none authorized, issued and
outstanding pro forma and pro forma as adjusted......... 5,770 -- --
Series C -- 3,089,157 shares authorized, issued and
outstanding actual; none authorized, issued and
outstanding pro forma and pro forma as adjusted......... 11,470 -- --
-------- -------- ----
Total convertible participating preferred
stock(2)......................................... 20,021 -- --
-------- -------- ----
Stockholders' equity (deficit):
Common stock, $.01 par value; 15,000,000 shares
authorized, 2,716,650 shares issued outstanding actual;
10,670,391 shares issued and outstanding pro forma;
10,670,391 shares issued and outstanding pro forma as
adjusted(1)............................................. 27 107
Additional paid-in capital................................ 1,298 19,233
Accumulated dividends on preferred stock(3)............... (2,006) -- --
Deferred compensation..................................... (398) (398) (398)
Other comprehensive income................................ 1 1 1
Accumulated deficit....................................... (13,091) (13,091)
-------- -------- ----
Total stockholders' equity (deficit)........................ $(14,169) 5,852
-------- -------- ----
Total capitalization........................................ $ 6,008 $ 6,008 $
======== ======== ====
</TABLE>
- ---------------
(1) On February 25, 1999, Silknet increased its authorized capital stock to
50,000,000 shares of common stock and 15,000,000 shares of preferred stock.
(2) On February 26, 1999, Silknet issued 1,205,913 shares of Series D
Convertible Preferred Stock at $7.324109 per share for total consideration
of approximately $8.8 million. These shares will convert to 1,205,913 shares
of common stock upon the closing of this offering. The Series D Convertible
Preferred Stock has not been included in the above capitalization table.
(3) Upon conversion of the convertible participating preferred stock, all
accrued dividends will be eliminated.
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of Silknet at December 31, 1998 was
$5,852,000, or $.55 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 shares of common stock offered hereby by Silknet at an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and offering expenses, Silknet's pro
forma net tangible book value as of December 31, 1998 would have been
approximately $ , or $ per share. This represents an immediate increase
in pro forma net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ 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..................... $
Pro forma net tangible book value per share at December
31, 1998............................................... $ .55
Increase attributable to this offering....................
------
Pro forma net tangible book value per share after this offering..... $
------
Net tangible book value dilution per share to new investors in this
offering.......................................................... $
======
</TABLE>
The following table summarizes, as of December 31, 1998, 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 $ 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................ 10,670,391 % $18,372,363 % $1.72
New investors........................ % $ % $
---------- --- ----------- ----
Totals..................... 100% 100%
========== === =========== ====
</TABLE>
As of December 31, 1998, there were (a) 732,451 shares of common stock
issuable upon exercise of outstanding stock options, at a weighted average
exercise price of $.43 per share; (b) 53,188 shares of common stock reserved for
issuance under Silknet's Employee Stock Option 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 Stock Option and Incentive Plan, pursuant to which 1,000,000 shares of
common stock were initially reserved for issuance, 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" and Note M to consolidated
financial statements.
18
<PAGE> 20
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 balance sheet
data as of June 30, 1997 and 1998, 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 six months ended
December 31, 1997 and 1998 and the balance sheet data as of December 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 participating preferred stock are not
included in the calculation of pro forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
MARCH 6, 1995 YEAR ENDED JUNE 30, DECEMBER 31,
(INCEPTION) TO --------------------------- -----------------
JUNE 30, 1995 1996 1997 1998 1997 1998
-------------- ------ -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License................................................... -- -- $ 75 $ 2,977 $ 508 $ 3,689
Services.................................................. -- $ 266 119 670 128 1,855
------ ------ ------- ------- ------- -------
Total revenue....................................... -- 266 194 3,647 636 5,544
------ ------ ------- ------- ------- -------
Cost of revenue:
License................................................... -- -- 29 32 5 184
Services.................................................. -- 141 312 1,354 574 1,519
------ ------ ------- ------- ------- -------
Total cost of revenue............................... -- 141 341 1,386 579 1,703
------ ------ ------- ------- ------- -------
Gross margin................................................ -- 125 (147) 2,261 57 3,841
------ ------ ------- ------- ------- -------
Operating expenses:
Sales and marketing....................................... -- 33 888 4,802 1,814 4,236
Research and development.................................. $ 26 120 961 2,409 944 2,274
General and administrative................................ 35 430 696 1,187 494 1,290
------ ------ ------- ------- ------- -------
Total operating expenses............................ 61 583 2,545 8,398 3,252 7,800
------ ------ ------- ------- ------- -------
Operating loss.............................................. (61) (458) (2,692) (6,137) (3,195) (3,959)
Interest income (expense), net.............................. -- (7) (61) 134 65 150
------ ------ ------- ------- ------- -------
Net loss.................................................... (61) (465) (2,753) (6,003) (3,130) (3,809)
Accrued dividends for preferred stockholders................ -- -- 190 903 51 913
------ ------ ------- ------- ------- -------
Net loss attributable to common stockholders................ $ (61) $ (465) $(2,943) $(6,906) $(3,181) $(4,722)
====== ====== ======= ======= ======= =======
Basic and diluted net loss per share attributable to common
stockholders.............................................. $(0.02) $(0.18) $ (1.15) $ (2.69) $ (1.24) $ (1.76)
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 2,675
Unaudited pro forma basic and diluted net loss per share.... (0.02) (0.18) (0.63) (0.76) (0.42) (0.36)
Shares used in computing unaudited pro forma basic and
diluted net loss per share................................ 2,478 2,551 4,398 7,879 7,422 10,629
</TABLE>
The pro forma as adjusted balance sheet data as of December 31, 1998 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 shares of common stock offered hereby at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
JUNE 30, -------------------------
-------------------------------- PRO FORMA
1995 1996 1997 1998 ACTUAL AS ADJUSTED
---- ----- ------- ------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 17 $ 40 $ 4,752 $ 9,045 $ 4,585 $
Working capital (deficit)................................... (28) (102) 4,155 8,472 4,477
Total assets................................................ 64 170 5,402 12,129 10,598
Note payable to bank........................................ -- -- 115 222 156 156
Total convertible participating preferred stock............. -- -- 7,432 19,107 20,021 --
Total stockholders' equity (deficit)........................ 19 (34) (2,834) (9,587) (14,168)
</TABLE>
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Silknet should be read in conjunction with "Selected
Consolidated Financial Data" and Silknet's consolidated financial statements and
notes thereto appearing elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Silknet's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. In January 1997, Silknet recorded its
first license revenue upon delivery of the 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.
In the fiscal years ended June 30, 1998 and 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 services is recognized
ratably over the term of the service agreement.
Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms. International revenue generated to date has been insignificant.
Silknet has only a limited operating history on which to base an evaluation
of its business and prospects. Silknet's prospects must be considered in light
of the risks and uncertainties encountered by companies in an early stage of
development in new and rapidly evolving markets. To address these risks, Silknet
must, among other things:
- develop new products and product enhancements more rapidly than its
competitors;
- attract, integrate, motivate and train qualified personnel;
- successfully implement its sales and marketing strategy; and
- expand relationships with implementation partners and grow its internal
services staff.
There can be no assurance that Silknet will succeed in addressing any or all of
these risks, and the failure to do so would have a material adverse effect on
Silknet's business, operating results and financial condition.
20
<PAGE> 22
Silknet has experienced substantial net losses since its inception, and as
of December 31, 1998, it had an accumulated deficit of $13.1 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>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
---------------------------- -----------------
1996 1997 1998 1997 1998
------ -------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Revenue:
License................................ -- 38.5% 81.6% 79.9% 66.5%
Services............................... 100.0% 61.5 18.4 20.1 33.5
------ -------- ------ ------ -----
Total revenue....................... 100.0 100.0 100.0 100.0 100.0
------ -------- ------ ------ -----
Cost of revenue:
License................................ -- 14.9 0.9 0.9 3.3
Services............................... 53.0 160.9 37.1 90.2 27.4
------ -------- ------ ------ -----
Total cost of revenue............... 53.0 175.8 38.0 91.1 30.7
------ -------- ------ ------ -----
Gross margin............................. 47.0 (75.8) 62.0 8.9 69.3
------ -------- ------ ------ -----
Operating expenses:
Sales and marketing.................... 12.4 458.4 131.7 285.1 76.4
Research and development............... 45.0 496.0 66.0 148.4 41.0
General and administrative............. 161.8 359.6 32.6 77.6 23.3
------ -------- ------ ------ -----
Total operating expenses............ 219.2 1,314.1 230.2 511.1 140.7
------ -------- ------ ------ -----
Operating loss........................... (172.1) (1,389.7) (168.3) (502.2) (71.4)
Interest income (expense), net........... (2.5) (31.1) 3.7 10.4 2.7
------ -------- ------ ------ -----
Net loss................................. (174.6)% (1,420.9)% (164.6)% (491.8)% (68.7)%
====== ======== ====== ====== =====
</TABLE>
21
<PAGE> 23
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
REVENUE
Total revenue increased to $5.5 million for the six-month period ended
December 31, 1998 from $636,000 for the six-month period ended December 31,
1997.
License Revenue. License revenue increased to $3.7 million for the
six-month period ended December 31, 1998 from $508,000 for the six-month period
ended December 31, 1997. 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 six months ended December 31, 1998. These new products
included a new version of Silknet eService and Silknet eBusiness System, which
was released in November 1998.
Services Revenue. Services revenue increased to $1.9 million for the
six-month period ended December 31, 1998 from $128,000 for the six-month period
ended December 31, 1997. Of this increase, $850,000 was attributable to a
consulting services project which was eventually completed in January 1999 and
$523,000 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 24 as of December 31, 1998 from eight as of December 31, 1997.
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 $184,000, or 5.0% of license revenue, for the six-month period
ended December 31, 1998 from $5,000, or 1.1% of license revenue, for the
six-month period ended December 31, 1997. 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 $1.5 million, or 81.9% of
services revenue, for the six-month period ended December 31, 1998 from
$574,000, or 449.2% of services revenue, for the six-month period ended December
31, 1997. 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 18 as of December 31, 1998 from 10 as of December 31, 1997, and
Silknet anticipates that it will continue to increase the number of customer
service employees in 1999. The improvement in services gross margins to 18.1%
for the six-month period ended December 31, 1998 from a negative margin of
349.2% for the six-month period ended December 31, 1997 was primarily
attributable to the substantial growth in consulting and maintenance revenue
from Silknet's increased installed base. Silknet realized negative margin on
services revenue for several quarters prior to the six-month period ended
December 31, 1998 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.
22
<PAGE> 24
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions and costs associated with marketing programs,
such as trade shows, seminars, public relations and new product launches. Sales
and marketing expenses increased to $4.2 million, or 76.4% of total revenue, for
the six-month period ended December 31, 1998 from $1.8 million, or 285.1% of
total revenue, for the six-month period ended December 31, 1997. The increase
was primarily attributable to an increase in the number of direct sales,
pre-sales support and marketing employees to 31 as of December 31, 1998 from 12
as of December 31, 1997. 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 $2.3 million, or 41.0% of total revenue, for the six-
month period ended December 31, 1998 from $944,000, or 148.4% of total revenue,
for the six-month period ended December 31, 1997. The increase primarily
resulted from salaries associated with newly hired development personnel. The
number of research and development employees increased to 42 as of December 31,
1998 from 20 as of December 31, 1997 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 $1.3 million, or 23.3% of total
revenue, for the six-month period ended December 31, 1998 from $494,000, or
77.6% of total revenue, for the six-month period ended December 31, 1997.
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 15 as of December 31, 1998 from six as of December 31, 1997.
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, net of interest expense,
increased to $151,000, or 2.7% of total revenue, for the six-month period ended
December 31, 1998 from $66,000, or 10.4% of total revenue, for the six-month
period ended December 31, 1997. 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
$13.1 million from inception through December 31, 1998. 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.
YEARS ENDED JUNE 30, 1998 AND 1997
REVENUE
Silknet's total revenue increased to $3.6 million for the period ended June
30, 1998 from $194,000 for the period ended June 30, 1997.
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
23
<PAGE> 25
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, 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.
24
<PAGE> 26
YEARS ENDED JUNE 30, 1997 AND 1996
REVENUE
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 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.
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 December
31, 1998. 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
25
<PAGE> 27
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
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- --------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License........................ $ 25 $ 50 $ 142 $ 366 $ 1,218 $ 1,250 $ 1,648 $ 2,040
Services....................... 14 14 17 111 240 303 621 1,234
--------- --------- ------- ------- ------- ------- ------- -------
Total revenue................ 39 64 159 477 1,458 1,553 2,269 3,274
--------- --------- ------- ------- ------- ------- ------- -------
Cost of revenue:
License........................ 10 19 1 4 13 14 92 91
Services....................... 95 152 237 337 327 453 538 981
--------- --------- ------- ------- ------- ------- ------- -------
Total cost of revenue........ 105 171 238 341 340 467 630 1,072
--------- --------- ------- ------- ------- ------- ------- -------
Gross margin..................... (66) (107) (79) 136 1,118 1,086 1,639 2,202
--------- --------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............ 313 503 832 982 1,209 1,779 1,892 2,343
Research and development....... 322 345 443 501 651 813 1,005 1,270
General and administrative..... 195 259 172 322 306 388 630 660
--------- --------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 830 1,107 1,447 1,805 2,166 2,980 3,527 4,273
--------- --------- ------- ------- ------- ------- ------- -------
Operating loss................... (896) (1,214) (1,526) (1,669) (1,048) (1,894) (1,888) (2,071)
Interest income, net............. 12 11 45 21 4 64 91 59
--------- --------- ------- ------- ------- ------- ------- -------
Net loss......................... $ (884) $ (1,203) $(1,481) $(1,648) $(1,044) $(1,830) $(1,797) $(2,012)
========= ========= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUE:
Revenue:
License........................ 64.1% 78.1% 89.3% 76.7% 83.5% 80.5% 72.6% 62.3%
Services....................... 35.9 21.9 10.7 23.3 16.5 19.5 27.4 37.7
--------- --------- ------- ------- ------- ------- ------- -------
Total revenue................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
--------- --------- ------- ------- ------- ------- ------- -------
Cost of Revenue:
License........................ 25.6 29.7 0.6 0.8 0.9 0.9 4.1 2.8
Services....................... 243.6 237.5 149.1 70.7 22.4 29.2 23.7 29.9
--------- --------- ------- ------- ------- ------- ------- -------
Total cost of revenue........ 269.2 267.2 149.7 71.5 23.3 30.1 27.8 32.7
--------- --------- ------- ------- ------- ------- ------- -------
Gross margin..................... (169.2) (167.2) (49.7) 28.5 76.7 69.9 72.2 67.3
--------- --------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing............ 802.6 785.9 523.3 205.9 82.9 114.6 83.4 71.6
Research and development....... 825.6 539.1 278.6 105.0 44.7 52.4 44.3 38.8
General and administrative..... 500.0 404.7 108.2 67.5 21.0 25.0 27.7 20.2
--------- --------- ------- ------- ------- ------- ------- -------
Total operating expenses..... 2,128.2 1,729.7 910.1 378.4 148.6 192.0 155.4 130.6
--------- --------- ------- ------- ------- ------- ------- -------
Operating loss................... (2,297.4) (1,896.9) (959.8) (349.9) (71.9) (122.1) (83.2) (63.3)
Interest income, net............. 30.7 17.2 28.3 4.4 0.3 4.1 4.0 1.8
--------- --------- ------- ------- ------- ------- ------- -------
Net loss......................... (2,266.7)% (1,897.7)% (931.5)% (345.5)% (71.6)% (118.0)% (79.2)% (61.5)%
========= ========= ======= ======= ======= ======= ======= =======
</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 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
26
<PAGE> 28
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 $17.8 million
through December 31, 1998. As of December 31, 1998, Silknet had cash and cash
equivalents totaling $4.6 million. In February 1999, Silknet received gross
proceeds of approximately $8.8 million from the sale of 1,205,913 shares of
Series D Preferred Stock.
27
<PAGE> 29
Cash used for operating activities for the six-month period ended December
31, 1998 was $3.8 million, primarily due to a net loss of $3.8 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue. As of December 31, 1998,
accounts receivable included $2.5 million from one significant customer which
has since been collected. 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 six-month period ended December
31, 1998 and the year ended June 30, 1998 was $577,000 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 used in financing activities for the six-months ended December 31,
1998 was $55,000 as a result of payments made on notes payable, partially offset
by proceeds received from the exercise of stock options. Cash provided by
financing activities for the year ended June 30, 1998 was $11.0 million,
primarily due to the issuance of preferred stock for net proceeds totaling $10.8
million.
As of December 31, 1998 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 $328,000 and $471,000,
respectively.
In March 1999, Silknet entered into a new line of credit with a bank 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 (7.75% as of March 2,
1999) plus 0.5%. As of March 2, 1999, $3.0 million was available for borrowing.
As of December 31, 1998, Silknet had net operating loss carryforwards of
approximately $12.4 million available for federal 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 may be subject to
risks associated with future acquisitions" and "-- 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
28
<PAGE> 30
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.
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. However, 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 ("FASB") issued
Statement of Financial Accounting Standard ("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 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 Post retirement 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 ("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.
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BUSINESS
SILKNET
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. 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 "home-grown" 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, company-tailored Web site interface. 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, company-tailored Web site interface. 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, graphical user interface 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.
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
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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 January 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, n-tiered architecture that incorporates dynamic Hypertext Markup
Language, eXtensible Markup Language (XML), 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.
PRODUCTS
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. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web,
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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 (typically
employees of that company), and from $1 to $10 for every anticipated public user
(typically customers of that company). The per user charges generally increase
with the number of Silknet applications and functions utilized by a company. For
the first eight months of fiscal 1999, the average license fee per customer was
approximately $386,000.
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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 seamlessly 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 a
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collaborative business environment, engaging them in an interactive,
personalized exchange. This 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 a
graphical user interface and features a set of browser-based components 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 legacy and client/server 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 pre-defined
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
XML 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 shots 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 shots 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, guaranteed response time 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 Java- and XML-based problem resolution tool that provides 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
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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 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
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on Microsoft Windows Distributed InterNet Applications architecture, which
includes technologies such as Microsoft's Distributed Component Object Model
(DCOM) 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 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, n-tiered 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 n-tiered 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, or "public," side of the
application, which operates outside a company's firewall, and the employee, or
"private," side of the application, which is typically used within a company
behind its firewall, 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
Sprint PCS
Sprint PCS operates the largest 100% digital, 100% PCS 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 it 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
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<PAGE> 43
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 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. Microsoft
maintains strict standards of responsiveness by its product management teams.
The messaging and escalation features within Silknet eService are used to
monitor and manage compliance with these internal standards.
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 January 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 five 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 (a subsidiary of Davox
Corporation), 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 January 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 January 31, 1999, Silknet's marketing organization
consisted of six 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;
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<PAGE> 44
- brochures, data sheets and white papers; and
- Web site marketing.
CUSTOMERS
Silknet has targeted and will continue to target the financial services,
information technology and telecommunications industries. Silknet also has
identified other industries, such as travel services, manufacturing and retail
distribution, which it plans to target. The following is a partial list of
Silknet's customers as of February 28, 1999:
3Com
Autodesk
Bank of America
Bell Advanced Communications
Cigna
Compaq
GEAC Computer Corporation
Inacom Corp.
Insurance Holdings of America
KPMG Peat Marwick
MachOne Communications
Microsoft
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
January 31, 1999, Silknet had 16 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 January 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
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<PAGE> 45
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
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 January 31, 1999, Silknet had 44 employees engaged in research and
development activities. Silknet's research and development expenditures for
fiscal year 1997 and 1998 and for the six months ended December 31, 1998, were
approximately $961,000, $2.4 million and $2.3 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 manage-
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<PAGE> 46
ment 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-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
any marks. Silknet has applications pending
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<PAGE> 47
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 filed an earlier
application for the use of "Silk" in connection with Internet information
resource services. Silknet has filed an appeal, but there can be no assurance
that it will be able to register the trademark "Silknet" in Canada.
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 (for example, patents may be excluded) 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 January 31, 1999, Silknet had 121 employees, 96 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 January 31, 1999, Silknet also leased office
space in 10 other cities for its sales and support personnel. Silknet believes
that these
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existing facilities are adequate to meet its current, foreseeable requirements
or that suitable additional or substitute space will be available on
commercially reasonable terms.
LEGAL PROCEEDINGS
Silknet is not a party to any material legal proceedings.
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<PAGE> 49
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).............. 42 Director
John Doggett.................. 51 Director
Stanley Fung(2)............... 41 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 June 1997. Since
October 1996, Mr. Doggett has been a Vice President at BancBoston Ventures Inc.
From 1992 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 V, L.P. since 1992, as Managing Partner
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.
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 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 Compensation Committee also administers Silknet's stock
option and stock purchase plans.
The 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
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<PAGE> 51
system of internal accounting and financial controls. The 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, 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. Accordingly, as permitted by the rules of the
Securities and Exchange Commission, 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 $ .
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
</TABLE>
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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 (the "Code"),
and non-qualified stock options to officers and other employees of Silknet.
Options granted pursuant to 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. An option is not
transferable by the recipient except by will or by the laws of descent and
distribution. As of February 28, 1999, options to purchase 2,085,042 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 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.
The 1999 Option Plan is administered by the Compensation Committee. The
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
Securities Exchange Act of 1934, as amended, or 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 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 (the "Initial Grant"), an
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
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<PAGE> 53
granted on the third anniversary of his or her Initial 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 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 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. 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.
The Stock Purchase Plan is administered by the Compensation Committee. All
employees who have completed three months of employment with Silknet and whose
customary employment is more than part-time (i.e. 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 December 31, 1999. Thereafter,
the offering periods will begin on each January 1 and July 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 Code.
All Silknet employees who are at least 21 years of age are eligible to
participate in the 401(k) plan. Under the 401(k) plan, a participant may
contribute a maximum of 15% 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) 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
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<PAGE> 54
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 Compensation
Committee were Messrs. Bradley, Doggett and Wood. Mr. Wood has served as
Silknet's Chairman of the Board and President since March 1995. The Compensation
Committee takes recommendations concerning salaries and incentive compensation
for employees of and consultants to Silknet and administers and grants stock
options pursuant to Silknet's stock option plans. No executive officer of
Silknet has served as a director or member of the compensation committee (or
other committee serving an equivalent function) of any other entity whose
executive officers served as a director or member of the 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.
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. In the Series A Preferred Stock financing, 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 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. In the Series B Preferred Stock financing, 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. In the Series C Preferred Stock financing, 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
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<PAGE> 55
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,
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. In the Series D Preferred Stock financing, 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.
Pursuant to 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.
Pursuant to the preferred stock financings, Silknet granted demand,
"piggy-back" and S-3 registration rights to preferred stockholders. See
"Description of Capital Stock -- Registration Rights."
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 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. 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 $1.10 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.
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<PAGE> 56
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 February 28, 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 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 February 28, 1999;
and
- shares of common stock issuable by Silknet to that person pursuant to
warrants which may be exercised within 60 days after February 28, 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) 2,816,121 shares
of common stock outstanding as of February 28, 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) 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 19.76%
Nigel K. Donovan.................................... 427,593 3.46%
Guy Bradley(2)...................................... 2,835,876 23.53%
Stanley Fung(3)..................................... 1,954,047 15.89%
John Doggett(4)..................................... 1,943,605 15.90%
Joo Hock Chua....................................... -- --
Andrew Goldfarb..................................... -- --
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK OUTSTANDING
NUMBER OF --------------------
SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
CMG @ Ventures II LLC............................... 2,835,876 23.53%
c/o CMG Information Services, Inc.
100 Brickstone Square, 5th Floor
Andover, MA 01810
Zero Stage Capital V, L.P. ......................... 1,952,108 15.87%
101 Main Street
Kendall Square
Cambridge, MA
BancBoston Ventures Inc. ........................... 1,943,605 15.90%
175 Federal Street
10th Floor
Boston, MA 02110
The Vertex Entities(5).............................. 1,028,802 8.52%
Three Lagoon Drive, Ste. 220
Redwood City, CA 94065
The JAFCO Entities(6)............................... 777,795 6.49%
One Boston Place, Ste. 3320
Boston, MA 02108
Intel Corporation................................... 571,736 4.77%
2200 Mission College Blvd.
Mail Stop SC4-210
Santa Clara, CA 95052
The Goldman Group, L.P.............................. 477,874 3.99%
85 Broad Street
New York, NY 10004
KPMG LLP............................................ 136,536 1.14%
3 Chestnut Ridge Road
Montvale, NJ 07645
Cambridge Technology Capital Fund I, L.P............ 136,536 1.14%
11512 El Camino Real
San Diego, CA 92130
All executive officers and directors as a group (8
persons)(7)....................................... 9,527,220 73.16%
</TABLE>
- ---------------
(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. 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.
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<PAGE> 58
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. and 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.
(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.
(7) See Notes 1 through 4.
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 February 28, 1999, there were 11,975,775 shares of common stock
outstanding and held of record by 76 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 February 28, 1999
and giving effect to the issuance of the shares of common stock offered by
Silknet hereby, there will be shares of common stock outstanding upon
the closing of this offering. In addition, as of February 28, 1999, there were
outstanding stock options for the purchase of a total of 2,085,042 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. All outstanding
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<PAGE> 59
shares of common stock are fully paid and non-assessable. The shares of common
stock to be issued by Silknet in this offering will be fully paid and
non-assessable. 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.
WARRANTS
As of February 28, 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
Pursuant to 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
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 750,000 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
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<PAGE> 60
pursuant to 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 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.
Pursuant to 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
preferred stock, which will automatically convert into an aggregate of 1,205,913
shares of common stock upon completion of this 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
pursuant to 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.
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<PAGE> 61
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 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 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 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 and filling the
new directorships with such stockholder's own nominees without Board approval.
These provisions of the 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 of attempting to change the
composition or policies of the Board, even though such attempts might be
beneficial to Silknet or its stockholders.
The By-Laws provide that, unless otherwise prescribed by law or the
Certificate of Incorporation, only a majority of the Board, the Chairman of the
Board or the President is able to call a special meeting of stockholders. The
Certificate of Incorporation and the 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, except at an annual
meeting.
The 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 (the "Notice
Procedure"). 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 preceeding year's annual
meeting. However, if the number of directors to be elected to the Board 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 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. Notice of stockholder nominations
or proposals to be made at a special meeting called by
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<PAGE> 62
the Board for the purpose of electing one or more directors (other than a
special meeting in lieu of an annual meeting), 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. 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, to inform
stockholders about such matters. The Notice Procedure also provides a more
orderly procedure for conducting annual meetings of stockholders. The By-Laws do
not give the Board 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.
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;
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<PAGE> 63
- 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 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 .
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 February
28, 1999), Silknet will have outstanding an aggregate of 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
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 (an "Affiliate").
The remaining 11,975,775 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("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. As a result of the
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<PAGE> 64
contractual restrictions described below, the provisions of Rules 144, 144(k)
and 701, and Silknet's intention to file registration statements covering shares
of common stock subject to outstanding stock options or issued pursuant to the
exercise of stock options, approximately shares will be eligible
for sale in the public market during the 180 days after the date of this
prospectus. In addition, approximately shares will become
eligible for sale in the public market upon expiration of the lock-up agreements
180 days after the date of this prospectus.
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 (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) 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
shares immediately after the offering), or the 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
(including the holding period of any prior owner except an Affiliate), 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, "144(k) 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 Securities Exchange Act of
1934, as amended (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
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<PAGE> 65
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 pursuant to the exercise of stock options, subject to outstanding options
or reserved for issuance under Silknet's 1995 Option Plan, 1999 Option Plan,
Director Plan and Stock Purchase Plan. Accordingly, shares registered under such
registration statements will, subject to Rule 144 provisions applicable to
Affiliates, be available for sale in the open market, except to the extent that
such shares are subject to Silknet's vesting restrictions or the contractual
restrictions described above. See "Management -- Stock Plans."
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<PAGE> 66
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 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 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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<PAGE> 67
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 has applied for listing 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 Securities Exchange Act
of 1934. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
shares of the common stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate when shares of
the common stock originally sold by such syndicate member are purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE> 68
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that Silknet prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to Silknet and the dealer from whom
such purchase confirmation is received that (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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<PAGE> 69
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Silknet by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
Certain legal matters will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of Silknet as of June 30, 1997 and 1998 and for
each of the three years in the period ended June 30, 1998, 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
In November 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 (the
"Commission") a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered hereby. This prospectus does not contain all
of the information set forth in the registration statement. For further
information with respect to Silknet and the common stock, reference is made to
the registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of the contract
or document filed as an exhibit to the registration statement, and each such
statement is qualified in all respects by reference to such exhibit. Copies of
the registration statement may be examined without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and 7 World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of
all or any portion of the registration statement may be obtained from the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or by calling the Commission at
1-800-SEC-0330, at prescribed rates. The Commission also maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, such as Silknet, that make electronic
filings with the Commission.
Silknet intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm.
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<PAGE> 70
SILKNET CORPORATION
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
December 31, 1998 (unaudited)............................. F-3
Consolidated Statements of Operations for the years ended
June 30, 1996, 1997, 1998 and the six months ended
December 31, 1997 (unaudited) and 1998 (unaudited)........ F-4
Consolidated Statements of Convertible Participating
Preferred Stock and Stockholders' Equity (Deficit) for the
years ended June 30, 1996, 1997 and 1998 and the six
months ended December 31, 1998 (unaudited)................ F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1997 and 1998 and the six months ended
December 31, 1997 (unaudited) and December 31, 1998
(unaudited)............................................... 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 participating
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 the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, 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
Boston, Massachusetts
December 18, 1998 except
for Note M for which the
date is March 2, 1999.
F-2
<PAGE> 72
SILKNET SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
------------------------- DECEMBER 31, DECEMBER 31,
1997 1998 1998 1998
----------- ----------- ------------ ------------
(NOTE B)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,751,988 $ 9,045,094 $ 4,584,502 $ 4,584,502
Accounts receivable, net of allowance for doubtful
accounts of $200,000 at December 31, 1998 actual and pro
forma................................................... 32,694 1,546,967 3,878,002 3,878,002
Prepaid expenses and other current assets................. 59,746 265,692 604,163 604,163
----------- ----------- ------------ ------------
Total current assets................................ 4,844,428 10,857,753 9,066,667 9,066,667
Property and equipment, net................................. 528,673 1,217,029 1,477,106 1,477,106
Other assets................................................ 28,824 54,149 53,788 53,788
----------- ----------- ------------ ------------
Total assets........................................ $ 5,401,925 $12,128,931 $ 10,597,561 $ 10,597,561
=========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to bank, current portion..................... 153,855 248,725 171,797 171,797
Accounts payable.......................................... 264,107 207,256 686,102 686,102
Accrued expenses.......................................... 116,394 916,908 2,333,994 2,333,994
Deferred revenue.......................................... 154,586 1,013,183 1,397,315 1,397,315
----------- ----------- ------------ ------------
Total current liabilities........................... 688,942 2,386,072 4,589,208 4,589,208
Note payable to bank........................................ 115,392 222,222 156,096 156,096
Convertible participating preferred stock, $.01 par value
(Note M):
Series A;
Authorized: 2,364,584 shares
Issued and outstanding: 2,364,584 shares (liquidation
value $2,799,314 at December 31, 1998).................. 2,415,869 2,659,288 2,780,997 --
Series B;
Authorized: 2,500,000 shares
Issued and outstanding: 2,500,000 shares (liquidation
value $5,779,931 at December 31, 1998).................. 5,015,982 5,518,585 5,769,885 --
Series C;
Authorized: 3,089,157 shares
Issued and outstanding: 3,089,157 shares (liquidation
value $11,503,448 at December 31, 1998)................. -- 10,929,494 11,469,806 --
----------- ----------- ------------ ------------
Total convertible participating preferred stock..... 7,431,851 19,107,367 20,020,688 --
----------- ----------- ------------ ------------
Commitments and contingencies (Note J)
Stockholders' equity (deficit) (Note M):
Common stock, $.01 par value;
Authorized: 15,000,000 shares
Issued and outstanding: 2,557,900, 2,627,625 and
2,716,650 shares at June 30, 1997, 1998 and December 31,
1998, respectively, and 10,670,391 shares on a pro forma
basis................................................... 25,579 26,276 27,166 106,703
Additional paid-in capital.................................. 818,462 887,489 1,297,881 19,232,564
Accumulated dividends on
preferred stock........................................... (190,214) (1,093,147) (2,006,468) --
Deferred compensation....................................... (209,016) (125,409) (397,758) (397,758)
Other comprehensive income.................................. -- -- 1,288 1,288
Accumulated deficit......................................... (3,279,071) (9,281,939) (13,090,540) (13,090,540)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit).................................... (2,834,260) (9,586,730) (14,168,431) 5,852,257
----------- ----------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)......................................... $ 5,401,925 $12,128,931 $ 10,597,561 $ 10,597,561
=========== =========== ============ ============
</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>
SIX MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------- -------------------------
1996 1997 1998 1997 1998
--------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License..................... -- $ 74,638 $ 2,976,938 $ 508,541 $ 3,688,364
Services.................... $ 266,266 119,071 670,517 127,797 1,855,206
--------- ----------- ----------- ----------- -----------
Total revenue....... 266,266 193,709 3,647,455 636,338 5,543,570
Cost of revenue:
License..................... -- 28,940 32,480 5,549 183,709
Services.................... 140,992 311,626 1,353,603 574,030 1,518,830
--------- ----------- ----------- ----------- -----------
Total cost of
revenue.......... 140,992 340,566 1,386,083 579,579 1,702,539
--------- ----------- ----------- ----------- -----------
Gross margin.................. 125,274 (146,857) 2,261,372 56,759 3,841,031
Operating expenses:
Sales and marketing......... 33,085 888,017 4,802,243 1,814,135 4,235,817
Research and development.... 119,721 960,845 2,408,723 944,126 2,274,377
General and
administrative........... 430,786 696,579 1,187,275 493,909 1,290,073
--------- ----------- ----------- ----------- -----------
Total operating
expenses......... 583,592 2,545,441 8,398,241 3,252,170 7,800,267
--------- ----------- ----------- ----------- -----------
Operating loss................ (458,318) (2,692,298) (6,136,869) (3,195,411) (3,959,236)
Interest income (expense),
net......................... (6,708) (60,206) 134,001 65,862 150,635
Net loss...................... (465,026) (2,752,504) (6,002,868) 3,129,549 (3,808,601)
Accrued dividends for
preferred stockholders...... -- 190,214 902,933 51,478 913,321
--------- ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders......... $(465,026) $(2,942,718) $(6,905,801) $(3,181,027) $(4,721,922)
========= =========== =========== =========== ===========
Basic and diluted net loss per
share....................... $ (0.18) $ (1.15) $ (2.69) $ (1.24) $ (1.76)
Shares used in computing basic
and diluted net loss
per share................... 2,550,781 2,557,153 2,566,258 2,557,900 2,675,345
Unaudited pro forma basic and
diluted net loss per
share....................... (0.18) (0.63) (0.76) (0.42) (0.36)
Shares used in computing
unaudited pro forma basic
and diluted net loss per
share....................... 2,550,781 4,397,564 7,879,405 7,422,484 10,629,086
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 74
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PARTICIPATING
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND
1998 AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE PARTICIPATING ACCUMULATED
PREFERRED 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 canceled......... (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....... 89,025 890 87,123
Deferred compensation related
to grant of stock options.... 323,269 (323,269)
Amortization of deferred
compensation................. 50,920
Accrued dividends for preferred
stockholders................. 913,321 (913,321)
Net loss.......................
Other comprehensive income.....
--------- ----------- --------- ------- ---------- ----------- ---------
Balance at December 31, 1998.... 7,953,741 $20,020,688 2,716,650 $27,166 $1,297,881 $(2,006,468) $(397,758)
========= =========== ========= ======= ========== =========== =========
<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 canceled.........
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....... 88,013
Deferred compensation related
to grant of stock options....
Amortization of deferred
compensation................. 50,920
Accrued dividends for preferred
stockholders................. (913,321)
Net loss....................... (3,808,601) (3,808,601)
Other comprehensive income..... $1,288 1,288
------ ------------ ------------
Balance at December 31, 1998.... $1,288 $(13,090,540) $(14,168,431)
====== ============ ============
</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>
SIX MONTHS ENDED
FOR THE YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------- -------------------------
1996 1997 1998 1997 1998
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(465,026) $(2,752,504) $(6,002,868) $(3,129,549) $(3,808,601)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 24,598 187,449 339,397 125,820 317,243
Provision for doubtful accounts.............. -- -- -- -- 200,000
Loss on disposal of equipment................ -- -- 4,318 -- --
Amortization of deferred compensation........ 185,204 92,987 83,607 41,802 50,920
Stock issued for services.................... 5,000 2,900 -- -- --
Changes in operating assets and liabilities:
Accounts receivable........................ (55,365) 22,671 (1,514,273) (210,118) (2,531,035)
Prepaid and other current assets........... (5,199) (22,500) (205,946) (76,672) 361
Other assets............................... -- (59,746) (25,325) (7,489) (338,471)
Accounts payable........................... (3,063) 231,647 (56,851) (59,212) 478,845
Accrued expenses........................... 12,347 94,546 800,514 282,233 1,417,087
Deferred revenues.......................... -- 154,586 858,597 (43,332) 384,132
--------- ----------- ----------- ----------- -----------
Net cash used in operating activities... (301,504) (2,047,964) (5,718,830) (3,076,517) (3,829,519)
Cash flows from investing activities:
Purchase of property and equipment............. (46,162) (554,844) (1,058,671) (220,123) (577,320)
Proceeds from dispositions of property and
equipment.................................... -- -- 26,600 -- --
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities... (46,162) (554,844) (1,032,071) (220,123) (577,320)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 50,000 -- 69,724 -- 88,013
Proceeds from capital contributions............ 124,500 -- -- -- --
Proceeds from issuance of notes payable and
warrants..................................... 261,117 510,000 400,000 290,491 --
Payments on notes payable...................... (64,541) (187,329) (198,300) (76,928) (143,054)
Proceeds from issuance of preferred stock, net
of issuance costs............................ -- 6,991,637 10,772,583 -- --
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities............................ 371,076 7,314,308 11,044,007 213,563 (55,041)
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... 23,410 4,711,500 4,293,106 (3,083,077) (4,461,880)
Effect of exchange rate changes on cash and cash
equivalents.................................... -- -- -- -- 1,288
--------- ----------- ----------- ----------- -----------
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 $ 1,668,911 $ 4,584,502
========= =========== =========== =========== ===========
Supplemental schedule of cash flow information:
Interest paid.................................. $ 6,708 $ 15,201 $ 39,438 $ 13,991 $ 20,426
========= =========== =========== =========== ===========
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
(INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
A. NATURE OF THE BUSINESS:
Silknet develops and sells software that allows companies to offer
personalized marketing, sales, electronic commerce and customer support services
through a single 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. 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 December 31, 1998, had an accumulated deficit of $13,090,540. 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
February 1999, Silknet issued Series D Convertible Participating Preferred Stock
for net proceeds of approximately $8.8 million. 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 subsidiary. 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.
F-7
<PAGE> 77
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 amount of Silknet's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximate their fair values at December 31, 1998.
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 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 one customer accounted for
76% of accounts receivable as of December 31, 1998. 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%
F-8
<PAGE> 78
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 10% of total revenue for the year ended June 30, 1998, and three customers
accounted for 45%, 15% and 10% of total revenue for the six months ended
December 31, 1998.
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 December 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. The results of operations
for the six month period ended December 31, 1998 are not necessarily indicative
of the results of operations for the full year ended June 30, 1999.
Unaudited Pro Forma Balance Sheet
Upon the closing of Silknet's anticipated initial public offering, all of
the outstanding shares of Series A Convertible Participating Preferred Stock,
Series B Convertible Participating Preferred Stock, and Series C Convertible
Participating Preferred Stock (collectively "Preferred Stock") will
automatically convert into 7,953,741 shares of common stock. These conversions
have been reflected in the unaudited pro forma balance sheet as of December 31,
1998, and exclude 1,205,913 shares of common stock issuable upon the conversion
of Series D Convertible Participating Preferred Stock issued after December 31,
1998 (Note M).
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 six
months ended December 31, 1998, options to purchase 670,400,
F-9
<PAGE> 79
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1,220,158, 1,506,092 and 2,179,962 shares of common stock, respectively,
Preferred Stock convertible into 0, 4,864,584, 7,953,741 and 7,953,741 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
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.
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 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
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,
---------------------- DECEMBER 31,
1997 1998 1998
--------- ---------- ------------
<S> <C> <C> <C>
Computer.................................... $ 399,444 $1,032,015 $1,463,479
Furniture and fixtures...................... 243,215 525,104 648,423
Leasehold improvements...................... 6,833 102,650 125,187
--------- ---------- ----------
649,492 1,659,769 2,237,089
Less accumulated depreciation and
amortization.............................. (120,819) (442,740) (759,983)
--------- ---------- ----------
Total............................. $ 528,673 $1,217,029 $1,477,106
========= ========== ==========
</TABLE>
F-11
<PAGE> 81
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and amortization expense for the years ended June 30, 1996, 1997
and 1998 and the six months ended December 31, 1998 was $24,598, $93,515,
$339,397 and $317,243, respectively.
D. ACCRUED LIABILITIES:
Accrued liabilities consist of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- DECEMBER 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Commissions, bonuses and other incentives... $334,198 $ 771,512
Vacation.................................... $ 33,190 196,037 282,780
Royalties................................... 7,480 15,420 47,500
Professional services....................... 14,000 72,000 152,485
Marketing................................... -- 74,041 320,268
Sales tax................................... 11,475 112,823 282,927
Other....................................... 50,249 112,389 476,522
-------- -------- ----------
Total............................. $116,394 $916,908 $2,333,994
======== ======== ==========
</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,
-------------------------- DECEMBER 31,
1997 1998 1998
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Organizational and start-up costs,
capitalized for tax............... $ 12,157 $ 8,318 $ 6,398
Fixed assets......................... (11,340) (36,711) (46,778)
Accrued expenses..................... 22,210 96,951 112,685
Deferred compensation................ 112,028 145,696 162,530
Research and experimentation
credit............................ 36,902 36,902 36,902
Net operating loss carryforwards..... 1,023,217 2,996,487 4,269,400
----------- ----------- -----------
1,195,174 3,247,643 4,541,137
Less valuation allowance.......... (1,195,174) (3,247,643) (4,541,137)
----------- ----------- -----------
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
F-12
<PAGE> 82
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
state income tax purposes. As a result, a 100% valuation allowance has been
applied against Silknet net deferred tax assets.
The following reconciles the difference between the federal statutory rate
and Silknet's effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS
------------------------ ENDING
1997 1998 DECEMBER 31, 1998
--------- ----------- -----------------
<S> <C> <C> <C>
U.S. federal statutory rate.......... $(935,851) $(2,040,975) $(1,291,825)
State income taxes, net.............. (22,034) (28,006) (18,880)
Research and experimentation tax
credit............................. (36,902) -- --
Other................................ 2,316 16,512 17,211
Change in valuation allowance........ 992,471 2,052,469 1,293,494
--------- ----------- -----------
-- -- --
========= =========== ===========
</TABLE>
At December 31, 1998, Silknet has net operating loss carryforwards of
approximately $12,372,648 for federal and state 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 plus 2% (10.25% at June
30, 1996). 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 line 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 plus 2%
(9.75% at December 31, 1998). 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 of which Silknet has been in
compliance. At December 31, 1998, the balance outstanding totaled $39,004.
During December 1997, Silknet entered into an equipment loan line 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 plus 1%
(8.75% at December 31, 1998). 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 of which Silknet has been in
compliance. At December 31, 1998, the balance outstanding totaled $288,889.
F-13
<PAGE> 83
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Payments of principal and interest on existing debt are due as follows:
<TABLE>
<S> <C>
Fiscal year ended June 30,
1999................................................ $282,260
2000................................................ 148,914
2001................................................ 92,205
--------
Total payments...................................... 523,379
Less amounts representing interest.................. 52,432
--------
$470,947
========
</TABLE>
Notes Payable
During May 1996, Silknet entered into a Note and Warrant Purchase Agreement
(the "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 warrants to purchase 125,000 shares of Silknet's
common stock at $1.00 per share (Note G). The warrants expire in May 2002. The
fair value of the warrants 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 the note of $47,000 was amortized over the estimated life
of the note of six months.
In July 1996, Silknet issued a demand subordinated note payable in the
amount of $125,000 in exchange for cash and issued additional warrants to
purchase 125,000 shares of Silknet's common stock at $1.00 per share (Note G).
The fair value of the warrants 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 the 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 warrants to purchase 125,000 shares of
common stock at $1.00 per share in connection with a $125,000 bridge loan
agreement with Silknet (Note F). During 1997, Silknet issued additional warrants
to purchase 125,000 shares of common stock to a private investor in connection
with the second draw of $125,000 under the bridge loan agreement with Silknet
(Note F). The total consideration received under each 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
F-14
<PAGE> 84
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the note of $94,000 was amortized over the estimated life of the note of six
months. The warrants expire in May 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 PARTICIPATING 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).
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
F-15
<PAGE> 85
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
---------
7,953,741
</TABLE>
I. STOCK OPTIONS:
On August 8, 1995, the Board of Directors authorized the Employee Stock
Option Plan (the "Plan"). The Plan 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-16
<PAGE> 86
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the years ended June 30, 1996, 1997 and 1998 and
the six month period ended December 31, 1998 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
Canceled................... (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
Canceled................... (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
Canceled................... (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.................... 595,650 1.75 184,725 1.75 780,375 1.75
Exercised.................. (89,025) 1.00 -- (89,025) 1.00
Canceled................... (17,480) 1.08 -- (17,480) 1.08
--------- ----- ------- ----- --------- -----
Outstanding at December 31,
1998..................... 1,498,087 1.31 681,875 0.49 2,179,962 1.05
========= ===== ======= ===== ========= =====
</TABLE>
As of December 31, 1998, 53,188 shares were available for grant under the Plan.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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 6.7 425,195 $0.02
1.00............................. 886,062 8.2 305,136 1.00
1.75............................. 796,750 9.7 2,120 1.75
--------- --- ------- -----
$0.02-1.75........................ 2,179,962 8.4 732,451 $0.43
========= === ======= =====
</TABLE>
Compensation expense of $185,204, $92,287, $83,607, and $50,920 was
recognized during the years ended June 30, 1996, 1997, and 1998 and the six
months ended December 31, 1998, respectively, related to the grant of stock
options at exercise prices below the fair market value of Silknet's common stock
on the date of the grant.
F-17
<PAGE> 87
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
six month period ended December 31, 1998, 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>
SIX MONTH
YEAR ENDED JUNE 30, PERIOD ENDED
------------------------------------- DECEMBER 31,
1996 1997 1998 1998
--------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Net loss -- as reported........ $(465,026) $(2,942,718) $(6,905,820) $(4,721,923)
Net loss -- pro forma.......... (748,254) (3,119,757) (7,090,377) (4,898,331)
Basic and diluted net loss per
share -- as reported......... $ (0.18) $ (1.15) $ (2.69) $ (1.76)
Basic and diluted net loss per
share -- pro forma........... $ (0.29) $ (1.22) $ (2.76) $ (1.83)
</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>
SIX MONTH
YEAR ENDED JUNE 30, PERIOD ENDED
------------------------------- DECEMBER 31,
1996 1997 1998 1998
--------- ------- ------- -----------------
<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
Weighted average grant date fair
value of options granted.......... $1.00 $1.00 $1.04 $2.16
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
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 $223,806 for the years
ended June 30, 1996, 1997 and 1998 and the six month period ended December 31,
1998, respectively.
F-18
<PAGE> 88
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments on
noncancelable operating leases:
Fiscal Years ending June 30:
<TABLE>
<S> <C>
1999.............................................. $450,132
2000.............................................. 611,312
2001.............................................. 600,512
2002.............................................. 568,609
2003.............................................. 508,662
Thereafter........................................ 254,331
</TABLE>
Silknet is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of Silknet.
K. EMPLOYEE BENEFIT PLAN:
Silknet maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. All Silknet employees who are at least 21 years of age
are eligible to participate in the 401(k) plan. Under the 401(k) plan, a
participant may contribute a maximum of 15% 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. During 1998, Silknet 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 six months ended
December 31, 1998, Silknet recognized license and services revenue from
transactions with affiliated companies of $30,725, $55,600 and $7,800,
respectively.
M. SUBSEQUENT EVENTS:
On February 26, 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 approximately $8.8 million.
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.
In February 1999, Silknet adopted the 1999 Stock Option and Incentive Plan,
the 1999 Non-Employee Director Stock Option Plan and the 1999 Employee Stock
Purchase Plan. A total of 1,000,000, 350,000 and 350,000, respectively, shares
of common stock have been reserved for issuance under the three plans.
On March 2, 1999, Silknet entered into a new line of credit with a bank
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 (7.75% at March
2, 1999) plus 0.5%. At March 2, 1999, $3.0 million was available for borrowing.
F-19
<PAGE> 89
[SILKNET LOGO]
<PAGE> 90
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........................................ $ 9,591
NASD filing fee............................................. 3,950
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses (including legal fees)........... *
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be filed by Amendment.
The Company 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.
II-1
<PAGE> 91
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.
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 January 1999, Silknet issued 178,795 shares of common
stock at exercise prices ranging from $1.00 to $1.75 for an aggregate purchase
price of $179,467 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> 92
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 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.
10.02** 1999 Stock Option and Incentive Plan.
10.03** 1999 Non-Employee Director Stock Option Plan.
10.04** 1999 Employee Stock Purchase Plan.
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.
16.01* Letter from KPMG Peat Marwick dated March , 1999.
21.01 Subsidiaries.
23.01* Consent of Testa, Hurwitz & Thibeault, LLP (contained in
Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP.
24.01 Power of Attorney (contained on page II-5).
27.01 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
II-3
<PAGE> 93
(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> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Manchester, New
Hampshire on March 3, 1999.
SILKNET SOFTWARE, INC.
By: /s/ JAMES C. WOOD
------------------------------------
James C. Wood
President, Chief Executive Officer
and
Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Silknet Software, Inc.,
hereby severally constitute and appoint James C. Wood and Patrick J. Scannell,
Jr., and each of them singly, our true and lawful attorneys, with full power to
them and each of them singly, to sign for us in our names in the capacities
indicated below, any registration statement related to the offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933 (a "462(b) Registration Statement"), any and all amendments and exhibits to
this registration statement or any 462(b) Registration Statement, and any and
all applications and other documents to be filed with the Securities and
Exchange Commission pertaining to the registration of the securities covered
hereby or thereby, and generally to do all things in our names and on our behalf
in such capacities to enable Silknet Software, Inc. to comply with the
provisions of the Securities Act of 1933 and all requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ JAMES C. WOOD President, Chief Executive Officer and March 3, 1999
- ------------------------------------------ Chairman of the Board (Principal
James C. Wood Executive Officer)
/s/ PATRICK J. SCANNELL, JR. Vice President, Chief Financial March 3, 1999
- ------------------------------------------ Officer, Treasurer and Secretary
Patrick J. Scannell, Jr. (Principal Financial and Accounting
Officer)
/s/ STANLEY FUNG Director March 3, 1999
- ------------------------------------------
Stanley Fung
/s/ GUY BRADLEY Director March 3, 1999
- ------------------------------------------
Guy Bradley
/s/ JOHN DOGGETT Director March 3, 1999
- ------------------------------------------
John Doggett
</TABLE>
II-5
<PAGE> 95
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
/s/ JOO HOCK CHUA Director March 3, 1999
- ------------------------------------------
Joo Hock Chua
/s/ ANDREW GOLDFARB Director March 3, 1999
- ------------------------------------------
Andrew Goldfarb
</TABLE>
II-6
<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 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.
10.02** 1999 Stock Option and Incentive Plan.
10.03** 1999 Non-Employee Director Stock Option Plan.
10.04** 1999 Employee Stock Purchase Plan.
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.
16.01* Letter from KPMG Peat Marwick dated March , 1999.
21.01 Subsidiaries
23.01* Consent of Testa, Hurwitz & Thibeault, LLP (contained in
Exhibit 5.01).
23.02 Consent of PricewaterhouseCoopers LLP.
24.01 Power of Attorney (contained on page II-5).
27.01 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
<PAGE> 1
EXHIBIT 3.01
CERTIFICATE OF INCORPORATION
OF
SILKNET SOFTWARE, INC.
FIRST. The name of the Corporation is Silknet Software, Inc.
SECOND. The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington,
New Castle County, Delaware 19801 and the name of its registered agent at such
address is The Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH. The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is Sixty-Five Million
(65,000,000) shares, consisting of Fifty Million (50,000,000) shares of Common
Stock, with a par value of $.01 per share (the "Common Stock"), and Fifteen
Million (15,000,000) shares of Preferred Stock, with a par value of $.01 per
share (the "Preferred Stock").
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"), any action which is required to be taken at any
annual or special meeting of stockholders of the Corporation, or any action with
may be taken at any annual or special meeting of stockholders, may be taken
without a meeting in accordance with section 228 of the General Corporation Law
of the State of Delaware. 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) the stockholders would be
entitled to cast at any annual election of directors or class of directors shall
be required to amend or repeal, or to adopt any provision inconsistent with,
this paragraph of this Article Fourth.
Notwithstanding the provisions of Section 242(b)(2) of the General
Corporation Law of the State of Delaware, the holders of Common Stock shall vote
together with the holders of the Preferred Stock as a single class with respect
to any proposed amendment hereto that would increase the number of authorized
shares of Common Stock or Preferred Stock with each such share being entitled to
such number of votes per share as is provided in this Article Fourth, and the
holders of the Common Stock shall not be entitled to a separate class vote with
respect thereto.
<PAGE> 2
A description of the respective classes of stock and a statement of the
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
1. GENERAL. All shares of Common Stock will be identical and will
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
2. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. DISSOLUTION, LIQUIDATION OR WINDING UP. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. VOTING RIGHTS. Except as otherwise required by law or this
Certificate of Incorporation, each holder of Common Stock shall have one vote in
respect of each share of stock held of record by such holder on the books of the
Corporation for the election of directors and on all matters submitted to a vote
of stockholders of the Corporation. Except as otherwise required by law or
provided herein, holders of Common Stock shall vote together with holders of the
Preferred Stock as a single class, subject to any special or preferential voting
rights of any then outstanding Preferred Stock. There shall be no cumulative
voting.
B. PREFERRED STOCK
The undesignated Preferred Stock may be issued in one or more series at
such time or times and for such consideration or considerations as the Board of
Directors of the Corporation may determine. Each series shall be so designated
as to distinguish the shares thereof from the shares of all other series and
classes. Except as to the relative preferences, powers, qualifications, rights
and privileges which may be determined by the Board of Directors of the
Corporation as described below, all shares of Preferred Stock shall be
identical. Except as and to the extent otherwise specified herein, different
series of Preferred Stock shall not be construed to constitute different classes
of shares for the purpose of voting by class.
The Board of Directors of the Corporation is expressly authorized by a
vote of a majority of the members of the Board of Directors then in office,
subject to the limitations prescribed by law and the provisions of this
Certificate of Incorporation, as amended from time to time, to provide by
adopting a vote or votes, a certificate of which shall be filed in accordance
with the
-2-
<PAGE> 3
General Corporation Law of the State of Delaware, for the issue of the Preferred
Stock or one or more classes or series, each with the designations, rights and
privileges that shall be stated in the vote or votes creating such classes or
series. The authority of the Board of Directors of the Corporation with respect
to each such class or series of Preferred Stock shall include, without
limitation of the foregoing, the right to determine and fix:
1. The distinctive designation of such class or series and the number
of shares to constitute such class or series;
2. The rate at which dividends on the shares of such class or series
shall be declared and paid, or set aside for payment, whether dividends at the
rate so determined shall be cumulative, and whether the shares of such class or
series shall be entitled to any participating or other dividends in addition to
dividends at the rate so determined, and if so on what terms;
3. The right, if any, of the Corporation to redeem shares of the
particular class or series and, if redeemable, the price, terms and manner of
such redemption;
4. The special and relative rights and preferences, if any, and the
amount or amounts per share, which the shares of such class or series shall be
entitled to receive upon any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation;
5. The terms and conditions, if any, upon which shares of such class or
series shall be convertible into, or exchangeable for, shares of stock, or any
other class or classes, including the price or prices or the rate or rates of
conversion or exchange and the terms of adjustment, if any;
6. The obligation, if any, of the Corporation to retire or purchase
shares of such class or series pursuant to a sinking fund or fund of a similar
nature or otherwise, and the terms and conditions of such obligation;
7. Voting rights, if any, including special voting rights with respect
to the election of directors and matters adversely affecting any such class or
series;
8. Limitations, if any, on the issuance of additional shares of such
class or series or any shares of any other class or series of Preferred Stock;
and
9. Any other preferences, powers, qualifications, special or relative
rights and privileges thereof that the Board of Directors of the Corporation may
deem advisable and that are not inconsistent with law and the provisions of this
Certificate of Incorporation.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. In furtherance and not in limitation of powers conferred by
the General Corporation Law of the State of Delaware, it is further provided
that:
-3-
<PAGE> 4
A. BY-LAWS. The Board of Directors is expressly authorized to
adopt, amend or repeal the By-laws of the Corporation.
B. ELECTION OF DIRECTORS. The election of directors by the
stockholders need not be by written ballot unless the Bylaws
of the Corporation provide otherwise.
C. BOOKS AND RECORDS. The books and records of the Corporation
may be kept at such place within or without the State of
Delaware as the Bylaws of the Corporation may provide or as
may be designated from time to time by the Board of Directors
of the Corporation.
SEVENTH. The Corporation eliminates the personal liability of each
member of its Board of Directors to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided, however,
that, to the extent provided by applicable law, the foregoing shall not
eliminate the liability of a director (i) for any breach of such director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which such director derived an
improper personal benefit.
If the General Corporation Law of the State of Delaware is amended in
the future to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended from time to
time.
Any repeal or modification of this Article SEVENTH shall not increase
the personal liability of any director of the Corporation for any act or
occurrence taking place prior to such repeal or modification, or otherwise
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
EIGHTH.
1. ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (each such person being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in
-4-
<PAGE> 5
connection with such action, suit or proceeding and any appeal therefrom, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action suit or proceeding by judgment,
order, settlement, conviction or upon a plea of NOLO CONTENDERE or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, best interests of the Corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful. Notwithstanding anything to the contrary in this Article, except as
set forth in Section 7 below, the Corporation shall not indemnify an Indemnitee
seeking indemnification in connection with an actual or threatened claim,
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) (i)
initiated by the Indemnitee unless the initiation thereof was approved by the
Board of Directors of the Corporation or (ii) initiated and approved by the
Board of Directors of the Corporation against the Indemnitee. Notwithstanding
anything to the contrary in this Article, the Corporation shall not indemnify an
Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of
insurance, and in the event the Corporation makes any indemnification payments
to an Indemnitee and such Indemnitee is subsequently reimbursed from the
proceeds of insurance, such Indemnitee shall promptly refund such
indemnification payments to the Corporation to the extent of such insurance
reimbursement.
2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and, to the extent permitted by law,
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to, the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses (including attorneys fees) which the Court of
Chancery of Delaware or such other court shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim issue or matter therein or on appeal from any such action, suit
-5-
<PAGE> 6
or proceeding he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such a
claim, other than as provided below in this Section 4. The Indemnitee shall have
the right to employ his own counsel in connection with such claim, but the fees
and expenses of such counsel incurred after notice to the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
as otherwise expressly provided by this Article. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below,
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal from shall be
paid by the Corporation in advance of the final disposition of such matter;
PROVIDED, HOWEVER, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts
so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Article. Such undertaking shall be accepted without reference to the
financial ability of the Indemnitee to make such repayment.
-6-
<PAGE> 7
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines within such 60-day period that the Indemnitee did not
meet the applicable standard of conduct set forth in Section 1 or 2, as the case
may be. Such determination shall be made in each instance by (a) a majority of
the directors of the Corporation consisting of persons who are not at that time
parties to the action, suit or proceeding in question ("disinterested
directors"), whether or not a quorum, (b) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (c)
independent legal counsel (who may, to the extent permitted by law, be regular
legal counsel to the Corporation), or (d) a court of competent jurisdiction.
7. REMEDIES. The right to indemnification or advances as granted by
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disruption thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Article shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of the
State of Delaware or any other applicable laws shall affect or diminish in any
way the rights of any Indemnitee to indemnification under the provisions hereof
with respect to any action suit, proceeding or investigation lancing out of or
relating to any actions, transactions or facts occurring prior to the final
adoption of such amendment, termination or repeal.
9. OTHER RIGHTS. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
-7-
<PAGE> 8
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set form in this
Article and as limited by applicable law.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to Indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of the State of Delaware.
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
correction with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of the State of Delaware shall
have the respective meanings assigned to such terms in such Section 145(h) and
Section 145(i).
-8-
<PAGE> 9
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of the State
of Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall indemnify
such persons to the fullest extent permitted by the General Corporation Law of
the State of Delaware, as so amended.
NINTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TENTH. Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of the General Corporation Law of the State of
Delaware or on the application of trustees in dissolution or of any receiver or
receivers appointed for the Corporation under the provisions of Section 279 of
the General Corporation Law of the State of Delaware, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as such court directs. If a majority in number representing three-fourths
in value of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of the Corporation as a
consequence of such compromise or arrangement, such compromise or arrangement
and such reorganization shall, if sanctioned by the court to which such
application has been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of stockholders, of the
Corporation, as the case may be, and also on the Corporation.
ELEVENTH. The name and mailing address of the incorporator is as
follows:
Name Mailing Address
---- ---------------
Kristie P. Hathaway Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
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<PAGE> 10
I, THE UNDERSIGNED, being the sole incorporator hereinabove named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand on this 23rd day of February, 1999.
/s/ Kristie P. Hathaway
----------------------------
Kristie P. Hathaway
Sole Incorporator
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<PAGE> 11
SILKNET SOFTWARE, INC.
CERTIFICATE OF DESIGNATION
OF THE
SERIES A, B AND C CONVERTIBLE PARTICIPATING PREFERRED STOCK
The undersigned officers of Silknet Software, Inc. (the "CORPORATION"),
a corporation organized and existing under the General Corporation Law of the
State of Delaware (the "GENERAL CORPORATION LAW"), do hereby certify that,
pursuant to the authority conferred by the Certificate of Incorporation of the
Corporation and pursuant to the provisions of Section 151 of the General
Corporation Law, the Board of Directors (the "Board") of the Corporation, by
unanimous written consent dated as of February 23, 1999, adopted the following
resolution creating three series of the Corporation's undesignated Preferred
Stock, to be designated as the Series A Convertible Participating Preferred
Stock, the Series B Convertible Participating Preferred Stock and the Series C
Convertible Participating Preferred Stock, and providing for certain powers,
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations and restrictions thereof, of shares of such
Series A, B and C Convertible Participating Preferred Stock:
RESOLVED: That pursuant to authority expressly granted to and vested in
the Board of Directors of this Corporation by the provisions
of the Certificate of Incorporation, the Board of Directors
hereby designates the following series of Preferred Stock in
the number set forth opposite each series below, with the
relative rights and preferences as set forth in Certificate of
Designation attached hereto as EXHIBIT A:
SERIES NUMBER
------ ---------
Series A Convertible Participating Preferred 2,364,584
Series B Convertible Participating Preferred 2,500,000
Series C Convertible Participating Preferred 3,089,157
<PAGE> 12
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be duly executed in its corporate name by a duly authorized
officer as of this 25th day of February, 1999.
Silknet Software, Inc.
By: /s/ James C. Wood
----------------------------------
James C. Wood
President
Attest:
/s/ Patrick J. Scannell, Jr.
- -----------------------------
Patrick J. Scannell, Jr.
Secretary
<PAGE> 13
EXHIBIT A
A. DESCRIPTION AND DESIGNATION OF THE SERIES A, B AND C CONVERTIBLE
PARTICIPATING PREFERRED STOCK.
ALL NUMBERS SET FORTH HEREIN REFLECT A ONE-FOR-TWO STOCK EXCHANGE OF
COMMON STOCK AND PREFERRED STOCK OF SILKNET SOFTWARE, INC., A NEW HAMPSHIRE
CORPORATION, INTO SHARES OF COMMON STOCK AND PREFERRED STOCK OF THE
CORRESPONDING CLASS OR SERIES OF CAPITAL STOCK IN THE CORPORATION.
1. DESIGNATION. The 2,364,584 shares of Series A Convertible
Participating Preferred Stock, par value $.01 per share, shall be designated the
"Series A Convertible Participating Preferred Stock" (being referred to herein
as the "Series A Preferred Stock"); the 2,500,000 shares of Series B Convertible
Participating Preferred Stock, par value $.01 per share, shall be designated the
"Series B Convertible Participating Preferred Stock" (being referred to herein
as the "Series B Preferred Stock"); the 3,089,157 shares of Series C Convertible
Participating Preferred Stock, par value $.01 per share, shall be designated the
"Series C Convertible Participating Preferred Stock" (being referred to herein
as the "Series C Preferred Stock", and together with the Series A Preferred
Stock and the Series B Preferred Stock, the "Preferred Stock"). The shares of
Preferred Stock shall have the following rights, terms and privileges:
2. DIVIDENDS.
(a) DIVIDENDS. The holders of shares of Series A Preferred
Stock shall be entitled to receive, out of funds legally available therefor,
cumulative annual dividends when and as they may be declared from time to time
by the Board of Directors of the Corporation at an annual rate per share equal
to ten percent (10%) of the original purchase price of $.96 paid per share of
the Series A Preferred Stock (which amount shall be subject to adjustment
whenever there shall occur a stock split, combination, reclassification or other
similar event involving the Series A Preferred Stock); the holders of shares of
Series B Preferred Stock shall be entitled to receive, out of funds legally
available therefor, cumulative annual dividends when and as they may be declared
from time to time by the Board of Directors of the Corporation at an annual rate
per share equal to ten percent (10%) of the original purchase price of $2.00
paid per share of the Series B Preferred Stock (which amount shall be subject to
adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Series B Preferred Stock);
and the holders of shares of Series C Preferred Stock shall be entitled to
receive, out of funds legally available therefor, cumulative annual dividends
when and as they may be declared from time to time by the Board of Directors of
the Corporation at an annual rate per share equal to ten percent (10%) of the
original purchase price of $3.498117 paid per share of the Series C Preferred
Stock (which amount shall be subject to adjustment whenever there shall occur a
stock split, combination, reclassification or other similar event involving the
Series C Preferred Stock). Such amounts shall be compounded annually such that
if the dividend is not paid for such year the unpaid amount shall be added to
the original purchase price paid
<PAGE> 14
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per share of the Preferred Stock, as the case may be, for purposes of
calculating succeeding years' dividends. Such dividends shall be deemed to
accrue on the Preferred Stock from the date of the original issuance thereof and
be cumulative, whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Corporation legally available for the
payment of dividends. If such cumulative dividends in respect of any prior or
current annual dividend period shall not have been declared and paid or if there
shall not have been a sum sufficient for the payment thereof set apart, the
deficiency shall first be fully paid before any dividend or other distribution
shall be paid or declared and set apart with respect to any class of the
Corporation's capital stock, now or hereafter outstanding. Upon any conversion
of the Preferred Stock under Section 5 hereof, all accumulated and unpaid
dividends on the Preferred Stock, whether or not declared, since the date of
issue up to and including the date of conversion thereof shall be forgiven.
(b) DIVIDENDS IN KIND. In the event the Corporation shall make
or issue, or shall fix a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution with respect to the
Common Stock payable in (i) securities of the Corporation other than shares of
Common Stock or (ii) assets, then and in each such event the holders of
Preferred Stock shall receive, at the same time such distribution is made with
respect to Common Stock, the number of securities or such other assets of the
Corporation which they would have received had their Preferred Stock been
converted into Common Stock immediately prior to the record date for determining
holders of Common Stock entitled to receive such distribution.
3. LIQUIDATION, DISSOLUTION OR WINDING UP
(a) TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. In
the event of any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, before any distribution may be made with
respect to the Common Stock, each holder of outstanding shares of Preferred
Stock shall be entitled to be paid, PARI PASSU, out of the assets of the
Corporation available for distribution to holders of the Corporation's capital
stock of all classes, whether such assets are capital, surplus, or capital
earnings as follows: the holders of outstanding shares of Series A Preferred
Stock shall receive an amount equal to $.96 per share (which amount shall be
subject to equitable adjustment whenever there shall occur a stock split,
combination, reclassification or other similar event involving the Series A
Preferred Stock) plus all accrued and unpaid dividends thereon, whether or not
earned or declared, since the date of issue up to and including the date full
payment shall be tendered to the holders of the Series A Preferred Stock with
respect to such liquidation, dissolution or winding up (collectively, the
"Series A Liquidation Amount"); the holders of outstanding shares of Series B
Preferred Stock shall receive an amount equal to $2.00 per share (which amount
shall be subject to equitable adjustment whenever there shall occur a stock
split, combination, reclassification or other similar event involving the Series
B Preferred Stock) plus all accrued and unpaid dividends thereon, whether or not
earned or declared, since the date of issue up to and including the date full
payment shall be tendered to the holders of the Series B Preferred Stock with
respect to such liquidation, dissolution or winding up (collectively, the
"Series B Liquidation Amount"); and the holders of outstanding shares of
<PAGE> 15
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Series C Preferred Stock shall receive an amount equal to $3.498117 per share
(which amount shall be subject to equitable adjustment whenever there shall
occur a stock split, combination, reclassification or other similar event
involving the Series C Preferred Stock) plus all accrued and unpaid dividends
thereon, whether or not earned or declared, since the date of issue up to and
including the date full payment shall be tendered to the holders of the Series C
Preferred Stock with respect to such liquidation, dissolution or winding up
(collectively, the "Series C Liquidation Amount", and together with the Series A
Liquidation Amount and the Series B Liquidation Amount, the "Liquidation
Amount"). If the assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the holders of shares of Preferred
Stock the full amount of the Liquidation Amount to which they shall be entitled,
the holders of shares of Preferred Stock shall share ratably in any distribution
of assets according to the amounts which would be payable with respect to the
Preferred Stock held by them upon such distribution if all amounts payable on or
with respect to said shares were paid in full.
After the payment of the Liquidation Amount shall have been made in
full to the holders of the Preferred Stock or funds necessary for such payment
shall have been set aside by the Corporation in trust for the account of holders
of the Preferred Stock so as to be available for such payments, the remaining
assets of the Corporation legally available for distribution to its shareholders
shall be distributed among (i) the holders of other classes of capital stock of
the Corporation (the "Junior Stock"), and (ii) the holders of shares of
Preferred Stock, collectively as one class. Such distribution shall be made to
the holders of Preferred Stock and Junior Stock ratably as if each share of the
Preferred Stock had been converted into the number of shares of Common Stock
issuable upon the conversion of a share of Preferred Stock immediately prior to
any such liquidation, dissolution or winding up of the Corporation.
Notwithstanding the foregoing, in the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
in which holders of the Preferred Stock receive an amount per share equal to at
least $7.00 (for this purpose, all of the shares of Preferred Stock being deemed
to have been converted into Common Stock), which amount shall be subject to
equitable adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Preferred Stock, then the
holders of the Preferred Stock shall participate PRO RATA along with the holders
of the Junior Stock in such proceeds as if all such shares of Preferred Stock
had been converted into Common Stock immediately prior to such liquidation,
dissolution or winding up in lieu of the Liquidation Amount being payable on the
Preferred Stock.
(b) TREATMENT OF REORGANIZATIONS. Any Reorganization (as such
term is defined in Section 5(g)), shall be regarded as a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of this Section 3; PROVIDED, HOWEVER, that each holder of Preferred Stock shall
have the right to elect the benefits of the provisions of Section 5(g) hereof,
if applicable, in lieu of receiving payment of amounts payable upon liquidation,
dissolution or winding up of the Corporation pursuant to this Section 3.
<PAGE> 16
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(c) DISTRIBUTIONS IN CASH. The Liquidation Amount shall in all
events be paid in cash; PROVIDED, HOWEVER, that if the Liquidation Amount is
payable in connection with a Reorganization, then each holder of the Preferred
Stock may, at its election, receive payment of the Liquidation Amount in the
same form of consideration as is payable with respect to the Common Stock. In
the event of any Reorganization which is intended to be treated as a "pooling of
interests" for accounting purposes under Accounting Principles Board Opinion No.
16, the Reorganization or other acquisition consideration (including any shares
of capital stock to be delivered by the acquiring corporation) shall be
reallocated among the holders of Preferred Stock in an appropriate manner to
give economic effect to the intent and purpose of Sections 3(a), 3(b) and 3(c).
Wherever a distribution provided for in this Section 3 is payable in property
other than cash, the value of such distribution shall be the fair market value
of such property as determined in good faith by the Corporation's Board of
Directors.
4. VOTING POWER. Except as otherwise expressly provided in
Section 8 hereof, or as required by law, each holder of Preferred Stock shall be
entitled to vote on all matters and shall be entitled to that number of votes
equal to the largest number of whole shares of Common Stock into which such
holder's shares of Preferred Stock could be converted, pursuant to the
provisions of Section 5 hereof, at the record date for the determination of
shareholders entitled to vote on such matter or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise expressly provided herein or as
required by law, the holders of shares of Preferred Stock and Common Stock shall
vote together as a single class on all matters.
5. CONVERSION RIGHTS FOR THE PREFERRED STOCK. The holders of the
Preferred Stock shall have the following rights with respect to the conversion
of the Preferred Stock into shares of Common Stock:
(a) GENERAL. Subject to and in compliance with the provisions
of this Section 5, any share of the Preferred Stock may, at the option of the
holder, be converted at any time into fully paid and non-assessable shares of
Common Stock. The number of shares of Common Stock to which a holder of
Preferred Stock shall be entitled upon conversion shall be determined by
multiplying the applicable Conversion Rate (determined as provided in Section
5(b)) by the number of shares of Preferred Stock being converted.
(b) APPLICABLE CONVERSION RATE. The conversion rate in effect
at any time for the conversion of Preferred Stock (the "Conversion Rate") shall
be determined by dividing, in the case of the Series A Preferred Stock, $.96, in
the case of the Series B Preferred Stock, $2.00, and in the case of the Series C
Preferred Stock, $3.498117, by the applicable Conversion Value, calculated as
provided in Section 5(c).
(c) APPLICABLE CONVERSION VALUE. The conversion value (the
"Conversion Value") shall initially be, in the case of the Series A Preferred
Stock, $.96, in the case of the Series B Preferred Stock, $2.00, and in the case
of the Series C Preferred Stock, $3.498117. Such Conversion Value shall be
subject to adjustment from time to time in accordance with
<PAGE> 17
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this Section 5.
(d) ADJUSTMENTS TO APPLICABLE CONVERSION VALUES.
(i) (A) UPON SALE OF COMMON STOCK. If the
Corporation shall, while there are any shares of Preferred Stock
outstanding, issue or sell (or in accordance with Section 5(d)(i)(B)
below is deemed to have issued or sold) shares of its Common Stock
without consideration or at a price per share less than the applicable
Conversion Value in effect immediately prior to such issuance or sale,
then in each such case the applicable Conversion Value, upon each such
issuance or sale, except as hereinafter provided, shall be lowered so
as to be equal to the following:
(1) For the Series A Preferred Stock and Series
B Preferred Stock, an amount determined by multiplying the
Conversion Value for the Series A Preferred Stock or Series B
Preferred Stock, as appropriate, by a fraction:
(I) the numerator of which shall be (a) the
number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock, plus (b) the number of shares
of Common Stock which the net aggregate
consideration, if any, received by the Corporation
for the total number of such additional shares of
Common Stock so issued would purchase at the
Conversion Value for the Series A Preferred Stock or
the Series B Preferred Stock, as applicable, in
effect immediately prior to such issuance, and
(II) the denominator of which shall be (a)
the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock plus (b) the number of such
additional shares of Common stock so issued.
(2) For the Series C Preferred Stock (x) with
respect to issuances or sales on or prior to December 31,
1999, the lowest net price per share at which such Common
Stock has been issued or sold or is deemed to have been issued
or sold, and (y) with respect to issuances or sales after
December 31, 1999, an amount determined by multiplying the
Conversion Value for the Series C Preferred Stock by a
fraction:
(I) the numerator of which shall be (a) the
number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock, plus (b) the number of shares
of Common Stock which the net aggregate
consideration, if any, received by the Corporation
for the total number of such additional shares of
Common Stock so issued would purchase at the
Conversion Value for the Series C Preferred Stock in
effect immediately prior to such issuance, and
<PAGE> 18
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(II) the denominator of which shall be (a)
the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock plus (b) the number of such
additional shares of Common stock so issued.
For purposes of this Section 5(d)(i)(A), the determination of
Common Stock outstanding shall be calculated on a fully-diluted basis
assuming the conversion of the Preferred Stock and the exercise of
outstanding options and warrants at the time of any adjustment to the
Applicable Conversion Value of any series of Preferred Stock.
(B) UPON ISSUANCE OF WARRANTS, OPTIONS AND
RIGHTS TO COMMON STOCK.
(1) For the purposes of this Section 5(d)(i),
the issuance of any warrants, options, subscriptions, or
purchase rights with respect to shares of Common Stock and the
issuance of any securities convertible into or exchangeable
for shares of Common Stock (or the issuance of any warrants,
options or any rights with respect to such convertible or
exchangeable securities) shall be deemed an issuance of such
Common Stock at such time if the Net Consideration Per Share
(as hereinafter determined) which may be received by the
Corporation for such Common Stock shall be less than the
applicable Conversion Value at the time of such issuance. Any
obligation, agreement, or undertaking to issue warrants,
options, subscriptions, or purchase rights at any time in the
future shall be deemed to be an issuance at the time such
obligation, agreement or undertaking is made or arises. No
adjustment of the applicable Conversion Value shall be made
under this Section 5(d)(i) upon the issuance of any shares of
Common Stock which are issued pursuant to the exercise of any
warrants, options, subscriptions, or purchase rights or
pursuant to the exercise of any conversion or exchange rights
in any convertible securities if any adjustment shall
previously have been made or deemed not required hereunder,
upon the issuance of any such warrants, options, or
subscription or purchase rights or upon the issuance of any
convertible securities (or upon the issuance of any warrants,
options or any rights therefor) as above provided.
Should the Net Consideration Per Share of any such
warrants, options, subscriptions, or purchase rights or
convertible securities be decreased from time to time (other
than as a result of a stock split, stock dividend or other
similar event), then, upon the effectiveness of each such
change, each Conversion Value shall be adjusted to such
Conversion Value as would have obtained (1) had the
adjustments made upon the issuance of such warrants, options,
rights, or convertible securities been made upon the basis of
the decreased Net Consideration per share of such securities,
and (2) had adjustments made to the Conversion Value since the
date of issuance of such
<PAGE> 19
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securities been made to the Conversion Value as adjusted
pursuant to (1) above. Any adjustment of the Conversion Value
with respect to this Section 5(d)(i)(B) which relates to
warrants, options, subscriptions, purchase rights or
convertible securities with respect to shares of Common Stock
shall be disregarded if, as, when and to the extent such
warrants, options, subscriptions, purchase rights or
convertible securities expire or are canceled without being
exercised or converted, so that the Conversion Value effective
immediately upon such cancellation or expiration shall be
equal to the Conversion Value in effect at the time of the
issuance of the expired or canceled warrants, options,
subscriptions, purchase rights, or convertible securities with
such additional adjustments as would have been made to that
Conversion Value had the expired or canceled warrants,
options, subscriptions, purchase rights or convertible
securities not been issued.
(2) For purposes of this paragraph, the "Net
Consideration Per Share" which may be received by the
Corporation shall be determined as follows:
(I) The "Net Consideration Per Share"
shall mean the amount equal to the total amount of
consideration, if any, received by the Corporation
for the issuance of such warrants, options,
subscriptions, or other purchase rights or
convertible or exchangeable securities, plus the
minimum amount of consideration, if any, payable to
the Corporation upon exercise or conversion thereof,
divided by the aggregate number of shares of Common
Stock that would be issued if all such warrants,
options, subscriptions, or other purchase rights or
convertible or exchangeable securities were
exercised, exchanged, or converted.
(II) The "Net Consideration Per Share"
which may be received by the Corporation shall be
determined in each instance as of the date of
issuance of warrants, options, subscriptions, or
other purchase rights or convertible or exchangeable
securities without giving effect to any possible
future upward price adjustments or rate adjustments
which may be applicable with respect to such
warrants, options, subscriptions, or other purchase
rights or convertible or exchangeable securities.
(C) STOCK DIVIDENDS. In the event the
Corporation shall make or issue a dividend or other distribution
payable in Common Stock or securities of the Corporation convertible
into or otherwise exchangeable for the Common Stock of the Corporation,
then such Common Stock or other securities issued in payment of such
dividend shall be deemed to have been issued without consideration
(except for dividends payable in shares of Common Stock payable PRO
RATA to holders of Preferred Stock and to holders of any other class of
stock).
<PAGE> 20
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(D) CONSIDERATION OTHER THAN CASH. For
purposes of this Section 5(d), if a part or all of the consideration
received by the Corporation in connection with the issuance of shares
of the Common Stock or the issuance of any of the securities described
in this Section 5(d) consists of property other than cash, such
consideration shall be deemed to have a fair market value as is
reasonably determined in good faith by the Board of Directors of the
Corporation.
(E) EXCEPTIONS. This Section 5(d)(i)
shall not apply under any of the circumstances which would constitute
an Extraordinary Common Stock Event (as hereinafter defined in Section
5(d)(ii)). Further, the provisions of this Section 5(d) shall not apply
to (i) shares issued upon conversion of the Preferred Stock, (ii)
shares of Common Stock issued upon exercise of certain Common Stock
Purchase Warrants dated May 17, 1996 and July 24, 1996 issued to Zero
Stage Capital V, L.P. by Silknet Software, Inc., a New Hampshire
corporation ("Silknet-NH"), and assumed by the Corporation pursuant to
a migratory merger agreement dated February 23, 1999 (the "Merger
Agreement"), (iii) shares of Common Stock issued upon exercise of
certain Common Stock Purchase Warrants dated on or about June 11, 1997
issued pursuant to the terms of the Series B Preferred Stock and
Warrant Purchase Agreement between Silknet-NH and the Investors named
therein and assumed by the Corporation pursuant to the Merger Agreement
or (iv) options (and the shares issuable upon exercise thereof) to
purchase up to an aggregate of 5,250,000 shares of Common Stock
(including options outstanding on the date hereof) issued to employees,
officers or directors of, or consultants to, the Corporation issued or
reserved for issuance pursuant to any stock option plan or agreement,
stock purchase plan or agreement, stock ownership plan, consulting
agreement or such other options, warrants, agreement, plans or any
increase in the number of shares of Common Stock permitted under this
subsection, which are approved by a majority of the Board of Directors
(which approval includes the approval of a majority of the directors
elected by the holders of the Preferred Stock). The number of shares in
this Section (E) shall be proportionately adjusted to reflect any stock
dividend, stock split or other form of recapitalization occurring after
the date hereof.
(ii) UPON EXTRAORDINARY COMMON STOCK EVENT. Upon
the happening of an Extraordinary Common Stock Event (as hereinafter defined),
the applicable Conversion Value for the Preferred Stock shall, simultaneously
with the happening of such Extraordinary Common Stock Event, be adjusted by
multiplying the then effective Conversion Value by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such Extraordinary Common Stock Event and the denominator of which
shall be the number of shares of Common Stock outstanding immediately after such
Extraordinary Common Stock Event, and the product so obtained shall thereafter
be the applicable Conversion Value. The Conversion Value shall be readjusted in
the same manner upon the happening of any successive Extraordinary Common Stock
Event or Events.
<PAGE> 21
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"Extraordinary Common Stock Event" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution
on outstanding Common Stock or on any class or series of preferred
stock, unless made PRO RATA to holders of Preferred Stock, (ii) a
subdivision of outstanding shares of Common Stock into a greater number
of shares of Common Stock, or (iii) a combination of outstanding shares
of the Common Stock into a smaller number of shares of Common Stock.
(e) DIVIDENDS. In the event the Corporation shall make or
issue, a dividend or other distribution with respect to the Common Stock payable
in (i) securities of the Corporation other than shares of Common Stock or (ii)
assets, then and in each such event the holders of Preferred Stock shall
receive, at the same time such distribution is made with respect to Common
Stock, the number of securities or such other assets of the Corporation which
they would have received had their Preferred Stock been converted into Common
Stock immediately prior to the date of such distribution.
(f) CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common
Stock issuable upon the conversion of the Preferred Stock shall be changed into
the same or different number of shares of any class or classes of stock, whether
by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or distribution provided
for elsewhere in this Section 5 or by a Reorganization), then and in each such
event, the holder of each share of Preferred Stock shall have the right
thereafter to convert such share into the kind and amount of shares of stock and
other securities and property receivable upon such capital reorganization,
reclassification or other change by holders of the number of shares of Common
Stock into which such shares of Preferred Stock might have been converted
immediately prior to such capital reorganization, reclassification or other
change.
(g) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If at
any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 5) or a merger or
consolidation of the Corporation with or into another corporation, or the sale
of all or substantially all of the Corporation's properties and assets to any
other person, or the sale of a majority of the voting securities of the
Corporation in one transaction or a series of related transactions (any of which
events is herein referred to as a "Reorganization"), then as a part of such
Reorganization, provision shall be made so that the holders of the Preferred
Stock shall thereafter be entitled to receive upon conversion of the Preferred
Stock, the number of shares of stock or other securities or property of the
Corporation, or of the successor corporation resulting from such Reorganization,
to which such holder would have been entitled if such holder had converted its
shares of Preferred Stock immediately prior to such Reorganization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 5 with respect to the rights of the holders of the Preferred
Stock after the Reorganization, to the end that the provisions of this Section 5
(including adjustment of the Conversion Value then in effect and the number
<PAGE> 22
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of shares issuable upon conversion of the Preferred Stock) shall be applicable
after that event in as nearly equivalent a manner as may be practicable.
Notwithstanding the foregoing, a Reorganization shall not include any
reorganization, merger or consolidation involving (1) only a change in the state
of incorporation of the Corporation, (2) a merger of the Corporation with or
into a wholly-owned subsidiary of the Corporation that is incorporated in the
United States of America, or (3) an acquisition by merger, reorganization or
consolidation, of which the Corporation is substantively the surviving
corporation and operates as a going concern, of another corporation that is
engaged in a business similar or related to or complementary with the business
of the Corporation and which does not involve a recapitalization or
reorganization of the Preferred Stock or Common Stock, and does not involve (in
a single transaction or series of related transactions) a transfer of more than
51% of the voting power of the Corporation.
Except as otherwise provided in Section 3(b), upon the occurrence of a
Reorganization, under circumstances which make the preceding paragraph
applicable, each holder of Preferred Stock shall have the option of electing
treatment for his shares of Preferred Stock under either this Section 5(g) or
Section 3 hereof, notice of which election shall be submitted in writing to the
Corporation at its principal offices no later than five (5) business days before
the effective date of such event.
(h) CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In
each case of an adjustment or readjustment of the Conversion Rate, the
Corporation at its expense will furnish each holder of Preferred Stock with a
certificate, executed by the president and chief financial officer (or in the
absence of a person designated as the chief financial officer, by the treasurer)
showing such adjustment or readjustment, and stating in detail the facts upon
which such adjustment or readjustment is based. Any adjustment shall be
calculated to five decimal places.
(i) EXERCISE OF CONVERSION PRIVILEGE. To exercise its
conversion privilege, a holder of Preferred Stock shall surrender the
certificate or certificates representing the shares being converted to the
Corporation at its principal office, and shall give written notice to the
Corporation at that office that such holder elects to convert such shares. Such
notice shall also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued. The certificate or certificates for shares of
Preferred Stock surrendered for conversion shall be accompanied by proper
assignment thereof to the Corporation or in blank. The date when such written
notice is received by the Corporation, together with the certificate or
certificates representing the shares of Preferred Stock being converted, shall
be the "Conversion Date." As promptly as practicable after the Conversion Date,
the Corporation shall issue and shall deliver to the holder of the shares of
Preferred Stock being converted, or on its written order, such certificate or
certificates as it may request for the number of whole shares of Common Stock
issuable upon the conversion of such shares of Preferred Stock in accordance
with the provisions of this Section 5, and cash, as provided in Section 5(j), in
respect of any fraction of a share of Common Stock issuable upon such
<PAGE> 23
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conversion. Such conversion shall be deemed to have been effected immediately
prior to the close of business on the Conversion Date, and at such time the
rights of the holder as holder of the converted shares of Preferred Stock shall
cease and the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon such conversion
shall be deemed to have become the holder or holders of record of the shares of
Common Stock represented thereby. The Corporation shall pay any taxes payable
with respect to the issuance of Common Stock upon conversion of the Preferred
Stock, other than any taxes payable with respect to income by the holders
thereof.
(j) CASH IN LIEU OF FRACTIONAL SHARES. The Corporation may, if
it so elects, issue fractional shares of Common Stock or scrip representing
fractional shares upon the conversion of shares of Preferred Stock. If the
Corporation does not elect to issue fractional shares, the Corporation shall pay
to the holder of the shares of Preferred Stock which were converted a cash
adjustment in respect of such fractional shares in an amount equal to the same
fraction of the market price per share of the Common Stock (as determined in a
reasonable manner prescribed by the Board of Directors) at the close of business
on the Conversion Date. The determination as to whether or not any fractional
shares are issuable shall be based upon the total number of shares of Preferred
Stock being converted at any one time by any holder thereof, not upon each share
of Preferred Stock being converted.
(k) PARTIAL CONVERSION. In the event some but not all of the
shares of Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Corporation shall execute and deliver
to or on the order of the holder, at the expense of the Corporation, a new
certificate representing the number of shares of Preferred Stock which were not
converted.
(l) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Preferred Stock, such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Preferred Stock, and if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the Preferred Stock, the Corporation shall take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
(m) MINIMUM ADJUSTMENT. Any provision of this Section 5 to the
contrary notwithstanding, no adjustment in the Conversion Value shall be made if
the amount of such adjustment would be less than 1% of the Conversion Value then
in effect, but any such amount shall be carried forward and an adjustment with
respect thereto shall be made at the time of and together with any subsequent
adjustment which, together with all amounts so carried forward, aggregates 1% or
more of the Conversion Value then in effect.
(n) MANDATORY CONVERSION. If at any time the Corporation shall
effect a Qualified Public Offering (as herein after defined), then effective
upon the closing of such
<PAGE> 24
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Qualified Public Offering, all outstanding shares of Preferred Stock shall
automatically convert into shares of Common Stock on the basis set forth in
Section 5 hereof. For purposes hereof, the term "Qualified Public Offering"
shall mean the effectiveness of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended (the "Act"), covering the offer and sale of Common Stock for the account
of the Corporation in which the aggregate net proceeds to the Corporation equal
at least $10,000,000 and in which the price per share of Common Stock is equal
or greater than $8.00 (which amount shall be subject to equitable adjustment
wherever there shall occur a stock split, combination, reclassification or other
similar event involving the Common Stock. Holders of shares subject to
conversion shall deliver to the Corporation at its principal office (or such
other office or agency as the Corporation may designate by notice in writing)
during its usual business hours, the certificate or certificates for shares of
Preferred Stock being converted, and the Corporation shall issue and deliver to
such holders certificates for the number of shares of Common Stock to which such
holders are entitled. Until such time as holders of shares of Preferred Stock
shall surrender those certificates therefor as provided above, such certificates
shall be deemed to represent the shares of Common Stock to which the holders
shall be entitled upon the surrender thereof.
The automatic conversion of the Preferred Stock into shares of
Common Stock as provided above shall be subject in all circumstances to the
closing and consummation of a Qualified Public Offering.
6. NO REISSUANCE OF PREFERRED STOCK. No share or shares of
Preferred Stock acquired by the Company by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be canceled
and retired and restored to the status of undesignated Preferred Stock. The
Company may from time to time take such appropriate corporate action as may be
necessary to reduce the authorized number of shares of the Preferred Stock
accordingly.
7. REDEMPTION.
(a) OPTIONAL REDEMPTION UPON PUBLIC OFFERING. Effective upon
the closing of an initial public offering which does not constitute a Qualified
Public Offering ("Non-Qualified Public Offering"), each holder may request the
Corporation to redeem the shares of Preferred Stock held by such holder at a
redemption price (the "Redemption Price") for each share of Preferred Stock
redeemed pursuant to this Section 7(a) equal to the Series A Liquidation Amount,
the Series B Liquidation Amount or the Series C Liquidation Amount, as the case
may be (in either case, including all accrued but unpaid dividends, whether or
not declared) with the amount of accrued dividends due thereon to be calculated
and paid through the date payment is actually made to the holders of the
Preferred Stock with respect to such redemption. The Corporation shall give the
holders of the Preferred Stock thirty days' written notice of the pendency of a
Non-Qualified Public Offering. Such notice shall be mailed by the Corporation,
postage prepaid, to each holder of record of Preferred Stock at its address
shown on the records of the Corporation. Each holder of Preferred
<PAGE> 25
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Stock shall notify the Corporation in writing within ten days of receipt of the
Corporation's notice if it intends to have its shares redeemed under this
Section 7(a). The Redemption Price shall be paid at the closing of the
Non-Qualified Public Offering and shall be paid in cash.
Nothing contained in this Section 7(a) shall in any way restrict or
prohibit the holders of the Preferred Stock from exercising their conversion
rights pursuant to Section 5 hereof prior to the effective date of the
redemption to be effected hereunder; provided, however, that any such conversion
under this Section 7(a) may be subject to the closing of the Non-Qualified
Public Offering.
(b) OPTIONAL REDEMPTION BY HOLDERS. At any time on or after
May 8, 2003, at the request of the holders of a majority of the then outstanding
shares of Preferred Stock (the "Requisite Holders"), the Corporation shall, to
the extent it may do so under applicable law, redeem, within sixty days of the
date of such request, from the holders the shares of Preferred Stock held by the
Requisite Holders and all other holders of Preferred Stock who elect to have
their shares redeemed. In the event the shares of Preferred Stock may not be
redeemed because of a prohibition under applicable law, such shares shall be
redeemed as soon as such prohibition no longer exists. The redemption price for
each share of Preferred Stock redeemed pursuant to this Section 7(b) (the
"Optional Redemption Price") shall be equal to the greater of (i) the applicable
Liquidation Amount for the respective series of Preferred Stock (including all
accrued and unpaid dividends, whether or not declared) with the amount of all
accrued dividends due thereon to be calculated and paid through the date payment
is actually made to the holders of the Preferred Stock and (ii) the fair market
value of such shares on the Redemption Date. The fair market value of such
shares shall be determined in good faith by the Board of Directors of the
Corporation as of the Redemption Date after taking into consideration all
factors which it deems appropriate, provided however, that such fair market
value shall take into account the valuations of comparable companies that are
publicly traded or privately held, but not including any discount attributable
to the fact that the Preferred Stock represents a minority ownership interest in
the Corporation and no premium to reflect any special voting or approval rights
of the holders with respect to certain matters. The Board of Directors shall
notify the holders of Preferred Stock as to its determination of the fair market
value of such shares not later than 30 days prior to any given Redemption Date.
The Requisite Holders shall have the right, after receiving notice of such
determination, not later than five business days before any given Redemption
Date, to contest such determination If the Requisite Holders disagree with the
Corporation's determination of fair market value, and are unable, within five
days of their receipt of the Corporation's determination, to reach agreement
with the Corporation on the fair market value of the shares, the fair market
value shall be determined by appraisal as set forth below. All appraisals shall
be undertaken by two appraisers, one selected by the Board of Directors of the
Corporation and one selected by the Requisite Holders, each to be selected as
soon as reasonably practicable after the determination to make an appraisal has
been made. The fair market value shall be the fair market value arrived at by
those appraisers within thirty (30) days following the appointment of the last
appraiser to be appointed. In the event that the two appraisers agree in good
faith on such fair market value
<PAGE> 26
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within such a period of time, such agreed value shall be used for these
purposes. If the appraisers cannot agree but their valuations are within 10% of
each other, the fair market value shall be the mean of the two valuations. If
the appraisers cannot agree and the differences in the valuations are greater
than 10%, the appraisers shall select a third appraiser who will calculate fair
market value independently, and, except as provided in the next sentence, the
fair market value of the shares of Preferred Stock shall be the average of the
two fair market values arrived at by the appraisers who are closest in amount.
If one appraiser's valuation is the mean of the other two valuations, such mean
valuation shall be the fair market value. In the event that the two original
appraisers cannot agree upon a third appraiser within ten (10) days following
the end of the thirty (30) day period referred to above, then the third
appraiser shall be appointed by the American Arbitration Association in Boston,
Massachusetts. The redemption of the shares shall occur within ten days
following receipt of the results of the appraisal. If, following the final
determination of the Optional Redemption Price for the shares, any holder
previously requesting that its shares be redeemed shall choose not to sell any
or all of its shares, then such holder shall so notify the Corporation within
ten (10) days following receipt of the results of the appraisal. The expenses of
the appraiser chosen by the Corporation will be borne by it, the expenses of the
appraiser chosen by the holders will be borne by them, PRO RATA based on the
number of shares being redeemed, and the expenses of the third appraiser will be
borne 50% by the Corporation and 50% by the holders, PRO RATA based on the
number of shares being redeemed.
In the event that the holders of the Preferred Stock do not elect to
have the Preferred Stock redeemed pursuant to this Section 7(b), the shares of
Preferred Stock shall remain outstanding and subject to the provisions hereof.
(c) REDEMPTION NOTICE. If an election is made pursuant to
Section 7(b) hereof, written notice of such election shall be mailed, postage
prepaid, to the Corporation, not later than thirty days before the date fixed
for each redemption pursuant to Section 7(b) (each of the dates fixed for
redemption and the extended redemption date is hereinafter referred to as a
"Redemption Date"). If such election is made and appropriate notice is given
then, at least fifteen (15) days before the Redemption Date, written notice
(hereinafter referred to as the "Redemption Notice") shall be mailed by the
Corporation, postage prepaid, to each holder of record of Preferred Stock at its
address shown on the records of the Corporation; PROVIDED, HOWEVER, that the
Corporation's failure to give such Redemption Notice shall in no way affect its
obligation to redeem the shares of Preferred Stock or the obligation of the
holders to redeem their shares of Preferred Stock as provided in Section 7(b)
hereof. The Redemption Notice shall contain the following information:
(i) the number of shares of Preferred Stock held
by the holder and the total number of shares of Preferred Stock held by all
holders subject to redemption as of such Redemption Date; and
(ii) the Redemption Date and the applicable
Redemption Price.
<PAGE> 27
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Any holder of Preferred Stock who wishes to do so may, by giving notice to the
Corporation at least five business days prior to the Redemption Date, convert
into Common Stock any or all of the shares of Preferred Stock held by it and
scheduled for redemption on such Redemption Date.
(d) SURRENDER OF CERTIFICATES. Each holder of shares of
Preferred Stock to be redeemed under this Section 7 shall surrender the
certificate or certificates representing such shares to the Corporation at the
place designated in the Redemption Notice, and thereupon the Redemption Price
for such shares as set forth in this Section 7 shall be paid to the order of the
person whose name appears on such certificate or certificates. Irrespective of
whether the certificates therefor shall have been surrendered, all shares of
Preferred Stock which are the subject of a Redemption Notice shall be deemed to
have been redeemed and shall be canceled effective as of the Redemption Date,
unless the Corporation shall default in the payment of the applicable Redemption
Price.
8. RESTRICTIONS AND LIMITATIONS.
(a) CORPORATE ACTION. Except as expressly provided herein
or as required by law, so long as any shares of Preferred Stock remain
outstanding, the Corporation shall not, and shall not permit any subsidiary
(which shall mean any corporation, association or other business entity which
the Corporation and/or any of its other subsidiaries directly or indirectly owns
at the time more than fifty percent (50%) of the outstanding voting shares of
such corporation or trust, other than directors' qualifying shares) to, without
the approval by vote or written consent by the holders of at least two-thirds of
the then outstanding shares of Preferred Stock, voting together as a single
class but as a separate class from the Common Stock:
(i) redeem, purchase or otherwise acquire for
value (or pay into or set aside for a sinking fund for such purpose), or declare
and pay or set aside funds for the payment of any dividend with respect to, any
share or shares of capital stock, except as required or permitted hereunder;
(ii) authorize or issue, or obligate itself to
authorize or issue, additional shares of Preferred Stock;
(iii) authorize or issue, or obligate itself to
authorize or issue, any equity security senior to or on parity with the
Preferred Stock as to liquidation preferences, redemption rights, dividend
rights, voting rights or otherwise, except such equity securities which are
authorized and designated by a majority of the Board of Directors, including a
majority of the directors elected by holders of Preferred Stock;
(iv) merge or consolidate with any other
corporation, or sell, assign, lease or otherwise dispose of or voluntarily part
with the control of (whether in one transaction or in a series of transactions)
all, or substantially all, of its assets or any significant portion of its
intellectual property rights (whether now owned or hereinafter
<PAGE> 28
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acquired), or consent to any liquidation, dissolution or winding up of the
Corporation, or permit any subsidiary to do any of the foregoing, EXCEPT for (1)
a change in the state of incorporation of the Corporation, (2) a merger of the
Corporation with or into a wholly-owned subsidiary of the Corporation that is
incorporated in the United States of America, or (3) an acquisition by merger,
reorganization or consolidation, of which the Corporation is substantively the
surviving corporation and operates as a going concern, of another corporation
that is engaged in a business similar or related to or complementary with the
business of the Corporation and which does not involve a recapitalization or
reorganization of the Preferred Stock or Common Stock, and does not involve (in
a single transaction or series of related transactions) a transfer of more than
51% of the voting power of the Corporation; or
(v) amend, restate, modify or alter the by-laws
of the Corporation in any way which adversely affects the rights of the holders
of the Preferred Stock.
(b) AMENDMENTS TO CHARTER. The Corporation shall not
amend its Certificate of Incorporation without the approval, by vote or written
consent, by the holders of at least two-thirds of the then outstanding shares of
Series A Preferred Stock, the then outstanding shares of Series B Preferred
Stock, and the then outstanding Series C Preferred Stock, each voting separately
as a class, if such amendment would amend any of the rights, preferences,
privileges of or limitations provided for herein for the benefit of, or
materially effect the value of, any shares of Series A Preferred Stock, the
Series B Preferred Stock or Series C Preferred Stock, as the case may be.
Without limiting the generality of the preceding sentence, the Corporation will
not amend its Certificate of Incorporation without the approval by the holders
of at least two-thirds of the then outstanding shares of Series A Preferred
Stock or the then outstanding shares of Series B Preferred Stock, as the case
may be, if such amendment would:
(i) change the relative seniority rights of the
holders of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock as to the payment of dividends in relation to the holders of any
other capital stock of the Corporation, or create any other class or series of
capital stock entitled to seniority or parity as to liquidation preferences,
redemption rights, dividend rights, voting rights or otherwise in relation to
the holders of Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock;
(ii) reduce the amount payable to the holders of
Series A Preferred Stock, the Series B Preferred Stock or Series C Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, or change the relative seniority of the liquidation
preferences of the holders of Series A Preferred Stock, Series B Preferred Stock
or Series C Preferred Stock to the rights upon liquidation of the holders of
other capital stock of the Corporation, or change the dividend rights of the
holders of Series A Preferred Stock, the Series B Preferred Stock or Series C
Preferred Stock;
(iii) cancel or modify the conversion rights of
the holders of Preferred Stock provided for in Section 5 herein;
<PAGE> 29
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(iv) cancel or modify the rights of the holders
of the Preferred Stock provided for in this Section 8; or
(v) increase or decrease (other than by
redemption or conversion) the authorized number of shares of Series A Preferred
Stock, Series B Preferred Stock or Series C Preferred Stock, as the case may be.
Notwithstanding the foregoing provisions, the
designation or authorization of any equity security senior to or on a parity
with the Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock as to liquidation preferences, voting rights, dividends or
redemption rights shall not be regarded as adversely affecting or amending the
rights of the each particular series of the Series A Preferred Stock, Series B
Preferred Stock or Series C Preferred Stock so as to require a separate class
vote of the Series A Preferred Stock, Series B Preferred Stock or Series C
Preferred Stock for the authorization of such equity security, provided such
equity security is authorized by a majority of the Board of Directors, including
a majority of the directors elected by holders of Preferred Stock.
9. NO DILUTION OR IMPAIRMENT. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of the Preferred Stock set forth herein, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate in order to
protect the rights of the holders of the Preferred Stock against dilution or
other impairment. Without limiting the generality of the foregoing, the
Corporation (a) will not increase the par value of any shares of stock
receivable on the conversion of the Preferred Stock above the amount payable
therefor on such conversion, (b) will take all such action as may be necessary
or appropriate in order that the Corporation may validly and legally issue fully
paid and nonassessable shares of stock on the conversion of all Preferred Stock
from time to time outstanding, or (c) will not consolidate with or merge into
any other person or permit any such person to consolidate with or merge into the
Corporation (if the Corporation is not the surviving person), unless such other
person shall expressly assume in writing and will be bound by all of the terms
of the Preferred Stock set forth herein.
10. PREEMPTIVE RIGHTS.
(a) RIGHT OF PURCHASE. The Corporation hereby grants to
each holder of the Preferred Stock (the "Holders") so long as it shall own, of
record or beneficially, any shares of Preferred Stock or shares of Common Stock
issuable upon conversion thereof (the "Conversion Shares"), the right to
purchase all or part of its pro rata share of New Securities (as defined in
Section 10(b) below) which the Corporation, from time to time, proposes to sell
and issue. A Holder's pro rata share, for purposes of this preemptive right, is
the ratio of the number of shares of issued or issuable Conversion Shares which
such Holder owns to
<PAGE> 30
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the total number of shares of issued or issuable Conversion Shares and shares of
Common Stock then outstanding. The Holders shall have a right of over-allotment
pursuant to this Section 10 such that to the extent a Holder does not exercise
its preemptive right in full hereunder, such additional shares of New Securities
which such Holder did not purchase may be purchased by the other Holders in
proportion to the total number of shares of issued or issuable Conversion Shares
which each such other Holder owns compared to the total number of shares of
issued or issuable Conversion Shares which all such other Holders own.
(b) DEFINITION OF NEW SECURITIES. "New Securities" shall mean
any capital stock of the Corporation whether now authorized or not, and rights,
options or warrants to purchase capital stock, and securities of any type
whatsoever that are, or may become convertible into or exchangeable for capital
stock, issued on or after the date hereof; PROVIDED that the term "New
Securities" does not include (i) Conversion Shares issuable upon conversion of
any series of the Preferred Stock which is convertible into Common Stock, (ii)
Common Stock issued as a stock dividend to holders of Common Stock or upon any
stock split, subdivision or combination of shares of Common Stock, (iii)
Preferred Stock issued as a dividend to holders of Preferred Stock or upon any
stock split, subdivision or combination of Preferred Stock, (iv) the aggregate
number of shares of Common Stock issuable upon exercise of options and warrants
and other securities referred to in Section 5(d)(i)(E) hereof, and (v)
securities issued in connection with the acquisition by the Corporation of any
other corporation or business concern, whether by acquisition of assets or
stock, or (vi) securities authorized for issuance in a joint venture or
strategic alliance by all of the members of the Board of Directors as being
exempt from the definition of New Securities and such exemption is determined by
all of the Board of Directors to be in the best interests of the Corporation.
(c) NOTICE FROM THE CORPORATION. In the event the Corporation
proposes to undertake an issuance of New Securities, it shall give each Holder
written notice of its intention, describing the type of New Securities and the
price and the terms upon which the Corporation proposes to issue the same. Each
Holder shall have 10 days from the date of receipt of any such notice to agree
to purchase up to the Holder's pro rata share of such New Securities (and any
over-allotment amount pursuant to the operation of Section 10(b) hereof) for the
price and upon the terms specified in the notice by giving written notice to the
Corporation and stating therein the quantity of New Securities to be purchased.
The closing of the purchase of the New Securities shall be at the Corporation's
principal place of business within 15 days following the expiration of the 10
day period, or at such other time or place as the Corporation and the Holders
may determine.
(d) SALE BY THE CORPORATION. In the event any Holder fails to
exercise in full its preemptive right (after giving effect to the over-allotment
provision of Section 10(a) hereof), the Corporation shall have 120 days
thereafter to sell the New Securities with respect to which the Holder's option
was not exercised, at a price and upon terms no more favorable to the purchasers
thereof than specified in the Corporation's notice. To the extent the
Corporation does not sell all the New Securities offered within said 120 day
period, the Corporation shall not thereafter issue or sell such New Securities
without first again offering
<PAGE> 31
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such securities to the Holders in the manner provided above.
(e) TERMINATION OF RIGHTS. The rights granted to the Holders
under this Section 10 shall expire immediately prior to, and shall not apply in
connection with, the consummation of the first Qualified Public Offering.
(f) AMENDMENTS AND WAIVERS. The rights of the Holders
contained in this Section 10 may be amended, modified and waived with the
written consent of the Holders of at least two-thirds of the issued or issuable
Conversion Shares.
11. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Corporation of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger of the Corporation, or any transfer of all or substantially all of
the assets of the Corporation to any other corporation, or any other entity or
person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation,
then and in each such event the Corporation shall mail or cause to be
mailed to each holder of Preferred Stock a notice specifying (i) the date on
which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right,
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, merger, dissolution, liquidation or winding up is
expected to become effective and (iii) the time, if any, that is to be fixed, as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up. Such notice shall be mailed at least ten (10) days prior to the
date specified in such notice on which such action is to be taken.
<PAGE> 32
SILKNET SOFTWARE, INC.
CERTIFICATE OF DESIGNATION
OF THE
SERIES D CONVERTIBLE PREFERRED STOCK
The undersigned officers of Silknet Software, Inc. (the "CORPORATION"),
a corporation organized and existing under the General Corporation Law of the
State of Delaware (the "GENERAL CORPORATION LAW"), do hereby certify that,
pursuant to the authority conferred by the Certificate of Incorporation of the
Corporation and pursuant to the provisions of Section 151 of the General
Corporation Law, the Board of Directors of the Corporation, by unanimous written
consent dated as of February 25, 1999, adopted the following resolution creating
a series of the Corporation's undesignated Preferred Stock, to be designated as
the Series D Convertible Preferred Stock, and providing for certain powers,
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations and restrictions thereof, of shares of such
Series D Convertible Preferred Stock:
RESOLVED: That pursuant to authority expressly granted to and vested in
the Board of Directors of this Corporation by the provisions
of the Certificate of Incorporation, the Board of Directors
hereby designates 1,205,913 shares of Preferred Stock as
Series D Convertible Preferred Stock, with the relative rights
and preferences as set forth in Certificate of Designation
attached hereto as EXHIBIT A.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 33
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IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be duly executed in its corporate name by a duly authorized
officer as of this 26th day of February, 1999.
Silknet Software, Inc.
By: /s/ James C. Wood
--------------------------------
James C. Wood
President
Attest:
/s/ Patrick J. Scannell, Jr.
- -----------------------------
Secretary
<PAGE> 34
EXHIBIT A
A. DESCRIPTION AND DESIGNATION OF THE SERIES D CONVERTIBLE PREFERRED STOCK
1. DESIGNATION. The 1,205,913 shares of Series D Convertible
Preferred Stock, par value $.01 per share, shall be designated the "SERIES D
CONVERTIBLE PREFERRED STOCK" (being referred to herein as the "SERIES D
PREFERRED STOCK," and together with the Corporation's Series A Convertible
Participating Preferred Stock, par value $.01 per share, the Corporation's
Series B Convertible Participating Preferred Stock, par value $.01 per share,
and the Corporation's Series C Convertible Participating Preferred Stock, par
value $.01 per share, the "PREFERRED STOCK"). The shares of Series D Preferred
Stock shall have the following rights, terms and privileges:
2. DIVIDENDS.
(a) DIVIDENDS. The holders of shares of Series D Preferred
Stock shall be entitled to receive, out of funds legally available therefor,
cumulative annual dividends when and as they may be declared from time to time
by the Board of Directors of the Corporation at an annual rate per share equal
to ten percent (10%) of the original purchase price of $7.324109 paid per share
of the Series D Preferred Stock (which amount shall be subject to adjustment
whenever there shall occur a stock split, combination, reclassification or other
similar event involving the Series D Preferred Stock). Such amounts shall be
compounded annually such that if the dividend is not paid for such year the
unpaid amount shall be added to the original purchase price paid per share of
the Series D Preferred Stock for purposes of calculating succeeding years'
dividends. Such dividends shall be deemed to accrue on the Series D Preferred
Stock from the date of the original issuance thereof and be cumulative, whether
or not earned or declared and whether or not there are profits, surplus or other
funds of the Corporation legally available for the payment of dividends. If such
cumulative dividends in respect of any prior or current annual dividend period
shall not have been declared and paid or if there shall not have been a sum
sufficient for the payment thereof set apart, the deficiency shall first be
fully paid before any dividend or other distribution shall be paid or declared
and set apart with respect to any class of the Corporation's capital stock, now
or hereafter outstanding. Upon any conversion of the Series D Preferred Stock
under Section 5 hereof, all accumulated and unpaid dividends on the Series D
Preferred Stock, whether or not declared, since the date of issue up to and
including the date of conversion thereof shall be forgiven.
(b) DIVIDENDS IN KIND. In the event the Corporation shall make
or issue, or shall fix a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution with respect to the
Common Stock payable in (i) securities of the Corporation other than shares of
Common Stock or (ii) assets, then and in each such event the holders of Series D
Preferred Stock shall receive, at the same time such distribution is made with
respect to Common Stock, the number of securities or such other assets of the
Corporation which they would have received had their Series D Preferred Stock
been converted into Common Stock immediately prior to the record date for
determining holders of Common Stock entitled to receive such distribution.
<PAGE> 35
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3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. In
the event of any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, before any distribution may be made with
respect to the Common Stock, each holder of outstanding shares of Series D
Preferred Stock shall be entitled to be paid, PARI PASSU with all other holders
of outstanding shares of Preferred Stock, out of the assets of the Corporation
available for distribution to holders of the Corporation's capital stock of all
classes, whether such assets are capital, surplus, or capital earnings, an
amount equal to $7.324109 per share (which amount shall be subject to equitable
adjustment whenever there shall occur a stock split, combination,
reclassification or other similar event involving the Series D Preferred Stock)
plus all accrued and unpaid dividends thereon, whether or not earned or
declared, since the date of issue up to and including the date full payment
shall be tendered to the holders of the Series D Preferred Stock with respect to
such liquidation, dissolution or winding up (collectively, the "SERIES D
LIQUIDATION AMOUNT," and together with all other amounts to be paid in respect
of shares of Preferred Stock in the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
"LIQUIDATION AMOUNT"). If the assets of the Corporation available for
distribution to its shareholders shall be insufficient to pay the holders of
shares of Preferred Stock the full amount of the Liquidation Amount to which
they shall be entitled, the holders of shares of Preferred Stock shall share
ratably in any distribution of assets according to the amounts which would be
payable with respect to the Preferred Stock held by them upon such distribution
if all amounts payable on or with respect to said shares were paid in full.
(b) TREATMENT OF REORGANIZATIONS. Any Reorganization (as such
term is defined in Section 5(g)), shall be regarded as a liquidation,
dissolution or winding up of the affairs of the Corporation within the meaning
of this Section 3; PROVIDED, HOWEVER, that each holder of Series D Preferred
Stock shall have the right to elect the benefits of the provisions of Section
5(g) hereof, if applicable, in lieu of receiving payment of amounts payable upon
liquidation, dissolution or winding up of the Corporation pursuant to this
Section 3.
(c) DISTRIBUTIONS IN CASH. The Series D Liquidation Amount
shall in all events be paid in cash; PROVIDED, HOWEVER, that if the Series D
Liquidation Amount is payable in connection with a Reorganization, then each
holder of Series D Preferred Stock may, at its election, receive payment of the
Series D Liquidation Amount in the same form of consideration as is payable with
respect to the Common Stock. In the event of any Reorganization which is
intended to be treated as a "pooling of interests" for accounting purposes under
Accounting Principles Board Opinion No. 16, the Reorganization or other
acquisition consideration (including any shares of capital stock to be delivered
by the acquiring corporation) shall be reallocated among the holders of Series D
Preferred Stock in an appropriate manner to give economic effect to the intent
and purpose of Sections 3(a), 3(b) and 3(c). Wherever a distribution provided
for in this Section 3 is payable in property other than cash, the value of such
distribution shall be the fair market value of such property as determined in
good faith by the Corporation's Board of Directors.
<PAGE> 36
4. VOTING POWER. Except as otherwise expressly provided in
Section 8 hereof, or as required by law, each holder of Series D Preferred Stock
shall be entitled to vote on all matters and shall be entitled to that number of
votes equal to the largest number of whole shares of Common Stock into which
such holder's shares of Series D Preferred Stock could be converted, pursuant to
the provisions of Section 5 hereof, at the record date for the determination of
shareholders entitled to vote on such matter or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise expressly provided herein or as
required by
<PAGE> 37
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law, the holders of shares of Series D Preferred Stock, other shares of all
other series of outstanding Preferred Stock and shares of Common Stock shall
vote together as a single class on all matters.
5. CONVERSION RIGHTS FOR THE PREFERRED STOCK. The holders of
Series D Preferred Stock shall have the following rights with respect to the
conversion of Series D Preferred Stock into shares of Common Stock:
(a) GENERAL. Subject to and in compliance with the
provisions of this Section 5, any share of Series D Preferred Stock may, at the
option of the holder, be converted at any time into fully paid and
non-assessable shares of Common Stock. The number of shares of Common Stock to
which a holder of Series D Preferred Stock shall be entitled upon conversion
shall be determined by multiplying the Conversion Rate (determined as provided
in Section 5(b)) by the number of shares of Series D Preferred Stock being
converted.
(b) CONVERSION RATE. The conversion rate in effect at any
time for the conversion of Series D Preferred Stock (the "CONVERSION RATE")
shall be determined by dividing $7.324109 by the Conversion Value, calculated as
provided in Section 5(c).
(c) CONVERSION VALUE. The conversion value (the
"CONVERSION VALUE") shall initially be $7.324109. Such Conversion Value shall be
subject to adjustment from time to time in accordance with this Section 5.
(d) ADJUSTMENTS TO CONVERSION VALUE.
(i) (A) UPON SALE OF COMMON STOCK. If the
Corporation shall, while there are any shares of Series D Preferred
Stock outstanding, issue or sell (or in accordance with Section
5(d)(i)(B) below is deemed to have issued or sold) shares of its Common
Stock without consideration or at a price per share less than the
Conversion Value in effect immediately prior to such issuance or sale,
then in each such case the Conversion Value, upon each such issuance or
sale, except as hereinafter provided, shall be lowered so as to be
equal to the following:
(1) With respect to issuances or sales on or
prior to December 31, 1999 at, or deemed to be at, a net price
per share of Common Stock greater than or equal to $3.50, the
lowest net price per share at which such Common Stock has been
issued or sold or is deemed to have been issued or sold, and
(2) With respect to issuances or sales on or
prior to December 31, 1999 at, or deemed to be at, a net price
per share of Common Stock less than $3.50, first $3.50 and
then, after adjusting the Conversion Value to equal $3.50, an
amount determined by multiplying the Conversion Value by a
fraction:
(I) the numerator of which shall be (a) the
number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock, plus (b) the number of shares
of Common Stock which the net aggregate
consideration, if any, received by the Corporation
for the total number of such additional shares of
Common Stock so issued would purchase at the
Conversion Value in effect immediately prior to such
issuance, and
<PAGE> 38
-4-
(II) the denominator of which shall be (a)
the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock plus (b) the number of such
additional shares of Common stock so issued; and
(3) With respect to issuances or sales after
December 31, 1999, an amount determined by multiplying the
Conversion Value by a fraction:
(I) the numerator of which shall be (a) the
number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock, plus (b) the number of shares
of Common Stock which the net aggregate
consideration, if any, received by the Corporation
for the total number of such additional shares of
Common Stock so issued would purchase at the
Conversion Value in effect immediately prior to such
issuance, and
(II) the denominator of which shall be (a)
the number of shares of Common Stock outstanding
immediately prior to the issuance of such additional
shares of Common Stock plus (b) the number of such
additional shares of Common stock so issued.
For purposes of this Section 5(d)(i)(A), the determination of Common
Stock outstanding shall be calculated on a fully-diluted basis assuming the
conversion of all series of Preferred Stock outstanding and the exercise of
outstanding options and warrants at the time of any adjustment to the Conversion
Value.
(B) UPON ISSUANCE OF WARRANTS, OPTIONS AND
RIGHTS TO COMMON STOCK.
(1) For the purposes of this Section 5(d)(i),
the issuance of any warrants, options, subscriptions, or
purchase rights with respect to shares of Common Stock and the
issuance of any securities convertible into or exchangeable
for shares of Common Stock (or the issuance of any warrants,
options or any rights with respect to such convertible or
exchangeable securities) shall be deemed an issuance of such
Common Stock at such time if the Net Consideration Per Share
(as hereinafter determined) which may be received by the
Corporation for such Common Stock shall be less than the
Conversion Value at the time of such issuance. Any obligation,
agreement, or undertaking to issue warrants, options,
subscriptions, or purchase rights at any time in the future
shall be deemed to be an issuance at the time such obligation,
agreement or undertaking is made or arises. No adjustment of
the Conversion Value shall be made under this Section 5(d)(i)
upon the issuance of any shares of Common Stock which are
issued pursuant to the exercise of any warrants, options,
subscriptions, or purchase rights or pursuant to the exercise
of any conversion or exchange rights in any convertible
securities if any adjustment shall previously have been made
or deemed not required hereunder, upon the issuance of any
such warrants, options, or subscription or purchase rights or
upon the issuance of any convertible securities (or upon the
issuance of any warrants, options or any rights therefor) as
above provided.
<PAGE> 39
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Should the Net Consideration Per Share of any such
warrants, options, subscriptions, or purchase rights or
convertible securities be decreased from time to time (other
than as a result of a stock split, stock dividend or other
similar event), then, upon the effectiveness of each such
change, the Conversion Value shall be adjusted to the
Conversion Value as would have obtained (1) had the
adjustments made upon the issuance of such warrants, options,
rights, or convertible securities been made upon the basis of
the decreased Net Consideration per share of such securities,
and (2) had adjustments made to the Conversion Value since the
date of issuance of such securities been made to the
Conversion Value as adjusted pursuant to (1) above. Any
adjustment of the Conversion Value with respect to this
Section 5(d)(i)(B) which relates to warrants, options,
subscriptions, purchase rights or convertible securities with
respect to shares of Common Stock shall be disregarded if, as,
when and to the extent such warrants, options, subscriptions,
purchase rights or convertible securities expire or are
canceled without being exercised or converted, so that the
Conversion Value effective immediately upon such cancellation
or expiration shall be equal to the Conversion Value in effect
at the time of the issuance of the expired or canceled
warrants, options, subscriptions, purchase rights, or
convertible securities with such additional adjustments as
would have been made to that Conversion Value had the expired
or canceled warrants, options, subscriptions, purchase rights
or convertible securities not been issued.
(2) For purposes of this paragraph, the "NET
CONSIDERATION PER SHARE" which may be received by the
Corporation shall be determined as follows:
(I) The "NET CONSIDERATION PER SHARE"
shall mean the amount equal to the total amount of
consideration, if any, received by the Corporation
for the issuance of such warrants, options,
subscriptions, or other purchase rights or
convertible or exchangeable securities, plus the
minimum amount of consideration, if any, payable to
the Corporation upon exercise or conversion thereof,
divided by the aggregate number of shares of Common
Stock that would be issued if all such warrants,
options, subscriptions, or other purchase rights or
convertible or exchangeable securities were
exercised, exchanged, or converted.
(II) The "NET CONSIDERATION PER SHARE"
which may be received by the Corporation shall be
determined in each instance as of the date of
issuance of warrants, options, subscriptions, or
other purchase rights or convertible or exchangeable
securities without giving effect to any possible
future upward price adjustments or rate adjustments
which may be applicable with respect to such
warrants, options, subscriptions, or other purchase
rights or convertible or exchangeable securities.
(C) STOCK DIVIDENDS. In the event the
Corporation shall make or issue a dividend or other distribution
payable in Common Stock or securities of the Corporation convertible
into or otherwise exchangeable for the Common Stock of the Corporation,
then such Common Stock or other securities issued in payment of such
dividend shall be deemed to have been issued without consideration
(except for dividends payable in shares of Common Stock payable PRO
RATA to holders of Series D Preferred Stock and to holders of any other
class of stock).
<PAGE> 40
-6-
(D) CONSIDERATION OTHER THAN CASH. For
purposes of this Section 5(d), if a part or all of the consideration
received by the Corporation in connection with the issuance of shares
of the Common Stock or the issuance of any of the securities described
in this Section 5(d) consists of property other than cash, such
consideration shall be deemed to have a fair market value as is
reasonably determined in good faith by the Board of Directors of the
Corporation.
(E) EXCEPTIONS. This Section 5(d)(i)
shall not apply under any of the circumstances which would constitute
an Extraordinary Common Stock Event (as hereinafter defined in Section
5(d)(ii)). Further, the provisions of this Section 5(d) shall not
apply to (i) shares issued upon conversion of the Preferred Stock,
(ii) shares of Common Stock issued upon exercise of certain Common
Stock Purchase Warrants dated May 17, 1996 and July 24, 1996 issued to
Zero Stage Capital V, L.P. by Silknet Software, Inc., a New Hampshire
corporation ("SILKNET-NH"), and assumed by the Corporation pursuant to
a migratory merger agreement dated February 23, 1999 (the "MERGER
AGREEMENT"), (iii) shares of Common Stock issued upon exercise of
certain Common Stock Purchase Warrants dated on or about June 11, 1997
issued pursuant to the terms of the Series B Preferred Stock and
Warrant Purchase Agreement between Silknet-NH and the Investors named
therein and assumed by the Corporation pursuant to the Merger
Agreement, or (iv) options (and the shares issuable upon exercise
thereof) to purchase up to an aggregate of 4,750,000 shares of Common
Stock (including options outstanding on the date hereof) issued to
employees, officers or directors of, or consultants to, the
Corporation issued or reserved for issuance pursuant to any stock
option plan or agreement, stock purchase plan or agreement, stock
ownership plan, consulting agreement or such other options, warrants,
agreement, plans, or any increase in the number of shares of Common
Stock permitted under this subsection which is approved by a majority
of the Board of Directors (which approval includes the approval of a
majority of the directors elected by the holders of all series of
Preferred Stock outstanding). The number of shares in this Section (E)
shall be proportionately adjusted to reflect any stock dividend, stock
split or other form of recapitalization occurring after the date
hereof.
(ii) UPON EXTRAORDINARY COMMON STOCK EVENT. Upon
the happening of an Extraordinary Common Stock Event (as hereinafter defined),
the Conversion Value shall, simultaneously with the happening of such
Extraordinary Common Stock Event, be adjusted by multiplying the then effective
Conversion Value by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such Extraordinary
Common Stock Event and the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such Extraordinary Common Stock
Event, and the product so obtained shall thereafter be the applicable Conversion
Value. The Conversion Value shall be readjusted in the same manner upon the
happening of any successive Extraordinary Common Stock Event or Events.
"EXTRAORDINARY COMMON STOCK EVENT" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution
on outstanding Common Stock or on any class or series of preferred
stock, unless made PRO RATA to holders of Preferred Stock, (ii) a
subdivision of outstanding shares of Common Stock into a greater number
of shares of Common Stock, or (iii) a combination of outstanding shares
of the Common Stock into a smaller number of shares of Common Stock.
<PAGE> 41
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(e) DIVIDENDS. In the event the Corporation shall make or
issue, a dividend or other distribution with respect to the Common Stock payable
in (i) securities of the Corporation other than shares of Common Stock or (ii)
assets, then and in each such event the holders of Series D Preferred Stock
shall receive, at the same time such distribution is made with respect to Common
Stock, the number of securities or such other assets of the Corporation which
they would have received had their Series D Preferred Stock been converted into
Common Stock immediately prior to the date of such distribution.
(f) CAPITAL REORGANIZATION OR RECLASSIFICATION. If the
Common Stock issuable upon the conversion of the Series D Preferred Stock shall
be changed into the same or different number of shares of any class or classes
of stock, whether by capital reorganization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend or
distribution provided for elsewhere in this Section 5 or by a Reorganization),
then and in each such event, the holder of each share of Series D Preferred
Stock shall have the right thereafter to convert such share into the kind and
amount of shares of stock and other securities and property receivable upon such
capital reorganization, reclassification or other change by holders of the
number of shares of Common Stock into which such shares of Series D Preferred
Stock might have been converted immediately prior to such capital
reorganization, reclassification or other change.
(g) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If
at any time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Section 5) or a merger or
consolidation of the Corporation with or into another corporation, or the sale
of all or substantially all of the Corporation's properties and assets to any
other person, or the sale of a majority of the voting securities of the
Corporation in one transaction or a series of related transactions (any of which
events is herein referred to as a "REORGANIZATION"), then as a part of such
Reorganization, provision shall be made so that the holders of Series D
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series D Preferred Stock, the number of shares of stock or other securities or
property of the Corporation, or of the successor corporation resulting from such
Reorganization, to which such holder would have been entitled if such holder had
converted its shares of Series D Preferred Stock immediately prior to such
Reorganization. Notwithstanding the foregoing, a Reorganization shall not
include any reorganization, merger or consolidation involving (1) only a change
in the state of incorporation of the Corporation, (2) a merger of the
Corporation with or into a wholly-owned subsidiary of the Corporation that is
incorporated in the United States of America, or (3) an acquisition by merger,
reorganization or consolidation, of which the Corporation is substantively the
surviving corporation and operates as a going concern, of another corporation
that is engaged in a business similar or related to or complementary with the
business of the Corporation and which does not involve a recapitalization or
reorganization of the Series D Preferred Stock or Common Stock, and does not
involve (in a single transaction or series of related transactions) a transfer
of more than 51% of the voting power of the Corporation. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of Series D Preferred
Stock after the Reorganization, to the end that the provisions of this Section 5
(including adjustment of the Conversion Value then in effect and the number of
shares issuable upon conversion of the Series D Preferred Stock) shall be
applicable after that event in as nearly equivalent a manner as may be
practicable.
Except as otherwise provided in Section 3(b), upon the occurrence of a
Reorganization, under circumstances which make the preceding paragraph
applicable, each holder of Series D Preferred Stock shall have the option of
electing treatment for his shares of Series D Preferred Stock under either this
Section 5(g) or Section 3 hereof, notice of which election shall be submitted
in writing to the Corporation at its principal offices no later than five (5)
business
<PAGE> 42
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days before the effective date of such event.
(h) CERTIFICATE AS TO ADJUSTMENTS; NOTICE BY CORPORATION. In
each case of an adjustment or readjustment of the Conversion Rate, the
Corporation at its expense will furnish each holder of Series D Preferred Stock
with a certificate, executed by the president and chief financial officer (or in
the absence of a person designated as the chief financial officer, by the
treasurer) showing such adjustment or readjustment, and stating in detail the
facts upon which such adjustment or readjustment is based. Any adjustment shall
be calculated to five (5) decimal places.
(i) EXERCISE OF CONVERSION PRIVILEGE. To exercise its
conversion privilege, a holder of Series D Preferred Stock shall surrender the
certificate or certificates representing the shares being converted to the
Corporation at its principal office, and shall give written notice to the
Corporation at that office that such holder elects to convert such shares. Such
notice shall also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock issuable upon such
conversion shall be issued. The certificate or certificates for shares of Series
D Preferred Stock surrendered for conversion shall be accompanied by proper
assignment thereof to the Corporation or in blank. The date when such written
notice is received by the Corporation, together with the certificate or
certificates representing the shares of Series D Preferred Stock being
converted, shall be the "CONVERSION DATE." As promptly as practicable after the
Conversion Date, the Corporation shall issue and shall deliver to the holder of
the shares of Series D Preferred Stock being converted, or on its written order,
such certificate or certificates as it may request for the number of whole
shares of Common Stock issuable upon the conversion of such shares of Series D
Preferred Stock in accordance with the provisions of this Section 5, and cash,
as provided in Section 5(j), in respect of any fraction of a share of Common
Stock issuable upon such conversion. Such conversion shall be deemed to have
been effected immediately prior to the close of business on the Conversion Date,
and at such time the rights of the holder as holder of the converted shares of
Series D Preferred Stock shall cease and the person or persons in whose name or
names any certificate or certificates for shares of Common Stock shall be
issuable upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Common Stock represented thereby. The
Corporation shall pay any taxes payable with respect to the issuance of Common
Stock upon conversion of the Series D Preferred Stock, other than any taxes
payable with respect to income by the holders thereof.
(j) CASH IN LIEU OF FRACTIONAL SHARES. The Corporation may, if
it so elects, issue fractional shares of Common Stock or scrip representing
fractional shares upon the conversion of shares of Series D Preferred Stock. If
the Corporation does not elect to issue fractional shares, the Corporation shall
pay to the holder of the shares of Series D Preferred Stock which were converted
a cash adjustment in respect of such fractional shares in an amount equal to the
same fraction of the market price per share of the Common Stock (as determined
in a reasonable manner prescribed by the Board of Directors) at the close of
business on the Conversion Date. The determination as to whether or not any
fractional shares are issuable shall be based upon the total number of shares of
Series D Preferred Stock being converted at any one time by any holder thereof,
not upon each share of Series D Preferred Stock being converted.
(k) PARTIAL CONVERSION. In the event some but not all of the
shares of Series D Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Corporation shall execute and deliver
to or on the order of the holder, at the expense of
<PAGE> 43
-9-
the Corporation, a new certificate representing the number of shares of Series D
Preferred Stock which were not converted.
(l) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of Series D Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of Series D Preferred Stock, and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of all then outstanding shares of Series D Preferred Stock, the
Corporation shall take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
(m) MINIMUM ADJUSTMENT. Any provision of this Section 5 to the
contrary notwithstanding, no adjustment in the Conversion Value shall be made if
the amount of such adjustment would be less than 1% of the Conversion Value then
in effect, but any such amount shall be carried forward and an adjustment with
respect thereto shall be made at the time of and together with any subsequent
adjustment which, together with all amounts so carried forward, aggregates 1% or
more of the Conversion Value then in effect.
(n) MANDATORY CONVERSION. If at any time the Corporation shall
effect a Qualified Public Offering (as herein after defined), then upon the
effectiveness of such Qualified Public Offering, all outstanding shares of
Series D Preferred Stock shall automatically convert into shares of Common Stock
on the basis set forth in Section 5 hereof. For purposes hereof, the term
"QUALIFIED PUBLIC OFFERING" shall mean the effectiveness of a firmly
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "ACT"), covering the offer and
sale of Common Stock for the account of the Corporation in which the aggregate
net proceeds to the Corporation equal at least $20,000,000 and in which the
price per share of Common Stock is equal or greater than $9.16 (which amount
shall be subject to equitable adjustment wherever there shall occur a stock
split, combination, reclassification or other similar event involving the Common
Stock. Holders of shares subject to conversion shall deliver to the Corporation
at its principal office (or such other office or agency as the Corporation may
designate by notice in writing) during its usual business hours, the certificate
or certificates for shares of Series D Preferred Stock being converted, and the
Corporation shall issue and deliver to such holders certificates for the number
of shares of Common Stock to which such holders are entitled. Until such time as
holders of shares of Series D Preferred Stock shall surrender those certificates
therefor as provided above, such certificates shall be deemed to represent the
shares of Common Stock to which the holders shall be entitled upon the surrender
thereof.
The automatic conversion of the Series D Preferred Stock into shares of
Common Stock as provided above shall be subject in all circumstances to the
closing and consummation of a Qualified Public Offering.
<PAGE> 44
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6. NO REISSUANCE OF PREFERRED STOCK. No share or shares of Series
D Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be canceled
and retired and restored to the status of undesignated Preferred Stock. The
Corporation may from time to time take such appropriate corporate action as may
be necessary to reduce the authorized number of shares of Series D Preferred
Stock accordingly.
7. REDEMPTION
(a) OPTIONAL REDEMPTION UPON PUBLIC OFFERING. Effective upon
the closing of an initial public offering which does not constitute a Qualified
Public Offering ("NON-QUALIFIED PUBLIC OFFERING"), each holder may request the
Corporation to redeem the shares of Series D Preferred Stock held by such holder
at a redemption price (the "REDEMPTION PRICE") for each share of Series D
Preferred Stock redeemed pursuant to this Section 7(a) equal to the Series D
Liquidation Amount (including all accrued but unpaid dividends, whether or not
declared) with the amount of accrued dividends due thereon to be calculated and
paid through the date payment is actually made to the holders of Series D
Preferred Stock with respect to such redemption. The Corporation shall give the
holders of Series D Preferred Stock 30 days' written notice of the pendency of a
Non-Qualified Public Offering. Such notice shall be mailed by the Corporation,
postage prepaid, to each holder of record of Series D Preferred Stock at its
address shown on the records of the Corporation. Each holder of Series D
Preferred Stock shall notify the Corporation in writing within ten days of
receipt of the Corporation's notice if it intends to have its shares redeemed
under this Section 7(a). The Redemption Price shall be paid at the closing of
the Non-Qualified Public Offering and shall be paid in cash.
Nothing contained in this Section 7(a) shall in any way restrict or
prohibit the holders of Series D Preferred Stock from exercising their
conversion rights pursuant to Section 5 hereof prior to the effective date of
the redemption to be effected hereunder; provided, however, that any such
conversion under this Section 7(a) may be subject to the closing of the
Non-Qualified Public Offering.
(b) OPTIONAL REDEMPTION BY HOLDERS. At any time on or after
February 26, 2004, at the request of the holders of a majority of the then
outstanding shares of Series D Preferred Stock (the "REQUISITE HOLDERS"), the
Corporation shall, to the extent it may do so under applicable law, redeem,
within 60 days of the date of such request, from the holders the shares of
Preferred Stock held by the Requisite Holders and all other holders of Series D
Preferred Stock who elect to have their shares redeemed. In the event that the
shares of Series D Preferred Stock may not be redeemed because of a prohibition
under applicable law, such shares shall be redeemed as soon as such prohibition
no longer exists. The redemption price for each share of Series D Preferred
Stock redeemed pursuant to this Section 7(b) (the "OPTIONAL REDEMPTION PRICE")
shall be equal to the greater of (i) the Series D Liquidation Amount (including
all accrued and unpaid dividends, whether or not declared) with the amount of
all accrued dividends due thereon to be calculated and paid through the date
payment is actually made to the holders of Series D Preferred Stock and (ii) the
fair market value of such shares on the Redemption Date. The fair market value
of such shares shall be determined in good faith by the Board of Directors of
the Corporation as of the Redemption Date after taking into consideration all
factors which it deems appropriate, provided however, that such fair market
value shall take into account the valuations of comparable companies that are
publicly traded or privately held, but not including any discount attributable
to the fact that the Series D Preferred Stock represents a minority ownership
interest in the Corporation and no premium to reflect any special voting or
approval rights of the holders with respect to certain matters. The Board of
Directors shall notify the holders of Series D Preferred Stock as to its
determination of the fair market value of such shares not later than 30 days
prior to any given Redemption Date. The Requisite Holders shall have the right,
after receiving notice
<PAGE> 45
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of such determination, not later than five (5) business days before any given
Redemption Date, to contest such determination If the Requisite Holders disagree
with the Corporation's determination of fair market value, and are unable,
within five (5) days of their receipt of the Corporation's determination, to
reach agreement with the Corporation on the fair market value of the shares, the
fair market value shall be determined by appraisal as set forth below. All
appraisals shall be undertaken by two (2) appraisers, one (1) selected by the
Board of Directors of the Corporation and one (1) selected by the Requisite
Holders, each to be selected as soon as reasonably practicable after the
determination to make an appraisal has been made. The fair market value shall be
the fair market value arrived at by those appraisers within 30 days following
the appointment of the last appraiser to be appointed. In the event that the two
(2) appraisers agree in good faith on such fair market value within such a
period of time, such agreed value shall be used for these purposes. If the
appraisers cannot agree but their valuations are within 10% of each other, the
fair market value shall be the mean of the two (2) valuations. If the appraisers
cannot agree and the differences in the valuations are greater than 10%, the
appraisers shall select a third appraiser who will calculate fair market value
independently, and, except as provided in the next sentence, the fair market
value of the shares of Series D Preferred Stock shall be the average of the two
(2) fair market values arrived at by the appraisers who are closest in amount.
If one appraiser's valuation is the mean of the other two (2) valuations, such
mean valuation shall be the fair market value. In the event that the two
original appraisers cannot agree upon a third appraiser within ten (10) days
following the end of the 30-day period referred to above, then the third
appraiser shall be appointed by the American Arbitration Association in Boston,
Massachusetts. The redemption of the shares shall occur within ten days
following receipt of the results of the appraisal. If, following the final
determination of the Optional Redemption Price for the shares, any holder
previously requesting that its shares be redeemed shall choose not to sell any
or all of its shares, then such holder shall so notify the Corporation within
ten (10) days following receipt of the results of the appraisal. The expenses of
the appraiser chosen by the Corporation will be borne by it, the expenses of the
appraiser chosen by the holders will be borne by them, PRO RATA based on the
number of shares being redeemed, and the expenses of the third appraiser will be
borne 50% by the Corporation and 50% by the holders, PRO RATA based on the
number of shares being redeemed.
In the event that the holders of Series D Preferred Stock do not elect
to have the Series D Preferred Stock redeemed pursuant to this Section 7(b), the
shares of Series D Preferred Stock shall remain outstanding and subject to the
provisions hereof.
(c) REDEMPTION NOTICE. If an election is made pursuant to
Section 7(b) hereof, written notice of such election shall be mailed, postage
prepaid, to the Corporation, not later than 30 days before the date fixed for
each redemption pursuant to Section 7(b) (each of the dates fixed for redemption
and the extended redemption date is hereinafter referred to as a "REDEMPTION
DATE"). If such election is made and appropriate notice is given then, at least
15 days before the Redemption Date, written notice (hereinafter referred to as
the "REDEMPTION NOTICE") shall be mailed by the Corporation, postage prepaid, to
each holder of record of Series D Preferred Stock at its address shown on the
records of the Corporation; PROVIDED, HOWEVER, that the Corporation's failure to
give such Redemption Notice shall in no way affect its obligation to redeem the
shares of Series D Preferred Stock or the obligation of the holders to redeem
their shares of Series D Preferred Stock as provided in Section 7(b) hereof. The
Redemption Notice shall contain the following information:
(i) the number of shares of Series D Preferred
Stock held by the holder and the total number of shares of Series D Preferred
Stock held by all holders subject to redemption as of such Redemption Date; and
<PAGE> 46
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(ii) the Redemption Date and the applicable
Redemption Price.
Any holder of Series D Preferred Stock who wishes to do so may, by giving notice
to the Corporation at least five (5) business days prior to the Redemption Date,
convert into Common Stock any or all of the shares of Series D Preferred Stock
held by it and scheduled for redemption on such Redemption Date.
(d) SURRENDER OF CERTIFICATES. Each holder of shares of
Series D Preferred Stock to be redeemed under this Section 7 shall surrender the
certificate or certificates representing such shares to the Corporation at the
place designated in the Redemption Notice, and thereupon the Redemption Price
for such shares as set forth in this Section 7 shall be paid to the order of the
person whose name appears on such certificate or certificates. Irrespective of
whether the certificates therefor shall have been surrendered, all shares of
Series D Preferred Stock which are the subject of a Redemption Notice shall be
deemed to have been redeemed and shall be canceled effective as of the
Redemption Date, unless the Corporation shall default in the payment of the
applicable Redemption Price.
8. RESTRICTIONS AND LIMITATIONS.
(a) CORPORATE ACTION. Except as expressly provided herein
or as required by law, so long as any shares of Series D Preferred Stock remain
outstanding, the Corporation shall not, and shall not permit any subsidiary
(which shall mean any corporation, association or other business entity which
the Corporation and/or any of its other subsidiaries directly or indirectly owns
at the time more than fifty percent (50%) of the outstanding voting shares of
such corporation or trust, other than directors' qualifying shares) to, without
the approval by vote or written consent by the holders of at least two-thirds of
the then outstanding shares of Series D Preferred Stock, voting as a separate
class:
(i) redeem, purchase or otherwise acquire for
value (or pay into or set aside for a sinking fund for such purpose), or declare
and pay or set aside funds for the payment of any dividend with respect to, any
share or shares of capital stock other than shares of Preferred Stock in
accordance with their terms, except as required or permitted hereunder and
except for the purchase of shares of Common Stock from former directors,
officers, employees or consultants of the Corporation who acquired such shares
directly from the Corporation, if each such purchase is made pursuant to
contractual rights held by the Corporation relating to the termination of
employment or engagement of such former director, officer, employee or
consultant, as the case may be, and the purchase price does not exceed the
original issue price paid by such former director, officer, employee or
consultant, as the case may be, to the Corporation for such shares;
(ii) authorize or issue, or obligate itself to
authorize or issue, additional shares of Series D Preferred Stock;
(iii) authorize or issue, or obligate itself to
authorize or issue, any equity security senior to or on parity with the Series D
Preferred Stock as to liquidation preferences, redemption rights, dividend
rights, voting rights or otherwise, except such equity securities which are
authorized and designated by a majority of those directors who serve as
representatives of the holders of any series of Preferred Stock; or
(iv) amend, restate, modify or alter the by-laws
of the Corporation in any way which adversely affects the rights of the holders
of Series D Preferred Stock in a manner disproportionately different than any
other series of Preferred Stock.
<PAGE> 47
-13-
(b) AMENDMENTS TO CHARTER. The Corporation shall not
amend its Certificate of Incorporation without the approval, by vote or written
consent, by the holders of at least two-thirds of the then outstanding shares of
Series D Preferred Stock, voting separately as a class, if such amendment would
amend any of the rights, preferences, privileges of or limitations provided for
herein for the benefit of, or materially effect the value of, any shares of
Series D Preferred Stock. Without limiting the generality of the preceding
sentence, the Corporation will not amend its Certificate of Incorporation
without the approval by the holders of at least two-thirds of the then
outstanding shares of Series D Preferred Stock, if such amendment would:
(i) change the relative seniority rights of the
holders of Series D Preferred Stock as to the payment of dividends in relation
to the holders of any other capital stock of the Corporation, or create any
other class or series of capital stock entitled to seniority as to liquidation
preferences, redemption rights, dividend rights, voting rights or otherwise in
relation to the holders of Series D Preferred Stock;
(ii) reduce the amount payable to the holders of
Series D Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, or change the relative seniority
of the liquidation preferences of the holders of Series D Preferred Stock to the
rights upon liquidation of the holders of other capital stock of the
Corporation, or change the dividend rights of the holders of Series D Preferred
Stock;
(iii) cancel or modify the conversion rights of
the holders of Series D Preferred Stock provided for in Section 5 herein;
(iv) cancel or modify the rights of the holders
of Series D Preferred Stock provided for in this Section 8; or
(v) increase or decrease (other than by
redemption or conversion) the authorized number of shares of Series D Preferred
Stock.
Notwithstanding the foregoing provisions, the designation or
authorization of any equity security senior to or on a parity with the Series D
Preferred Stock as to liquidation preferences, voting rights, dividends or
redemption rights shall not be regarded as adversely affecting or amending the
rights of the Series D Preferred Stock so as to require a separate class vote of
the Series D Preferred Stock for the authorization of such equity security,
provided such equity security is authorized by a majority of the Board of
Directors, including a majority of the directors elected by holders of any
series of Preferred Stock.
9. NO DILUTION OR IMPAIRMENT. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of the Series D Preferred Stock set forth
herein, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate in order to protect the rights of the holders of Series D Preferred
Stock against dilution or other impairment. Without limiting the generality of
the foregoing, the Corporation (a) will not increase the par value of any shares
of stock receivable on the conversion of the Series D Preferred Stock above the
amount payable therefor on such conversion, (b) will take all such action as may
be necessary or appropriate in order that the Corporation may validly and
legally issue fully paid and non-
<PAGE> 48
-14-
assessable shares of stock on the conversion of all shares of Series D Preferred
Stock from time to time outstanding, or (c) will not consolidate with or merge
into any other person or permit any such person to consolidate with or merge
into the Corporation (if the Corporation is not the surviving person), unless
such other person shall expressly assume in writing and will be bound by all of
the terms of the Series D Preferred Stock set forth herein.
10. PREEMPTIVE RIGHTS.
(a) RIGHT OF PURCHASE. The Corporation hereby grants to each
holder of Series D Preferred Stock (the "HOLDERS") so long as it shall own, of
record or beneficially, any shares of Series D Preferred Stock or shares of
Common Stock issuable upon conversion thereof (the "CONVERSION SHARES"), the
right to purchase all or part of its pro rata share of New Securities (as
defined in Section 10(b) below) which the Corporation, from time to time,
proposes to sell and issue. A Holder's pro rata share, for purposes of this
preemptive right, is the ratio of the number of shares of issued or issuable
Conversion Shares which such Holder owns to the total number of shares of issued
or issuable upon conversion of shares of Preferred Stock, including, without
limitation, the Series D Preferred Stock, and shares of Common Stock then
outstanding. The Holders shall have a right of over-allotment pursuant to this
Section 10 such that to the extent a Holder does not exercise its preemptive
right in full hereunder, such additional shares of New Securities which such
Holder did not purchase may be purchased by the other Holders in proportion to
the total number of shares of issued or issuable Conversion Shares which each
such other Holder owns compared to the total number of shares of issued or
issuable Conversion Shares which all such other Holders own.
(b) DEFINITION OF NEW SECURITIES. "NEW SECURITIES" shall mean
any capital stock of the Corporation whether now authorized or not, and rights,
options or warrants to purchase capital stock, and securities of any type
whatsoever that are, or may become convertible into or exchangeable for capital
stock, issued on or after the date hereof; PROVIDED that the term "NEW
SECURITIES" does not include (i) shares of Common Stock issuable upon conversion
of the Preferred Stock, (ii) Common Stock issued as a stock dividend to holders
of Common Stock or upon any stock split, subdivision or combination of shares of
Common Stock, (iii) Preferred Stock issued as a dividend to holders of Preferred
Stock or upon any stock split, subdivision or combination of Preferred Stock,
(iv) the aggregate number of shares of Common Stock issuable upon exercise of
options and warrants referred to in Section 5(d)(i)(E) hereof, (v) securities
issued in connection with the acquisition by the Corporation of any other
corporation or business concern, whether by acquisition of assets or stock, or
(vi) securities authorized for issuance in a joint venture or strategic alliance
by all of the members of the Board of Directors as being exempt from the
definition of New Securities and such exemption is determined by all of the
Board of Directors to be in the best interests of the Corporation.
(c) NOTICE FROM THE CORPORATION. In the event the Corporation
proposes to undertake an issuance of New Securities, it shall give each Holder
written notice of its intention, describing the type of New Securities and the
price and the terms upon which the Corporation proposes to issue the same. Each
Holder shall have ten (10) days from the date of receipt of any such notice to
agree to purchase up to the Holder's pro rata share of such New Securities (and
any over-allotment amount pursuant to the operation of Section 10(b) hereof) for
the price and upon the terms specified in the notice by giving written notice to
the Corporation and stating therein the quantity of New Securities to be
purchased. The closing of the purchase of the New Securities shall be at the
Corporation's principal place of business within 15 days following the
expiration of the ten-day period, or at such other time or place as the
Corporation and the Holders may determine.
<PAGE> 49
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(d) SALE BY THE CORPORATION. In the event any Holder fails to
exercise in full its preemptive right (after giving effect to the over-allotment
provision of Section 10(a) hereof), the Corporation shall have 120 days
thereafter to sell the New Securities with respect to which the Holder's option
was not exercised, at a price and upon terms no more favorable to the purchasers
thereof than specified in the Corporation's notice. To the extent the
Corporation does not sell all the New Securities offered within said 120-day
period, the Corporation shall not thereafter issue or sell such New Securities
without first again offering such securities to the Holders in the manner
provided above.
(e) TERMINATION OF RIGHTS. The rights granted to the Holders
under this Section 10 shall expire immediately prior to, and shall not apply in
connection with, the consummation of the first Qualified Public Offering.
(f) AMENDMENTS AND WAIVERS. The rights of the Holders
contained in this Section 10 may be amended, modified and waived with the
written consent of the Holders of at least two-thirds of the issued or issuable
Conversion Shares.
11. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Corporation of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger of the Corporation, or any transfer of all or substantially all of
the assets of the Corporation to any other corporation, or any other entity or
person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, then and in each such event the Corporation shall
mail or cause to be mailed to each holder of Series D Preferred Stock a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right and a description of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, merger, dissolution, liquidation
or winding up is expected to become effective and (iii) the time, if any, that
is to be fixed, as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, transfer, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least ten
(10) days prior to the date specified in such notice on which such action is to
be taken.
<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
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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 Operating
Officer of the Corporation. He shall also 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,
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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.
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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<PAGE> 16
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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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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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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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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Register of Amendments to the By-Laws
Date Section Affected Change
- ---- ---------------- ------
<PAGE> 1
EXHIBIT 4.03
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SILKNET
SOFTWARE, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE
HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT
A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF OR RECOMMENDED OR GIVEN APPROVAL TO ANY PERSON
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE OR CAUSE TO BE MADE TO ANY
PROSPECTIVE PURCHASER CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
COMMON STOCK PURCHASE WARRANT
Warrant No. 1 Number of Shares 250,000
SILKNET SOFTWARE, INC.
Void after , 2002
1. ISSUANCE. This Warrant is issued to Zero Stage Capital V,
L.P. by Silknet Software, Inc., a New Hampshire corporation (hereinafter with
its successors called the "Company").
2. PURCHASE PRICE; NUMBER OF SHARES. Subject to the terms and
conditions hereinafter set forth, the registered holder of this Warrant (the
"Holder"), commencing on the date hereof, is entitled upon surrender of this
Warrant with the subscription form annexed hereto duly executed, at the office
of the Company, 1001 Elm Street, Manchester, New Hampshire 03101, or such other
office as the Company shall notify the Holder of in writing, to purchase from
the Company at a price per share (the "Purchase Price") of $0.50, 250,000 fully
paid and nonassessable shares of Common Stock, no par value, of the company (the
"Common Stock").
<PAGE> 2
Until such time as this Warrant is exercised in full or expires, the Purchase
Price and the securities issuable upon exercise of this Warrant are subject to
adjustment as hereinafter provided.
3. PAYMENT OF PURCHASE PRICE. The Purchase Price may be paid (i) in
cash or by check, (ii) by the surrender by the Holder to the Company of any
promissory notes or other obligations issued by the Company, with all such notes
and obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) through delivery by the Holder to the Company of other
securities issued by the Company, with such securities being credited against
the Purchase Price in an amount equal to the fair market value thereof, as
determined in good faith by the Board of Directors of the Company (the "Board"),
or (iv) by any combination of the foregoing. The Board shall promptly respond in
writing to an inquiry by the Holder as to the fair market value of any
securities the Holder may wish to deliver to the company pursuant to clause
(iii) above.
4. NET ISSUE ELECTION. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
------
A
where X = the number of shares to be issued to the Holder pursuant to
this Section 4.
Y = the number of shares covered by this Warrant in respect of
which the net issue election is made pursuant to this Section
4.
A = the fair market value of one share of Common Stock, as
determined in good faith by the Board, as at the time the net
issue election is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time
the net issue election is made pursuant to this Section 4.
The Board shall promptly respond in writing to an inquiry by the Holder as to
the fair market value of one share of Common Stock.
5. PARTIAL EXERCISE. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.
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<PAGE> 3
6. ISSUANCE DATE. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
7. EXPIRATION DATE. This Warrant shall expire at the close of business
on , 2002, and shall be void thereafter.
8. RESERVED SHARES, VALID ISSUANCE. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be issued
pursuant to the exercise of this Warrant will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
9. DIVIDENDS. If after the date hereof (the "Original Issue Date") the
Company shall subdivide the Common Stock, by split-up or otherwise, or combine
the Common Stock, or issue additional shares of Common Stock in payment of a
stock dividend on the Common Stock, the number of shares issuable on the
exercise of this Warrant shall forthwith be proportionately increased in the
case of a subdivision or stock dividend, or proportionately decreased in the
case of a combination, and the Purchase Price shall forthwith be proportionately
decreased in the case of a subdivision or stock dividend, or proportionately
increased in the case of a combination. Prior to an initial public offering of
equity securities of the Company, the Company shall not pay any dividend or make
any other distribution upon the Common Stock payable in cash, property or
securities of the Company other than Common Stock or in securities of a
corporation other than the Company.
10. RECLASSIFICATIONS. If after the Original Issue Date there shall be
any reclassification, capital reorganization or change of the Common Stock
(other than as a result of a subdivision, combination or stock dividend provided
in Section 9 hereof), or any sale or conveyance to another corporation or other
business organization of all or substantially all of the assets of the Company,
then, as a condition of such reclassification, reorganization, change, sale or
conveyance, lawful provisions shall be made, and duly executed documents
evidencing the same from the Company or its successor shall be delivered to the
Holder, so that the Holder shall thereafter have the right to purchase, at a
total price not to exceed that payable upon the exercise of this Warrant in
full, the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, reorganization, change, sale or
conveyance by a holder of the number of shares of Common Stock which might have
been purchased by the Holder immediately prior to such reclassification,
reorganization, change, sale or conveyance, and in any such case appropriate
provisions shall be made with respect to the rights and interest of the Holder
to the end that the provision hereof (including without limitation, provisions
for the adjustment of the Purchase Price and the number of shares issuable
hereunder) shall thereafter be applicable in relation to any shares of stock or
other securities and property thereafter deliverable
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<PAGE> 4
upon exercise hereof, provided that the holder must exercise this Warrant or
consent to the expiration of this Warrant immediately prior to any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or change of the
outstanding Common Stock or a consolidation or merger into a subsidiary of the
Corporation).
11. ADJUSTMENTS FOR ISSUANCES BELOW PURCHASE PRICE. In case the Company
shall at any time or from time to time after the Original Issue Date issue or
sell any Common Stock or any securities convertible into or exchangeable for
Common Stock (other than shares issued in transactions to which Sections 9 or 10
of this Warrant apply) for a consideration per share less than the Purchase
Price in effect for this Warrant immediately prior to the time of such issue or
sale, then forthwith upon such issue or sale, the Purchase Price shall (until
another such issue or sale) be reduced to the price at which the Company issued
or sold such securities. Further, the number of shares purchasable hereunder
shall be increased to a number determined by dividing (i) the number of shares
purchasable hereunder immediately prior to such issue or sale, multiplied by the
Purchase Price hereunder immediately prior to such event, by (ii) the Purchase
Price in effect immediately after the foregoing adjustment. If the price per
share for which Common Stock is deliverable upon such conversion or exchanged
(determined by dividing (i) the total minimum amount received or receivable by
the Company in consideration of the issue or sale of such convertible or
exchangeable shares or obligations, plus the total minimum amount of premiums,
if any, payable to the Company upon conversion or exchange, by (ii) the total
number of shares of Common Stock necessary to effect the conversion or exchange
of all such convertible or exchangeable shares or obligations) shall be less
than the Purchase Price in effect immediately prior to the time of such issue or
sale, then such issue or sale shall be deemed to be an issue or sale (as of the
date of issue or sale of such convertible or exchangeable share or obligations)
of the total maximum number of shares of Common Stock necessary to effect the
conversion or exchange of all such convertible or exchangeable shares or
obligations, and the total minimum amount received or receivable by the Company
in consideration of the issue or sale of such convertible or exchangeable shares
or obligations, plus the total minimum amount of premiums, if any, payable to
the Company upon exchange or conversion, shall be deemed to be the consideration
actually received (as of the date of the issue or sale of such convertible or
exchangeable shares or obligations) for the issue or sale of such Common Stock.
Notwithstanding anything to the contrary contained in this Section 11, no
adjustment to Purchase Price or number of shares purchasable hereunder shall be
made as a result of the grant of options to purchase Common Stock to employees
of the Company or the issuance of shares of Common Stock upon exercise thereof.
12. FRACTIONAL SHARES. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant as an entirety, the Holder would, except as provided in this Section 12,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.
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<PAGE> 5
13. CERTIFICATE OF ADJUSTMENT. Whenever the Purchase Price is adjusted,
as herein provided, the Company shall promptly deliver to the Holder a
certificate of a firm of independent public accountants setting forth the
Purchase Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment.
14. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares or stock of any class or
any other securities or property, or to receive any other right,
(b) any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger involving the
Company, or sale or conveyance of all or substantially all of its assets, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, then and in each such event the Company will mail or
cause to be mailed to the Holder a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right, or (ii) the date on which any such reclassification, reorganization,
consolidation, merger, sale or conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record in respect of such event are to be determined. Such notice
shall be mailed at least 20 days prior to the date specified in such notice on
which any such action is to be taken.
15. AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the Holder.
16. WARRANT REGISTER; TRANSFERS, ETC.
A. The Company will maintain a register containing the name and
address of the registered Holder of the Warrant. The Holder may change
its address as shown on the warrant register by written notice to the
Company requesting such change. Any notice or written communication
required or permitted to be given to the holder may be given by
certified mail or delivered to the Holder at its address as shown on the
warrant register.
B. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and
denomination and deliver the same (i) in exchange and substitution for
and upon surrender and cancellation of any mutilated Warrant, or (ii) in
lieu of any Warrant lost, stolen or destroyed, upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft or destruction
of such Warrant (including a reasonably detailed affidavit with respect
to the circumstances of any loss, theft or destruction) and of indemnity
reasonably satisfactory to the Company, provided
-5-
<PAGE> 6
however, that so long as Zero Stage Capital V, L.P. is the registered
holder of this Warrant, no indemnity shall be required other than its
written agreement to indemnify the Company against any loss arising from
the issuance of such new warrant.
17. NO IMPAIRMENT. The Company will not, by amendment of its
Certificate of Incorporation or through any reclassification, capital
reorganization, consolidation, merger, sale or conveyance of assets,
dissolution, liquidation, issue or sale of securities or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of this Warrant, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder.
18. NON-TRANSFERABILITY. This Warrant shall not be transferable except
pursuant to a bankruptcy, reorganization, liquidation, or other event affecting
the status of the holder as a going concern.
19. GOVERNING LAW. The provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the State of
New Hampshire.
20. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the
Company's successors and assigns and shall inure to the benefit of the holder's
successors, legal representatives and permitted assigns.
21. BUSINESS DAYS. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal holiday in New Hampshire, then such action may be
taken or right may be exercised on the next succeeding day which is not a
Saturday or Sunday or such a legal holiday.
Dated: 1996 SILKNET SOFTWARE, INC.
(Corporate Seal) By:
--------------------------------
Attest: Title:
-----------------------------
- ------------------------
-6-
<PAGE> 7
Subscription
To: Date:
---------------------------- ------------------------
The undersigned hereby subscribes for shares of Common Stock overed
by this Warrant. The manner of payment of the exercise price of this Warrant is
as follows: . The certificate(s) for such shares shall be
issued in the name of the undersigned or as otherwise indicated below:
---------------------------------------
Signature
---------------------------------------
Name for Registration
---------------------------------------
Mailing Address
-7-
<PAGE> 8
Net Issue Election Notice
To: Date:
----------------------------- ---------------------------
The undersigned hereby elects under Section 4 to surrender the right to
purchase shares of Common Stock pursuant to this Warrant. The certificate(s) for
the shares issuable upon such net issue election shall be issued in the name of
the undersigned or as otherwise indicated below.
---------------------------------------
Signature
---------------------------------------
Name for Registration
---------------------------------------
Mailing Address
-8-
<PAGE> 1
EXHIBIT 4.04
THIS WARRANT AND THE UNDERLYING SHARES OF COMMON STOCK ISSUED UPON ITS EXERCISE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT") OR APPLICABLE STATE SECURITIES LAWS, AND NO SALE OR TRANSFER THEREOF MAY
BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL FOR THE HOLDER,
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
ACT.
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE
HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT
A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF OR RECOMMENDED OR GIVEN APPROVAL TO ANY PERSON,
SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE OR CAUSE TO BE MADE TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
No. W- June 11, 1997
SILKNET SOFTWARE, INC.
Common Stock Purchase Warrant
SILKNET SOFTWARE, INC., a New Hampshire corporation (the "Company"), hereby
certifies that, for value received, is entitled, subject to the terms set forth
below, to purchase from the Company at any time or from time to time before 5:00
P.M., Boston, Massachusetts time, on June 11, 2003, fully paid and nonassessable
shares of Common Stock, no par value per share, of the Company, at a purchase
price per share of $1.10 (such purchase price per share as adjusted from time to
time as herein provided is referred to herein as the "Purchase Price"). The
number and character of such shares of Common Stock and the Purchase Price are
subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requries, have the following respective meanings:
<PAGE> 2
-2-
(a) The term "Company" shall include Silknet Software, Inc.
and any corporation which shall succeed or assume the obligations of the Company
hereunder.
(b) The term "Common Stock" includes the Company's Common
Stock, no par value per share, as authorized on the date hereof and any other
securities into which or for which any of such Common Stock may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale
of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the holders of the Warrant at any time shall be
entitled to receive, or shall have received, on the exercise of the Warrant, in
lieu of or in addition to Common Stock, or which at any time shall be issuable
or shall have been issued in exchange for or in replacement of Common Stock or
Other Securities pursuant to Section 4 or otherwise.
(d) The term "Warrant" shall mean this Common Stock Purchase
Warrant.
(e) The term "Warrant Shares" shall mean the shares of Common
Stock issuable upon exercise of this Warrant.
1. EXERCISE OF WARRANT.
1.1 FULL EXERCISE. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of subscription at
the end hereof duly executed by such holder, to the Company at its principal
office, accompanied by payment either (i) in cash or by certified or official
bank check payable to the order of the Company or by wire transfer in
immediately available funds, in the amount obtained by multiplying the number of
shares of Common Stock for which this Warrant is then exercisable by the
Purchase Price then in effect or (ii) pursuant to the provisions of Section 1.3
hereof.
1.2 PARTIAL EXERCISE. This Warrant may be exercised in part by
surrender of this Warrant in the manner and at the place provided in Section
1.1, except that the amount payable by the holder on such partial exercise shall
be the amount obtained by multiplying (a) the number of shares of Common Stock
designated by the holder in the subscription at the end hereof by (b) the
Purchase Price then in effect. On any such partial exercise the Company at its
expense will forthwith issue and deliver to or upon the order of the holder
hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof
or as such holder (upon payment by such holder of any applicable transfer taxes)
may request, calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock for which such Warrant or Warrants may still be
exercised.
1.3 NET ISSUANCE. At the option of the holder hereof, the
aggregate Purchase Price may be paid by the surrender of all or a portion of the
Warrant ("Net Issuance"). If the
<PAGE> 3
-3-
Net Issuance method is elected on the attached form of subscription, the Company
will, as promptly as practicable, issue certificates representing Common Stock
to the holder hereof in accordance with the following formula:
X = (P)(A-B)
------
A
Where: X = the number of shares of common stock to be issued for the
portion of the Warrant being exercised.
P = the number of Warrant Shares covered by the portion of the
Warrant being exercised.
A = the Fair Market Value (defined below) of one (1) share of
the Common Stock multiplied by the number of shares of common
stock issuable upon the purchase of one Warrant Share on the
date of exercise.
B = the Purchase Price for one share of Common Stock.
As used herein, "Fair Market Value" shall mean with respect to each
share of Common Stock as of a date specified below (each, a "Determination
Date"):
(i) if the Determination Date is the date of the
closing of the sale of shares of common stock in a public offering (a
"Public Offering") pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "1933 Act"), then the
Fair Market Value shall be deemed to be the initial public offering
price (before deducting commissions, discounts or expenses) at which
the common stock is sold in such Public Offering;
(ii) if the Determination Date is subsequent to a
Public Offering, the Fair Market Value shall be deemed to be the
average of the closing prices over a ten (10) day period ending two
days before the Determination Date;
(iii) if at any time the common stock has not yet
been sold to the public, the Fair Market Value shall be the highest
price per share which the Company could obtain from a willing buyer
(not a current employee or director) for Common Stock sold by the
Company, from authorized but unissued shares, as determined in good
faith by its board of Directors, unless the company shall become
subject to a merger, acquisition or other consolidation pursuant to
which the company is not the surviving party, in which case the Fair
Market Value shall be deemed to be the value received by the holders of
Common Stock pursuant to such merger or acquisition.
<PAGE> 4
-4-
1.4 COMPANY ACKNOWLEDGMENT. The Company will, at the time of
the exercise of the Warrant, upon the request of the holder hereof, acknowledge
in writing its continuing obligation to afford to such holder any rights to
which such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such holder any such rights.
1.5 TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or
trust company shall have been appointed as trustee for the holders of the
Warrants pursuant to Section 3.2, such bank or trust company shall have all the
powers and duties of a warrant agent appointed pursuant to Section 10 and shall
accept, in its own name for the account of the Company or such successor person
as may be entitled thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant to this
Section 1.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Common
Stock (or Other Securities) to which such holder shall be entitled on such
exercise, plus, in lieu of any fractional share to which the holder would
otherwise be entitled, cash equal to such fraction multiplied by the then
current market value of one full share, together with any other stock or other
securities and property (including cash, where applicable) to which such holder
is entitled upon such exercise pursuant to Section 1 or otherwise.
3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.
3.1 REORGANIZATION. In case at any time or from time to time,
the Company shall (a) effect a reorganization, (b) consolidate with or merge
into any other person, or (c) transfer all or substantially all of its
properties or assets to any other person under any plan or arrangement
contemplating the dissolution of the Company, then, in each such case, the
holder of this Warrant, on the exercise hereof as provided in Section 1 at any
time after the consummation of such reorganization, consolidation or merger or
the effective date of such dissolution as the case may be, shall receive, in
lieu of the Common Stock (or Other Securities) issuable on such exercise prior
to such consummation or such effective date, the stock and other securities and
property (including cash) to which such holder would have been entitled upon
such consummation or in connection with such dissolution, as the case may be, if
such holder had so exercised this Warrant immediately prior thereto, all subject
to further adjustment thereafter as provided in Section 4.
<PAGE> 5
-5-
3.2 DISSOLUTION. In the event of any dissolution of the
Company following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its expenses deliver or
cause to be delivered the stock and other securities and property (including
cash, where applicable) receivable by the holders of the Warrants after the
effective date of such dissolution pursuant to this Section 3 to a bank or trust
company having its principal office in Boston, Massachusetts, as trustee for the
holder or holders of the Warrants.
3.3 CONTINUATION OF TERMS. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the securities and other
property receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and shall be
binding upon the issuer of any such securities, including, in the case of any
such transfer, the person acquiring all or substantially all of the properties
or assets of the Company, whether or not such person shall have expressly
assumed the terms of this Warrant as provided in Section 5.
4. ADJUSTMENT FOR STOCK DIVIDENDS AND STOCK SPLITS. In the event that
the Company shall (i) issue additional shares of Common Stock as a dividend or
other distribution on outstanding Common Stock, (ii) subdivide its outstanding
shares of common Stock, (iii) combine its outstanding shares of the Common Stock
into a smaller number of shares of the Common Stock or (iv) otherwise effect a
reorganization or recapitalization, then, in each such event, the Purchase Price
shall, simultaneously with the happening of such event, be adjusted by
multiplying the Purchase Price in effect immediately prior to such event by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such event and the denominator of which shall
be the number of shares of Common Stock outstanding immediately after such
event, and the product so obtained shall thereafter be the Purchase Price then
in effect. The Purchase Price, as so adjusted, shall be readjusted in the same
manner upon the happening of any successive event or events described herein in
this Section 4. The holder of this Warrant shall thereafter, on the exercise
hereof as provided in Section 1, be entitled to receive that number of shares of
Common stock determined by multiplying the number of shares of Common Stock
which would otherwise (but for the provisions of this Section 4) be issuable on
such exercise by a fraction of which (i) the numerator is the Purchase Price
which would otherwise (but for the provisions of this Section 4) be in effect,
and (ii) the denominator is the Purchase Price in effect on the date of such
exercise.
5. NO IMPAIRMENT. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Warrants, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be
<PAGE> 6
-6-
necessary or appropriate in order to protect the rights of the holders of
the Warrants against impairment. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any shares of
stock receivable on the exercise of the Warrants above the amount payable
therefor on such exercise, (b) will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of stock on the exercise of all Warrants from time to
time outstanding, and (c) will not transfer all or substantially all of its
properties and assets to any other person (corporate or otherwise), or
consolidate with or merge into any other person or permit any such person to
consolidate with or merge into the Company (if the Company is not the surviving
person), unless such other person shall expressly assume in writing and will be
bound by all the terms of the Warrants.
6. NOTICES OF RECORD DATE, ETC. In the event of
(a) any taking by the Company of a record of the holders of
any class or securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution,
or any right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to
receive any other right, or
(b) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the
Company or any transfer of all or substantially all the assets of the
Company to or consolidation or merger of the Company with or into any
other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) any proposed issue or grant by the Company of any shares
of stock of any class or any other securities, or any right or option
to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities (other than the issue of Common Stock
on the exercise of the Warrants),
then and in each such event the Company will mail or cause to be mailed to each
holder of a Warrant a notice specifying (i) the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and stating
the amount and character of such dividend, distribution or right, (ii) the date
on which any such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up, and (iii) the amount and
character of any stock or other securities, or rights or
<PAGE> 7
-7-
options with respect thereto, proposed to be issued or granted, the date of such
proposed issue or grant and the persons or class of persons to whom such
proposed issue or grant is to be offered or made. Such notice shall be mailed at
least 10 days prior to the date specified in such notice on which any such
action is to be taken.
7. RESERVATION OF STOCK, ETC., ISSUABLE ON EXERCISE OF WARRANTS. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of the Warrants, all shares of common Stock (or other
Securities) from time to time issuable on the exercise of the Warrants. In the
case of any adjustment in the shares of Common Stock issuable on the exercise of
this Warrant, the Company will furnish to the holder a certificate of its chief
financial officer setting forth how such adjustment was calculated.
8. EXCHANGE OF WARRANTS. On surrender for exchange of any Warrant,
properly endorsed, to the Company, the Company at its expense will issue and
deliver to or on the order of the holder thereof a new Warrant or Warrants of
like tenor, in the name of such holder or as such holder (on payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
9. REPLACEMENT OF WARRANTS. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant,
on delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such warrant, the Company at its expense will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. WARRANT AGENT. The Company may, by written notice to each holder of
a Warrant, appoint an agent having an office in Boston, Massachusetts for the
purpose of issuing Common Stock (or Other Securities) on the exercise of the
Warrants pursuant to Section 1, exchanging Warrants pursuant to Section 8, and
replacing Warrants pursuant to Section 9, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
11. REMEDIES. The Company stipulates that the remedies at law of the
holder of this warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
12. NEGOTIABILITY, ETC. This Warrant is issued upon the following
terms, to all of which each holder or owner hereof by the taking hereof consents
and agrees:
<PAGE> 8
-8-
(a) title to this Warrant may be transferred by endorsement
(by the holder hereof executing the form of assignment at the end
hereof) and delivery in the same manner as in the case of a negotiable
instrument transferable by endorsement and delivery, subject to
compliance with all applicable Federal and state securities laws;
(b) any person in possession of this Warrant properly endorsed
is authorized to represent himself as absolute owner hereof and is
empowered to transfer absolute title hereto by endorsement and delivery
hereof to a bona fide purchaser hereof for value; each prior taken or
owner waives and renounces all of this equities or rights in this
Warrant in favor of each such bona fide purchaser, and each such bona
fide purchaser shall acquire absolute title hereto and to all rights
represented hereby; and
(c) until this Warrant is transferred on the books of the
Company, the Company may treat the registered holder hereof as the
absolute owner hereof for all purposes, notwithstanding any notice to
the contrary.
13. NOTICES, ETC. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to the
Company an address, then to, and at the address of, the last holder of this
Warrant who has so furnished an address to the Company.
14. STOCK PURCHASE AGREEMENT. This Warrant is subject to, and entitled
to the benefits of, all of the terms, provisions and conditions of that certain
Series B Preferred Stock and Warrant Purchase Agreement dated as of June 11,
1997 (the "Purchase Agreement") between the Company and the original holder
hereof, which Agreement is hereby incorporated herein by reference and made a
part hereof and to which Agreement reference is hereby made for a full
description of the rights, limitation of rights, obligations, duties and
immunities hereunder of the Company and the holder of this Warrant. Copies of
the Agreement are on file at the principal office of the Company.
15. MISCELLANEOUS. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with an
governed by the laws of the State of Wisconsin. The headings in this Warrant are
for purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof. This Warrant is being executed as an instrument under seal.
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
Dated: June 11, 1997 SILKNET SOFTWARE, INC.
By:
------------------------------------
Name: James C. Wood
Title: President
<PAGE> 9
-9-
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: SILKNET SOFTWARE, INC.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder shares of
Common Stock of Silknet Software, Inc., and herewith makes payment of the
aggregate Purchase Price therefor by (cross out inapplicable choices)
cash/check/the Net Issuance method, and requests that the certificates
for such shares be issued in the name of, and delivered to whose address
is .
---------------
Dated:
--------------------- -----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
Net Issuance Election Notice
TO: SILKNET SOFTWARE, INC.
The undersigned hereby elects pursuant to Section 1.3 to surrender the
right to purchase shares of common stock pursuant to this Warrant.. The
certificate(s) for the shares issuable upon such net issuance election
shall be issued in the name of the undersigned.
-----------------------------------------
(Signature must conform to name of holder
as specified on the face of the Warrant)
<PAGE> 10
-10-
FORM OF ASSIGNMENT
(To be signed only on transfer of warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto ________ the right represented by the within Warrant to purchase
shares of Common Stock of Silknet Software, Inc. to which the within
Warrant relates, and appoints __________ as its Attorney to transfer such
right on the books of Silknet Software, Inc. with full power of
substitution in the premises.
Dated:
------------------------ -------------------------------------------
(Signature must conform to name of holder as
specified on the face of the Warrant)
------------------------------------------
(Address)
Signed in the presence of:
- ---------------------------
<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 Five Hundred Thousand (2,500,000) (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
-2-
(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
-3-
(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;
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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,
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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. Notwithstanding anything to
the contrary set forth in this Plan or in any Employee Stock Option Agreement,
the Board shall have the right at any time (including, without limitation, at
any time prior to an event described in subsections (a) or (b) of Section 6) to
accelerate the date by which any Option (or any remaining installment or other
portion thereof) must be exercised. Except to the extent that an optionee's
Employee Stock Option Agreement provides for a shorter notice period, written
notice of such acceleration shall be given to the optionee not less than ten
(10) days prior to the accelerated exercise deadline.
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
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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.
<PAGE> 1
EXHIBIT 10.02
SILKNET SOFTWARE, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE AND ELIGIBILITY
The purpose of this 1999 Stock Option and Incentive Plan (the "PLAN")
of Silknet, Inc. (the "COMPANY") is to provide incentive and non-qualified stock
options, stock issuances and other equity interests in the Company (each, an
"AWARD") to employees, officers, directors, consultants and advisors of the
Company and its Subsidiaries, all of whom are eligible to receive Awards under
the Plan. Any person to whom an Award has been granted under the Plan is called
a "PARTICIPANT". Additional definitions are contained in Section 11.
2. ADMINISTRATION
a. ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered
by the Board of Directors of the Company (the "BOARD"). The Board, in its sole
discretion, shall have the authority to grant and amend Awards, to adopt, amend
and repeal rules relating to the Plan and to interpret and correct the
provisions of the Plan and any Award. The Board shall have authority, subject to
the express limitations of the Plan, to construe and determine the respective
option agreement, Awards and the Plan, to prescribe, amend and rescind rules and
regulations relating to the Plan and any Awards, to determine the terms and
provisions of the respective option agreements and Awards, which need not be
identical, to make all other determinations in the judgment of the Board of
Directors necessary or desirable for the administration and interpretation of
the Plan. The Board may correct any defect or supply any omission or reconcile
any inconsistency in the Plan or in any option agreement or Award in the manner
and to the extent it shall deem expedient to carry the Plan, any option
agreement or Award into effect and it shall be the sole and final judge of such
expediency. All decisions by the Board shall be final and binding on all
interested persons. Neither the Company nor any member of the Board shall be
liable for any action or determination relating to the Plan.
b. APPOINTMENT OF COMMITTEE. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "COMMITTEE"). All references in the
Plan to the "BOARD" shall mean such Committee or the Board.
c. DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to grant Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of Awards to be granted and the maximum number of shares issuable to any one
Participant pursuant to Awards granted by such executive officers.
d. APPLICABILITY OF RULE 16b-3. Those provisions of the Plan which
makes express reference to Rule 16b-3 promulgated under the Securities and
Exchange Act of 1934 (the "EXCHANGE ACT") or, any successor rules ("RULE 16B-3")
or which are required in order for
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certain option transactions to qualify for exemption under Rule 16b-3 shall
apply only to such persons as are required to file reports under Section 16 (a)
of the Exchange Act (a "REPORTING PERSON").
e. APPLICABILITY OF SECTION 162 (m). Those provisions of the Plan which
are required by or make express reference to Section 1262 (m) of the Internal
Revenue Code or any regulations thereunder, or any successor section of the Code
or regulations thereunder ("SECTION 162 (m)") shall apply only upon the
Company's becoming a company that is subject to Section 162 (m). Notwithstanding
any provisions in this Plan to the contrary, whenever the Board is authorized to
exercise its discretion in the administration or amendment of this Plan or any
Award hereunder or otherwise, the Board may not exercise such discretion in a
manner that would cause any outstanding Award that would otherwise qualify as
performance-based compensation under Section 162 (m) to fail to so qualify under
Section 162 (m).
f. GRANT OF OPTIONS TO DIRECTORS. The selection of a director or an
officer (as the terms "director" and "officer" are defined for purposes of Rule
16b-3) as a participant, the timing of the option grant or Award, the exercise
price of the option or the sale price of the Award and the number of shares for
which an option or Award may be granted to such director or officer shall be
determined either (i) by the Board, of which all members shall be "disinterested
persons" (as hereinafter defined), or (ii) by a committee of two or more
directors having full authority to act in the matter, of which all members shall
be "disinterested persons." For the purposes of the Plan, a director shall be
deemed to be "disinterested" only if such person qualifies as a "disinterested
person" within the meaning of Rule 16b-3 of the Exchange Act, as such terms is
interpreted from time to time. From the date on which the Company first has its
Common Stock registered under the Exchange Act, non-employee directors of the
Company are not eligible to receive options or awards of restricted stock under
the Plan.
3. STOCK AVAILABLE FOR AWARDS
a. NUMBER OF SHARES. Subject to adjustment under Section 3(c), the
aggregate number of shares of Common Stock of the Company (the "COMMON STOCK")
that may be issued pursuant to the Plan is 1,000,000 shares (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), which
number shall automatically increase on January 1, 2000, January 1, 2001 and
January 1, 2002 by such number of shares as is equal to 5% of the number of
shares of Common Stock outstanding on December 31, 1999, December 31, 2000 and
December 31, 2001, respectively; provided, however, that the cumulative number
of such shares that may be issued pursuant to the Plan will not exceed 3,500,000
shares (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). If any Award expires, or is terminated, surrendered or forfeited, in
whole or in part, the unissued Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan. If shares of Common Stock
issued pursuant to the Plan are repurchased by, or are surrendered or forfeited
to, the Company at no more than cost, such shares of Common Stock shall again be
available for the grant of Awards under the Plan. Shares issued under the Plan
may consist in whole or in part of authorized but unissued shares or
<PAGE> 3
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treasury shares. Except as may be prohibited by Rule 16b-3, (i) if an Award
granted under the Plan shall expire or terminate for any reason without having
been exercised in full, the unpurchased shares subject to such Award shall again
be available for subsequent option grants or Awards under the Plan, and (ii) if
restricted stock awarded under the Plan shall be repurchased by the Company, the
repurchased shares subject to such Award shall again be available for subsequent
option grants or Awards under the Plan.
b. PER-PARTICIPANT LIMIT. Subject to adjustment under Section 3(c), no
Participant may be granted Awards during any one fiscal year to purchase more
than 1,000,000 shares of Common Stock.
c. ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, combination, exchange of shares, liquidation, spin-off, split-up,
or other similar change in capitalization or event, (i) the number and class of
securities available for Awards under the Plan and the per-Participant share
limit, (ii) the number and class of securities, vesting schedule and exercise
price per share subject to each outstanding Option, (iii) the repurchase price
per security subject to repurchase, and (iv) the terms of each other outstanding
stock-based Award shall be adjusted by the Company (or substituted Awards may be
made) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is appropriate. If Section 7(f)(i) applies for any
event, this Section 3(c) shall not be applicable.
4. STOCK OPTIONS
a. GENERAL. The Board may grant options to purchase Common Stock (each,
an "OPTION") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option and the Common Stock
issued upon the exercise of each Option, including vesting provisions,
repurchase provisions and restrictions relating to applicable federal or state
securities laws, as it considers advisable.
b. INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "INCENTIVE
STOCK OPTION") shall be granted only to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Board and the Company shall have no liability if an Option
or any part thereof that is intended to be an Incentive Stock Option does not
qualify as such. An Option or any part thereof that does not qualify as an
Incentive Stock Option is referred to herein as a "NONSTATUTORY STOCK OPTION" or
"NONQUALIFIED STOCK OPTION."
c. DOLLAR LIMITATION. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market (determined as of the
<PAGE> 4
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respective date or dates of grant) of more than $100,000. The amount of
Incentive Stock Options which exceed such $100,000 limitation shall be deemed to
be Nonqualified Stock Options.
d. EXERCISE PRICE. The Board shall establish the exercise price
(or determine the method by which the exercise price shall be determined) at the
time each Option is granted and specify the exercise price in the applicable
option agreement.
e. DURATION OF OPTIONS. Each Option shall be exercisable at such
times and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
f. EXERCISE OF OPTION. Options may be exercised only by delivery
to the Company of a written notice of exercise signed by the proper person
together with payment in full as specified in Section 4(g) or the option
agreement for the number of shares for which the Option is exercised.
g. PAYMENT UPON EXERCISE. Common Stock purchased upon the
exercise of an Option shall be paid for by one or any combination of the
following forms of payment:
(i) by check payable to the order of the Company;
(ii) except as otherwise explicitly provided in the
applicable option agreement, and only if the Common Stock is then publicly
traded, delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery by the Plan participant to the Company of a copy
of irrevocable and unconditional instructions to a creditworthy broker to
deliver promptly to the Company cash or a check sufficient to pay the exercise
price; or
(iii) to the extent explicitly provided in the applicable
option agreement, by (x) delivery of shares of Common Stock owned by the
Participant valued at fair market value (as determined by the Board or as
determined pursuant to the applicable option agreement), (y) delivery of a
promissory note of the Plan participant to the Company (and delivery to the
Company by the Participant of a check in an amount equal to the par value of the
shares purchased), or (z) payment of such other lawful consideration as the
Board may determine.
The fair market value of any shares of the Company's Common Stock or
other non-cash consideration which may be delivered upon exercise of an option
shall be determined in such manner as may be prescribed by the Board.
h. ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in
its sole discretion, include additional provisions in any Award granted under
the Plan, including without limitation restrictions in transfer, repurchase
rights, commitments to pay cash bonuses, to make, arrange for or guaranty loans
or to transfer other property to optionees upon exercise of Awards, or transfer
other property to optionees upon exercise of options, or such other provisions
as shall be determined by the Board; PROVIDED THAT such additional provisions
shall not be inconsistent with any other term or condition of the Plan.
<PAGE> 5
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i. ACCELERATION, EXTENSION, ETC. The Board may, in its sole
discretion, and in all instances subject to any relevant tax and accounting
considerations which may adversely impact or impair the Company, (i) accelerate
the date or dates on which all or any particular options or Awards granted under
the Plan any be exercised or (ii) extend the dates during which all or any
particular options or Awards granted under the Plan may be exercised.
j. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option
is granted under the Plan, the Company's Common Stock is publicly traded under
the Exchange Act, "fair market value" shall be determined by the five-day or
ten-day trading average preceding the date of grant or, if the prices or quotes
discussed in this sentence are unavailable for such date, the last business day
for which such prices or quotes are available prior to the date such Option is
granted (as the average of the five-day or ten-day trading period preceding the
grant) and shall mean (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 for a five-day or ten-day trading period preceding the date
of grant; 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 for a five-day or ten-day trading period preceding the date
of grant; 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 for a
five-day or ten-day trading period preceding the date of grant. The five-day or
ten-day trading period shall be selected by the Board at the time of the grant
based on trading volume, price fluctuations and flotation of publicly-traded
securities and other factors affecting volatility. However, if the Common Stock
is not publicly-traded at the time an Award is granted under the Plan, "FAIR
MARKET VALUE" shall be deemed to be the fair value of the Common Stock as
determined by the Board 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, revenues
and pre-tax earnings of the Company for the most recent twelve-month period,
projected revenues and pre-tax earnings of the Company for the next twelve-month
period, discounted positive cash flow of the Company, price/earnings multiples
of comparable publicly-traded companies (adjusted for any illiquidity associated
with the Company's Common Stock), appropriate discounts for illiquidity and
appropriate consideration of the senior rights, preferences and privileges of
other classes of preferred stock outstanding, and other pertinent factors
determined by the Board.
5. RESTRICTED STOCK
a. GRANTS. The Board may grant Awards entitling recipients to
acquire shares of Common Stock, subject to (i) delivery to the Company by the
Participant of a check in an amount at least equal to the par value of the
shares purchased, and (ii) the right of the Company to repurchase all or part of
such shares at their issue price or other stated or formula price from the
Participant in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each, a
"RESTRICTED STOCK AWARD").
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b. TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award. Any stock certificates issued in
respect of a Restricted Stock Award shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). After the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or, if the Participant has died, to the
beneficiary designated by a Participant, in a manner determined by the Board, to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "DESIGNATED BENEFICIARY"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
6. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the
Common Stock having such terms and conditions as the Board may determine,
including, without limitation, the grant of shares based upon certain
conditions, the grant of securities convertible into Common Stock and the grant
of stock appreciation rights, phantom stock awards or stock units.
7. GENERAL PROVISIONS APPLICABLE TO AWARDS
a. TRANSFERABILITY OF AWARDS. Except as the Board may otherwise
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant; provided, however, that Nonstatutory Option
may be transferred pursuant to a qualified domestic relations order (as defined
in Rule 16b-3) or to a grantor-retained annuity trust ("GRANT") or a similar
estate-planning vehicle in which the trust is bound by all provisions of the
option which are applicable to the optionee. References to a Participant, to the
extent relevant in the context, shall include references to authorized
transferees.
b. DOCUMENTATION. Each Award under the Plan shall be evidenced by
a written instrument in such form as the Board shall determine or as executed by
an officer of the Company pursuant to authority delegated by the Board. Each
Award may contain terms and conditions in addition to those set forth in the
Plan, provided that such terms and conditions do not contravene the provisions
of the Plan.
c. BOARD DISCRETION. The terms of each type of Award need not be
identical, and the Board need not treat Participants uniformly.
d. ADDITIONAL AWARD PROVISIONS. The Board may, in its sole
discretion, include additional provisions in any Award granted under the Plan,
including without limitation commitments to pay cash bonuses, make, arrange for
or guarantee loans or transfer other
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property to recipients upon the grant of awards, or such other provisions as
shall be determined by the Board.
e. TERMINATION OF STATUS. The Board shall determine the effect on
an Award of the disability, death, retirement, authorized leave of absence or
other change in the employment or other status of a Participant and the extent
to which, and the period during which, the Participant, or the Participant's
legal representative, conservator, guardian or Designated Beneficiary, may
exercise rights under the Award, subject to applicable law and the provisions of
the Code related to Incentive Stock Options.
f. ACQUISITION OF THE COMPANY
(i) CONSEQUENCES OF AN ACQUISITION.
(A) 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 Awards 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 Common
Stock then subject to such Awards the consideration payable with respect to the
outstanding shares of Common Stock in connection with the Acquisition and (y)
the vesting provisions of all Awards shall become accelerated by an amount which
represents twenty-five percent (25%) of the remaining unvested portion of any
outstanding Award. In addition to the foregoing, on the first yearly anniversary
of the consummation of the Acquisition, with respect to Participants 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: (1) all Options then outstanding shall become
immediately exercisable in full and will terminate, to the extent unexercised,
on their scheduled expiration date, and if the shares of Common Stock subject to
such Options are subject to repurchase provisions then such repurchase
restrictions shall immediately lapse; (2) all Restricted Stock Awards then
outstanding shall become free of all repurchase provisions; and (3) all other
stock-based Awards shall become exercisable, realizable or vested in full, or
shall be free of all repurchase provisions, as the case may be. In the event
that any such Participant 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 clauses
(1) through (3) shall be deemed to be immediately applicable to such employee on
such termination date.
Notwithstanding the foregoing paragraph, as to any Plan Participant,
the remaining unvested portion of any Option or Award 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
Participant.
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It shall be deemed to be a constructive termination "WITHOUT CAUSE" or
"FOR GOOD REASON" if: (i) the Participant's responsibilities and executive
authority are reduced or diluted in any material way without the Participant's
written consent; (ii) the Participant's annual salary or bonus arrangement is
reduced in any material way without written consent; (iii) the Participant is
relocated to another office or facility to a location outside of a radius of 25
miles from any Company facility at which the Participant was employed at the
time of the Acquisition and without the Participant's written consent; (iv)
there occurs a termination of Participant'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 Participant; (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.
(B) ACQUISITION INTENDED TO BE ACCOUNTED FOR UNDER THE
PURCHASE METHOD. Unless otherwise expressly provided in the applicable Option or
Award, 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(f)(i)(B), also the "BOARD"), shall,
as to outstanding Awards (on the same basis or on different bases, as the Board
shall specify), make appropriate provision for the continuation of such Awards
by the Company or the assumption of such Awards by the surviving or acquiring
entity and by substituting on an equitable basis for the shares then subject to
such Awards either (a) the consideration payable with respect to the outstanding
shares of Common 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 Common Stock subject to such Awards 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
<PAGE> 9
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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.
g. 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).
h. ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. In connection with
a merger or consolidation of an entity with the Company or the acquisition by
the Company of property or stock of an entity, the Board may grant Awards under
the Plan in substitution for stock and stock-based awards issued by such entity
or an affiliate thereof. The substitute Awards shall be granted on such terms
and conditions as the Board considers appropriate in the circumstances.
i. 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 Award 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 Participant, to be consistent
with pooling-of-interests accounting treatment for such Acquisition.
j. PARACHUTE PAYMENTS AND PARACHUTE AWARDS. Notwithstanding the
provisions of Section 7(f)(i)(A), 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 Awards 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 Participant (the Awards not becoming so accelerated,
realizable or vested, the "PARACHUTE AWARDS"); provided, however, that if the
"AGGREGATE PRESENT VALUE" of the Parachute Awards would exceed the tax that, but
for this sentence, would be imposed on the Participant under Section 4999 of the
Code in connection with the Acquisition, then the Awards 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 Award 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(j)(iv) shall be made by the Company.
<PAGE> 10
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k. AMENDMENT OF AWARDS. The Board may amend, modify or terminate
any outstanding Award including, but not limited to, substituting therefor
another Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that, except as otherwise provided in Section 7(i), the
Participant'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 Participant.
l. CONDITIONS ON DELIVERY OF STOCK. The Company will not be
obligated to deliver any shares of Common Stock pursuant to the Plan or to
remove restrictions from shares previously delivered under the Plan until (i)
all conditions of the Award 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 Participant 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.
m. ACCELERATION. The Board may at any time provide that any
Options shall become immediately exercisable in full or in part, that any
Restricted Stock Awards shall be free of some or all restrictions, or that any
other stock-based Awards may become exercisable in full or in part or free of
some or all restrictions or conditions, 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 Incentive Stock Option.
8. WITHHOLDING.
The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee or recipient of an award any federal, state or
local taxes of any kind required by law to be withheld with respect to any
shares issues upon exercise of options under the Plan or the purchase of shares
subject to the award. Subject to the prior approval of the Company, which may be
withheld by the Company in its sole discretion, the optionee or recipient of an
award may elect to satisfy such obligation, in whole or in part, (i) by causing
the Company to withhold shares of Common Stock otherwise issuable pursuant to
the exercise of an option or the purchase of shares subject to an award or (ii)
by delivering to the Company shares of Common Stock already owned by the
optionee or award recipient. The shares so delivered or withheld shall have a
fair market value of the shares used to satisfy such withholding obligation
shall be determined by the Company as of the date that the amount of tax to be
withheld is to be determined. An optionee or award recipient who has made an
election pursuant to this Section may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
<PAGE> 11
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9. CANCELLATION AND NEW GRANT OF OPTIONS.
The Board of Directors shall have the authority to effect, at any time
and may from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
canceled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
10. NO EXERCISE OF OPTION IF ENGAGEMENT OR EMPLOYMENT TERMINATED FOR CAUSE.
If the employment of the any Participant is terminated "FOR CAUSE,"
the Award may terminate, upon a determination of the Board, on the date of such
termination and the Option shall thereupon not be exercisable to any extent
whatsoever. For purposes of this Section 10, "FOR CAUSE" is conduct, as
determined by the Board of Directors, involving one or more of the following:
(i) gross misconduct by the Participant which is materially injurious to the
Company; or (ii) the commission of an act of embezzlement, fraud or deliberate
disregard of the rules or policies of the Company which results in material
economic loss, damage or injury to the Company; or (iii) the unauthorized
disclosure of any trade secret or confidential information of the Company (or
any customer, supplier or other third party who has a business relationship with
the Company) or the violation of any noncompetition covenant or assignment of
inventions obligation with the Company; or (iv) the commission of an act which
constitutes unfair competition with the Company or which induces any customer or
prospective customer of the Company to break a contract with the Company or to
decline to do business with the Company; or (v) the conviction of the
Participant of a felony, either in connection with the performance of his
obligations to the Company or which shall adversely affect the Participant's
ability to perform such obligations; or (vi) the commission of an act of fraud
or breach of fiduciary duty which results in loss, damage or injury to the
Company; (vii) the failure of the Participant to perform in a material respect
his or her employment obligations without proper cause. In making such
determination, the Board shall act fairly and in utmost good faith. The Board
may in its discretion waive or modify the provisions of this Section at a
meeting of the Board with respect to any individual Participant with regard to
the facts and circumstances of any particular situation involving a
determination under this Section.
11. MISCELLANEOUS
a. DEFINITIONS.
(i) "COMPANY," for purposes of eligibility under the
Plan, shall include any present or future subsidiary corporations of Silknet
Software, Inc., as defined in Section 424(f) of the Code (a "SUBSIDIARY"), and
any present or future parent corporation of Silknet Software, Inc., as defined
in Section 424(e) of the Code. For purposes of Awards other than Incentive Stock
<PAGE> 12
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Options, the term "COMPANY" shall include any other business venture in which
the Company has a direct or indirect significant interest, as determined by the
Board in its sole discretion.
(ii) "CODE" means the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder.
(iii) "EMPLOYEE" for purposes of eligibility under the Plan
shall include a person to whom an offer of employment has been extended by the
Company.
b. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have
any claim or right to be granted an Award, and the grant of an Award shall not
be construed as giving a Participant the right to continued employment or any
other relationship with the Company. The Company expressly reserves the right at
any time to dismiss or otherwise terminate its relationship with a Participant
free from any liability or claim under the Plan.
c. NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award until becoming the record holder thereof.
d. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become
effective on the date on which it is adopted by the Board. No Awards shall be
granted under the Plan after the completion of ten years from the date on which
the Plan was adopted by the Board, but Awards previously granted may extend
beyond that date.
e. AMENDMENT OF PLAN. The Board may amend, suspend or terminate
the Plan or any portion thereof at any time.
f. GOVERNING LAW. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the state of incorporation of the Company (Delaware), without regard to any
applicable conflicts of law.
Adopted by the Board of Directors on
February 23, 1999
Approved by the stockholders on
February 23, 1999
<PAGE> 1
EXHIBIT 10.03
SILKNET SOFTWARE, INC.
1999 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE. This Non-Qualified Stock Option Plan, to be known as the
1999 Non-Employee Director Stock Option Plan (hereinafter, the "Plan") is
intended to promote the interests of Silknet Software, Inc. (hereinafter, the
"Company") by providing an inducement to obtain and retain the services of
qualified persons who are not employees or officers of the Company to serve as
members of its Board of Directors (the "Board").
2. AVAILABLE SHARES. The total number of shares of Common Stock, par
value $.01 per share, of the Company (the "Common Stock") for which options may
be granted under this Plan shall not exceed 350,000 shares (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 in accordance with paragraph 10 of this Plan. Shares
subject to this Plan are authorized but unissued shares or shares that were once
issued and subsequently reacquired by the Company. If any options granted under
this Plan are surrendered before exercise or lapse without exercise, in whole or
in part, the shares reserved therefor shall continue to be available under this
Plan.
3. ADMINISTRATION. This Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board 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. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable. No
member of the Board 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.
4. AUTOMATIC GRANT OF OPTIONS. The Plan shall first become effective
upon the date on which the Common Stock of the Company becomes registered under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Subject to
the availability of shares under this Plan, (a) each person who is or becomes a
member of the Board and who is not an employee or officer of the Company (a
"Non-Employee Director") shall be automatically granted on either (i) the date
such person is first elected to the Board or (ii) the date on which the Common
Stock of the Company becomes registered under the Exchange Act (the "Approval
Date") ((i) and (ii) collectively referred to as the "Grant Date"), without
further action by the Board, an option to purchase
<PAGE> 2
2
10,000 shares of the Common Stock (the "Initial Options") and (b) each person
receiving an option pursuant to clause (a) hereof who remains a Non-Employee
Director through (i) the third anniversary of such person's Grant Date and (ii)
the third anniversary of the date of grant of any Additional Options (as
hereafter defined) (each, an "Additional Option Grant Date"), shall be
automatically granted on the anniversary of such person's Grant Date or
Additional Option Grant Date, as applicable, an option to purchase 10,000 shares
of Common Stock (the "Additional Options").
The options to be granted under this paragraph 4 shall be the only options ever
to be granted at any time to such member under this Plan. Notwithstanding
anything to the contrary set forth herein, if this Plan is not approved by a
majority of the Company's stockholders within 12 months of the Approval Date,
then the Plan and the options granted pursuant to this Section 4 shall terminate
and become void, and no further options shall be granted under this Plan.
5. OPTION PRICE. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of paragraph 10 of this Plan. For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall 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 option is granted and
shall mean (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 closing bid price (or average of bid 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. If the Common Stock is not publicly traded at the time an option is
granted under the Plan, "fair market value" shall be deemed to be the fair 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. Notwithstanding the foregoing the fair
market value of the Common Stock for the grant of an option on the date of the
Company's Prospectus in connection with its initial public offering (the
"Offering") shall be equal to 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.
6. PERIOD OF OPTION. Unless sooner terminated in accordance with the
provisions of paragraph 8 of this Plan, an option granted hereunder shall expire
on the date which is ten (10) years after the date of grant of the option.
<PAGE> 3
3
7. VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS. (a) Options
granted under this Plan shall not be exercisable until they become vested.
Initial Options granted under paragraph 4 of this Plan shall vest in the
optionee and thus become exercisable in accordance with the following schedule,
provided that the optionee has continuously served as a member of the Board
through such vesting date, and subject also to subsection (b) of this paragraph
7:
Number of Option Shares for which
Option Will be Exercisable Date of Vesting
-------------------------- ---------------
1/3 One year from the date of grant
1/3 Two years from the date of grant
1/3 Three years from the date of grant
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan.
(b) Notwithstanding subsection (a) of this paragraph 7, if an
optionee attends less than 75% of the Board meetings held in any fiscal year (a
"Default Year"), then the optionee shall forfeit his exercise rights with
respect to the option installment which vested on the preceding annual vesting
date, in proportion to the percentage of Board meetings not attended by such
optionee during the Default Year, such forfeiture to be applied first to the
options which vested on the immediately preceding annual vesting date (the
"Prior Vesting Date"), and second, prorata to the options which vested on each
annual vesting date preceding the Prior Vesting Date (beginning with the annual
vesting date immediately preceding the Prior Vesting Date) until the forfeiture
obligation has been satisfied. In the event that the optionee does not own a
sufficient number of exercisable options to satisfy the forfeiture obligation
described above (the "Forfeiture Shortfall"), the optionee shall forfeit his
right to receive the next succeeding annual installment of all options in an
amount equal to the Forfeiture Shortfall, such shortfall to be applied prorata
to all options which vest on such date.
By way of illustration, if an optionee attends only 50% of the actual
meetings of the Board of Directors (whether regular or special) held in any
fiscal year, then the optionee shall forfeit the right to exercise 50% of the
option installment which became exercisable on the preceding annual vesting
date. If, however, the optionee had already exercised 75% of the preceding
option installment, and did not own any additional vested but unexercised
options available to satisfy the forfeiture obligation, the optionee would
forfeit the remaining 25% of the prior installment, and would also forfeit the
right to receive or exercise 25% of the next succeeding annual option
installment.
(c) TRANSFERABILITY. Any option granted pursuant to this Plan
shall be assignable or transferable by will, the laws of descent and
distribution, pursuant to a
<PAGE> 4
4
domestic relations order or in accordance with the terms of the optionee's
option agreement and only in compliance with the provisions of the Securities
Act of 1933, as amended (the "Securities Act").
8. TERMINATION OF OPTION RIGHTS.
(a) Except as otherwise specified in the agreement relating to
an option, in the event an optionee ceases to be a member of the Board for any
reason other than death or permanent disability, any then unexercised portion of
options granted to such optionee shall, to the extent not then vested,
immediately terminate and become void; any portion of an option which is then
vested but has not been exercised at the time the optionee so ceases to be a
member of the Board may be exercised, to the extent it is then vested, by the
optionee at any time prior to the scheduled expiration date of the option.
(b) In the event that an optionee ceases to be a member of the
Board by reason of his or her death or permanent disability, any option granted
to such optionee shall be immediately and automatically accelerated and become
fully vested. All unexercised options which are then exercisable (including
those options which become exercisable pursuant to the first sentence of this
Section 8(b)) but have not been exercised at the time the optionee so ceases to
be a member of the Board of Directors may be exercised, to the extent any
portion of such options are then exercisable, by the optionee (or by the
optionee's personal representative, heir or legatee, in the event of death) for
a period of three years thereafter.
(c) No portion of an option may be exercised if the optionee
is removed from the Board of Directors for any one of the following reasons: (i)
disloyalty, gross negligence, dishonesty or breach of fiduciary duty to the
Company; or (ii) the commission of an act of embezzlement, fraud or deliberate
disregard of the rules or policies of the Company which results in loss, damage
or injury to the Company, whether directly or indirectly; or (iii) the
unauthorized disclosure of any trade secret or confidential information of the
Company; or (iv) the commission of an act which constitutes unfair competition
with the Company or which induces any customer of the Company to break a
contract with the Company; or (v) the conduct of any activity on behalf of any
organization or entity which is a competitor of the Company (unless such conduct
is approved by a majority of the members of the Board of Directors).
<PAGE> 5
5
9. EXERCISE OF OPTION. Subject to the terms and conditions of this Plan
and the option agreements, an option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to the
Company by mail, facsimile or in person addressed to Silknet Software, Inc., at
its principal executive offices, stating the number of shares with respect to
which the option is being exercised, accompanied by payment in full for such
shares. Payment may be (a) in United States dollars in cash or by check, (b) in
whole or in part in shares of the Common Stock of the Company already owned by
the person or persons exercising the option or shares subject to the option
being exercised (subject to such restrictions and guidelines as the Board may
adopt from time to time), valued at fair market value determined in accordance
with the provisions of paragraph 5 or (c) consistent with applicable law,
through the delivery of an assignment to the Company of a sufficient amount of
the proceeds from the sale of the Common Stock acquired upon exercise of the
option and an authorization to the broker or selling agent to pay that amount to
the Company, which sale shall be at the participant's direction at the time of
exercise. There shall be no such exercise at any one time as to fewer than one
hundred (100) shares or all of the remaining shares then purchasable by the
person or persons exercising the option if fewer than one hundred (100) shares.
The Company's transfer agent shall, on behalf of the Company, prepare a
certificate or certificates representing such shares acquired pursuant to
exercise of the option, shall register the optionee as the owner of such shares
on the books of the Company and shall cause the fully executed certificate(s)
representing such shares to be delivered to the optionee as soon as practicable
after payment of the option price in full. The holder of an option shall not
have any rights of a stockholder with respect to the shares covered by the
option, except to the extent that one or more certificates for such shares shall
be delivered to him or her upon the due exercise of the option.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER EVENTS. Upon
the occurrence of any of the following events, an optionee's rights with respect
to options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
(b) RECAPITALIZATION ADJUSTMENTS. In the event of an Acquisition, each
option granted under this Plan which is outstanding but unvested as of the
effective date of such event shall become exercisable in full immediately
prior to the effective date of such event. In the event of a
reorganization, recapitalization, merger, consolidation, or any other
change in the corporate structure or shares of the Company, to the extent
permitted by Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule
16b-3"), adjustments in the number and kind of shares authorized by this
Plan and in the
<PAGE> 6
6
number and kind of shares covered by, and in the option price of outstanding
options under this Plan necessary to maintain the proportionate interest of the
optionee and preserve, without exceeding, the value of such option, shall be
made. Notwithstanding the foregoing, no such adjustment shall be made which
would, within the meaning of any applicable provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), constitute a modification, extension or
renewal of any Option or a grant of additional benefits to the holder of an
Option. For purposes of this paragraph 10, 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) ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the 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 shares subject to options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
(d) ADJUSTMENTS. Upon the happening of any of the foregoing events, the
class and aggregate number of shares set forth in paragraph 2 of this Plan
that are subject to options which previously have been or subsequently may
be granted under this Plan shall also be appropriately adjusted to reflect
such events. The Board shall determine the specific adjustments to be made
under this paragraph 10 and its determination shall be conclusive.
11. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions
of paragraphs 4 and 9 of this Plan, the Company shall have no obligation to
deliver any certificate or certificates upon exercise of an option until one of
the following conditions shall be satisfied:
(a) The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively
registered under applicable Federal and state securities laws as now in
force or hereafter amended; or
(b) Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and
state securities laws as now in force or hereafter amended; and the
Company has complied with all applicable laws and regulations with respect
thereto, including without limitation all
<PAGE> 7
7
regulations required by any stock exchange upon which the Company's
outstanding Common Stock is then listed.
12. LEGEND ON CERTIFICATES. The certificates representing shares issued
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act, as
amended, or any state securities laws.
13. REPRESENTATION OF OPTIONEE. If requested by the Company, the
optionee shall deliver to the Company written representations and warranties
upon exercise of the option that are necessary to show compliance with Federal
and state securities laws, including representations and warranties to the
effect that a purchase of shares under the option is made for investment and not
with a view to their distribution (as that term is used in the Securities Act).
14. OPTION AGREEMENT. Each option granted under the provisions of this
Plan shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the officer
executing it.
15. TERMINATION AND AMENDMENT OF PLAN. Options may no longer be granted
under this Plan after 10 years from the Approval Date, and this Plan shall
terminate when all options granted or to be granted hereunder are no longer
outstanding. The Board may at any time terminate this Plan or make such
modification or amendment thereof as it deems advisable; PROVIDED, HOWEVER, that
the Board may not, without approval by the affirmative vote of the holders of a
majority of the shares of Common Stock present in person or by proxy and voting
on such matter at a meeting, (a) increase the maximum number of shares for which
options may be granted under this Plan (except by adjustment pursuant to Section
10), (b) materially modify the requirements as to eligibility to participate in
this Plan, or (c) materially increase benefits accruing to option holders under
this Plan. Termination or any modification or amendment of this Plan shall not,
without consent of a participant, affect his or her rights under an option
previously granted to him or her.
16. WITHHOLDING OF INCOME TAXES. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Code, may require the
optionee to pay withholding taxes in respect of amounts considered to be
compensation includible in the optionee's gross income.
17. COMPLIANCE WITH REGULATIONS. It is the Company's intent that this
Plan comply in all respects with Rule 16b-3 (or any successor or amended
provision thereof) and any applicable Securities and Exchange Commission
interpretations thereof. If any
<PAGE> 8
8
provision of this Plan is deemed not to be in compliance with Rule 16b-3, the
provision shall be null and void.
18. GOVERNING LAW. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.
<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
January 1 and July 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.
<PAGE> 1
EXHIBIT 10.05
ARTICLE VI
REGISTRATION RIGHTS
6.1 CERTAIN DEFINITIONS. As used in this Article VI, the following
terms shall have the following respective meanings:
"Holder" means the person who is then the record owner of Registrable
Securities which have not been sold to the public.
"Initiating Holders" means any Purchaser or its assignees who in the
aggregate are holders of at least twenty-five percent (25%) of either the Series
A Registrable Securities held by all Purchasers and their assigns or Series C
Registrable Securities held by all Purchasers and their assigns.
"Registrable Securities" means, collectively, the Series A Registrable
Securities and the Series C Registrable Securities.
The term "register" means to register under the Act and applicable
state securities laws for the purpose of effecting a public sale of securities.
"Registration Expenses" means all expenses incurred by the Company in
compliance with Sections 6.2, 6.3 or 6.5 hereof, including, without limitation,
all registration and filing fees, printing expenses, transfer taxes, fees and
disbursements of counsel for the Company, blue sky fees and expenses, reasonable
fees and disbursements of one counsel for all the selling Holders and other
security holders, and the expense of any special audits incident to or required
by any such registration.
"Selling Expenses" means all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities.
"Series A Registrable Securities" means (i) all of the Conversion
Shares issued or issuable upon conversion of the shares of Series A Preferred
Stock and Series B Preferred Stock owned by the Purchasers, (ii) all of the
shares of Common Stock issued or issuable upon exercise of any Warrants owned by
the Purchasers, (iii) all other shares of Common Stock now owned or hereafter
acquired by any Purchaser, (iv) all shares of Common Stock issuable with respect
to securities of the Company convertible into or exercisable for shares of
Common Stock now owned or hereafter acquired by any Purchaser and (v) any Common
Stock issued in respect of the shares described in clauses (i) through (iv) upon
any stock split, stock dividend, recapitalization or other similar event.
"Series C Registrable Securities" means (i) all of the Conversion
Shares issued or issuable upon conversion of the shares of Series C Preferred
Stock (ii) all other shares of Common Stock now owned or hereafter acquired by
any Purchaser, (iii) all shares of Common Stock issuable with respect to
securities of the Company convertible into or exercisable for shares of Common
Stock now owned or hereafter acquired by any Purchaser and (iv) any
<PAGE> 2
Common Stock issued in respect of the shares described in clauses (i) through
(iii) upon any stock split, stock dividend, recapitalization or other similar
event.
6.2 REQUESTED REGISTRATIONS.
(a) If at any time after the earlier to occur of (i) an
initial public offering of equity securities of the Company or (ii) the third
anniversary of the date hereof, but in no event within 180 days of a
registration effected by the Company, the Company shall receive from one or more
of the Initiating Holders a written request that the Company effect the
registration of either the Series A Registrable Securities or Series C
Registrable Securities, in each case, representing at least twenty-five percent
(25%) of the Series A Registrable Securities or Series C Registrable Securities,
as the case may be (or any lesser percentage if the reasonably anticipated
aggregate price to the public of the Registrable Securities to be included in
such registration would exceed $5 million) in connection with a firm commitment
underwriting managed by a nationally recognized underwriter, the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable, use all commercially
reasonable efforts to effect such registration as may be so requested
and as would permit or facilitate the sale and distribution of such
portion of such Registrable Securities as are specified in such
request, together with such portion of the Registrable Securities of
any Holder or Holders joining in such request as are specified in a
written request given within thirty days after receipt of such written
notice from the Company. If the underwriter managing the offering
advises the Holders who have requested inclusion of their Registrable
Securities in such registration that marketing considerations require a
limitation on the number of shares offered, such limitation shall be
imposed PRO RATA among such Holders who requested inclusion of
Registrable Securities in such registration according to the number of
Registrable Securities each such Holder requested to be included in
such registration. Neither the Company nor any other shareholder may
include shares in a registration effected under this Section 6.2
without the consent of the Holders holding a majority of the
Registrable Securities sought to be included in such registration if
the inclusion of shares by the Company or the other shareholders would
limit the number of Registrable Securities sought to be included by the
Holders or reduce the offering price thereof. No registration initiated
by Initiating Holders hereunder shall count as a registration under
this Section 6.2 unless and until it shall have been declared
effective.
(b) SELECTION OF UNDERWRITER. The underwriter of any
underwriting requested under this Section 6.2 shall be selected by the Holders
holding a majority of the Registrable Securities included therein and the
Company.
(c) LIMITATION. The holders of the Series A Registrable
Securities shall not be permitted to require more than three registrations under
this Section 6.2 and the holders of the Series C Registrable Securities shall
not be permitted to require more than three registrations
<PAGE> 3
under this Section 6.2. The Purchasers and the Company agree that each of CMG,
ZSC and BBV shall be permitted to initiate at least one registration available
to the Holders of Series A Registrable Securities under this Section 6.2 so long
as such Holder is an Initiating Holder. Accordingly, in the event that CMG, ZSC
or BBV initiates the first registration under this Section 6.2 without the other
party, then the other parties shall be permitted to initiate the second and
third registrations available to the Holder of Series A Registrable Securities
under this Section 6.2. Nothing in this Section 6.2(c) shall restrict any
Purchaser from joining in a registration under this Section 6.2 once the
Initiating Holders have requested a registration.
6.3 "PIGGY BACK" REGISTRATIONS.
(a) If the Company shall determine to register any of its
securities, either for its own account or the account of a security holder or
holders exercising their registration rights, other than a registration relating
solely to employee benefit plans, or a registration on any registration form
which does not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of Registrable Securities, the Company will:
(i) Promptly give to each Holder of Registrable
Securities written notice thereof (which shall include the number of
shares the Company or other security holder proposes to register and,
if known, the name of the proposed underwriter); and
(ii) Use its reasonable best efforts to include in such
registration all the Registrable Securities specified in a written
request or requests, made by any Holder within twenty (20) days after
the date of delivery of the written notice from the Company described
in clause (i) above. If the underwriter advises the Company that
marketing considerations require a limitation on the number of shares
offered pursuant to any registration statement, then the maximum amount
that the underwriter considers saleable shall be apportioned: First, to
the Company to the extent of the shares to be registered for its own
account, second, PRO RATA among the selling Holders according to the
number of Registrable Securities each Holder requested to be included
in the registration statement, and then PRO RATA among all other
selling shareholders according to the number of shares each shareholder
requested to be included in the registration statement.
(b) The Company shall select the underwriter for an
offering made pursuant to this Section 6.3.
6.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
Section 6.2, 6.3 or 6.5 shall be paid by the Company. All Selling Expenses
incurred in connection with any such registration, qualification or compliance
shall be borne by the holders of the securities registered, pro rata on the
basis of the number of their shares so registered.
<PAGE> 4
6.5 REGISTRATION ON FORM S-3. The Company shall use its reasonable
best efforts to qualify for registration on Form S-3 or any comparable or
successor form; and to that end the Company shall register (whether or not
required by law to do so) the Common Stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in accordance with the provisions of the
Exchange Act following the effective date of the first registration of any
securities of the Company on Form S-1 or any comparable or successor form. After
the Company has qualified for the use of Form S-3, in addition to the rights
contained in the foregoing provisions of this Article VI, the Holders of
Registrable Securities shall have the right to request an unlimited number of
registrations on Form S-3 (such requests shall be in writing and shall state the
number of shares of Registrable Securities to be disposed of and the intended
methods of disposition of such shares by such Holder or Holders), provided that
in no event shall the Company be required to register shares more than one time
in any six month period or with an aggregate market value of less than
$1,000,000.
6.6 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to this Article VI, the Company will keep each
Holder of Registrable Securities included in such registration advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will do the following for the benefit of
such Holders:
(a) Keep such registration effective for a period of one
hundred twenty days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs, and amend or supplement such registration statement and the
prospectus contained therein from time to time to the extent necessary to comply
with the Act and applicable state securities laws;
(b) Use its reasonable best efforts to register or qualify the
Registrable Securities covered by such registration under the applicable
securities or "blue sky" laws of such jurisdictions as the selling shareholders
may reasonably request; provided, that the Company shall not be obligated to
qualify to do business in any jurisdiction where it is not then so qualified or
otherwise required to be so qualified or to take any action which would subject
it to the service of process in suits other than those arising out of such
registration;
(c) Furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request;
(d) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 6.2 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and is entered into by all of the Holders
included in such registration;
(e) To the extent then permitted under applicable professional
guidelines and standards, obtain (i) an opinion dated the effective date of the
registration statement, of counsel representing the Company for the purposes of
such registration in form and substance as is
<PAGE> 5
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of the
Registrable Securities and (ii) a comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by comfort letters and an opinion from the Company's counsel
in customary form and covering such matters of the type customarily covered in a
public issuance of securities, in each case addressed to the Holders, and
provide copies thereof to the Holders; and
(f) Permit the counsel to the selling shareholders whose
expenses are being paid pursuant to Section 6.4 hereof to inspect and copy such
corporate documents as he may reasonably request.
6.7 INDEMNIFICATION.
(a) The Company will, and hereby does, indemnify each Holder,
each of its officers, directors and partners, and each person controlling such
Holder within the meaning of the Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Article VI, and
each underwriter, if any, and each person who controls such underwriter within
the meaning of the Act, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by the Company of the
Act or the Exchange Act or securities act of any state or any rule or regulation
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, qualification or
compliance, and will reimburse each such Holder, each of its officers, directors
and partners, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, whether or not resulting in any
liability, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement (or alleged untrue statement) or omission (or
alleged omission) based upon written information furnished to the Company by any
Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by it are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors and
officers, each other Holder and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of the Act and the rules and
regulations thereunder, each other such Holder and each of their officers,
directors and partners, and each person controlling such Holder, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
<PAGE> 6
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and such
Holder's directors, officers, partners, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
whether or not resulting in liability, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder and stated to be
specifically for use therein; provided, however, that the obligations of each
Holder hereunder shall be limited to an amount equal to the net proceeds
received by such Holder upon sale of his securities.
(c) Each party entitled to indemnification under this Section
6.7 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
failure of any Indemnifying Party to give such notice shall not relieve the
Indemnifying Party of its obligations under this Section 6.7 (except and to the
extent the Indemnifying Party has been prejudiced as a consequence thereof). The
Indemnifying Party will be entitled to participate in, and to the extent that it
may elect by written notice delivered to the Indemnified Party promptly after
receiving the aforesaid notice from such Indemnified Party, at its expense to
assume, the defense of any such claim or any litigation resulting therefrom,
with counsel reasonably satisfactory to such Indemnified Party, provided that
the Indemnified Party may participate in such defense at its expense,
notwithstanding the assumption of such defense by the Indemnifying Party, and
provided, further, that if the defendants in any such action shall include both
the Indemnified Party and the Indemnifying Party and the Indemnified Party shall
have reasonably concluded that there may be legal defenses available to it
and/or other Indemnified Parties which are different from or additional to those
available to the Indemnifying Party, the Indemnified Party or Parties shall have
the right to select separate counsel to assert such legal defenses and to
otherwise participate in the defense of such action on behalf of such
Indemnified Party or Parties and the reasonable fees and expenses of such
counsel shall be paid by the Indemnifying Party. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall (i) furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom and
(ii) shall reasonably assist the Indemnifying Party in any such defense,
provided that the Indemnified Party shall be entitled to be reimbursed by this
Indemnifying Party for its out-of-pocket expenses paid in connection with such
assistance.
(d) No Holder shall be required to participate in a
registration pursuant to which it would be required to execute an underwriting
agreement in connection with a registration effected under Section 6.2 or 6.3
which imposes indemnification or contribution
<PAGE> 7
obligations on such Holder more onerous than those imposed hereunder; provided,
however, that the Company shall not be deemed to breach the provisions of
Section 6.2 or 6.3 if a Holder is not permitted to participate in a registration
on account of his refusal to execute an underwriting agreement on the basis of
this subsection (d).
6.8 INFORMATION BY HOLDER. Each Holder of Registrable Securities
included in any registration shall furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Article VI or otherwise required by applicable state or federal securities
laws.
6.9 LIMITATIONS ON REGISTRATION RIGHTS. From and after the date of
this Agreement, the Company shall not enter into any agreement with any holder
or prospective holder of any securities of the Company giving such holder or
prospective holder (a) the right to require the Company, upon any registration
of any of its securities, to include, among the securities which the Company is
then registering, securities owned by such holder, unless under the terms of
such agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of its securities
will not limit the number of Registrable Securities sought to be included by the
Holders of Registrable Securities or reduce the offering price thereof; or (b)
the right to require the Company to initiate any registration of any securities
of the Company.
6.10 EXCEPTION TO REGISTRATION. The Company shall not be required
to effect a registration under this Article VI if (i) in the written opinion of
counsel for the Company, which counsel and the opinion so rendered shall be
reasonably acceptable to the Holders of Registrable Securities, such Holders may
sell without registration under the Act the Registrable Securities for which
they requested registration under the provisions of the Act and in the manner
and in the quantity in which the Registrable Securities were proposed to be
sold, or (ii) the Company shall have obtained from the Commission a "no-action"
letter to that effect; provided that this Section 6.10 shall not apply to sales
made under Rule 144(k) or any successor rule promulgated by the Commission until
after the effective date of the Company's initial registration of shares under
the Act. Notwithstanding the foregoing, in no event shall the provisions of this
Section 6.10 be construed to preclude a Holder of Registrable Securities from
exercising rights under Section 6.3 for a period of three years after the
effective date of the Company's initial registration of shares under the Act.
6.11 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of restricted securities (as that term is used in Rule 144 under the Act)
to the public without registration, the Company agrees to:
(a) make and keep public information available as those terms
are understood and defined in Rule 144 under the Act, at all times from and
after ninety days following the effective date of the first registration under
the Act filed by the Company for an offering of its securities to the general
public;
<PAGE> 8
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Act and the Exchange Act at any time after it has become subject to such
reporting requirements; and
(c) so long as a Purchaser owns any restricted securities,
furnish to the Purchaser forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at any
time from and after ninety days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
the general public), and of the Act and Exchange Act (at any time after it has
become subject to such reporting requirements), a copy of the most recent annual
or quarterly report of the Company, and such other reports and documents so
filed as a Purchaser may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Purchaser to sell any such securities
without registration.
6.12 LISTING APPLICATION. If shares of any class of stock of the
Company shall be listed on a national securities exchange, the Company shall, at
its expense, include in its listing application all of the shares of the listed
class then owned by any Purchaser.
6.13 DAMAGES. The Company recognizes and agrees that the holder of
Registrable Securities shall not have an adequate remedy if the Company fails to
comply with the provisions of this Article VI, and that damages will not be
readily ascertainable, and the Company expressly agrees that in the event of
such failure any Holder of Registrable Securities shall be entitled to seek
specific performance of the Company's obligations hereunder and that the Company
will not oppose an application seeking such specific performance based on there
being an adequate remedy at law.
<PAGE> 1
Exhibit 10.06
ARTICLE VI
REGISTRATION RIGHTS
6.1 CERTAIN DEFINITIONS. As used in this Article VI, the following
terms shall have the following respective meanings:
"Holder" means the person who is then the record owner of Registrable
Securities which have not been sold to the public.
"Initiating Holders" means any Purchasers or their assignees who in the
aggregate are holders of at least fifty percent (50%) of the Registrable
Securities held by all Purchasers and their assigns.
"Registrable Securities" means (i) all of the Conversion Shares issued
or issuable upon conversion of the shares of Series D Preferred Stock and (ii)
any Common Stock issued in respect of the shares described in clause (i) upon
any stock split, stock dividend, recapitalization or other similar event.
The term "register" means to register under the Act and applicable
state securities laws for the purpose of effecting a public sale of securities.
"Registration Expenses" means all expenses incurred by the Company in
compliance with Sections 6.2, 6.3 or 6.5 hereof, including, without limitation,
all registration and filing fees, printing expenses, transfer taxes, fees and
disbursements of counsel for the Company, blue sky fees and expenses, reasonable
fees and disbursements of one counsel for all the selling Holders and other
security holders, and the expense of any special audits incident to or required
by any such registration.
"Selling Expenses" means all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities.
6.2 REQUESTED REGISTRATIONS.
(a) If at any time after 180 days have elapsed from the
closing of the Company's initial public offering of equity securities, but in no
event within 180 days of a registration effected by the Company, the Company
shall receive from one or more of the Initiating Holders a written request that
the Company effect the registration of Registrable Securities representing at
least fifty percent (50%) of the Registrable Securities (or any lesser
percentage if the reasonably anticipated aggregate price to the public of the
Registrable Securities to be included in such registration would exceed
$5,000,000) in connection with a firm commitment underwriting managed by a
nationally recognized underwriter, the Company will:
(i) promptly give written notice of the proposed
registration to all other Holders; and
<PAGE> 2
(ii) as soon as practicable, use all commercially
reasonable efforts to effect such registration as may be so requested
and as would permit or facilitate the sale and distribution of such
portion of such Registrable Securities as are specified in such
request, together with such portion of the Registrable Securities of
any Holder or Holders joining in such request as are specified in a
written request given within thirty days after receipt of such written
notice from the Company. If the underwriter managing the offering
advises the Holders who have requested inclusion of their Registrable
Securities in such registration that marketing considerations require a
limitation on the number of shares offered, such limitation shall be
imposed PRO RATA among such Holders who requested inclusion of
Registrable Securities in such registration according to the number of
Registrable Securities each such Holder requested to be included in
such registration. Neither the Company nor any other shareholder may
include shares in a registration effected under this Section 6.2
without the consent of the Holders holding a majority of the
Registrable Securities sought to be included in such registration if
the inclusion of shares by the Company or the other shareholders would
limit the number of Registrable Securities sought to be included by the
Holders or reduce the offering price thereof. No registration initiated
by Initiating Holders hereunder shall count as a registration under
this Section 6.2 unless and until it shall have been declared
effective.
(b) SELECTION OF UNDERWRITER. The underwriter of any
underwriting requested under this Section 6.2 shall be selected by the Holders
holding a majority of the Registrable Securities included therein and the
Company.
(c) LIMITATION. The holders of Registrable Securities
shall not be permitted to require more than one (1) registration under this
Section 6.2. Nothing in this Section 6.2(c) shall restrict any Purchaser from
joining in a registration under this Section 6.2 once the Initiating Holders
have requested a registration.
6.3 "PIGGY BACK" REGISTRATIONS.
(a) If, after 180 days have elapsed from the closing of
the Company's initial public offering of equity securities, the Company shall
determine to register any of its securities, either for its own account or the
account of a security holder or holders exercising their registration rights,
other than a registration relating solely to employee benefit plans, or a
registration on any registration form which does not permit secondary sales or
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable
Securities, the Company will:
(i) Promptly give to each Holder of Registrable
Securities written notice thereof (which shall include the number of
shares the Company or other security holder proposes to register and,
if known, the name of the proposed underwriter); and
(ii) Use its reasonable best efforts to include in such
registration all the Registrable Securities specified in a written
request or requests, made by any Holder within twenty (20) days after
the date of delivery of the written notice from the Company
<PAGE> 3
described in clause (i) above. If the underwriter advises the Company
that marketing considerations require a limitation on the number of
shares offered pursuant to any registration statement, then the maximum
amount that the underwriter considers saleable shall be apportioned:
First, to the Company to the extent of the shares to be registered for
its own account, if any, second, among the selling shareholders
exercising their demand registration rights to the extent such
shareholders requested securities to be included in the registration
statement, and then PRO RATA among the selling Holders and all other
selling shareholders according to the number of shares each Holder and
shareholder requested to be included in the registration statement.
(b) The Company shall select the underwriter for an
offering made pursuant to this Section 6.3.
6.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with any registration, qualification or compliance pursuant to
Section 6.2, 6.3 or 6.5 shall be paid by the Company. All Selling Expenses
incurred in connection with any such registration, qualification or compliance
shall be borne by the holders of the securities registered, pro rata on the
basis of the number of their shares so registered.
6.5 REGISTRATION ON FORM S-3. The Company shall use its reasonable
best efforts to qualify for registration on Form S-3 or any comparable or
successor form; and to that end the Company shall register (whether or not
required by law to do so) the Common Stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), in accordance with the provisions of the
Exchange Act following the effective date of the first registration of any
securities of the Company on Form S-1 or any comparable or successor form. After
the Company has qualified for the use of Form S-3, in addition to the rights
contained in the foregoing provisions of this Article VI, the Holders of
Registrable Securities shall have the right to request three (3) registrations
on Form S-3 (such request shall be in writing and shall state the number of
shares of Registrable Securities to be disposed of and the intended methods of
disposition of such shares by such Holder or Holders), provided that in no event
shall the Company be required to register shares with an aggregate market value
(measured at the time of the receipt by the Company of such request) of less
than $5,000,000.
6.6 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to this Article VI, the Company will keep each
Holder of Registrable Securities included in such registration advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will do the following for the benefit of
such Holders:
(a) Keep such registration effective for a period of one
hundred twenty days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs, and amend or supplement such registration statement and the
prospectus contained therein from time to time to the extent necessary to comply
with the Act and applicable state securities laws;
<PAGE> 4
(b) Use its reasonable best efforts to register or
qualify the Registrable Securities covered by such registration under the
applicable securities or "blue sky" laws of such jurisdictions as the selling
shareholders may reasonably request; provided, that the Company shall not be
obligated to qualify to do business in any jurisdiction where it is not then so
qualified or otherwise required to be so qualified or to take any action which
would subject it to the service of process in suits other than those arising out
of such registration;
(c) Furnish such number of prospectuses, prospectus
supplements or amendments and other documents incident thereto as a Holder from
time to time may reasonably request;
(d) In connection with any underwritten offering pursuant
to a registration statement filed pursuant to Section 6.2 hereof, the Company
will enter into any underwriting agreement reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and is entered into by all of the Holders
included in such registration;
(e) To the extent then permitted under applicable
professional guidelines and standards, obtain (i) an opinion, dated the
effective date of the registration statement, of counsel representing the
Company for the purposes of such registration in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of the
Registrable Securities and (ii) a comfort letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by comfort letters in a public issuance of securities,
addressed to the underwriters, if any, and the Holders requesting registration
of the Registrable Securities, and provide copies thereof to the Holders; and
(f) Permit the counsel to the selling shareholders whose
expenses are being paid pursuant to Section 6.4 hereof to inspect and copy such
corporate documents as such counsel may reasonably request.
6.7 INDEMNIFICATION.
(a) The Company will, and hereby does, indemnify each
Holder, each of its officers, directors and partners, and each person
controlling such Holder within the meaning of the Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Article VI, and each underwriter, if any, and each person who controls such
underwriter within the meaning of the Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Act or the Exchange Act or securities act of any state or any
rule or regulation thereunder applicable to the Company and relating to action
<PAGE> 5
or inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of its
officers, directors and partners, and each person controlling such Holder, each
such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or action,
whether or not resulting in any liability, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement (or
alleged untrue statement) or omission (or alleged omission) based upon written
information furnished to the Company by any Holder or underwriter and stated to
be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by
it are included in the securities as to which such registration, qualification
or compliance is being effected, indemnify the Company, each of its directors
and officers, each other Holder and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of the Act and the rules and
regulations thereunder, each other such Holder and each of their officers,
directors and partners, and each person controlling such Holder, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and such
Holder's directors, officers, partners, persons, underwriters or control persons
for any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action,
whether or not resulting in liability, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder and stated to be
specifically for use therein; provided, however, that the obligations of each
Holder hereunder shall be limited to an amount equal to the net proceeds
received by such Holder upon sale of his securities.
(c) Each party entitled to indemnification under this
Section 6.7 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, but the failure of any Indemnifying Party to give such notice shall not
relieve the Indemnifying Party of its obligations under this Section 6.7 (except
and to the extent the Indemnifying Party has been prejudiced as a consequence
thereof). The Indemnifying Party will be entitled to participate in, and to the
extent that it may elect by written notice delivered to the Indemnified Party
promptly after receiving the aforesaid notice from such Indemnified Party, at
its expense to assume, the defense of any such claim or any litigation resulting
therefrom, with counsel reasonably satisfactory to such Indemnified Party,
provided that the Indemnified Party may participate in such defense at its
expense, notwithstanding the assumption of such defense by the Indemnifying
Party, and provided, further, that if the defendants in any such action shall
include both the Indemnified Party and the Indemnifying
<PAGE> 6
Party and the Indemnified Party shall have reasonably concluded that there may
be legal defenses available to it and/or other Indemnified Parties which are
different from or additional to those available to the Indemnifying Party, the
Indemnified Party or Parties shall have the right to select separate counsel to
assert such legal defenses and to otherwise participate in the defense of such
action on behalf of such Indemnified Party or Parties and the reasonable fees
and expenses of such counsel shall be paid by the Indemnifying Party. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which includes an admission of fault on
the part of an Indemnified Party or which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. Each
Indemnified Party shall (i) furnish such information regarding itself or the
claim in question as an Indemnifying Party may reasonably request in writing and
as shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom and (ii) shall reasonably assist the Indemnifying
Party in any such defense, provided that the Indemnified Party shall be entitled
to be reimbursed by the Indemnifying Party for its out-of-pocket expenses paid
in connection with such assistance.
(d) No Holder shall be required to participate in a
registration pursuant to which it would be required to execute an underwriting
agreement in connection with a registration effected under Section 6.2 or 6.3
which imposes indemnification or contribution obligations on such Holder more
onerous than those imposed hereunder; provided, however, that the Company shall
not be deemed to breach the provisions of Section 6.2 or 6.3 if a Holder is not
permitted to participate in a registration on account of his refusal to execute
an underwriting agreement on the basis of this subsection (d).
6.8 INFORMATION BY HOLDER. Each Holder of Registrable Securities
included in any registration shall furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Article VI or otherwise required by applicable state or federal securities
laws.
6.9 LIMITATIONS ON REGISTRATION RIGHTS. From and after the date of
this Agreement, the Company shall not enter into any agreement with any holder
or prospective holder of any securities of the Company giving such holder or
prospective holder (a) the right to require the Company, upon any registration
of any of its securities, to include, among the securities which the Company is
then registering, securities owned by such holder, unless under the terms of
such agreement, such holder or prospective holder may include such securities in
any such registration only to the extent that the inclusion of its securities
will not limit the number of Registrable Securities sought to be included by the
Holders of Registrable Securities or reduce the offering price thereof; or (b)
the right to require the Company to initiate any registration of any securities
of the Company.
6.10 EXCEPTION TO REGISTRATION. The Company shall not be required
to effect a registration under this Article VI if (i) in the written opinion of
counsel for the Company, which counsel and the opinion so rendered shall be
reasonably acceptable to the Holders of Registrable
<PAGE> 7
Securities, such Holders may sell without registration under the Act the
Registrable Securities for which they requested registration under the
provisions of the Act and in the manner and in the quantity in which the
Registrable Securities were proposed to be sold, or (ii) the Company shall have
obtained from the Commission a "no-action" letter to that effect; provided that
this Section 6.10 shall not apply to sales made under Rule 144(k) or any
successor rule promulgated by the Commission until after the effective date of
the Company's initial registration of shares under the Act. Notwithstanding the
foregoing, in no event shall the provisions of this Section 6.10 be construed to
preclude a Holder of Registrable Securities from exercising rights under Section
6.3 for a period of two (2) years after the effective date of the Company's
initial registration of shares under the Act.
6.11 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of restricted securities (as that term is used in Rule 144 under the Act)
to the public without registration, the Company agrees to:
(a) make and keep public information available as those
terms are understood and defined in Rule 144 under the Act, at all times from
and after ninety days following the effective date of the first registration
under the Act filed by the Company for an offering of its securities to the
general public;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Act and the Exchange Act at any time after it has become subject to such
reporting requirements; and
(c) so long as a Purchaser owns any restricted
securities, furnish to the Purchaser forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements of Rule 144
(at any time from and after ninety days following the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), and of the Act and Exchange Act (at any time
after it has become subject to such reporting requirements), a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed as a Purchaser may reasonably request in availing itself of
any rule or regulation of the Commission allowing a Purchaser to sell any such
securities without registration.
6.12 LISTING APPLICATION. If shares of any class of stock of the
Company shall be listed on a national securities exchange, the Company shall, at
its expense, include in its listing application all of the shares of the listed
class then owned, or issuable upon conversion of any shares of Series D
Preferred Stock owned, by any Purchaser.
6.13 MARKET STANDOFF. If requested in writing by the underwriters
for the initial public offering of equity securities of the Company, each Holder
who is a party to this Agreement shall agree that, for a period of 180 days
after such initial public offering, such Holder will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly (including by
way of any hedging or derivative security transaction, costless collar or
similar derivative transaction
<PAGE> 8
using Common Stock held by such Holder), any shares of Common Stock or
securities convertible into or exchangeable or exercisable for any shares of
Common Stock, or publicly disclose the intention to make any such offer, sale,
pledge or disposal without the prior written consent of the underwriters for
such initial public offering of equity securities. Notwithstanding anything in
this Section 6.13 to the contrary, Goldman, Sachs & Co. and its affiliates may
engage in any brokerage, investment advisory, financial advisory, anti-raid
advisory, merger advisory, financing, asset management, trading, market making,
arbitrage and other similar activities conducted in the ordinary course of
Goldman, Sachs & Co.'s and its affiliates' business.
6.14 DAMAGES. The Company recognizes and agrees that the holder of
Registrable Securities shall not have an adequate remedy if the Company fails to
comply with the provisions of this Article VI, and that damages will not be
readily ascertainable, and the Company expressly agrees that in the event of
such failure any Holder of Registrable Securities shall be entitled to seek
specific performance of the Company's obligations hereunder and that the Company
will not oppose an application seeking such specific performance based on there
being an adequate remedy at law.
<PAGE> 1
EXHIBIT 10.08
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of March 2, 1999
by and between SILICON VALLEY BANK, a California-chartered bank, with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
and with a loan production office located at Wellesley Office Park, 40 William
Street, Suite 350, Wellesley, Massachusetts 02481, doing business under the name
"Silicon Valley East" ("Bank") and SILKNET SOFTWARE, INC., a Delaware
corporation with its chief executive office located at The Gateway Building, 50
Phillippe Cote Street, Manchester, New Hampshire 03101 ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the
rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or reclaimed
by Borrower and Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" means a loan advance under the
Committed Revolving Line.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such
Person, and each of such Person's senior executive officers, directors,
partners and, for any Person that is a limited liability company, such
Person's managers and members.
"Agreement" means this Loan and Security Agreement.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in
connection with the preparation, negotiation, administration, and
enforcement of the Loan Documents; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents, (including fees and expenses of appeal or review, or those
incurred in any Insolvency Proceeding) whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's
assets or liabilities, the Collateral, business operations or financial
condition; and all computer programs, or tape files, and the equipment,
containing such information.
"Borrowing Base" means an amount equal to (i) eighty percent
(80%) of Eligible Accounts, as determined by Bank with reference to the
most recent Borrowing Base Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California are authorized
or required to close.
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<PAGE> 2
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A
attached hereto.
"Committed Revolving Line" means a credit extension of up to
Three Million Dollars ($3,000,000.00).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person
with respect to (i) any indebtedness, lease, dividend, letter of credit
or other obligation of another, including, without limitation, any such
obligation directly or indirectly guaranteed, endorsed, co-made or
discounted or sold with recourse by that Person, or in respect of which
that Person is otherwise directly or indirectly liable; (ii) any
obligations with respect to undrawn letters of credit issued for the
account of that Person; and (iii) all obligations arising under any
interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided,
however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be
an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or,
if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event
exceed the maximum amount of the obligations under the guarantee or
other support arrangement.
"Credit Extension" means each Advance, Letter of Credit,
Exchange Contract, or any other extension of credit by Bank for the
benefit of Borrower hereunder.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its
Subsidiaries, as at such date, plus, to the extent not already included
therein, all outstanding Credit Extensions made under this Agreement,
including all Indebtedness that is payable upon demand or within one
year from the date of determination thereof unless such Indebtedness is
renewable or extendable at the option of Borrower or any Subsidiary to
a date more than one year from the date of determination, but excluding
(a) Subordinated Debt, and (b) deferred maintenance revenues of
Borrower.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of
Borrower's representations and warranties to Bank set forth in Section
5.4. Unless otherwise agreed to by Bank in writing, Eligible Accounts
shall not include the following:
(a) Accounts that the account debtor has failed
to pay within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor,
fifty percent (50%) or more of whose Accounts the account
debtor has failed to pay within ninety (90) days of invoice
date;
(c) Accounts with respect to an account debtor,
including Affiliates, whose total obligations to Borrower
exceed twenty-five percent (25%) of all Accounts to the extent
such obligations exceed the aforementioned percentage, except
as approved in writing by Bank;
(d) Accounts with respect to which the account
debtor does not have its principal place of business in the
United States except for Eligible Foreign Accounts;
(e) Accounts with respect to which the account
debtor is a federal, state, or local governmental entity or
any department, agency, or instrumentality thereof, except for
those Accounts
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<PAGE> 3
of the United States or any department, agency or
instrumentality thereof as to which the payee has assigned its
rights to payment thereof to Bank and the assignment has been
acknowledged, pursuant to the Assignment of Claims Act of
1940, as amended (31 U.S.C. 3727);
(f) Accounts with respect to which Borrower is
liable to the account debtor, but only to the extent of any
amounts owing to the account debtor (sometimes referred to as
"contra" accounts, e.g. accounts payable, customer deposits,
credit accounts etc.);
(g) Accounts generated by demonstration or
promotional equipment, or with respect to which goods are
placed on consignment, guaranteed sale, sale or return, sale
on approval, bill and hold, or other terms by reason of which
the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account
debtor is an Affiliate, officer, employee, or agent of
Borrower;
(i) Accounts with respect to which the account
debtor disputes liability or makes any claim with respect
thereto as to which Bank believes, in its sole discretion,
that there may be a basis for dispute (but only to the extent
of the amount subject to such dispute or claim), or is subject
to any Insolvency Proceeding, or becomes insolvent, or goes
out of business; and
(j) Accounts the collection of which Bank
reasonably determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business
in the United States and that are: (1) supported by one or more letters
of credit either advised or negotiated through Bank or in favor of Bank
as beneficiary, in an amount and of a tenor, and issued by a financial
institution, acceptable to Bank; or (2) that Bank approves on a
case-by-case basis.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Exchange Contract" has the meaning set forth in Section
2.1.3.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including
without limitation reimbursement and other obligations with respect to
surety bonds and letters of credit, (b) all obligations evidenced by
notes, bonds, debentures or similar instruments, (c) all capital lease
obligations and (d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or
insolvency law, including assignments for the benefit of creditors,
formal or informal moratoria, compositions, extension generally with
its creditors, or proceedings seeking reorganization, arrangement, or
other relief.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract
of service, of every kind and description now or at any time hereafter
owned by or in the custody or possession, actual or constructive, of
Borrower, including such inventory as is temporarily out of its custody
or possession or in transit and including any returns
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<PAGE> 4
upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Letter of Credit" means a letter of credit or similar
undertaking issued by Bank pursuant to Section 2.1.2.
"Letter of Credit Reserve" has the meaning set forth in
Section 2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other present or future
agreement entered into between Borrower and/or for the benefit of Bank
in connection with this Agreement, all as amended, extended or restated
from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of
Borrower and its Subsidiaries taken as a whole or (ii) the ability of
Borrower to repay the Obligations or otherwise perform its obligations
under the Loan Documents.
"Maturity Date" means the date which is one (1) year from the
Closing Date.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, and any notes,
drafts, instruments, securities, documents of title, or chattel paper,
owned by or payable to Borrower.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due
or to become due, now existing or hereafter arising, including, without
limitation, all "Indebtedness" (as such term is defined in a certain
Loan Modification Agreement by and between the Bank and the Borrower
dated December 1, 1997, as may be amended, and referred to herein as
the "Modification Agreement") and any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt,
liability, or obligation owing from Borrower to others that Bank may
have obtained by assignment or otherwise.
"Payment Date" means the first (1st) calendar day of each
month commencing on the first such date after the Closing Date and
ending on the Maturity Date.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank
arising under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date
and disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in
the ordinary course of business; and
(e) Indebtedness secured by Permitted Liens.
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<PAGE> 5
"Permitted Investment" means:
(a) Investments existing on the Closing Date
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or
any agency or any State thereof maturing within one (1) year
from the date of acquisition thereof, (ii) commercial paper
maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors
Service, Inc., and (iii) certificates of deposit maturing no
more than one (1) year from the date of investment therein
issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or
the other Loan Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being
contested in good faith by appropriate proceedings and as to
which adequate reserves are maintained on Borrower's Books in
accordance with GAAP, PROVIDED the same have no priority over
any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired
or held by Borrower or any of its Subsidiaries to secure the
purchase price of such Equipment or indebtedness incurred
solely for the purpose of financing the acquisition of such
Equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is confined solely to
the property so acquired and improvements thereon, and the
proceeds of such equipment;
(d) Leases or subleases and licenses or
sublicenses granted to others in the ordinary course of
Borrower's business not interfering in any material respect
with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor,
sublicensor or under any lease or license or sublicense
provided that such leases, subleases, licenses and sublicenses
do not prohibit the grant of the security interest granted
hereunder; and
(e) Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured
by Liens of the type described in clauses (a) through (c)
above, PROVIDED that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness
being extended, renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust,
unincorporated organization, association, corporation, institution,
public benefit corporation, firm, joint stock company, estate, entity
or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not
such announced rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable and
investments with maturities of fewer than 90 days of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive
Officer, the President, the Chief Financial Officer and the Controller
of Borrower.
"Schedule" means the schedule of exceptions attached hereto,
if any.
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<PAGE> 6
"Subordinated Debt" means any debt incurred by Borrower that
is subordinated to the debt owing by Borrower to Bank on terms
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business
entity of which more than fifty percent (50%) of the voting stock or
other equity interests is owned or controlled, directly or indirectly,
by such Person or one or more Affiliates of such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries MINUS,
without duplication, (i) the sum of any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and
research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, AND (ii) Total Liabilities.
"Total Liabilities" means as of any applicable date, any date
as of which the amount thereof shall be determined, all obligations
that should, in accordance with GAAP be classified as liabilities on
the consolidated balance sheet of Borrower, including in any event all
Indebtedness, but specifically excluding Subordinated Debt.
1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP
and all calculations and determinations made hereunder shall be made in
accordance with GAAP. When used herein, the term "financial statements"
shall include the notes and schedules thereto. The terms "including" or
"includes" shall always be read as meaning "including (or includes)
without limitation", when used herein or in any other Loan Document.
2. LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS. Borrower promises to pay to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrower hereunder.
Borrower shall also pay interest on the unpaid principal amount of such Credit
Extensions at rates in accordance with the terms hereof.
2.1.1 (a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding
amount not to exceed the Committed Revolving Line or the Borrowing Base,
whichever is less, minus (ii) the face amount of all outstanding Letters of
Credit (including drawn but unreimbursed Letters of Credit) and minus (iii) the
Foreign Exchange Reserve, and minus (iv) all outstanding amounts due under
credit cards issued by the Bank in favor of the Borrower. Subject to the terms
and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1
may be repaid and reborrowed at any time during the term of this Agreement.
(b) Whenever Borrower desires an Advance, Borrower will
notify Bank by facsimile transmission or telephone no later than 3:00 p.m.
Eastern time, on the Business Day that the Advance is to be made. Each such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B hereto. Bank is authorized to make Advances
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer, or without instructions if in
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrower shall indemnify and hold Bank
harmless for any damages or loss suffered by Bank as a result of such reliance.
Bank will credit the amount of Advances made under this Section 2.1 to
Borrower's deposit account.
(c) The Committed Revolving Line shall terminate on the
Maturity Date, at which time all Advances under this Section 2.1 and other
amounts due under this Agreement (except as otherwise expressly specified
herein) shall be immediately due and payable.
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<PAGE> 7
2.1.2 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the
account of Borrower in an aggregate outstanding face amount not to exceed (i)
the lesser of the Committed Revolving Line or the Borrowing Base, whichever is
less, minus (ii) the then outstanding principal balance of the Advances;
PROVIDED that the face amount of outstanding Letters of Credit (including drawn
but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not
in any case exceed One Million Dollars ($1,000,000.00). Each Letter of Credit
shall have an expiry date no later than one hundred eighty (180) days after the
Maturity Date provided that Borrower's Letter of Credit reimbursement obligation
shall be secured by cash on terms acceptable to Bank at any time after the
Revolving Maturity Date if the term of this Agreement is not extended by Bank.
All Letters of Credit shall be, in form and substance, acceptable to Bank in its
sole discretion and shall be subject to the terms and conditions of Bank's form
of standard Application and Letter of Credit Agreement.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any Letters of Credit.
(c) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such Letter of Credit, Bank shall treat such demand as
an Advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(d) Upon the issuance of any letter of credit payable in
a currency other than United States Dollars, Bank shall create a reserve under
the Committed Revolving Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to ten percent (10%) of the face
amount of such letter of credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Revolving Line shall be reduced by the
amount of such reserve for so long as such letter of credit remains outstanding.
2.1.3 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE SETTLEMENTS.
(a) Subject to the terms of this Agreement, Borrower may
enter into foreign exchange contracts (the "Exchange Contracts") not to exceed
an aggregate amount of $1,000,000.00 (the "Contract Limit"), pursuant to which
Bank shall sell to or purchase from Borrower foreign currency on a spot or
future basis. Borrower shall not request any Exchange Contracts at any time it
is out of compliance with any of the provisions of this Agreement. All Exchange
Contracts must provide for delivery of settlement on or before the Maturity
Date. The amount available under the Committed Revolving Line at any time shall
be reduced by the following amounts (the "Foreign Exchange Reserve") on any
given day (the "Determination Date"): (i) on all outstanding Exchange Contracts
on which delivery is to be effected or settlement allowed more than two business
days after the Determination Date, 10% of the gross amount of the Exchange
Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is
to be effected or settlement allowed within two business days after the
Determination Date, 100% of the gross amount of the Exchange Contracts.
(b) Bank may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or (b) that there is
no sufficient availability under the Committed Revolving Line and Borrower does
not have available funds in its bank account to satisfy the Foreign Exchange
Reserve. If Bank terminates the Exchange Contracts, and without limitation of
any applicable indemnities, Borrower agrees to reimburse Bank for any and all
fees, costs and expenses relating thereto or arising in connection therewith.
(c) Borrower shall not permit the total gross amount of
all Exchange Contracts on which delivery is to be effected and settlement
allowed in any two business day period to be more than $1,000,000.00 (the
"Settlement Limit") nor shall Borrower permit the total gross amount of all
Exchange Contracts to which Borrower is a
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party, outstanding at any one time, to exceed the Contract Limit.
Notwithstanding the above, however, the amount which may be settled in any two
(2) business day period may be increased above the Settlement Limit up to, but
in no event to exceed, the amount of the Contract Limit under either of the
following circumstances:
(i) if there is sufficient availability under
the Committed Revolving Line in the amount of the Foreign Exchange
Reserve as of each Determination Date, provided that Bank in advance
shall reserve the full amount of the Foreign Exchange Reserve against
the Committed Revolving Line; or
(ii) if there is insufficient availability under
the Committed Revolving Line, as to settlements within any two (2)
business day period, provided that Bank, in its sole discretion, may:
(A) verify good funds overseas prior to crediting Borrower's deposit
account with Bank (in the case of Borrower's sale of foreign currency);
or (B) debit Borrower's deposit account with Bank prior to delivering
foreign currency overseas (in the case of Borrower's purchase of
foreign currency).
(d) In the case of Borrower's purchase of foreign
currency, Borrower in advance shall instruct Bank upon settlement either to
treat the settlement amount as an advance under the Committed Revolving Line, or
to debit Borrower's account for the amount settled.
(e) Borrower shall execute all standard from applications
and agreements of Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Exchange Contracts.
(f) Without limiting any of the other terms of this
Agreement or any such standard form applications and agreement of Bank, Borrower
agrees to indemnify Bank and hold it harmless, from and against any and all
claims, debts, liabilities, demands, obligations, actions, costs and expenses
(including, without limitation, attorneys' fees of counsel of Bank's choice), of
every nature and description which it may sustain or incur, based upon, arising
out of, or in any way relating to any of the Exchange Contracts or any
transactions relating thereto or contemplated thereby.
2.2 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1.1, 2.1.2 and 2.1.3
of this Agreement is greater than the (i) the Committed Revolving Line or (ii)
the Borrowing Base, which ever is less, minus (iii) the face amount of all
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit), minus (iv) the Foreign Exchange Reserve, and minus (v) all outstanding
amounts due under credit cards issued by the Bank in favor of the Borrower, then
the Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.3(b),
any Advances shall bear interest, on the average daily balance thereof, at a per
annum rate equal to one half of one (0.50%) percentage point above the Prime
Rate.
(b) DEFAULT RATE. All Obligations shall bear interest,
from, after, and during the occurrence of an Event of Default, at a rate equal
to three (3) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable
on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with
Bank, including, without limitation, Account Number 3300053624 for payments of
principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will notify Borrower of all debits which Bank has made
against Borrower's accounts. Any such debits against Borrower's accounts in no
way shall be deemed a set-off. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
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<PAGE> 9
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment, whether directed to Borrower's deposit
account with Bank or to the Obligations or otherwise, shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment in respect of the Obligations unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by Bank after 12:00 noon
Eastern time shall be deemed to have been received by Bank as of the opening of
business on the immediately following Business Day. Whenever any payment to Bank
under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of
Borrower's Accounts (as provided in Section 6.3), and for each
appraisal of Collateral (but with respect to appraisals, only after the
occurrence of an Event of Default) and financial analysis and
examination of Borrower performed from time to time by Bank or its
agents;
(b) BANK EXPENSES. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred
through the date hereof, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by
Borrower or otherwise with respect to the transactions contemplated
hereby (except for taxes on the overall net income of Bank imposed by
the United States of America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against
assets held by, or deposits in or for the account of, or loans by,
Bank; or
(c) imposes upon Bank any other condition with respect to
its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall promptly notify Borrower thereof. Borrower agrees to pay
to Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or determined,
upon presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 TERM. Except as otherwise set forth herein, this Agreement
shall become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Maturity Date.
Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Credit Extensions under this Agreement immediately and
without notice upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination of this Agreement, Bank's lien on the
Collateral shall remain in effect for so long as any
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<PAGE> 10
Obligations are outstanding. Upon termination of any outstanding Obligations,
and the termination of any commitment to make Credit Extensions hereunder, Bank
shall execute all documents necessary or desirable evidencing such termination.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) a negative pledge agreement covering intellectual
property;
(d) an opinion of Borrower's counsel;
(e) financing statements (Forms UCC-1);
(f) insurance certificate;
(g) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(h) Certificate of Foreign Qualification (if applicable);
(i) Completion to the satisfaction of the Bank in its
sole discretion of the initial audit of the Borrower's Accounts; and
(j) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation
of Bank to make each Credit Extension, including the initial Credit Extension,
is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects in light
of the circumstances under which they are made and on and as of the
date of such Payment/Advance Form and on the effective date of each
Credit Extension as though made at and as of each such date, and no
Event of Default shall have occurred and be continuing, or would result
from such Credit Extension. The making of each Credit Extension shall
be deemed to be a representation and warranty by Borrower on the date
of such Credit Extension as to the accuracy of the facts referred to in
this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt payment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations. Notwithstanding termination of
this Agreement, Bank's Lien on the Collateral shall remain in effect for so long
as any Obligations are outstanding.
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<PAGE> 11
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona
fide existing obligations. To the Borrower's knowledge, the service or property
giving rise to such Eligible Accounts has been performed or delivered to the
account debtor or to the account debtor's agent for immediate shipment to and
unconditional acceptance by the account debtor. Borrower has not received notice
of actual or imminent Insolvency Proceeding of any account debtor whose accounts
are included in any Borrowing Base Certificate as an Eligible Account.
5.5 MERCHANTABLE INVENTORY. To the Borrower's knowledge, all
Inventory is in all material respects of good and marketable quality, free from
all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed
in the Schedule, Borrower has not done business and will not without at least
thirty (30) days prior written notice to Bank do business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and for the
period therein specified, and Borrower's consolidated results of operations for
the period then ended. There has not been a material adverse change in the
consolidated financial condition of Borrower since the date of the most recent
of such financial statements submitted to Bank on or about the Closing Date.
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<PAGE> 12
5.9 SOLVENCY. Borrower is able to pay its debts (including trade
debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations T and U of the Board of Governors of the Federal Reserve
System). Borrower has complied with all the provisions of the Federal Fair Labor
Standards Act. Borrower has not violated any statutes, laws, ordinances or rules
applicable to it, violation of which could have a Material Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. To the Borrower's knowledge, none of
Borrower's or any Subsidiary's properties or assets has ever been used by
Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous
owners or operators, in the disposal of, or to produce, store, handle, treat,
release, or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release, or other disposition of hazardous waste or
hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid, or
has made adequate provision for the payment of, all taxes reflected therein,
except those being contested in good faith by proper proceedings with adequate
reserves under GAAP.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 FULL DISCLOSURE. To the Borrower's knowledge, no
representation, warranty or other statement made by Borrower in any certificate
or written statement furnished to Bank contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained in such certificates or statements not misleading in light
of the circumstances under which such representation or warranty was made.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it
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is subject, noncompliance with which could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within twenty five
(25) days after the end of each month (other than the last month of each fiscal
year in which event the annual audited statement shall be furnished), a company
prepared consolidated balance sheet and income statement covering Borrower's
consolidated operations during such period, in a form and certified by an
officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but
in any event (i) on or before March 31, 1999 with respect to the Borrower's
fiscal year 1998, and (ii) within ninety (90) days after the end of Borrower's
fiscal year commencing with the fiscal year 1999, audited consolidated financial
statements of Borrower prepared in accordance with GAAP, consistently applied,
together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank; (c)
within five (5) days of filing, copies of all statements, reports and notices
sent or made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (d) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of Two Hundred Thousand Dollars ($200,000) or more; and (e) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Within twenty five (25) days after the last day of each month in which
there are any Obligations outstanding or Advances are requested, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto, together with aged listings of
accounts receivable, PROVIDED HOWEVER that in the event aggregate Credit
Extensions made, or outstanding, in any month exceed sixty percent (60%) of the
lesser of (i) the Committed Revolving Line, or (ii) Borrowing Base, the Borrower
shall thereafter provide Borrowing Base Certificates to the Bank on a bi-weekly
basis to be delivered to the Bank within five (5) days after the end of each two
(2) week calendar period. Notwithstanding the foregoing, Borrower shall not be
required to deliver a Borrowing Base Certificate for any month in which Borrower
has not requested Advances and no Obligations are outstanding.
Within twenty five (25) days after the last day of each month, Borrower
shall deliver to Bank with the monthly financial statements a Compliance
Certificate signed by a Responsible Officer in substantially the form of EXHIBIT
D hereto.
Bank shall have a right to audit Borrower's Accounts at Borrower's
expense, provided that such audits will be conducted no more often than every
six (6) months. Notwithstanding the foregoing, Bank shall have the right to
audit Borrower's Accounts at any time after an Event of Default has occurred and
is continuing, at the Borrower's expense in each instance. The initial audit
shall take place prior to the making of any Advances hereunder.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than One
Hundred Fifty Thousand Dollars ($150,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if (i) the amount or validity of such payment is contested in good faith
by appropriate proceedings, (ii) Borrower or Subsidiary, as the case may be, has
established proper reserves (to the extent required by GAAP) and (iii) no lien
other than a Permitted Lien results.
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6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as are reasonably satisfactory to Bank.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 DEPOSITORY. Borrower shall maintain a depository and operating
account with Bank and additionally shall maintain at all times in such account a
deposit amount of no less than Four Hundred Thousand Dollars ($400,000.00)
6.8 QUICK RATIO. Borrower shall maintain, as of the last day of
each calendar month, commencing as of the month ending October 31, 1998, a ratio
of Quick Assets to Current Liabilities of at least 1.5 to 1.0.
6.9 LIQUIDITY. Borrower shall maintain, as of the last day of each
calendar month, commencing as of the month ending October 31, 1998, a Liquidity
Ratio of not less than 2.0 to 1.0. For purposes of this Section 6.9, the term
"Liquidity Ratio" shall mean the ratio of (i) the Borrower's cash and cash
equivalents PLUS amounts available to be borrowed under the Committed Revolving
Line, as evidenced by the Borrowing Base Certificate, to (ii) the aggregate
outstanding balance due to the Bank under the existing equipment lines described
in the Modification Agreement.
6.10 TANGIBLE NET WORTH. Borrower shall maintain, as of the last
day of each calendar month, commencing as of the month ending October 31, 1998,
a Tangible Net Worth of not less than Two Million Dollars ($2,000,000.00).
6.11 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following without the Bank's written consent:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than Transfers: (i)
of inventory in the ordinary course of business, (ii) of non-exclusive licenses
and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; (iii) that constitute payment
of normal and usual operating expenses in the ordinary course of business; or
(iv) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, OR MANAGEMENT, BUSINESS
LOCATIONS. Engage in any business, or permit any of its Subsidiaries to engage
in any business, other than the businesses currently engaged in by Borrower and
any business substantially similar or related thereto (or incidental thereto),
or suffer a material change in Borrower's management, or suffer a material
change in Borrower's ownership by Borrower's issuance of its securities,
provided however that the Bank acknowledges that ownership of the Borrower may
change due to the anticipated initial public offering of stock of the Borrower
and the issuance by the Borrower of stock to directors and employees of Borrower
pursuant to its stock plans. Borrower will not, without at least thirty (30)
days prior written notification to Bank, relocate
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<PAGE> 15
its chief executive office or add any new offices or business locations other
than sales offices opened in the ordinary course of business of the Borrower.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person UNLESS: (A)
(i) there is no Event of Default hereunder, AND (ii) that such merger,
consolidation or acquisition will not result, on a prospective basis, in the
breach of any of the covenants, terms and conditions hereunder, AND (iii) that
such merger, consolidation or acquisition is in the same or similar line of
business as the Borrower, AND (iv) the Borrower is either (1) the surviving
legal entity, or (2) the stockholders of the Borrower immediately before such
merger, consolidation, or acquisition own at least a majority of the outstanding
capital of the surviving entity immediately after such merger, consolidation, or
acquisition AND the Borrower provides the Bank with at least forty five (45)
days advance notice of such intended merger, consolidation or acquisition in
which the Borrower shall not be the surviving legal entity to enable the Bank to
ensure the continued perfection of its security interest in the Collateral and
address any issues relative to the effect of such merger, consolidation, or
acquisition upon this Agreement, the costs of which shall be borne by the
Borrower, AND (v) no indebtedness (either direct or contingent) is assumed by
the Borrower in connection with such transaction without the Bank's prior
written consent, or (B) (i) all Obligations of the Borrower are repaid in
connection with such merger, consolidation, or acquisition, AND (ii) this
Agreement (and any commitment by the Bank to make Credit Extensions hereunder)
is terminated.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Except as pre-approved in
writing by the Bank, directly or indirectly enter into or permit to exist any
material transaction with any Affiliate of Borrower except for transactions that
are in the ordinary course of Borrower's business, upon fair and reasonable
terms that are no less favorable to Borrower than would be obtained in an arm's
length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose; fail to meet the minimum funding requirements of ERISA; permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, which violation could have a Material Adverse Effect or a material
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<PAGE> 16
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral; or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of
the Obligations.
8.2 COVENANT DEFAULT.
(a) If Borrower fails to perform any obligation under
Sections 6.3, 6.5, 6.6, 6.7, 6.8, 6.9, or 6.10, or violates any of the covenants
contained in Article 7 of this Agreement; or
(b) If Borrower fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten (10) days after the occurrence
thereof; provided, however, that if the default cannot by its nature be cured
within the ten (10) day period or cannot after diligent attempts by Borrower be
cured within such ten (10) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed thirty (30) days) to attempt to cure
such default, and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default (provided that no Advances
will be required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a change in the
business of the Borrower that has a Material Adverse Effect, or (ii) is a
material impairment of the priority of Bank's security interests in the
Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within thirty (30)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 45 days (provided that no
Advances will be made prior to the dismissal of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a final, non-appealable judgment or judgments
for the payment of money in an amount, individually or in the aggregate, of at
least Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against
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<PAGE> 17
Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days
(provided that no Credit Extensions will be made prior to the satisfaction or
stay of such judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate or writing delivered to Bank by Borrower
or any Person acting on Borrower's behalf pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following in
accordance with applicable law, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable (provided that upon the occurrence of an
Event of Default described in Section 8.5 all Obligations shall become
immediately due and payable without any action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other
agreement between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn,
as collateral security for the repayment of any future drawings under
such Letters of Credit, and Borrower shall forthwith deposit and pay
such amounts, and (ii) pay in advance all Letters of Credit fees
scheduled to be paid or payable over the remaining term of the Letters
of Credit;
(d) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without prior notice to or demand upon Borrower, make
such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower
agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Borrower authorizes
Bank to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which
in Bank's determination appears to be prior or superior to its security
interest and to pay all expenses incurred in connection therewith. With
respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge;
(f) Without prior notice to Borrower set off and apply to
the Obligations any and all (i) balances and deposits of Borrower held
by Bank, or (ii) indebtedness at any time owing to or for the credit or
the account of Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge, Borrower's
labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and
selling any Collateral and, in connection with Bank's exercise of its
rights under this Section 9.1, Borrower's rights under all licenses and
all franchise agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including
Borrower's premises) as Bank
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<PAGE> 18
determines is commercially reasonable, and apply the proceeds thereof
to the Obligations in accordance with applicable laws; and
(i) Bank may credit bid and purchase any Collateral at
any public sale, or at any private sale as permitted by law.
Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; and (f) to file,
in its sole discretion, one or more financing or continuation statements and
amendments thereto, relative to any of the Collateral without the signature of
Borrower where permitted by law. The appointment of Bank as Borrower's attorney
in fact, and each and every one of Bank's rights and powers, being coupled with
an interest, is irrevocable until all of the Obligations have been fully repaid
and performed and Bank's obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices and applicable law, Bank shall not in any way or
manner be liable or responsible for: (a) the safekeeping of the Collateral; (b)
any loss or damage thereto occurring or arising in any manner or fashion from
any cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
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<PAGE> 19
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower Silknet Software, Inc.
The Gateway Building
Phillippe Cote Street
Manchester, New Hampshire 03101
Attn: Mr. Patrick J. Scannell, Jr.
FAX: (603) 625-0428
If to Bank Silicon Valley Bank
William Street
Wellesley, Massachusetts 02481
Attn: Mr. Douglas W. Marshall, Assistant Vice President
FAX: (781) 431-9906
with a copy to: Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire
FAX: (617) 723-6831
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY WAIVER
The laws of the Commonwealth of Massachusetts shall apply to this
Agreement. BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT,
OR PROCEEDING OF ANY KIND, AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON BANK CANNOT AVAIL ITSELF OF
THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, BORROWER ACCEPTS JURISDICTION
OF THE COURTS AND VENUE IN SANTA CLARA COUNTY, CALIFORNIA.
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE
LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
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<PAGE> 20
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall, indemnify, defend, protect
and hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 COUNTERSIGNATURE. This Agreement shall become effective only
when it shall have been executed by Borrower and Bank (provided, however, in no
event shall this Agreement become effective until signed by an officer of Bank
in California).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SILKNET SOFTWARE, INC.
By: /s/ PATRICK J. SCANNELL, JR.
-------------------------------------------
Patrick J. Scannell, Jr.
Title: VP / CFO
By: __________________________________________
Title: ________________________________________
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<PAGE> 21
SILICON VALLEY BANK, d/b/a SILICON VALLEY EAST
By: /S/ DOUGLAS W. MARSHALL
-------------------------------------------
Name: Douglas W. Marshall
Title: Vice President
SILICON VALLEY BANK
By: /s/ MICHAEL JORDAN
-------------------------------------------
Name: Michael Jordan
Title: AVP
(Signed in Santa Clara County, California)
(56120/145)
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<PAGE> 22
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter
acquired, including, without limitation, all machinery,
fixtures, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever
located;
(b) All inventory, now owned or hereafter acquired,
including, without limitation, all merchandise, raw materials,
parts, supplies, packing and shipping materials, work in
process and finished products including such inventory as is
temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other
proceeds, including insurance proceeds, resulting from the
sale or disposition of any of the foregoing and any documents
of title representing any of the above, and Borrower's Books
relating to any of the foregoing;
(c) All contract rights and general intangibles now
owned or hereafter acquired, including, without limitation,
goodwill, leases, license agreements, franchise agreements,
blueprints, drawings, purchase orders, customer lists, route
lists, claims, literature, reports, catalogs, income tax
refunds, payments of insurance and rights to payment of any
kind;
(d) All now existing and hereafter arising accounts,
contract rights, royalties, license rights and all other forms
of obligations owing to Borrower arising out of the sale or
lease of goods, the licensing of technology or the rendering
of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other
security therefor, as well as all merchandise returned to or
reclaimed by Borrower and Borrower's Books relating to any of
the foregoing;
(e) All documents, cash, deposit accounts,
securities, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired
and Borrower's Books relating to the foregoing; and
(f) Any and all claims, rights and interests in any
of the above and all substitutions for, additions and
accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and
derivative work thereof, whether published or unpublished, now owned or
hereafter acquired; any patents, trademarks, servicemarks and
applications therefor; any trade secret rights, including any rights to
unpatented inventions, know-how, operating manuals, license rights and
agreements and confidential information, now owned or hereafter
acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing.
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<PAGE> 23
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _________________________
FAX#: (408) __________________________ TIME: _______________________
FROM: SILKNET SOFTWARE, INC.
FROM:___________________________________________________________________________
AUTHORIZED SIGNER'S NAME
________________________________________________________________________________
AUTHORIZED SIGNATURE
PHONE:__________________________________________________________________________
FROM ACCOUNT #______________________________ TO ACCOUNT#________________________
- --------------------------------------------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $
PRINCIPAL PAYMENT (ONLY) $
INTEREST PAYMENT (ONLY) $
PRINCIPAL AND INTEREST (PAYMENT) $
OTHER INSTRUCTIONS:
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Advance confirmed by this Advance
Request; provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date.
- --------------------------------------------------------------------------------
BANK USE ONLY:
TELEPHONE REQUEST:
------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_________________________
Authorized Requester
________________________________
Authorized Signature (Bank)
Phone #__________________________
- --------------------------------------------------------------------------------
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<PAGE> 24
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Silknet Software, Inc Bank: Silicon Valley Bank
Commitment Amount: $3,000,000.00
ACCOUNTS RECEIVABLE
Accounts Receivable Book Value as of $
-------------
Additions (please explain on reverse) $
-------------
TOTAL ACCOUNTS RECEIVABLE $
-------------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
Amounts over 90 days due $
-------------
Balance of 50% over 90 day accounts $
-------------
Concentration Limits $
-------------
Foreign Accounts $
-------------
Governmental Accounts $
-------------
Contra Accounts $
-------------
Promotion or Demo Accounts $
-------------
Intercompany/Employee Accounts $
-------------
Other (please explain on reverse) $
-------------
TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
-------------
Eligible Accounts (#3 minus #13) $
-------------
LOAN VALUE OF ACCOUNTS (80% of #14) $
-------------
BALANCES
Maximum Loan Amount $3,000,000.00
-------------
Total Funds Available (Lesser of #16 or #15) $
-------------
Present balance owing on Line of Credit $
-------------
Outstanding under Sublimits ( ) $
-------------
RESERVE POSITION (#17 minus #18 and #19) $
-------------
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS: ===============================
BANK USE ONLY
SILKNET SOFTWARE, INC. RECEIVED
BY:____________________________
DATE:__________________________
By: _______________________ REVIEWED:
Authorized Signer BY:____________________________
COMPLIANCE STATUS: YES/NO
===============================
<PAGE> 25
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: SILKNET SOFTWARE, INC.
The undersigned authorized officer of SILKNET SOFTWARE, INC. hereby certifies
that in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending __________ with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by the Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such compliance is determined not just at the date this certificate is
delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
Reporting Covenant Required Complies
- ------------------ -------- --------
Monthly financial statements Monthly within 25 days* Yes No
Annual (CPA Audited) FYE within 90 days Yes No
10Q and 10K Within 5 days after filing
with the SEC Yes No
A/R Agings Monthly within 25 days* Yes No
* subject to bi-weekly reporting as may be required pursuant to Section 6.3
of the Agreement.
Financial Covenant Required Actual Complies
- ------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ration 1.5:1.0 ____:1.0 Yes No
Minimum Liquidity 2.0:1.0 ____:1.0 Yes No
Minimum Tangible Net Worth $2,000,000.00 $_______ Yes No
Comments Regarding Exceptions: ==============================
BANK USE ONLY
Sincerely, RECEIVED
BY:___________________________
_________________Date:_________________ DATE:_________________________
SIGNATURE REVIEWED:
BY:___________________________
_________________ COMPLIANCE STATUS: Yes/No
TITLE ==============================
<PAGE> 1
EXHIBIT 10.09
-------------
SILICON VALLEY BANK
EAST COAST EQUIPMENT LOAN
LOAN AND SECURITY AGREEMENT
Borrower: Silknet Software, Inc. Address: The Gateway Building
50 Phillippe Cote Street
Manchester, NH 03101
Date: March 5, 1997
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, a California state chartered bank ("Silicon"), whose
address is 3003 Tasman Drive, Santa Clara, California 95054 and with a loan
production office located at 40 William Street, Suite 350, Wellesley, MA 02181
doing business under the name "Silicon Valley East" and the borrower named
above, (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address").
1. LOANS. Silicon will make loans to Borrower (the "Loans") in amounts
determined by Silicon in its reasonable business judgment up to the amount (the
"Credit Limit") shown on the Schedule to this Agreement (the "Schedule"),
provided no Event of Default and no event which, with notice or passage of time
or both, would constitute an Event of Default has occurred. All Loans and other
monetary Obligations will bear interest at the rate shown on the Schedule.
Interest will be payable monthly, on the date shown on the monthly billing from
Silicon. Silicon may, in its discretion, charge interest to Borrower's deposit
accounts maintained with Silicon.
2. SECURITY INTERESTS. As security for all present and future indebtedness,
guarantees, liabilities, and other obligations, of Borrower to Silicon
(collectively, the "Obligations"). Borrower hereby grants Silicon a continuing
security interest in all of Borrower's interest in the following types of
property, whether now owned or hereafter acquired, and wherever located
(collectively, the "Collateral"): All "accounts," "general intangibles,"
"chattel paper," "documents," "letters of credit," "instruments," "deposit
accounts," "inventory," "farm products," "fixtures" and "equipment," as such
terms are defined in the Massachusetts Uniform Commercial Code in effect on the
date hereof, and all products, proceeds and insurance proceeds of the foregoing.
3. REPRESENTATIONS AND AGREEMENTS OF BORROWER. Borrower represents to Silicon
as follows, and Borrower agrees that the following representations will continue
to be true, and that Borrower will comply with all of the following agreements
throughout the term of this Agreement.
<PAGE> 2
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is
and will continue to be, duly authorized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. The execution, delivery
and performance by Borrower of this Agreement, and all other documents
contemplated hereby have been duly and validly authorized, and do not violate
any law or any provision of, and are not grounds for acceleration under, any
agreement or instrument which is binding upon Borrower.
3.2 NAME; PLACES OF BUSINESS. The name of Borrower set forth in this
Agreement is its correct name. Borrower shall give Silicon 15 days' prior
written notice before changing its name. The address set forth in the heading to
this Agreement is Borrower's chief executive office. In addition, Borrower has
places of business and Collateral is located only at the locations set forth on
the Schedule. Borrower will give Silicon at least 15 days prior written notice
before changing its chief executive office or locating the Collateral at any
other location.
3.3 COLLATERAL. Silicon has and will at all times continue to have a
first-priority perfected security interest in all of the Collateral other than
specific equipment. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.4 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles. Since the last date
covered by any such statement, there has been no material adverse change in the
financial condition or business of Borrower. Borrower will provide Silicon: (i)
within 25 days after the end of each month, a monthly financial statement
prepared by Borrower, a compliance certificate and such information as Silicon
shall reasonably request: (ii) within 90 days following the end of Borrower's
fiscal year, beginning with fiscal year ending June 30, 1997, complete annual
financial statements, certified by independent certified public accountants
acceptable to Silicon and accompanied by the unqualified report thereon by said
independent certified public accountants: and (iii) other financial information
reasonably requested by Silicon from time to time.
3.5 TAXES; COMPLIANCE WITH LAW. Borrower has filed, and will file, when
due, all tax returns and reports required by applicable law, and Borrower has
paid, and will pay, when due, all taxes, assessments, deposits and contributions
now or in the future owed by Borrower. Borrower has complied, and will comply,
in all material respects, with all applicable laws, rules and regulations.
3.6 INSURANCE. Borrower shall at all times insure all of the tangible
personal property Collateral and carry such other business insurance as is
customary in Borrower's industry.
3.7 ACCESS TO COLLATERAL AND BOOKS AND RECORDS. At reasonable times, on
one business day notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records.
3.8 OPERATING ACCOUNTS. Borrower shall maintain its primary
operating accounts with Bank.
<PAGE> 3
3.9 FINANCIAL COVENANTS. Borrower shall at all times comply with the
financial covenants set forth in the Schedule to this Agreement.
3.10 ADDITIONAL AGREEMENTS. Borrower shall not, without Silicon's prior
written consent, do any of the following: (i) enter into any transaction outside
the ordinary course of business except for the sale of capital stock to venture
investors, provided that Borrower promptly delivers written notification to
Silicon of any such sale; (ii) sell or transfer any Collateral, except for the
sale of finished inventory or non-exclusive software licenses in the ordinary
course of Borrower's business, and the sale of obsolete or unneeded equipment in
the ordinary course of business; (iii) pay or declare any dividends on
Borrower's stock (except for dividends payable solely in stock of Borrower); or
(iv) redeem, retire, purchase or otherwise acquire, directly or indirectly, any
of Borrower's stock other than the repurchase of up to five percent (5%) of
Borrower's then issued stock in any fiscal year from Borrower's employees or
directors pursuant to written agreement with Borrower.
4. TERM. This Agreement shall continue in effect until the maturity date set
forth on the Schedule (the "Maturity Date"). This Agreement may be terminated,
without penalty, prior to the Maturity Date as follows: (i) by Borrower,
effective three business days after written notice of termination is given to
Silicon; or (ii) by silicon at any time after the occurrence of an Event of
Default, without notice, effective immediately. On the Maturity Date or on any
earlier effective date of termination, Borrower shall pay all Obligations in
full, whether or not such Obligations are otherwise then due and payable. No
termination shall in any way affect or impair any security interest or other
right or remedy of Silicon, nor shall any such termination relieve Borrower of
any Obligation to Silicon, until all of the Obligations have been paid and
performed in full.
5. EVENTS OF DEFAULT AND REMEDIES. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement: (a) Any
representation, statement, report or certificate given to Silicon by Borrower of
any of its officers, employees or agents, now or in the future, is untrue or
misleading in a material respect; or (b) Borrower fails to pay when due any Loan
or any interest thereon or any other monetary Obligation; or (c) the total
Obligations outstanding at any time exceed the Credit Limit; or (d) Borrower
fails to perform any other non-monetary Obligation, which failure is not cured
within 5 business days after the date due; or (e) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by or against Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (f) a material
change in the ownership of Borrower, without the prior written consent of
Silicon except for the sale of capital stock to venture investors, provided that
Borrower promptly delivers written notification to Silicon of any such sale; or
(g) a material adverse change in the business, operations, or financial or other
condition of Borrower. If an Event of Default occurs, Silicon, shall have the
right to accelerate and declare all of the Obligations to be immediately due and
payable, increase the interest rate by an additional four percent per annum, and
exercise all rights and remedies accorded it by applicable law.
<PAGE> 4
6. GENERAL. If any provision of this Agreement is held to be unenforceable, the
remainder of this Agreement shall still continue in full force and effect. This
Agreement and any other written agreements, documents and instruments executed
in connection herewith are the complete agreement between Borrower and Silicon
and supersede all prior and contemporaneous negotiations and oral
representations and agreements, all of which are merged and integrated in this
Agreement. There are no oral understandings, representations or agreements
between the parties which are not in this Agreement or in other written
agreements signed by the parties in connection this Agreement. The failure of
Silicon at any time to require Borrower to comply strictly with any of the
provisions of this Agreement shall not waive Silicon's right later to demand and
receive strict compliance. Any waiver of a default shall not waiver any other
default. None of the provisions of this Agreement may be waived except by a
specific written waiver signed by an officer of Silicon and delivered to
Borrower. The provisions of this Agreement may not be amended, except in a
writing signed by Borrower and Silicon. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all other reasonable costs incurred by Silicon,
in connection with this Agreement (whether or not a lawsuit is filed). If
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party shall be entitled to recover its
reasonable costs and attorneys' fees from the non-prevailing party. Borrower may
not assign any rights under this Agreement without Silicon's prior written
consent. This Agreement shall be governed by the laws of the Commonwealth of
Massachusetts.
7. MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN
ANY WAY RELATING TO, THIS AGREEMENT OR ANY CONDUCT, ACT OR OMISSION OF SILICON
OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
AFFILIATES.
This Agreement is executed as of the date first written above.
Borrower:
By: /s/ Nigel K. Donovan - Vice President
---------------------------------------
President or Vice President
Silicon:
SILICON VALLEY BANK
By:
-----------------------------------
Title:--------------------------------
<PAGE> 5
SCHEDULE TO EAST COAST EQUIPMENT LOAN
LOAN AND SECURITY AGREEMENT
BORROWER: Silknet Software, Inc.
DATE: March 5, 1997
This Schedule is an integral part of the Loan and Security Agreement
between Silicon Valley Bank, a California state chartered bank ("Silicon") and
the above-named borrower ("Borrower") of even date.
Credit Limit (Equipment) $300,000.00 (such amount to be funded under the
(Section 1): aggregate Credit Limit). Equipment Advances will
be made only on or prior to March 31, 1997 (the
"Last Advance Date") and only for the purpose of
purchasing equipment reasonably acceptable to
Silicon. Advances shall not exceed 80% of the
invoice value. Advances for software and leasehold
improvements may, however, comprise up to 50% of
the total Equipment Advances. Borrower must
provide invoices for the equipment, dated
subsequent to October 1, 1996, to Silicon on or
before the Last Advance Date.
Interest Rate (Section 1): A rate equal to the "Prime Rate" in effect from
time to time, plus 2% per annum. Interest shall be
calculated on the basis of a 360-day year for the
actual number of days elapsed. "Prime Rate" means
the rate announced from time to time by Silicon as
its "prime rate;" it is a base rate upon which
other rates charged by Silicon are based, and it
is not necessarily the best rate available at
Silicon. The interest rate applicable to the
Obligations shall change on each date there is a
change in the Prime Rate.
Financial Covenants Borrower shall comply with all of the following
(Section 3.9): covenants. Compliance shall be determined as of
the end of each month, except as otherwise
provided below:
Tangible Net Worth. Borrower shall maintain a minimum Tangible Net
Worth of $450,000.00.
Liquidity. Borrower shall maintain a minimum Cash
plus 50% of A/R equal to 1.5x outstandings on the
line of credit.
<PAGE> 6
Equity Investment. Borrower must raise a minimum
equity investment of $2,000,000.00 by May 15,
1997.
Definitions. "Tangible Net Worth" means the excess of total
assets over total liabilities, determined in
accordance with GAAP, excluding however all assets
which would be classified as intangible assets
under GAAP, including, without limitation
goodwill, licenses, patents, trademarks, trade
names, copyrights, capitalized software and
organizational costs, licenses and franchises.
Maturity Date (Section 4): After the Last Advance
Date, the unpaid principal balance of the
Equipment Advances shall be repaid in 24 equal
monthly installments of principal plus interest
commencing on April 30, 1997 and continuing on the
same day of each month thereafter until the entire
unpaid principal balance and all accrued unpaid
interest of the Equipment Advances have been paid
(subject to Silicon's right to accelerate the
Equipment Advances on an Event of Default).
Borrower: Silicon:
SILKNET SOFTWARE, INC. SILICON VALLEY BANK
By: /s/ Nigel K. Donovan By:
---------------------------------- ---------------------------------
President or Vice President Title
------------------------------
<PAGE> 7
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of December 1,
1997, by and between Silknet Software, Inc. ("Borrower") whose address is The
Gateway Building, 50 PhillipPe Cote Street, Manchester, NH 03101 and Silicon
Valley Bank, a California-chartered bank ("Silicon"), with its principal place
of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan
production office located at Wellesley Office Park, 40 William Street, Suite
350, Wellesley, MA 02181, doing business under the name "Silicon Valley East".
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Silicon, Borrower is indebted to Silicon pursuant to, among
other documents, an East Coast Equipment Loan and Security agreement (and
Schedule thereto) dated March 5, 1997, as may be amended from time to time, (the
"Loan Agreement"). The Loan Agreement provided for, among other things, an
Equipment Facility with a Credit Limit in the amount of Three Hundred Thousand
and 00/100 dollars ($300,000.00) (the "Equipment Facility #1"). With this
Agreement, an equipment facility in the amount of Four Hundred Thousand and
00/100 Dollars ($400,000.00) (the "Equipment Facility #2) shall be provided to
Borrower for the purchase of equipment. Capitalized terms used but not otherwise
defined herein shall have the same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Silicon shall be referred
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured by the
Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Document". Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to as
the "Existing Loan Document".
3. DESCRIPTION OF CHANGE IN TERMS.
A. MODIFICATION TO LOAN AGREEMENT AND SCHEDULE THERETO.
1. The following is hereby incorporated into the Schedule to
the Loan Agreement as follows:
EQUIPMENT FACILITY #2 (CREDIT LIMIT). Advances will be made
under Equipment facility #2 up to Four Hundred Thousand and
00/100 Dollars ($400,000.00).
EQUIPMENT FACILITY #2. Equipment Advances will be made only
on or prior to February 28, 1998 (the "Last Advance Date
#2") and only for the purpose of purchasing equipment
reasonably acceptable to Silicon. Advances shall not exceed
90% of the invoice value. Advances for
<PAGE> 8
software and leasehold improvements may, however, comprise
up to 25% of the total Equipment Facility #2.
Prior to the Last Advance Date #2, Borrower shall pay
regular monthly payments of all accrued unpaid interest
due as of each payment date beginning December 31, 1997
and all subsequent interest payments will be due on the
last day of each month thereafter. The outstanding
principal balance under the Equipment Facility as of the
Last Advance Date will be payable in thirty six (36) even
payments of principal plus interest due as of each payment
date, beginning March 31, 1998 and all subsequent payments
will be due on the last day of each month thereafter. The
final payment will be for all outstanding principal plus
all accrued interest not yet paid.
2. The paragraph entitled "Interest Rate" is hereby Amended
to incorporate the following:
Equipment Facility #2 Interest Rate. A rate equal to the
"Prime Rate" in effect from time to time, plus 1.00 per
annum.
3. The "Equity Investment" covenant as described in the
Section entitled "Financial Covenants" is hereby deleted
in its entirety.
4. The Liquidity covenant as described in the Section
entitled "Financial Covenants" is hereby amended as
follows:
Borrower shall maintain, as of the last day of each month,
a minimum cash (and cash equivalents) plus 50% of accounts
receivable equal to 2.00 times the outstandings under the
Equipment Facility #1 and Equipment Facility #2.
5. The Tangible Net Worth covenants as described in the
Section entitled "Financial Covenants" is hereby amended
as follows:
Borrower shall maintain, as of the last day of each month,
a minimum tangible net worth of $750,000.00.
4. PAYMENT OF LOAN FEE OR COMPENSATING BALANCES. Borrower shall pay Silicon a
fee in the amount of Three Thousand and 00/100 Dollars ($3,000.00) (the "Loan
Fee"), plus all out-of-pocket expenses. In the event Borrower maintains minimum
daily uncollected balances of not less than $500,000.00 in accounts maintained
with Silicon, Borrower shall not be required to pay the Loan Fee (the
"Compensating Balance Requirement").
5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
<PAGE> 9
6. NO DEFENSES OR BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Indebtedness, Silicon is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Silicon's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Silicon to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction or the Indebtedness. It is the
intention of Silicon and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released by
Silicon in writing. No maker, endorser, or guarantor will be released by virtue
of this Loan Modification Agreement. The terms of this Paragraph apply not only
to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its
properties, unconditionally, the non-exclusive jurisdiction of any state or
federal court of competent jurisdiction in the Commonwealth of Massachusetts in
any action, suit, or proceeding of any kind against it which arising out of or
by reason of this Loan Modification Agreement; provided, however, that if for
any reason Silicon cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Silicon (provided,
however, in no event shall this Loan Modification Agreement become effective
until signed by an officer of Silicon in California).
10. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee or the maintenance of the Compensating
Balance Requirement.
This Loan Modification Agreement if executed as of the date first
written above.
BORROWER: SILICON
SILKNET SOFTWARE, INC. SILICON VALLEY BANK, doing business
as SILICON VALLEY EAST
By: /s/ Nigel K. Donovan By:
----------------------------- --------------------------------
Name: Nigel K. Donovan Name:
--------------------------- ------------------------------
Title: CFO and Treasurer Title:
-------------------------- -----------------------------
<PAGE> 10
SILICON VALLEY BANK
By:
---------------------------------
Name:
---------------------------------
Title
---------------------------------
(Signed at Santa Clara County, CA)
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF THE REGISTRANT
Silknet Software (Canada) Inc.
Silknet Software (UK) Limited
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement on Form S-1 of our
report dated December 18, 1998 except for Note M for which the date is March 2,
1999, on our audits of the consolidated financial statements of Silknet
Software, Inc. We also consent to the reference to our firm under the caption
"Experts."
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
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<CIK> 0001079451
<NAME> SILKNET SOFTWARE INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,585
<SECURITIES> 0
<RECEIVABLES> 4,078
<ALLOWANCES> 200
<INVENTORY> 0
<CURRENT-ASSETS> 9,067
<PP&E> 2,237
<DEPRECIATION> 760
<TOTAL-ASSETS> 10,598
<CURRENT-LIABILITIES> 4,589
<BONDS> 0
0
20,021
<COMMON> 27
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<TOTAL-LIABILITY-AND-EQUITY> 10,598
<SALES> 3,688
<TOTAL-REVENUES> 5,544
<CGS> 184
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<OTHER-EXPENSES> 7,800
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,809)
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