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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-
SILKNET SOFTWARE, INC.
(Exact Name of registrant as specified in its charter)
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DELAWARE 02-0478949
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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50 PHILLIPPE COTE STREET, MANCHESTER, NH 03101
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 625-0070
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of September 20, 1999, was approximately $220 million (based
on the closing price of the Registrant's Common Stock on September 20, 1999, of
$42.00 per share).
The number of shares outstanding of the Registrant's $.01 par value Common
Stock as of September 20, 1999 was 15,599,034.
DOCUMENT INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended June 30,
1999. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.
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SILKNET SOFTWARE, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1999
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Consolidated Financial Data........................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7a. Quantitative and Qualitative Disclosure About Market Risk... 31
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 51
Item 13. Certain Relationships and Related Transactions.............. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 52
SIGNATURES............................................................ 54
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PART I
ITEM 1. BUSINESS
This Business section and other parts of this Form 10-K contain
forward-looking statements that involve risk and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this Form
10-K.
GENERAL
Silknet Software, Inc. ("Silknet" or the "Company") (Nasdaq: SILK) provides
software that allows companies to offer their customers personalized marketing,
sales, electronic commerce and customer support services through a single Web
site interface tailored by that company to meet its customer requirements.
Silknet's products enable a company to deliver these services to its customers
over the Web through customer self-service and immediate, direct collaboration
among that company and its customers, partners, vendors and suppliers. Silknet's
products allow a company to coordinate its interactions with customers by
integrating a variety of communications media, such as the Web, e-mail and the
telephone. Silknet's software can capture and consolidate data derived from all
these sources and distribute it throughout a company and to its partners to
provide a single view of a customer. This solution is more efficient for a
company and also more efficient for its customers, creating a competitive
advantage for that company.
THE SILKNET SOLUTION
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, Web site interface tailored by that company to meet its customer
requirements. Using Silknet's products, companies are able to:
- provide customers with a self-service capability to obtain a full range
of personalized services over the Web;
- deliver interactive commerce solutions that not only allow the electronic
sale of products, but also integrate the ongoing support and service of
those products on-line;
- coordinate interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone;
- provide a customer with personalized information and services based on
his or her preferences and prior interactions with that company;
- customize a browser-based interface that graphically utilizes windows
screen displays and icons to reflect their corporate image;
- collaborate with customers, partners, vendors and suppliers to solve
customer support problems, share information and conduct electronic
commerce; and
- capture, manage, publish and distribute real-time information throughout
the organization, including the marketing, sales, customer service,
billing, purchasing and product development departments.
PRODUCTS
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single Web site interface tailored by the company
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to meet its customer requirements. Silknet's products enable a company to
deliver these services to its customers over the Web through real-time
collaboration and customer self-service. Silknet's products allow a company to
coordinate its interactions with customers by integrating a variety of
communications media, such as the Web, e-mail and the telephone. Silknet's
software can capture and consolidate data derived from all of these sources and
distribute it throughout a company and to its partners to provide a single view
of a customer. Silknet's software products include:
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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 eCommerce Extensions An application that integrates Silknet eService with Silknet
eCommerce or third-party electronic commerce products,
enabling shopping, service and support through a single Web
interface.
Silknet eBusiness Toolkit An application that enables a company to create customized
business objects that add company-specific functionality to
the Silknet eBusiness System platform.
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Silknet licenses its products on a per user basis. Silknet typically
charges a company from $500 to $2,500 for every private user, who is typically
an employee of that company, and from $1 to $10 for every anticipated public
user, who is typically a customer of that company. The per user charges
generally increase with the number of Silknet applications and functions
utilized by a company. For the fiscal year ended 1999, the average license fee
per customer was approximately $472,000.
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The following diagram illustrates the various components of the Silknet
product suite and how they interrelate:
[Graph]
[Graphical depiction of the Silknet product suite, how it integrates other
software systems and how it integrates communications among a company's
employees, customers, partners and vendors over a variety of media.]
SILKNET eBUSINESS SYSTEM
The Silknet eBusiness System is both a set of Web-based applications and an
expandable platform for building, deploying and adapting software applications.
This platform can service additional users by adding more hardware, allowing a
customer to service a growing customer base. Silknet's platform can also be
tailored and extended to add features and functionality to accommodate the way a
company does business as that company's business evolves. The Silknet eBusiness
System integrates personalized interactions, collaborations and transactions
over the Web among a company and its customers, partners, vendors and suppliers.
With the Silknet eBusiness System, a customer can easily access information
from a company's marketing, sales, customer service, billing, purchasing and
product development departments. By deploying the Silknet eBusiness System, a
company can integrate its customers into an environment where customers can
collaborate directly and immediately with company representatives, suppliers and
partners. This process engages customers in an interactive, personalized
exchange to solve problems. It allows a company to leverage the customer's
individual knowledge to provide a more efficient and effective experience for
both the company and its customers. The Silknet eBusiness
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System employs an easy-to-use interface that graphically utilizes windows,
screen displays and icons and features a set of components using Web-based
browsers and search engines that provide access to all Silknet applications and
a company's other Web-based solutions. The product integrates internal and
external business processes operating on both traditional mainframe and
distributed, networked computing systems with Silknet's Web-based
infrastructure.
The Silknet eBusiness System includes the following applications and
features:
Personalization
The Personalization feature enables a company to provide a personalized Web
site interface for the customer to interact, collaborate and conduct business
over the Web. Using the Personalization feature, a company can:
- notify customers of product improvements, promotions and case updates,
and tailor information to the end-user's unique preferences;
- provide customers with a personalized view of all of their activity with
that company, including support requests, credit checking, sales
questions and order tracking; and
- make recommendations based on a customer's demographic profile,
preferences and history of service incidents, inquiries and purchases.
Knowledge Manager
The Knowledge Manager application captures, manages, publishes and
distributes corporate knowledge about its products and services. A company can
use this application to organize its corporate knowledge base on a secure
platform that is quickly accessible and easily usable by employees, customers,
partners, vendors and suppliers. Knowledge Manager provides companies with a
real-time, interactive environment in which to process and publish solutions to
common customer problems. Features of the Knowledge Manager application include:
- a multimedia platform supporting audio, video, graphics, diagrams, screen
displays and internal and external hyperlinks to the Web;
- the ability to render, publish and index multimedia solutions, in real
time, as a direct result of solving customers' problems or inquiries; and
- the storage of published solutions as business objects so they can be
combined with other business objects, such as customer profiles and case
histories.
Extranet Workflow
The Extranet Workflow application integrates internal and external business
processes with a Web interface, linking a company's legacy and client/server
systems within departments of a company to each other and to other employees,
customers, partners, vendors and suppliers. Once installed on the company's
server, this application allows these parties to participate in a cooperative
and efficient process to better service themselves. Unlike conventional workflow
systems, Extranet Workflow does not require a user agent to be installed on each
user's computer, thereby allowing the 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.
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Business Rules and Business Events
Combined with Extranet Workflow, the Business Rules and Business Events
features allow a company to modify the Silknet eBusiness System to fit its
needs, instead of modifying its business processes to fit the software.
Companies can define, categorize, assign and process business data, tasks and
events related to a specific customer relationship. After defining a business
event, a company can then communicate the appropriate response, or business
rule, to resolve the customer problem or inquiry. The Business Events feature
provides a mechanism for the Silknet eBusiness System to execute a Business Rule
when a customer operation is performed. For example, when a particular customer
request is received, if the system identifies the user as a very important
customer, the person responsible for the task might receive a page alerting him
to address the task.
The Silknet eBusiness System is shipped to a customer with a standard set
of business events. A company can customize and define its own business events
and business rules to the specialized needs of that company's business processes
and the unique character of its customer relationships. Using the Business Rules
and Business Events features, a company can:
- dynamically change business processes based on company or customer data;
- assign workflow tasks to individuals or groups; and
- notify individuals or groups of business events, using the Web, e-mail,
the telephone, a pager or other messaging media.
Silknet eBusiness Toolkit
Silknet is currently developing SilkDataObjects, an application written in
Extensible Markup Language that Silknet plans to include in the Silknet
eBusiness Toolkit. This toolkit 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
currently in beta release and is scheduled for general 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 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;
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- single-screen displays of a workload summary and real-time selection of
case views from a drop-down menu of choices;
- case creation, organization and resolution, and definition of case views
at the individual or system level;
- Web hyperlinks, images, video, audio, screen displays and other data
files to facilitate customer understanding; and
- case history analysis, assistance and contribution, reassignment and
escalation.
Web Communications
The Web Communications application enables multimedia collaboration over
the Web. This application allows a company to provide assisted service, in
addition to self-service, to its customers, partners, vendors and suppliers.
Features of the Web Communications application include:
- real-time chat and electronic white boards to help solve customer
problems;
- the ability to share graphics, screen displays and diagrams; and
- integration with Microsoft's NetMeeting to allow collaboration and video
conferencing among a company's service representatives and its customers,
partners, vendors and suppliers.
Call Center Integration
The Call Center Integration application provides customer service
representatives with a single interface to customer inquiries received over
various media, including the Web, e-mail and the telephone. This application
enables companies to capture and manage information from customer interactions
anywhere within the organization in a centralized case management system.
Customer service representatives can access customer information not only from
the call center, but also from their company's intranet to include data from
multiple departments, and from their company's extranet to include data from
customers, partners, vendors and suppliers. The Call Center Integration
application provides:
- high-volume call processing and problem resolution;
- single-screen displays of a customer's profile and case history;
- automatic case routing, queuing and escalation; and
- integration with third-party computer telephony software applications.
e-Mail Response Management
The e-Mail Response Management application provides a tracking and routing
system to respond to large volumes of incoming customer e-mail. This application
enables customer service and sales representatives to manage both e-mail
received from, and e-mail sent to, customers. The e-Mail Response Management
application manages the e-mail queuing process by urgency, premium service,
escalation level, the response time guaranteed to the customer or other customer
response attributes. Features of this application include:
- automatic, personalized acknowledgment of e-mail;
- automatic routing and workflow regardless of method of communication; for
example, inquiries and cases received by e-mail are handled in the same
manner as those received over the Web or the telephone;
- pop-up messages alerting service or sales representatives, containing
customer name, case number, date and nature of customer inquiry;
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- automatic tracking, saving and logging of each e-mail so that all
interaction becomes appended to the case history; and
- dynamic, real-time reporting so managers can assess volume and
performance.
Other Features of Silknet eService
Silknet eService also contains the following features that enable customer
self-service:
- InfoPath, a problem resolution tool that utilizes Extensible Markup
Language and Java as software development programming languages to
provide a series of natural language questions that help customers
identify symptoms and narrow the problem;
- a tool that allows customers to search a multimedia knowledge base using
simple English questions or commands; and
- FAQs, a listing of frequently asked questions which offers solutions to
common problems or answers to frequent inquiries and which allows
postings to the Web or intranet that can be linked to the multimedia
platform to provide graphical or audible solutions.
SILKNET eCOMMERCE
The Silknet eCommerce application combines Silknet eBusiness System and
Microsoft's Site Server Commerce Edition engine and enables a company to create
and manage an electronic storefront over the Web. Through the Silknet eBusiness
System platform, Silknet adds extranet workflow, object definition and
adaptability to Microsoft's Site Server Commerce Edition. The product provides
personalized shopping and promotion for both business-to-consumer and
business-to-business commerce. Features of the Silknet eCommerce application
include:
Site Builder Wizard
Site Builder Wizard is a step-by-step, graphical user interface that
assists a company in creating electronic stores or catalogs quickly and easily.
Site Builder Wizard helps a company establish cross-selling information, price
promotions, stores with multi-level departments, and products with varied
attributes.
Intelligent CrossSell
Intelligent CrossSell is an application that allows a company to run
promotions for products and to create cross-selling opportunities through the
promotions. It uses shopper trends and transaction information to recommend
products of interest to other customers. For the shopper, Intelligent CrossSell
enables customers to navigate a company's Web site to discover products of
interest to 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
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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 eCOMMERCE EXTENSIONS
The Silknet eCommerce Extensions 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
eCommerce Extensions create 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 eCommerce Extensions help companies and
their customers manage the entire customer relationship, from initial point of
interest to shopping and buying, support and service, marketing and follow-on
purchases. Features of this application include:
- One Log-in -- allows customers to browse, purchase or obtain service from
a single Web site interface;
- One View -- integrates the purchase and support history of the customer,
allowing sales and service representatives to better respond to customer
problems and inquiries;
- Complete Contact -- allows sales and service representatives to include
in any customer interaction commerce-and service-related Web hyperlinks,
such as sales order, inquiry and trouble ticketing; and
- Total Solution -- enables service representatives to provide multimedia
service solutions in an electronic commerce transaction.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Silknet is a leader in the delivery of interactive, Web-based electronic
business solutions that use advanced, industry standard Web and distributed
object technologies. Silknet's applications are built on Microsoft Windows
Distributed InterNet Applications architecture, which includes technologies such
as Microsoft's Distributed Component Object Model and Microsoft's Transaction
Server. This architecture allows Silknet to provide future upgrades of highly
scaleable, multi-tier business applications for deployment over the Web or any
network, while preserving a company's investment in existing applications and
data. In addition, Silknet's products incorporate a graphical user interface
that allows a company to create tailored applications for data model creation
and display, data object creation, workflow and business rules.
Silknet's products employ a standard, Web-designed architecture. Unlike a
client/server architecture, individual users simply need a browser to perform
any function available in the product. No software needs to be distributed to
any user, either within the organization or to customers, partners, vendors or
suppliers, making the software easier to implement, maintain and upgrade than
client/server solutions.
The multiple-component architecture of Silknet's products allows a company
to distribute the server side of the software across many different systems for
increased scalability and reliability. The customer side of the application,
which operates outside a company's firewall, or electronic security
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barrier, and is open to the public, and the employee side of the application,
which is typically used within a company behind its firewall and is closed to
public access, operate on both Windows NT and UNIX platforms. Silknet's
application server runs on Windows NT only and uses Microsoft's Transaction
Server and Message Queue. Silknet is currently designing a UNIX version of its
application server. The database server uses Microsoft's SQL Server on a Windows
NT platform or 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.
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
June 30, 1999, Silknet had 21 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 June 30, 1999, Silknet had five technical support
engineers.
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 June 30, 1999, Silknet's direct sales
organization consisted of 15 employees located in 11 offices throughout North
America and two employees in an office in the United Kingdom. In addition,
Silknet had nine 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.
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Silknet has established relationships with large, international systems
integrators and consulting firms, such as Cambridge Technology Partners, Cap
Gemini, CGI (formerly Deloitte & Touche Consulting Group/DRT Systems), Sapient
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, Genesys Telecommunications, Calico Technology and AnswerSoft,
that generally view Silknet's products as complementary to their product and
service offerings. These relationships are intended to provide Silknet
opportunities to penetrate an emerging market where either additional vertical
products or services are needed to secure the sale, or an understanding or
expertise in a particular vertical market is needed to sell effectively. As of
June 30, 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 June 30, 1999, Silknet's marketing organization
consisted of nine employees. Silknet's marketing programs include:
- market research and analysis;
- product and strategy updates with industry analysts;
- public relations activities and speaking engagements;
- direct mail and relationship marketing programs;
- telemarketing, seminars and trade shows;
- brochures, data sheets and white papers; and
- Web site marketing.
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
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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 e-business and on-line customer management
solutions, such as BroadVision, 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 Kana Communications,
Inc., and providers of stand-alone point solutions for knowledge base
applications, such as 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.
RESEARCH AND DEVELOPMENT
Silknet devotes a substantial portion of its resources to developing new
products and product features, extending and improving its products and
technology, and researching new technological initiatives in the market for
Web-based, interactive electronic business solutions. This new and emerging
market is characterized by rapid technological change, new product introductions
and enhancements, evolving industry standards and rapidly changing customer
requirements. The introduction of products incorporating new technologies and
the emergence of new industry standards could render existing products obsolete
and unmarketable. Silknet's future success will depend in part 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 Silknet eBusiness
Toolkit, scheduled for general release in the second half of calendar 1999.
Silknet eBusiness Toolkit 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 June 30, 1999, Silknet had 68 employees engaged in research and
development activities. Silknet's research and development expenditures for
fiscal year 1999, 1998 and 1997, were approximately $6.0 million, $2.4 million
and $961,000, 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."
13
<PAGE> 14
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Silknet's success and competitiveness are dependent to a significant degree
on the protection of its proprietary technology. Silknet relies primarily on a
combination of copyrights, trademarks, licenses, trade secret laws and
restrictions on disclosure to protect its intellectual property and proprietary
rights. Silknet also enters into confidentiality agreements with its employees
and consultants, and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions,
others may be able to copy or reverse engineer aspects of Silknet's products, to
obtain and use information that Silknet regards as proprietary or to
independently develop similar technology. Any such actions by competitors could
have a material adverse effect on Silknet's business, operating results and
financial condition.
In addition, the laws of some foreign countries do not protect Silknet's
proprietary rights to the same extent as do the laws of the United States, and
effective patent, copyright, trademark and trade secret protection may not be
available in these jurisdictions.
Litigation may be necessary in the future to enforce or defend Silknet's
intellectual property and proprietary rights, to protect Silknet's trade secrets
or to determine the validity and scope of the intellectual property and
proprietary rights of others. This litigation, whether successful or
unsuccessful, could result in substantial costs and diversion of management and
technical resources, either of which could have a material adverse effect on
Silknet's business, operating results and financial condition.
Silknet attempts to avoid infringing known intellectual property and
proprietary rights of third parties in its product development efforts. However,
Silknet has not conducted and does not conduct comprehensive patent searches to
determine whether the technology used in its products infringes patents held by
third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of them which are confidential when filed, with
regard to similar technologies. If Silknet were to discover that its products
violated third party proprietary rights, it may be liable for substantial
damages. In addition, Silknet may be required to reengineer its products or seek
to obtain licenses to continue offering such products, and there can be no
assurance that such efforts would be successful.
Silknet pursues the registration of some of its trademarks in the United
States and in other countries, although it has not yet secured registration of
most of its marks. Silknet has applications pending for trademark registrations
for "Silknet" and "Silknet" combined with the Silknet logo in the United States,
Canada and the European Union. Silknet's applications for the registration of
"Silknet" and "Silknet" combined with the Silknet logo were denied in Canada
because a company filed an earlier application for the use of "Silk" in
connection with Internet information resource services.
Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed a trademark application
for "e-Business" for use in creating, implementing and maintaining Web sites and
integration of computer systems and networks. Silknet's use of Silknet eBusiness
System could infringe on the rights of IBM and other companies using a mark that
contains "eBusiness." Silknet's use of "eBusiness," as well as the use of other
names, may result in costly litigation, divert management's attention and
resources, cause product shipment delays or require Silknet to pay damages
and/or to enter into royalty or license agreements. There can be no assurance
that a license agreement would be available to Silknet on any commercially
reasonable terms, if at all, and Silknet may be required to stop using the name
"eBusiness" for its products. Further, because names such as eBusiness,
eCommerce and eService are becoming widely used and descriptive, Silknet does
not expect to be able to prevent third parties from using these names for
competing products.
14
<PAGE> 15
Silknet currently licenses technology from third parties that it
incorporates into its products. For example, Silknet licenses Web information
server, transaction server and related technologies from Microsoft. There can be
no assurance that technology from these providers or others will continue to be
available to Silknet on commercially reasonable terms, if at all. The loss or
inability to access such technology could result in delays in development and
introduction of new products or enhancements by Silknet until equivalent or
replacement technology could be accessed, if available, or developed, if
feasible, by Silknet, which could have a material adverse effect on Silknet's
business, operating results and financial condition. Moreover, although Silknet
is generally indemnified against claims that technology licensed from third
parties infringes the intellectual property and proprietary rights of others,
such indemnification is not always available for all types of intellectual
property and proprietary rights and in some cases the scope of such
indemnification is limited. Even if Silknet receives broad indemnification,
third party indemnitors are not always well capitalized and may not be able to
indemnify Silknet in the event of infringement, resulting in substantial
exposure to Silknet. There can be no assurance that infringement or invalidity
claims arising from the incorporation of third party technology, and claims for
indemnification from Silknet's customers resulting from these claims, will not
be asserted or prosecuted against Silknet. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources in addition to potential product redevelopment costs and
delays, all of which could materially adversely affect Silknet's business,
operating results and financial condition.
EMPLOYEES
As of June 30, 1999, Silknet had 161 employees, 128 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.
ITEM 2. PROPERTIES
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 June 30, 1999, Silknet also leased office space
in 11 other cities for its sales and support personnel. Silknet believes that
these existing facilities are adequate to meet its current, foreseeable
requirements or that suitable additional or substitute space will be available
on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
Silknet is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In April 1999, the Company obtained the approval by written consent of
holders of at least a majority of the then outstanding shares of the Company's
capital stock to approve an amendment to Section 1(a) of the Company's Employee
Stock Option Plan dated August 8, 1995 (the "1995 Option Plan") establishing the
maximum aggregate number of shares of the Company's common stock subject to the
1995 Option Plan. Shareholders holding an aggregate of 10,155,606 shares signed
the action by written consent. The amendment was effective as of April 5, 1999.
In April 1999, the Company obtained the approval by written consent of
holders of at least a majority of the then outstanding shares of the Company's
capital stock to approve an amendment to Section 7 of the 1995 Option Plan
providing for the acceleration of vesting schedules for options granted under
the 1995 Option Plan in the event of an acquisition (as defined in the 1995
Option Plan) of the Company. Shareholders holding an aggregate of 10,155,606
shares signed the action by written consent. The amendment was effective as of
April 30, 1999.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Silknet effected its initial public offering of its common stock on May 5,
1999 at a price to the public of $15.00 per share. As of September 20, 1999,
there were approximately 136 holders of record of Silknet's common stock.
Silknet's common stock is listed for quotation on the Nasdaq National Market
under the symbol "SILK."
The range of high and low bid prices of Silknet's common stock as reported
on the Nasdaq National Market since Silknet's initial public offering are shown
below. The quotations represent interdealer quotations, without adjustments for
retail mark-ups, mark-downs, or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Quarter ended June 30, 1999........................... $47.63 $23.19
</TABLE>
Silknet has not paid any cash dividends on its common stock and currently
intends to retain any future earnings for use in its business. Accordingly,
Silknet does not anticipate that any cash dividends will be declared or paid on
the common stock in the foreseeable future.
Recent Sales of Unregistered Securities
During the fiscal year ended June 30, 1999, Silknet issued the following
securities that were not registered under the Securities Act of 1933, as
amended:
(a) Issuances of Capital Stock
In February 1999, Silknet issued and sold an aggregate of 1,205,913 shares
of its Series D preferred stock, $.01 par value per share, for an aggregate
purchase price of $8,832,238. Each share of Silknet's Series D preferred stock
automatically converted into one share of common stock upon the closing of
Silknet's initial public offering on May 10, 1999.
(b) Exercises of Stock Options
From July 1, 1998 to June 30, 1999, Silknet issued 309,687 shares of common
stock at exercise prices ranging from $1.00 to $1.75 for an aggregate purchase
price of $362,663 pursuant to the exercise of employee stock 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.
Use of Proceeds from Registered Securities
On May 5, 1999, Silknet commenced its initial public offering of 3,000,000
shares of common stock, $.01 par value per share, pursuant to Silknet's final
prospectus dated May 5, 1999. This prospectus was contained in Silknet's
Registration Statement on Form S-1, which was declared effective by the
Securities and Exchange Commission (SEC File No. 333-73295) on May 5, 1999. As
part of the initial public offering, Silknet granted the several underwriters,
for whom Credit Suisse First Boston Corporation, BancBoston Robertson Stephens
Inc., Banc of America Securities LLC (formerly NationsBanc Montgomery Securities
LLC) and First Union Capital Markets Corp. acted as representatives (the
"Representatives"), an overallotment option to purchase up to an additional
450,000 shares of common stock. The initial public offering closed on May 10,
1999.
16
<PAGE> 17
On May 14, 1999, the Representatives, on behalf of the several
underwriters, purchased 450,000 shares of common stock pursuant to the exercise
of the overallotment option.
The aggregate offering price of the initial public offering to the public
was $45,000,000 (exclusive of the overallotment option), with proceeds to
Silknet, after deduction of underwriting discounts and commissions, of
$41,850,000 (before deducting offering expenses payable by Silknet). The
aggregate offering price of the overallotment option to the several underwriters
was $6,750,000, with proceeds to Silknet, after deduction of the underwriting
discounts and commissions, of $6,277,500.
The aggregate amount of expenses incurred by Silknet through June 30, 1999
in connection with the issuance and distribution of the shares of common stock
offered and sold in the initial public offering was approximately $4,810,000,
including $3,622,500 in underwriting discounts and $1,187,500 in other expenses.
None of the expenses paid by Silknet in connection with the initial public
offering or the exercise of the overallotment option were paid, directly or
indirectly, to directors, officers, persons owning ten percent or more of
Silknet's equity securities, or affiliates of Silknet.
The net proceeds to Silknet from the initial public offering, after
deducting underwriting discounts and commissions and other expenses, were
approximately $46.9 million.
Silknet invested the net proceeds primarily in high quality securities with
maturities not exceeding ninety days.
17
<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 30, MARCH 6, 1995
----------------------------------------- (INCEPTION) TO
1999 1998 1997 1996 JUNE 30, 1995
-------- ------- ------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License............................. $ 10,050 $ 2,977 $ 75 -- --
Services............................ 3,868 670 119 $ 266 --
-------- ------- ------- ------- ------
Total revenue............... 13,918 3,647 194 266 --
-------- ------- ------- ------- ------
Cost of revenue:
License............................. 317 32 29 -- --
Services............................ 3,399 1,354 312 141 --
-------- ------- ------- ------- ------
Total cost of revenue....... 3,716 1,386 341 141 --
-------- ------- ------- ------- ------
Gross margin.......................... 10,202 2,261 (147) 125 --
Operating expenses:
Sales and marketing................. 10,815 4,802 888 33 --
Research and development............ 5,990 2,409 961 120 $ 26
General and administrative.......... 3,407 1,187 696 430 35
-------- ------- ------- ------- ------
Total operating expenses.... 20,212 8,398 2,545 583 61
-------- ------- ------- ------- ------
Operating loss........................ (10,010) (6,137) (2,692) (458) (61)
Interest income (expense), net........ 636 134 (60) (7) --
-------- ------- ------- ------- ------
Net loss.............................. (9,374) (6,003) (2,752) (465) (61)
Accrued dividends for preferred
stockholders........................ 1,787 903 190 -- --
-------- ------- ------- ------- ------
Net loss attributable to common
stockholders........................ $(11,161) $(6,906) $(2,942) $ (465) $ (61)
======== ======= ======= ======= ======
Basic and diluted net loss per share
attributable to common
stockholders........................ $ (2.39) $ (2.69) $ (1.15) $ (0.18) $(0.02)
Shares used in computing basic and
diluted net loss per share
attributable to common
stockholders........................ 4,679 2,566 2,557 2,551 2,478
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ----- ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $57,352 $ 9,045 $ 4,752 $ 40 $ 17
Working capital (deficit).................... 53,779 8,471 4,155 (102) (28)
Total assets................................. 64,746 12,129 5,402 170 64
Note payable to bank......................... 89 222 115 -- --
Total convertible preferred stock............ -- 19,107 7,432 -- --
Total stockholders' equity (deficit)......... 56,410 (9,587) (2,834) (34) 19
</TABLE>
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained or incorporated by
reference herein, this following discussion contains forward-looking statements
that involve risks and uncertainties, certain of which are beyond Silknet's
control. Actual results could differ materially from these forward-looking
statements as a result of a number of factors including, but not limited to,
those factors described in "Factors That May Affect Future Results" and
elsewhere in this Form 10-K.
OVERVIEW
Silknet provides software that allows companies to offer personalized
marketing, sales, electronic commerce and customer support services through a
single, company-tailored Web site interface. Silknet's products enable a company
to deliver these services to its customers over the Web through real-time
collaboration and customer self-service. In January 1997, Silknet recorded its
first license revenue upon delivery of the trial version of its initial product,
Silknet eService, to customers. Silknet commercially released Silknet eService
in July 1997, and since that time has introduced Silknet eBusiness System,
Silknet eCommerce, Silknet eCommerce Extensions, and Silknet eBusiness Toolkit.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1999 1998 1997
----- ------ --------
<S> <C> <C> <C>
Revenue:
License.............................................. 72.2% 81.6% 38.5%
Services............................................. 27.8 18.4 61.5
----- ------ --------
Total revenue..................................... 100.0 100.0 100.0
Cost of revenue:
License.............................................. 2.3 0.9 14.9
Services............................................. 24.4 37.1 160.9
----- ------ --------
Total cost of revenue............................. 26.7 38.0 175.8
----- ------ --------
Gross margin........................................... 73.3 62.0 (75.8)
Operating expenses:
Sales and marketing.................................. 77.7 131.7 458.4
Research and development............................. 43.0 66.0 496.0
General and administrative........................... 24.5 32.6 359.6
----- ------ --------
Total operating expenses.......................... 145.2 230.3 1,314.0
----- ------ --------
Operating loss......................................... (71.9) (168.3) (1,389.8)
Interest income (expense), net......................... 4.6 3.7 (31.1)
----- ------ --------
Net loss............................................... (67.3)% (164.6)% (1,420.9)%
===== ====== ========
</TABLE>
REVENUE
Since the beginning of fiscal year 1997, Silknet's revenue was derived
principally from licenses for software products and from professional services
including consulting, training, implementation, technical support and
maintenance. Revenue from sales of licenses to use Silknet's software products
is recognized upon delivery of products to customers, provided no significant
post-delivery obligations or uncertainties remain and collection of the related
receivable is probable. License or services revenue subject to a significant
acceptance clause is deferred until acceptance is received from the customer.
Revenue under arrangements where multiple products or services are sold together
under
19
<PAGE> 20
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. Revenue for consulting and training services is recognized as
services are provided, and revenue for maintenance and post-contract customer
support services is recognized ratably over the term of the service agreement.
Silknet generates its license revenue through direct sales to its customers
and sales through its relationships with systems integrators and consulting
firms. International revenue generated to date has been insignificant.
YEARS ENDED JUNE 30, 1999 AND 1998
Silknet's total revenue increased to $13.9 million for the year ended June
30, 1999 from $3.6 million for the year ended June 30, 1998.
License revenue increased to $10.1 million for the year ended June 30, 1999
from $3.0 million for the year ended June 30, 1998. The increase was primarily
due to an increase in the number of licenses sold to new customers of Silknet
eService, and other new products introduced and shipped during the year ended
June 30, 1999. These new products included Silknet eCommerce and Silknet
eCommerce Extensions, both released in January 1999, and new versions of Silknet
eService and Silknet eBusiness System, which were released in October 1998.
Additionally, during the year, revenue also increased due to an increase in the
average selling prices of software licenses resulting from these broader product
offerings.
Services revenue increased to $3.9 million for the year ended June 30, 1999
from $670,000 for the year ended June 30, 1998. Of this increase, $1.0 million
was attributable to a consulting services project which was completed in March
1999 and $1.0 million 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 39 as of June 30, 1999 from 17 as of June 30, 1998.
YEARS ENDED JUNE 30, 1998 AND 1997
Silknet's total revenue increased to $3.6 million for the year ended June
30, 1998 from $194,000 for the year ended June 30, 1997.
License revenue increased to $3.0 million for the year ended June 30, 1998
from $75,000 for the year ended June 30, 1997. The increase was primarily due to
an increase in the number of licenses sold for Silknet's first product, Silknet
eService, which was commercially released in July 1997, and new versions of
products introduced and shipped during the year ended June 30, 1998.
Services revenue increased to $670,000 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 consists primarily of royalties paid to third
parties under technology license arrangements.
Cost of services revenue consists primarily of employee-related costs and
third-party consultant fees incurred to provide services for consulting
projects, post contract customer support and training.
YEARS ENDED JUNE 30, 1999 AND 1998
Cost of license revenue increased to $317,000, or 3.2% of license revenue,
for the year ended June 30, 1999 from $32,000, or 1.1% of license revenue, for
the year ended June 30, 1998. The increase was due to an increase in royalty
obligations to third parties whose products are incorporated
20
<PAGE> 21
into Silknet products. Silknet anticipates that the cost of license revenue will
continue to increase in absolute dollars. Cost of license revenue as a percent
of license revenue has varied in the past due to the timing and volume of
product sales and the nature of royalty agreements during the period.
Cost of services revenue increased to $3.4 million or 87.9% of services
revenue, for the year ended June 30, 1999 from $1.4 million, or 202.1% of
services revenue, for the year ended June 30, 1998. The dollar increase resulted
primarily from the hiring of additional employees and the use of contractors to
support increased customer demand for consulting and training services. The
number of consulting employees dedicated to providing implementation services
increased to 21 as of June 30, 1999 from 10 as of June 30, 1998 to meet the
needs of its customer base. The improvement in services gross margins to 12.1%
for the year ended June 30, 1999 from a negative margin of 102.1% for the year
ended June 30, 1998 was primarily attributable to the substantial growth in
consulting and maintenance revenue from Silknet's increased installed customer
base. Silknet realized negative margins on services revenue for several quarters
prior to the year ended June 30, 1999 as the Company invested in the consulting
organization. The total number of employees in the services organization
increased to 27 as of June 30, 1999 from 12 as of June 30, 1998.
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.
YEARS ENDED JUNE 30, 1998 AND 1997
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 38.7% 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 61.3% for the year ended June 30, 1997 was
primarily attributable to increased license revenue.
Cost of services revenue increased to $1.4 million, or 202.1% of services
revenue, for the year ended June 30, 1998 from $312,000, or 262.2% 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 expenses consist primarily of employee-related costs,
commissions, and costs associated with marketing programs, such as trade shows,
seminars, public relations and new product launches.
Research and development expenses consist primarily of employee-related
costs and consulting fees associated with the development of the Company's
products. Costs incurred for the research and development of Silknet's software
products are expensed as incurred until such time that technological feasibility
is established and capitalized thereafter. To date, no research and development
costs have been capitalized.
General and administrative expenses consist primarily of employee-related
costs for executive and financial personnel, as well as legal, accounting, and
other professional services fees.
YEARS ENDED JUNE 30, 1999 AND 1998
Sales and marketing expenses increased to $10.8 million, or 77.7% of total
revenue, for the year ended June 30, 1999 from $4.8 million, or 131.7% of total
revenue, for the year ended June 30, 1998. The increase was primarily
attributable to an increase in the number of direct sales, pre-sales support
21
<PAGE> 22
and marketing employees to 45 as of June 30, 1999 from 25 as of June 30, 1998.
To a lesser extent, the increase was related to an increase in marketing
programs, including trade shows and public relations related to product launch
activities. Sales and marketing expenses will 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 expenses increased to $6.0 million, or 43.0% of
total revenue, for the year ended June 30, 1999 from $2.4 million, or 66.0% of
total revenue, for the year ended June 30, 1998. The increase primarily resulted
from salaries associated with newly hired development personnel. The number of
research and development employees increased to 68 as of June 30, 1999 from 32
as of June 30, 1998 to support the development of new products. Silknet
anticipates that research and development expenses will continue to increase in
absolute dollars.
General and administrative expenses increased to $3.4 million, or 24.5% of
total revenue, for the year ended June 30, 1999 from $1.2 million, or 32.6% of
total revenue, for the year ended June 30, 1998. Substantially all of the
increase was due to salaries associated with newly hired personnel and related
costs required to manage Silknet's growth and facilities expansion. The number
of general and administrative employees increased to 21 as of June 30, 1999 from
11 as of June 30, 1998. Silknet expects that its general and administrative
expenses will increase in absolute dollars as it continues to expand its
staffing to support expanded operations and facilities and incurs expenses
relating to its new responsibilities as a public company.
Interest income, net of interest expense, increased to $636,000, or 4.6% of
total revenue, for the year ended June 30, 1999 from $134,000, or 3.7% of total
revenue, for the year ended June 30, 1998. The increase was due to interest
income earned from the investment of net cash proceeds from Silknet's initial
public offering in May 1999.
Silknet incurred aggregate net losses of $18.7 million from inception
through June 30, 1999. Silknet has recorded a valuation allowance for the full
amount of its net deferred tax assets as the future realization of the tax
benefit is not sufficiently assured.
YEARS ENDED JUNE 30, 1998 AND 1997
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 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 expenses increased to $1.2 million, or 32.6% of
total revenue, for the year ended June 30, 1998 from $696,000, 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, net of interest expense, increased to $134,000, or 3.7% of
total revenue, for the year ended June 30, 1998 from a net expense of $60,000,
or 31.1% of total revenue, for the year ended June 30, 1997. The increase was
primarily due to an increase in Silknet's average cash balances resulting from
capital financing activities combined with a decrease in Silknet's debt
obligations.
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LIQUIDITY AND CAPITAL RESOURCES
In May 1999, Silknet sold 3,450,000 shares of its common stock through an
initial public offering. Net proceeds from the offering were approximately $46.9
million after deducting underwriting discounts and commissions and offering
expenses. Prior to its initial public offering, Silknet had funded operations
primarily through net cash proceeds from private placements of preferred stock
totaling $26.8 million. As of June 30, 1999, Silknet had cash and cash
equivalents totaling $57.4 million.
Cash used in operating activities for the year ended June 30, 1999 was $5.5
million, primarily due to a net loss of $9.4 million and an increase in accounts
receivable, partially offset by increases in accounts payable, accrued expenses
and deferred revenue. Cash used for operating activities for the year ended June
30, 1998 was $5.7 million, primarily due to a net loss of $6.0 million and an
increase in accounts receivable, partially offset by increases in accounts
payable, accrued expenses and deferred revenue.
Cash used in investing activities for the year ended June 30, 1999 and the
year ended June 30, 1998 was $2.0 million and $1.0 million, respectively.
Investing activities for the periods consisted primarily of purchases of
equipment, including computer servers, workstations and networking equipment.
Cash provided by financing activities for the year ended June 30, 1999 was
$55.8 million, primarily due to the net proceeds from Silknet's initial public
offering totaling $46.9 million and the issuance of preferred stock prior to
Silknet's initial public offering, for net proceeds totaling $8.8 million. 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 June 30, 1999 and June 30, 1998, Silknet's primary financial
commitments consisted of obligations outstanding under operating leases, and
notes payable under an equipment loan line of $222,000 and $471,000,
respectively.
In March 1999, Silknet entered into a new bank line of credit which allows
Silknet to borrow up to $3.0 million for working capital purposes and for the
issuance of letters of credit. The line of credit expires in March 2000. Amounts
available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate plus 0.5%. As of June 30,
1999, $3.0 million was available for borrowing and the bank's prime rate was
7.75%.
As of June 30, 1999, Silknet had net operating loss carryforwards of
approximately $16.6 million available for federal, state and foreign purposes to
reduce future taxable income expiring on various dates beginning in 2012. Under
the provisions of the Internal Revenue Code, certain substantial changes in
Silknet's ownership may have limited, or may limit in the future, the amount of
net operating loss carryforwards which could be utilized annually to offset
future taxable income.
Since its inception, Silknet has significantly increased its operating
expenses. Silknet anticipates that it will continue to experience significant
growth in its operating expenses for the foreseeable future and that its
operating expenses and capital expenditures will constitute a material use of
Silknet's cash resources. In addition, Silknet may utilize cash resources to
fund acquisitions or investments in businesses, technologies, products or
services that are complementary to Silknet's business. Silknet believes that the
net proceeds from the closing of the initial public offering, together with its
existing cash and cash equivalents, 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.
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YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
ready could result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
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 Silknet's products, and believes that they are
substantially Year 2000 ready. Silknet expects that modifications with respect
to any remaining Year 2000 issues will be made by the end of calendar year 1999.
Nevertheless, there can be no assurances that the implementation of
modifications to any embedded products will not be delayed or that Silknet will
not experience unexpected Year 2000 problems with its products.
There is no assurance that other Web applications, database software or
computer hardware of Silknet's customers which interface with Silknet's products
and which may be necessary in order to use Silknet's products are Year 2000
ready. Therefore, there can also be no assurance that implementations of
Silknet's products on its customers' systems are, or will be, Year 2000 ready.
Silknet installed new internal software systems in July 1998, and it has
received written confirmations from software vendors that the software they
installed is Year 2000 ready. Based on the foregoing, Silknet currently has no
reason to believe that its internal software systems are not Year 2000 ready.
Silknet is in the process of obtaining written certifications from suppliers of
hardware systems to the effect that the hardware they provide are Year 2000
ready. These vendors are under no contractual obligation to provide written
certifications to Silknet. Failure of the internal hardware or software systems
to operate properly with regard to the Year 2000 and thereafter could require
Silknet to incur significant unanticipated expenses to remedy any problems or
replace affected vendors, and could have a material adverse effect on Silknet's
business, operating results and financial condition.
To date, Silknet has not incurred significant incremental costs in order to
comply with Year 2000 requirements for its products or internal systems, and
Silknet does not believe it will incur significant incremental costs in the
foreseeable future. Silknet has not currently developed a contingency plan for
unanticipated Year 2000 issues relating to its products. Silknet has identified
the mission critical functions for its internal systems and is in the process of
developing a contingency plan for unanticipated Year 2000 problems that arise
with respect to those functions, including the identification of replacement
products for third-party products that may fail. There can be no assurance that
Year 2000 issues will not be discovered in Silknet's products or internal
software systems and, if such issues are discovered, there can also be no
assurance that the costs of making such products and systems Year 2000 ready
will not have a material adverse effect on Silknet's business, operating results
and financial condition.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Silknet operates in a rapidly changing environment that involves a number
of risks, some of which are beyond its control. The discussion highlights some
of the risks which may affect future operating results.
OUR LIMITED OPERATING HISTORY MAY IMPEDE YOUR ABILITY TO VALUE OUR BUSINESS AND
ITS FUTURE PROSPECTS
Your evaluation of our business will be more difficult because of our
limited operating history and could cause you to overpay for our common stock.
We commenced operations in March 1995 and we recorded our first license revenue
upon delivery of Silknet eService in a trial version to customers in January
1997. Accordingly, it is difficult to evaluate our business and prospects. In
addition, because we are in an early stage of development in a new and rapidly
evolving market, our prospects are difficult to predict and may change rapidly
and without warning.
WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND WE MAY NOT BE PROFITABLE IN
THE FUTURE
Since we began operations, we have incurred substantial operating losses in
every fiscal period. We cannot be certain if or when we will become profitable.
Failure to achieve profitability within the timeframe expected by investors may
adversely affect the market price of our common stock. As a result of
accumulated operating losses, at June 30, 1999, we had an accumulated deficit of
$18.7 million. We have generated relatively small amounts of revenue, while
increasing expenditures in all areas, particularly in research and development
and sales and marketing, in order to execute our business plan. Although we have
experienced revenue growth in recent periods, the growth has been from a limited
base of historical revenue, and it is unlikely that such growth rates are
sustainable.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE BECAUSE WE DEPEND ON A SMALL
NUMBER OF LARGE ORDERS
We derive a significant portion of our software license revenue in each
quarter from a small number of relatively large orders. Our operating results
for a particular fiscal period could be materially adversely affected if we are
unable to complete one or more substantial license sales planned for that
period. In each of the last eight quarters, we had at least one customer that
accounted for more than 24% of total revenue in that quarter. In addition, the
purchase and implementation of our products typically involve a significant cost
to our customers, including the purchase of related hardware and software, as
well as training and integration costs. These implementations also include
substantial commitment of resources by our customers or their consultants over
an extended period of time. As a result, our sales cycle is relatively long.
In addition, our services revenue, which is largely correlated with our
license revenue, has fluctuated and may fluctuate in the future due to
significant consulting and implementation services performed in a quarter.
Investors should not expect a commensurate increase in services revenue between
future quarters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DISAPPOINTING QUARTERLY REVENUE OR OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO FALL
Our quarterly revenue and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or securities
analysts, the price of our common stock could fall substantially.
Our quarterly revenue may fluctuate as a result of a variety of factors,
including the following:
- the market for interactive, Web-based electronic business solutions is in
an early stage of development and it is therefore difficult to accurately
predict customer demand; and
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- the sales cycle for our products and services varies substantially from
customer to customer, and we expect the sales cycle to be long. As a
result, we have difficulty determining whether and when we will receive
license revenue from a particular customer.
In addition, because our revenue from implementation, maintenance and
training services is largely correlated with our license revenue, a decline in
license revenue could also cause a decline in our services revenue in the same
quarter or in subsequent quarters.
Most of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. As a result, if
revenue for a particular quarter is below our expectations, we could not
proportionately reduce operating expenses for that quarter, and therefore this
revenue shortfall would have a disproportionate effect on our expected operating
results for that quarter.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WEB-BASED ELECTRONIC BUSINESS
SOLUTIONS ARE NOT WIDELY ADOPTED
Our products address a new and emerging market for Web-based, interactive
electronic business solutions. Therefore, our future success depends
substantially upon the widespread adoption of the Web as a primary medium for
commerce and business applications. The failure of this market to develop, or a
delay in the development of this market, would have a material adverse effect on
our business, financial condition and operating results. The Web has
experienced, and is expected to continue to experience, significant user and
traffic growth, which has, at times, caused user frustration with slow access
and download times. The Web infrastructure may not be able to support the
demands placed on it by the continued growth upon which our success depends.
Moreover, critical issues concerning the commercial use of the Web, such as
security, reliability, cost, accessibility and quality of service, remain
unresolved and may negatively affect the growth of Web use or the attractiveness
of commerce and business communication over the Web. In addition, the Web could
lose its viability due to delays in the development or adoption of new standards
and protocols to handle increased activity or due to increased government
regulation and taxation of Internet commerce.
GOVERNMENT LAWS AND REGULATIONS COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES AND ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS
Federal, state or foreign agencies may adopt laws or regulations affecting
the use of the Web as a commercial medium. If enacted, these laws or regulations
could limit the market for our products, which could materially adversely affect
our business, financial condition and operating results. Although many of these
laws or regulations may not apply to our business directly, we expect that laws
and regulations relating to user privacy, pricing, content and quality of
products and services could indirectly affect our business. It is possible that
these laws or regulations could expose companies involved in Web commerce to
liability, which could limit the growth of Web commerce generally.
INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES MAY ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND OPERATING RESULTS
The market for interactive, Web-based electronic business solutions is
intensely competitive. If we are unable to compete effectively, our business,
financial condition and operating results would be materially adversely
affected. Many of our current and potential competitors have longer operating
histories, greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other resources than we
do. Therefore, they may be able to respond more quickly than we can to new or
changing opportunities, technologies, standards or customer requirements.
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In addition, we expect that new competitors will enter the market with
competing products as the size and visibility of the market opportunity
increases. We also expect that competition will increase as a result of software
industry consolidations and formations of alliances among industry participants.
Increased competition could result in pricing pressures, reduced margins or the
failure of our products to achieve or maintain market acceptance. See
"Business -- Competition."
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS OR ENHANCE EXISTING PRODUCTS ON A
TIMELY BASIS
To be competitive, we must develop and introduce on a timely basis new
products and product enhancements which meet the needs of companies seeking to
deploy and manage electronic business applications over the Web. We have in the
past failed to ship certain new products or product enhancements by our planned
shipment date. If we fail to develop and introduce new products and enhancements
successfully and on a timely basis, it could have a material adverse effect on
our business, operating results and financial condition.
FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND CONSULTING
FIRMS WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND GROWTH OF OUR REVENUE
To increase our revenue and implementation capabilities, we must develop
and expand relationships with systems integrators and consulting firms. A
failure to do so could have a material adverse effect on our business, operating
results and financial condition. We rely on systems integrators and consulting
firms to recommend our products to their clients and to install and support our
products for their clients. Systems integrators and consulting firms may
develop, market or recommend software applications that compete with our
products. Moreover, if these firms fail to implement our products successfully
for their clients, we may not have the resources to implement our products on
the schedule required by the client, which could have a material adverse effect
on our business, operating results and financial condition.
OUR FAILURE TO EXPAND OUR DIRECT SALES FORCE AND THIRD-PARTY DISTRIBUTION
CHANNELS WOULD IMPEDE OUR REVENUE GROWTH AND FINANCIAL CONDITION
To increase our revenue, we must increase the size of our direct sales
force and the number of our indirect marketing and distribution partners,
including software and hardware vendors and resellers. A failure to do so could
have a material adverse effect on our business, operating results and financial
condition. There is intense competition for sales personnel in our business, and
we may not be successful in attracting, integrating, motivating or retaining new
personnel for these positions. Our existing or future marketing and distribution
partners may choose to devote greater resources to marketing and supporting the
products of competitors.
OUR FAILURE TO OPERATE OUR PROFESSIONAL SERVICES ORGANIZATION AT A PROFIT WOULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION
Our failure to operate our professional services organization at a profit
could have a material adverse effect on our business, operating results and
financial condition. To gain initial acceptance of our products by customers in
our targeted industries, we assist customers with the implementation of our
products, sometimes at a loss. We cannot be certain that our professional
services organization will sustain profitability.
OUR FAILURE TO MANAGE PROPERLY OUR RAPID GROWTH COULD STRAIN OUR RESOURCES AND
ADVERSELY AFFECT OUR BUSINESS
Our failure to manage properly our rapid growth could have a material
adverse effect on the quality of our products, our ability to retain key
personnel and our business, operating results and financial condition. Our
revenue increased 206% in the quarter ended June 30, 1999 from the same period
the year earlier. From July 1, 1998 to June 30, 1999, the number of our
employees increased from 80 to 161. The rapid rate of our recent growth has made
management of that growth more
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difficult. To manage future growth effectively we must maintain and enhance our
financial and accounting systems and controls, integrate new personnel and
manage expanded operations.
OUR FAILURE TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS WOULD ADVERSELY
AFFECT OUR REVENUE GROWTH AND FINANCIAL CONDITION
We expect international revenue to account for a significant percentage of
total revenue in the future and we believe that we must continue to expand our
international sales activities in order to be successful. Our failure to expand
our international sales could have a material adverse effect on our business,
operating results and financial condition. Our plans to expand internationally
may be adversely affected by a number of risks, including:
- expenses associated with customizing products for foreign countries;
- challenges inherent in managing geographically dispersed operations;
- protectionist laws and business practices that favor local competitors;
- dependence on local vendors;
- multiple, conflicting and changing governmental laws and regulations; and
- foreign currency exchange rate fluctuations.
Our international sales growth will be limited if we are unable to:
- establish additional foreign operations;
- expand international sales channel management and support organizations;
- hire additional personnel;
- customize products for local markets;
- develop relationships with international service providers; or
- establish relationships with additional distributors and systems
integrators.
OUR FAILURE TO MANAGE ACQUISITIONS COULD ADVERSELY AFFECT OUR BUSINESS
We may from time to time consider acquisitions of assets or businesses that
we believe may enable us to obtain complementary skills and capabilities, offer
new services, expand our customer base or obtain other competitive advantages.
Such acquisitions involve potential risks, including difficulties in
assimilating the acquired company's operations, technology, services and
personnel, and in completing and integrating acquired in-process technology,
diversion of management's resources, uncertainties associated with operating in
new markets and working with new employees and customers, and the potential loss
of the acquired company's key employees.
LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our future success depends to a significant degree on the skills,
experience and efforts of James C. Wood, our founder, Chairman of the Board,
President and Chief Executive Officer. The loss of the services of Mr. Wood
could have a material adverse effect on our business, operating results and
financial condition. We also depend on the ability of our executive officers and
other members of senior management to work effectively as a team. The loss of
one or more of our executive officers and other members of senior management
could have a material adverse effect on our business, operating results and
financial condition.
WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED
Qualified personnel are in great demand throughout the software industry.
The demand for qualified personnel is particularly acute in the New England
area, due to the large number of software companies and the low unemployment in
the region. Our success depends in large part upon our ability to attract,
train, motivate and retain highly skilled employees, particularly marketing
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personnel, software engineers and other senior personnel. Our failure to attract
and retain the highly-trained technical personnel that are integral to our
product development, professional services and support teams may limit the rate
at which we can develop new products or product enhancements. This could have a
material adverse effect on our business, operating results and financial
condition.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY RIGHTS
Our success depends to a significant degree upon the protection of our
software and other proprietary technology rights. We rely on trade secret,
copyright and trademark laws and confidentiality agreements with employees and
third-parties, all of which offer only limited protection. Moreover, the laws of
other countries in which we market our products may afford little or no
effective protection of our proprietary technology. The reverse engineering,
unauthorized copying or other misappropriation of our proprietary technology
could enable third parties to benefit from our technology without paying us for
it. This could have a material adverse effect on our business, operating results
and financial condition. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive
and could involve a high degree of risk. Further, names such as eBusiness,
eCommerce and eService are becoming widely used and descriptive. As a result, we
do not expect to be able to prevent third parties from using these names for
competing products. See "Business -- Intellectual Property and Proprietary
Rights."
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
If any of our products violate third party proprietary rights, we may be
required to reengineer our products or seek to obtain licenses from third
parties to continue offering our products without substantial reengineering. Any
efforts to reengineer our products or obtain licenses from third parties may not
be successful and, in any case, would substantially increase our costs and have
a material adverse effect on our business, operating results and financial
condition. We do not conduct comprehensive patent searches to determine whether
the technology used in our products infringes patents held by third parties. In
addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies. See "Business -- Intellectual Property and Proprietary Rights."
OUR USE OF THE "SILKNET" AND "EBUSINESS" TRADEMARKS MAY INFRINGE THE TRADEMARK
RIGHTS OF OTHER COMPANIES
Silknet's use of "eBusiness," as well as the use of other names, may result
in costly litigation, divert management's attention and resources, cause product
shipment delays or require Silknet to pay damages and/or to enter into royalty
or license agreements to continue to use a product name. Silknet may be required
to stop using the name "eBusiness" or other names currently used for its
products. Any of these events could have a material adverse effect on our
business, operating results and financial condition.
We have applied for registration of some of our trademarks in the United
States, Canada and the European Community. Most of these applications have not
been approved. Our applications for the registration of "Silknet" and "Silknet"
combined with the Silknet logo were denied in Canada because a company filed an
earlier application for the use of "Silk" in connection with Internet
information resource services.
Other companies have filed trademark applications for marks similar to the
names of Silknet's products. For example, IBM has filed a trademark application
for "e-Business" for use in creating, implementing and maintaining Web sites and
integration of computer systems and networks. Silknet's use of "Silknet
eBusiness System" could infringe the rights of IBM and other companies using a
mark that contains "eBusiness." See "Business -- Intellectual Property and
Proprietary Rights."
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WE MAY LOSE ACCESS TO THIRD-PARTY TECHNOLOGY USED IN OUR PRODUCTS
We incorporate into our products technology licensed from third parties,
such as Microsoft Corporation. The loss of access to this technology could
result in delays in the development and introduction of new products or
enhancements until equivalent or replacement technology could be accessed, if
available, or developed internally, if feasible. These delays could have a
material adverse effect on our business, operating results and financial
condition. It is possible that technology from others will not be available to
us on commercially reasonable terms, if at all.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS FAIL TO PERFORM
PROPERLY
Software products as complex as ours may contain undetected errors, or
bugs, which result in product failures, or otherwise fail to perform in
accordance with customer expectations. Our products may be particularly
susceptible to bugs or performance degradation because of the emerging nature of
Web technologies and the stress that may be placed on our products by the full
deployment of our products over the Web to thousands of end-users. Product
performance problems could result in loss of or delay in revenue, loss of market
share, failure to achieve market acceptance, diversion of development resources
or injury to our reputation, any of which could have a material adverse effect
on our business, operating results and financial condition. Prior to November
1998, we warranted some of our products for five years, providing customers a
right to refund a portion of the license fee if we are unable to correct an
error in the product. To date, no customer has requested a refund under the
warranty provisions. However, if we are required to refund significant portions
of license fees, our business, operating results and financial condition could
be materially adversely affected.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' CRITICAL BUSINESS OPERATIONS
Our products are critical to the operations of our customers' businesses.
If one of our products fails, a customer may assert a claim for substantial
damages against us, regardless of our responsibility for such failure. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Although we maintain general liability
insurance, including coverage for errors and omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or will be available in amounts sufficient to cover one or more large claims, or
that the insurer will not disclaim coverage as to any future claim.
WE MAY BE AFFECTED BY UNEXPECTED YEAR 2000 TECHNOLOGY PROBLEMS
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
miscalculations, data corruption, system failures or disruptions of operations.
We are subject to potential Year 2000 problems affecting our products, our
customers' systems, our internal systems and the systems of our vendors, any of
which could have a material adverse effect on our business, operating results
and financial condition.
Changing purchasing patterns of customers impacted by Year 2000 issues may
result in reduced resources available for purchases of interactive electronic
business solutions. In addition, there can be no assurance that Year 2000 errors
or defects will not be discovered in our internal software systems and, if such
errors or defects are discovered, there can be no assurance that the costs of
making such systems Year 2000 compliant will not be material.
Year 2000 errors or defects in the internal systems maintained by our
vendors could require us to incur significant unanticipated expenses to remedy
any problems or replace affected vendors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000 Readiness
Disclosure."
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OUR COMMON STOCK IS PARTICULARLY SUBJECT TO VOLATILITY BECAUSE OF THE INDUSTRY
THAT WE ARE IN
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Web-related companies, have been extremely volatile, and
have experienced fluctuations that have often been unrelated or disproportionate
to the operating performance of such companies. These broad market fluctuations
could adversely affect the market price of our common stock.
THE SIGNIFICANT CONTROL OVER STOCKHOLDER VOTING MATTERS WHICH MAY BE EXERCISED
BY OUR EXECUTIVE OFFICERS AND DIRECTORS WILL DEPRIVE YOU OF THE ABILITY TO
INFLUENCE CORPORATE ACTIONS
Our executive officers and directors and their affiliates together control
a majority of the outstanding common stock. As a result, these stockholders, if
they act together, will be able to control all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, preventing or deterring a change in control of Silknet, could deprive
our stockholders of an opportunity to receive a premium for their common stock
as part of a sale of Silknet and might affect the market price of our common
stock.
FUTURE SALES BY EXISTING SECURITY HOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK
If our existing stockholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly.
Moreover, the perception in the public market that our existing stockholders
might sell shares of common stock could depress the market price of the common
stock.
OUR BROAD DISCRETION IN USING CASH MAY NEGATIVELY IMPACT OUR FINANCIAL CONDITION
In times of growth, Silknet's operating and investing activities may use
more cash than they provide, thus requiring Silknet to obtain additional sources
of financing. In addition, Silknet may need additional sources of financing for
capital expenditures and material acquisitions of complementary businesses or
technologies. Silknet may be unable to obtain additional sources of financing on
favorable terms, if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about Silknet's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. Silknet is exposed to market risk
related to changes in interest rates and foreign currency exchange rates. As of
June 30, 1999, Silknet did not use derivative financial instruments for
speculative or trading purposes.
Interest Rate Risk
Silknet invests its excess cash in high quality securities with maturities
not exceeding ninety days and therefore would not expect its operating results
or cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates.
Foreign Currency Exchange Risk
To date, Silknet has not generated significant revenues originating outside
the United States, and therefore, foreign currency fluctuations have not had a
material effect on Silknet's operating results.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and stockholders of
Silknet Software, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, convertible preferred stock and
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the consolidated financial position of Silknet Software, Inc.
("Silknet") at June 30, 1999 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, 1999, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Silknet's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
July 19, 1999
32
<PAGE> 33
SILKNET SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1999 1998
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 57,352 $ 9,045
Accounts receivable, net of allowance for doubtful
accounts of $275 and $0................................ 3,985 1,547
Prepaid expenses and other current assets................. 689 266
-------- --------
Total current assets.............................. 62,026 10,858
-------- --------
Property and equipment, net................................. 2,468 1,217
Other assets................................................ 252 54
-------- --------
Total assets...................................... $ 64,746 $ 12,129
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,176 $ 208
Accrued expenses.......................................... 4,751 917
Deferred revenue.......................................... 2,187 1,013
Note payable to bank, current portion..................... 133 249
-------- --------
Total current liabilities......................... 8,247 2,387
-------- --------
Note payable to bank...................................... 89 222
Convertible preferred stock, $.01 par value; 15,000 shares
authorized:
Series A; Designated: 2,365 shares
Issued and outstanding: no shares at June 30, 1999 and
2,365 shares at June 30, 1998.......................... -- 2,659
Series B; Designated: 2,500 shares
Issued and outstanding: no shares at June 30, 1999 and
2,500 shares at June 30, 1998.......................... -- 5,519
Series C; Designated: 3,089 shares
Issued and outstanding: no shares at June 30, 1999 and
3,089 shares at June 30, 1998.......................... -- 10,929
Series D; Designated: 1,206 shares
Issued and outstanding: no shares at June 30, 1999 and
1998................................................... -- --
-------- --------
Total convertible preferred stock................. -- 19,107
-------- --------
Commitments and contingencies (Note K)
Stockholders' equity (deficit):
Common stock, $.01 par value;
Authorized: 50,000 shares
Issued and outstanding: 15,547 and 2,628 shares at June
30, 1999 and 1998, respectively........................ 155 26
Additional paid-in capital.................................. 75,619 887
Accumulated dividends on preferred stock.................... -- (1,093)
Deferred compensation....................................... (711) (125)
Other comprehensive income.................................. 3 --
Accumulated deficit......................................... (18,656) (9,282)
-------- --------
Total stockholders' equity (deficit)................. 56,410 (9,587)
-------- --------
Total liabilities and stockholders' equity
(deficit)......................................... $ 64,746 $ 12,129
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE> 34
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenue:
License................................................ $ 10,050 $ 2,977 $ 75
Services............................................... 3,868 670 119
-------- ------- -------
Total revenue.................................. 13,918 3,647 194
Cost of revenue:
License................................................ 317 32 29
Services............................................... 3,399 1,354 312
-------- ------- -------
Total cost of revenue.......................... 3,716 1,386 341
-------- ------- -------
Gross margin............................................. 10,202 2,261 (147)
Operating expenses:
Sales and marketing.................................... 10,815 4,802 888
Research and development............................... 5,990 2,409 961
General and administrative............................. 3,407 1,187 696
-------- ------- -------
Total operating expenses....................... 20,212 8,398 2,545
-------- ------- -------
Operating loss........................................... (10,010) (6,137) (2,692)
Interest income (expense), net........................... 636 134 (60)
-------- ------- -------
Net loss................................................. (9,374) (6,003) (2,752)
Accrued dividends for preferred stockholders............. 1,787 903 190
-------- ------- -------
Net loss attributable to common stockholders............. $(11,161) $(6,906) $(2,942)
======== ======= =======
Basic and diluted net loss per share..................... $ (2.39) $ (2.69) $ (1.15)
Shares used in computing basic and diluted net loss
per share.............................................. 4,679 2,566 2,557
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 35
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DIVIDENDS ON OTHER
--------------------- -------------- PAID-IN PREFERRED DEFERRED COMPREHENSIVE
SHARES VALUE SHARES VALUE CAPITAL STOCK COMPENSATION INCOME
--------- --------- ------ ----- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996...... -- $ -- 2,555 $ 26 $ 818 $ -- $(351) $--
Issuance of common stock.... -- -- 3 -- 2 -- -- --
Issuance of Series A
Convertible Participating
Preferred Stock, net of
offering costs............ 2,365 2,252 -- -- -- -- -- --
Issuance of Series B
Convertible Participating
Preferred Stock, net of
offering costs............ 2,500 4,990 -- -- -- -- -- --
Issuance of common stock
purchase warrants......... -- -- -- -- 47 -- -- --
Stock options cancelled..... -- -- -- -- (49) -- 49 --
Amortization of deferred
compensation.............. -- -- -- -- -- -- 93 --
Accrued dividends for
preferred stockholders.... -- 190 -- -- -- (190) -- --
Net loss.................... -- -- -- -- -- -- -- --
------ -------- ------ ---- ------- ------- ----- ---
Balance at June 30, 1997...... 4,865 7,432 2,558 26 818 (190) (209) --
Issuance of common stock
under stock option
plans..................... -- -- 70 -- 69 -- -- --
Issuance of Series C
Convertible Participating
Preferred Stock, net of
offering costs............ 3,089 10,772 -- -- -- -- -- --
Amortization of deferred
compensation.............. -- -- -- -- -- -- 84 --
Accrued dividends for
preferred stockholders.... -- 903 -- -- -- (903) -- --
Net loss.................... -- -- -- -- -- -- -- --
------ -------- ------ ---- ------- ------- ----- ---
Balance at June 30, 1998...... 7,954 19,107 2,628 26 887 (1,093) (125) --
Issuance of common stock
under stock option
plans..................... -- -- 309 3 359 -- -- --
Issuance of Series D
Convertible Preferred
Stock, net of offering
costs..................... 1,206 8,788 -- -- -- -- -- --
Accrued dividends for
preferred stockholders.... -- 1,787 -- -- -- (1,787) -- --
Conversion of Convertible
Participating Preferred
Stock and Convertible
Preferred Stock........... (9,160) (29,682) 9,160 92 26,711 2,880 -- --
Issuance of common stock in
initial public offering,
net of offering costs..... -- -- 3,450 34 46,906 -- -- --
Deferred compensation
related to grant of stock
options................... -- -- -- -- 769 -- (769) --
Stock options cancelled..... -- -- -- -- (13) -- 13 --
Amortization of deferred
compensation.............. -- -- -- -- -- -- 170 --
Net loss.................... -- -- -- -- -- -- -- --
Other comprehensive
income.................... -- -- -- -- -- -- -- 3
------ -------- ------ ---- ------- ------- ----- ---
Balance at June 30, 1999...... -- $ -- 15,547 $155 $75,619 $ -- $(711) $ 3
====== ======== ====== ==== ======= ======= ===== ===
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY (DEFICIT)
----------- ----------------
<S> <C> <C>
Balance at June 30, 1996...... $ (527) $ (34)
Issuance of common stock.... -- 2
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......... -- 47
Stock options cancelled..... -- --
Amortization of deferred
compensation.............. -- 93
Accrued dividends for
preferred stockholders.... -- (190)
Net loss.................... (2,752) (2,752)
-------- -------
Balance at June 30, 1997...... (3,279) (2,834)
Issuance of common stock
under stock option
plans..................... -- 69
Issuance of Series C
Convertible Participating
Preferred Stock, net of
offering costs............ -- --
Amortization of deferred
compensation.............. -- 84
Accrued dividends for
preferred stockholders.... -- (903)
Net loss.................... (6,003) (6,003)
-------- -------
Balance at June 30, 1998...... (9,282) (9,587)
Issuance of common stock
under stock option
plans..................... -- 362
Issuance of Series D
Convertible Preferred
Stock, net of offering
costs..................... -- --
Accrued dividends for
preferred stockholders.... -- (1,787)
Conversion of Convertible
Participating Preferred
Stock and Convertible
Preferred Stock........... -- 29,683
Issuance of common stock in
initial public offering,
net of offering costs..... -- 46,940
Deferred compensation
related to grant of stock
options................... -- --
Stock options cancelled..... -- --
Amortization of deferred
compensation.............. -- 170
Net loss.................... (9,374) (9,374)
Other comprehensive
income.................... -- 3
-------- -------
Balance at June 30, 1999...... $(18,656) $56,410
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 36
SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(9,374) $(6,003) $(2,752)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 751 339 187
Provision for doubtful accounts........................ 275 -- --
(Gain) loss on disposal of equipment................... (11) 4 --
Amortization of deferred compensation.................. 170 84 93
Stock issued for services.............................. -- -- 3
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,713) (1,514) 23
Prepaid expenses and other current assets............ (423) (206) (23)
Other assets......................................... (198) (25) (60)
Accounts payable..................................... 968 (57) 232
Accrued expenses..................................... 3,834 800 94
Deferred revenue..................................... 1,174 859 155
------- ------- -------
Net cash used in operating activities............. (5,547) (5,719) (2,048)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (2,002) (1,059) (555)
Proceeds from dispositions of property and equipment...... 12 27 --
------- ------- -------
Net cash used in investing activities............. (1,990) (1,032) (555)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance
costs.................................................. 46,940 -- --
Proceeds from exercise of common stock options............ 362 70 --
Proceeds from issuance of notes payable and warrants...... -- 400 510
Payments on notes payable................................. (249) (198) (187)
Proceeds from issuance of preferred stock, net of issuance
costs.................................................. 8,788 10,772 6,992
------- ------- -------
Net cash provided by financing activities......... 55,841 11,044 7,315
------- ------- -------
Net increase in cash and cash equivalents................... 48,304 4,293 4,712
Effect of exchange rate changes on cash and cash
equivalents............................................... 3 -- --
------- ------- -------
Cash and cash equivalents at beginning of year.............. 9,045 4,752 40
Cash and cash equivalents at end of year.................... $57,352 $ 9,045 $ 4,752
======= ======= =======
Supplemental schedule of cash flow information:
Interest paid............................................. $ 30 $ 39 $ 15
Income taxes paid......................................... $ 19 $ 12 $ --
Supplemental schedule of non-cash financing activity:
Settlement of debt through issuance of Series A
Convertible Participating Preferred Stock.............. $ -- $ -- $ 250
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 37
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF THE BUSINESS:
Silknet provides software that allows companies to offer their customers
personalized marketing, sales, electronic commerce and customer support services
through a single Web site interface tailored by the company to meet its customer
requirements.
Silknet 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.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of Silknet and
its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates include the valuation of deferred tax assets.
Cash and Cash Equivalents
Silknet considers money market mutual funds and all short-term investments
with original maturities of three months or less at the date of purchase to be
cash equivalents. Silknet invests its 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.
37
<PAGE> 38
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of Silknet's financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses and notes
payable approximate their fair values at June 30, 1999.
Revenue Recognition
Silknet recognizes revenue from software licenses upon delivery to
customers provided no significant post-delivery obligations or uncertainties
remain and collection of the related receivable is probable. License or services
revenue subject to a significant acceptance clause is deferred until acceptance
is received from the customer. Revenue under arrangements where multiple
products or services are sold together under one contract is allocated to each
element based on their relative fair values, with these fair values being
determined using the price charged when that element is sold separately. For
agreements with specified upgrade rights, the revenue related to such upgrade
rights is deferred until the specified upgrade is delivered. Training and
consulting services revenue is recognized as services are provided and revenue
for maintenance and post-contract customer support services is recognized
ratably over the term of the service agreement.
Concentrations of Credit Risk and Significant Customers
A potential exposure to Silknet is a concentration of credit risk in trade
accounts receivable. To minimize this risk, ongoing credit evaluations of
customers' financial condition are performed, although collateral generally is
not required. As of June 30, 1999, two customers accounted for 28% and 15% of
accounts receivable, while three customers accounted for 34%, 25% and 11% of
accounts receivable as of June 30, 1998. In addition, two customers accounted
for 21% and 17% of total revenue for the year ended June 30, 1999, while five
customers accounted for 20%, 14%, 11%, 10% and 10% of total revenue for the year
ended June 30, 1998 and four customers accounted for 34%, 27%, 16% and 14% of
total revenue for the year ended June 30, 1997.
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.
To date, no research and development costs have been capitalized.
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 J). All stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123.
38
<PAGE> 39
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999, 1998 and 1997, options to
purchase 2,474,189, 1,506,092 and 1,220,158 shares of common stock,
respectively, Preferred Stock convertible into 9,159,654, 7,953,741 and
4,864,584 shares of common stock, respectively, and warrants to purchase
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.
Stock Split
In February 1999, Silknet reincorporated from New Hampshire to Delaware. In
connection with the reincorporation, Silknet effected a one-for-two exchange of
all common and preferred stock and assigned a par value of $.01 per share to the
common stock. Additionally, Silknet increased the number of shares of authorized
common stock to 50,000,000 and authorized preferred stock to 15,000,000. All
references to shares and per share amounts in the financial statements and
related footnotes have been adjusted to reflect the exchange and the new par
value for all periods presented.
Comprehensive Income
On July 1, 1998, Silknet adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and display of comprehensive income and
its components. SFAS No. 130 is effective for Silknet's fiscal year ending June
30, 1999 including interim periods for that year. Comprehensive income consists
of net income and foreign currency translation adjustments and is presented in
the consolidated statement of convertible preferred stock and stockholders'
equity (deficit). Prior year financial statements have been reclassified to
conform to the SFAS No. 130 requirements. Management determined that SFAS No.
130 had no significant impact on Silknet's financial statements through June 30,
1999.
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. Management determined
that SFAS No. 131 had no significant impact on Silknet's financial statements
through June 30, 1999.
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.
39
<PAGE> 40
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management determined that SFAS No. 132 had no significant impact on Silknet's
financial statements through June 30, 1999.
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.
C. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------
1999 1998
------ ------
<S> <C> <C>
Computers................................................... $2,332 $1,032
Furniture and fixtures...................................... 961 525
Leasehold improvements...................................... 366 103
------ ------
3,659 1,660
Less accumulated depreciation and amortization.............. (1,191) (443)
------ ------
Total............................................. $2,468 $1,217
====== ======
</TABLE>
Depreciation and amortization expense for the years ended June 30, 1999, 1998
and 1997 was approximately $751,000, $339,000 and $94,000, respectively.
40
<PAGE> 41
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. ACCRUED EXPENSES:
Accrued expenses consist of (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1999 1998
------ ----
<S> <C> <C>
Commissions, bonuses and other incentives................... $1,849 $334
Vacation.................................................... 448 196
Royalties................................................... 100 16
Professional services....................................... 604 72
Marketing................................................... 542 74
Sales tax................................................... 660 113
Other....................................................... 548 112
------ ----
Total............................................. $4,751 $917
====== ====
</TABLE>
E. INCOME TAXES:
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets (liabilities):
Organizational and start-up costs, capitalized for tax.... $ 4 $ 8
Fixed assets.............................................. 76 (36)
Accrued expenses.......................................... 256 97
Deferred compensation..................................... 214 146
Research and experimentation credit....................... 87 37
Allowance for doubtful accounts........................... 172 --
Net operating loss carryforwards.......................... 6,172 2,996
------- -------
6,981 3,248
Less valuation allowance............................... (6,981) (3,248)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, Silknet considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Due to the fact that Silknet has incurred net
losses to date and expects to experience net losses in the near future, there is
substantial doubt about whether Silknet will have sufficient future taxable
income necessary to utilize the deferred tax assets over the periods which the
deferred tax assets are deductible for federal and state income tax purposes. As
a result, a 100% valuation allowance has been applied against Silknet net
deferred tax assets.
41
<PAGE> 42
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following reconciles the difference between the federal statutory rate
and Silknet's effective tax rate (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
U.S. federal statutory rate................................. $(3,187) $(2,041) $ (936)
State income taxes, net..................................... (554) (28) (22)
Research and experimentation tax credit..................... (50) -- (37)
Other....................................................... 58 17 2
Change in valuation allowance............................... 3,733 2,052 993
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
At June 30, 1999, Silknet has net operating loss carryforwards of
approximately $16,600,000 for federal, state, and foreign income tax purposes
which expire beginning in 2012. Under the provisions of the Internal Revenue
Code, certain substantial changes in Silknet's ownership may have limited, or
may limit in the future, the amount of net operating loss and research and
experimentation credit carryforwards which could be utilized annually to offset
future taxable income and income tax liabilities. The amount of any annual
limitation is determined based upon Silknet's value prior to an ownership
change.
F. LINES OF CREDIT AND NOTES PAYABLE:
Lines of Credit
During 1996, Silknet maintained a $125,000 line of credit with a bank.
Interest on the borrowings were at the bank's prime rate (8.25% at June 30,
1996) plus 2%. Borrowings outstanding under the line totaled approximately
$72,000 at June 30, 1996. This line of credit was repaid and terminated in 1997.
During March 1997, Silknet entered into an equipment loan agreement under
which Silknet was able to borrow up to $300,000 to finance fixed asset
purchases. Advances under this facility were to be repaid over a 24-month
period, commencing on April 30, 1997. Interest on borrowings were at the bank's
prime rate plus 2%. Borrowings under the facility were collateralized by all
assets of Silknet. Silknet was required to meet certain minimum financial
covenants for tangible net worth and liquidity with which Silknet was in
compliance. This line of credit was repaid and terminated in 1999.
During December 1997, Silknet entered into an equipment loan agreement
under which Silknet may borrow up to $400,000 to finance fixed asset purchases.
Advances under this facility are to be repaid over a 36-month period, commencing
on March 31, 1998. The facility bears interest at the bank's prime rate (7.75%
at June 30, 1999) plus 1%. Borrowings under the facility are collateralized by
all assets of Silknet. Silknet is required to meet certain minimum financial
covenants for tangible net worth and liquidity with which Silknet has been in
compliance. At June 30, 1999, the balance outstanding totaled approximately
$222,000.
During March 1999, Silknet entered into a new bank line of credit which
allows Silknet to borrow up to $3.0 million for working capital purposes and for
the issuance of letters of credit. The line of credit expires in March 2000.
Amounts available under the line of credit are a function of eligible accounts
receivable and bear interest at the bank's prime rate (7.75% at June 30, 1999)
plus 0.5%. Borrowings under the line of credit are collateralized by all assets
of Silknet. Silknet is required to meet certain minimum financial covenants for
tangible net worth and liquidity with which Silknet
42
<PAGE> 43
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has been in compliance. At June 30, 1999, there were no amounts outstanding
under the line of credit.
At June 30, 1999, payments of principal and interest on existing debt were
due as follows (in thousands):
<TABLE>
<S> <C>
Fiscal year ending June 30,
2000...................................................... $148
2001...................................................... 92
----
Total payments............................................ 240
Less amounts representing interest........................ 18
----
Total debt.................................................. $222
Less current portion........................................ 133
----
$ 89
====
</TABLE>
Notes Payable
During May 1996, Silknet entered into a Note and Warrant Purchase Agreement
with a private investor. Under the agreement, Silknet may borrow up to $250,000
and must issue warrants to purchase 250,000 shares of Silknet's common stock at
$1.00 per share. In May 1996, Silknet issued a demand subordinated note payable
under the agreement in the amount of $125,000 in exchange for cash and issued a
warrant to purchase 125,000 shares of Silknet's common stock at $1.00 per share.
This warrant expires in May 2002. In July 1996, Silknet issued another demand
subordinated note payable under the agreement in the amount of $125,000 in
exchange for cash and an additional warrant to purchase 125,000 shares of
Silknet's common stock at $1.00 per share. This warrant expires in July 2002
(Note G). The fair value of each warrant at the time of issuance was estimated
to be approximately $47,000, which was recorded as additional paid-in capital
and reduced the carrying value of the debt. The fair value was estimated using
the Black-Scholes model with the following assumptions: dividend yield of 0%,
volatility of 0%, risk free interest rate of 6.5% and an expected life of 5
years. The discount on each note of $47,000 was amortized over the estimated
life of the note of six months.
In November 1996, Silknet repaid the full amount due under each demand
subordinated note by issuing 268,388 shares of Series A Convertible
Participating Preferred Stock (Note H). No gain or loss was recognized on the
exchange.
G. COMMON STOCK WARRANTS:
During May 1996, Silknet issued a warrant to purchase 125,000 shares of
common stock at $1.00 per share in connection with the first draw of $125,000
under a bridge loan agreement with Zero Stage Capital V, L.P. During July 1996,
Silknet issued an additional warrant to purchase 125,000 shares of common stock
in connection with the second draw of $125,000 under the bridge loan agreement
with Zero Stage Capital V, L.P. (Note F). The total consideration received under
each issuance was allocated between the note and the warrants based upon their
relative fair values at the date of issuance. The estimated fair value at the
time of issuance assigned to each issue of the warrants was approximately
$47,000 and was recorded as additional paid-in capital, thus reducing the
carrying value of the debt. The discount on the note of $94,000 was amortized
over the estimated life of the note of six months. One warrant expires in May
2002 and the other expires in July 2002.
43
<PAGE> 44
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, in connection with the issuance of the Series B Convertible
Participating Preferred Stock, Silknet issued warrants to purchase 500,000
shares of common stock at $2.20 per share. The warrants expire in June 2003. The
estimated fair value of the warrants at the time of issuance using the
Black-Scholes model was insignificant.
H. CONVERTIBLE PREFERRED STOCK:
In October 1996, Silknet issued 2,364,584 shares of Series A Convertible
Participating Preferred Stock ("Series A Preferred Stock") at $0.96 per share to
private investors for total consideration of $2,251,683 (net of offering costs
of $18,317). Of the total consideration, $250,000 was paid by one investor
through the cancellation of demand subordinated notes payable issued by Silknet
(Note F).
The Series A Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $0.96 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any other class of preferred stock or on any class of common
stock. The Series A Preferred Stock is convertible at any time by the holders,
at the then applicable conversion rate adjusted from time to time (one to one on
the date of issuance). The Series A Preferred Stock is redeemable at the option
of the holder beginning in May 2003 if Silknet has not made a qualified initial
public offering of its common stock, as defined. Upon liquidation, holders of
Series A Preferred Stock are entitled to receive, out of funds then generally
available, $0.96 per share, plus any accrued and unpaid dividends, thereon.
Following payment to holders of all other classes of preferred stock subordinate
to the Series A Preferred Stock, holders of Series A Preferred Stock are then
entitled to share in remaining available funds on an "as if converted" basis
with holders of common stock.
In June 1997, the Company issued 2,500,000 shares of Series B Convertible
Participating Preferred Stock ("Series B Preferred Stock") at $2.00 per share to
private investors for total consideration of $4,989,954 (net of offering costs
of $10,046).
The Series B Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $2.00 per share,
on a per share basis. Dividends must be paid before any other dividends can be
declared or paid on any class of common stock. The Series B Preferred Stock is
convertible at any time by the holders, at the then applicable conversion rate
as adjusted from time to time (one to one on the date of issuance). The Series B
Preferred Stock is redeemable at the option of the holder beginning in May 2003
if Silknet has not made a qualified initial public offering of its common stock,
as defined. Upon liquidation, holders of Series B Preferred Stock are entitled
to receive, out of funds then generally available, $2.00 per share, plus any
accrued and unpaid dividends, thereon. Following payment to holders of all other
classes of preferred stock subordinate to the Series B Preferred Stock, holders
of Series B Preferred Stock are then entitled to share in remaining available
funds on an "as if converted" basis with holders of common stock.
In May 1998, Silknet issued 3,089,157 shares of Series C Convertible
Participating Preferred Stock ("Series C Preferred Stock") at $3.498117 per
share to private investors for total consideration of $10,772,583 (net of
offering costs of $33,642).
The Series C Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $3.498117 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any class of common stock. The Series C Preferred
Stock is convertible at any time by the holders, at the then applicable
conversion rate as adjusted from time to time (one to one on the date of
issuance). The Series C Preferred Stock is
44
<PAGE> 45
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
redeemable at the option of the holder beginning in May 2003 if Silknet has not
made a qualified initial public offering of its common stock, as defined. Upon
liquidation, holders of Series C Preferred Stock are entitled to receive, out of
funds then generally available, $3.498117 per share, plus all accrued and unpaid
dividends thereon. Following payment to holders of all other classes of
preferred stock subordinate to the Series C Preferred Stock, holders of Series C
Preferred Stock are then entitled to share in remaining available funds on an
"as if converted" basis with holders of common stock.
In February 1999, Silknet issued 1,205,913 shares of Series D Convertible
Preferred Stock ("Series D Preferred Stock") at $7.324109 per share to private
investors for total consideration of $8,788,463 (net of offering costs of
$43,775).
The Series D Preferred Stock is voting. Dividends accrue annually and are
cumulative at a rate of 10% of the original purchase price of $7.324109 per
share, on a per share basis. Dividends must be paid before any other dividends
can be declared or paid on any other classes of common stock. The Series D
Preferred Stock is convertible at any time by the holders, at the then
applicable conversion rate as adjusted from time to time (one to one on the date
of issuance). The Series D Preferred Stock is redeemable at the option of the
holder beginning in February 2004 if Silknet has not made a qualified initial
public offering of its common stock, as defined. Upon liquidation, holders of
Series D Preferred Stock are entitled to receive, out of funds then generally
available, $7.324109 per share, plus all accrued and unpaid dividends.
Upon the closing of the initial public offering, all outstanding shares of
Preferred Stock automatically converted into shares of common stock as follows:
<TABLE>
<CAPTION>
SHARES OF
SERIES COMMON STOCK
- ------ ------------
<S> <C>
Series A Preferred Stock........................... 2,364,584
Series B Preferred Stock........................... 2,500,000
Series C Preferred Stock........................... 3,089,157
Series D Preferred Stock........................... 1,205,913
---------
9,159,654
=========
</TABLE>
I. PUBLIC OFFERING:
In February 1999, the Board of Directors authorized Silknet management to
file a Registration Statement with the Securities and Exchange Commission
permitting Silknet to sell shares of its common stock in an initial public
offering. The 9,159,654 outstanding shares of Series A, Series B, Series C and
Series D Preferred Stock converted into 9,159,654 shares of common stock (Note
H).
In May 1999, Silknet offered for sale 3,450,000 shares of common stock.
Silknet received net proceeds from the offering of approximately $46,940,000.
J. STOCK OPTIONS:
The 1999 Stock Option and Incentive Plan (the "1999 Option Plan") was
adopted by the Board of Directors and received stockholder approval in February
1999. A total of 1,000,000 shares of common stock have initially been reserved
for issuance under the 1999 Option Plan. The 1999 Option
45
<PAGE> 46
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Plan provides that the number of shares authorized for issuance will
automatically increase by 5% of the outstanding number of shares of common stock
on December 31, 1999, 2000 and 2001 up to a maximum of an additional 2,500,000
shares of common stock. Under the terms of the 1999 Option Plan, Silknet is
authorized to grant incentive stock options as defined under the Internal
Revenue Code, non-qualified options, stock awards or opportunities to make
direct purchases of common stock to employees, officers, directors, consultants
and advisors of Silknet and its subsidiaries. The 1999 Option Plan is
administered by the Silknet Compensation Committee. The Silknet Compensation
Committee selects the individuals to whom options will be granted and determines
the option exercise price and other terms of each award, subject to the
provisions of the 1999 Option Plan. Options granted under the 1999 Option Plan
will expire on a date determined by the Compensation Committee, not to exceed 10
years. As of June 30, 1999, options to purchase 414,775 shares of Silknet common
stock had been granted under the 1999 Option Plan.
The 1999 Non-Employee Director Stock Option Plan (the "Director Plan") was
adopted by the Board of Directors and received stockholder approval in February
1999 and became effective on the date on which Silknet's common stock was
registered under the Exchange Act. A total of 350,000 shares of common stock
have been authorized for issuance under the Director Plan. The Director Plan is
administered by the Silknet Compensation Committee. Under the Director Plan,
each non-employee director who was a member of the Board of Directors was
automatically granted on the date the common stock was registered under the
Exchange Act or, if not a director on that date, the date first elected to the
Board of Directors, an initial option to purchase 10,000 shares of common stock.
In addition, provided that the director continues to serve as a member of the
Board of Directors, each non-employee director will be automatically granted on
the third anniversary of his or her initial option grant date and each three
years thereafter an option to purchase 10,000 shares of common stock. Provided
that the director continues to serve as a member of the Board of Directors,
one-third of the shares included in each grant will become exercisable on each
of the first, second and third anniversaries of the date of grant. If a director
fails to attend at least 75% of the Board of Directors meetings held in a fiscal
year, that director will forfeit his or her rights with respect to the option
installment which vested on the preceding vesting date, in proportion to the
percentage of Board of Directors meetings not attended. All options granted
under the Director Plan will have an exercise price equal to the fair market
value of the common stock on the date of grant and a term of ten years from the
date of grant. As of June 30, 1999, options to purchase 50,000 shares of Silknet
common stock had been granted under the Director Plan.
Silknet also has an Employee Stock Option Plan (the "1995 Option Plan")
which provides for the issuance of options to purchase up to 2,391,900 shares of
Silknet's common stock to eligible employees, officers, directors, consultants
and advisors of Silknet. As of June 30, 1999, options to purchase 2,388,826
shares of Silknet common stock had been granted under the 1995 Option Plan.
Under the 1995 Option Plan, the Board of Directors may award incentive and
non-qualified stock options. Stock options entitle the holder to purchase common
stock from Silknet for a specified exercise price, during a period specified by
the applicable option agreement. Generally, the options vest over four years.
Incentive stock options may not be granted with an exercise price less than the
fair market value of Silknet's common stock at the date of grant or for a term
exceeding ten years. The exercise price of each non-qualified stock option shall
be specified by the Board of Directors.
46
<PAGE> 47
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for the years ended June 30, 1997, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
EXERCISE PRICE LESS THAN GRANT
EQUALS GRANT DATE STOCK FAIR
DATE STOCK FAIR VALUE 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, 1996...... 173,250 $1.00 497,150 $0.02 670,400 $0.27
Granted........................... 634,500 1.00 -- -- 634,500 1.00
Cancelled......................... (84,742) 1.00 -- -- (84,742) 1.00
--------- ----- ------- ----- --------- -----
Outstanding at June 30, 1997...... 723,008 $1.00 497,150 $0.02 1,220,158 $0.60
Granted........................... 400,375 1.04 -- -- 400,375 1.04
Exercised......................... (69,725) 1.00 -- -- (69,725) 1.00
Cancelled......................... (44,716) 1.04 -- -- (44,716) 1.04
--------- ----- ------- ----- --------- -----
Outstanding at June 30, 1998...... 1,008,942 $1.01 497,150 $0.02 1,506,092 $0.69
Granted........................... 960,750 9.18 442,350 4.42 1,403,100 7.68
Exercised......................... (309,194) 1.17 (493) 1.75 (309,687) 1.17
Cancelled......................... (121,566) 1.60 (3,750) 1.75 (125,316) 1.60
--------- ----- ------- ----- --------- -----
Outstanding at June 30, 1999...... 1,538,932 $6.03 935,257 $2.09 2,474,189 $4.55
========= ===== ======= ===== ========= =====
</TABLE>
As of June 30, 1999, 588,311 shares were available for grant under the 1999
Option Plan and 1995 Option Plan.
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
VESTED AND EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED-
REMAINING AVERAGE
NUMBER CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (IN YEARS) OF SHARES PRICE
- -------------- ----------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
$ 0.02................................ 497,150 6.15 467,851 $0.02
$ 1.00................................ 726,898 7.67 283,320 1.00
$ 1.75................................ 649,166 9.20 89,079 1.75
$ 5.50- 7.32.......................... 236,000 9.73 -- --
$11.00-15.00.......................... 140,450 9.84 -- --
$24.81-35.56.......................... 219,775 9.96 -- --
$41.56-46.38.......................... 4,750 9.88 -- --
--------- ---- ------- -----
$ 0.02-46.38.......................... 2,474,189 8.29 840,250 $0.53
========= ==== ======= =====
</TABLE>
Silknet records deferred compensation for options issued with exercise
prices below the fair value of common stock. Deferred compensation is amortized
and recorded as compensation expense ratably over the vesting period of the
options. Compensation expense of approximately $170,000, $84,000 and $93,000 was
recognized during the years ended June 30, 1999, 1998 and 1997, respectively.
Silknet applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its plans. Silknet has adopted the
disclosure-only provisions of
47
<PAGE> 48
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation expense has been
recognized for the employee 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 1999, 1998 and 1997,
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 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net loss -- as reported............................... $(11,161) $(6,906) $(2,942)
Net loss -- pro forma................................. $(12,249) $(7,090) $(3,120)
Basic and diluted net loss per share -- as reported... $ (2.39) $ (2.69) $ (1.15)
Basic and diluted net loss per share -- pro forma..... $ (2.62) $ (2.76) $ (1.22)
</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>
YEAR ENDED JUNE 30,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividend yield........................................ 0% 0% 0%
Expected volatility................................... 85% 0% 0%
Risk free interest rate............................... 5.0% 5.5% 6.0%
Expected lives........................................ 5 years 5 years 5 years
</TABLE>
The weighted average grant date fair values using the Black-Scholes option
pricing model were:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Exercise price equals grant date stock fair value......... $7.28 $0.37 $0.35
Exercise price less than grant date stock fair value...... $5.11 -- --
All options............................................... $6.59 $0.37 $0.35
</TABLE>
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts. Additional grants in future years are anticipated.
On February 23, 1999, the Board of Directors adopted the 1999 Employee
Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan allows for the
issuance of 350,000 shares of Silknet's common stock to eligible employees.
Under the Purchase Plan, Silknet is authorized to make a series of offerings
during which employees may purchase shares of common stock through payroll
deductions made over the term of the offering. The per-share purchase price at
the end of each offering is equal to 85% of the fair market value of the common
stock at the beginning or end of the offering period (as defined by the Purchase
Plan), whichever is lower. The first offering period of the Purchase Plan
commenced upon the initial public offering of the common stock to the public and
shall end on January 31, 2000.
48
<PAGE> 49
SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. COMMITMENTS AND CONTINGENCIES:
Silknet leases office space and equipment under non-cancelable operating
leases extending through July 2004. 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 approximately $692,000, $292,000 and $83,000 for the
years ended June 30, 1999, 1998 and 1997, respectively.
The following is a schedule of future minimum lease payments under
noncancelable operating leases with initial terms in excess of one year at June
30, 1999 (in thousands):
Fiscal Years ending June 30:
<TABLE>
<S> <C>
2000................................................ $1,085
2001................................................ 1,132
2002................................................ 1,170
2003................................................ 1,228
2004................................................ 890
Thereafter.......................................... 45
</TABLE>
L. EMPLOYEE BENEFIT PLAN:
Silknet maintains a 401(k) plan qualified under Section 401(k) of the
Internal Revenue Code. All Silknet employees are eligible to participate in the
401(k) plan. Under the 401(k) plan, a participant may contribute a maximum of
20% of his or her pre-tax salary, commissions and bonuses through payroll
deductions (up to the statutorily prescribed annual limit -- $10,000 in 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 eligible employees. To date, Silknet has made no
profit-sharing contributions to the 401(k) plan.
M. RELATED PARTY TRANSACTIONS:
During the years ended June 30, 1999, 1998 and 1997, Silknet recognized
license and services revenue from transactions with affiliated companies of
approximately $16,000, $56,000 and $31,000, respectively. Additionally, Silknet
recognized license and service revenue from transactions with an investor of
approximately $1,006,000 during the year ended June 30, 1999.
49
<PAGE> 50
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly supplemental consolidated financial information for
each quarter of fiscal 1999 and 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31 SEPT. 30,
1999 1999 1998 1998 1998 1998 1997 1997
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License..................... $ 3,577 $ 2,785 $ 2,040 $ 1,648 $ 1,250 $ 1,218 $ 366 $ 142
Services.................... 1,180 833 1,234 621 303 240 111 17
------- ------- ------- ------- ------- ------- ------- -------
Total revenue............. 4,757 3,618 3,274 2,269 1,553 1,458 477 159
Cost of revenue:
License..................... 52 82 91 92 14 13 4 1
Services.................... 1,131 749 981 538 453 327 337 237
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenue..... 1,183 831 1,072 630 467 340 341 238
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.................. 3,574 2,787 2,202 1,639 1,086 1,118 136 (79)
Operating expenses:
Sales and marketing......... 3,734 2,846 2,343 1,892 1,779 1,209 982 832
Research and development.... 2,277 1,438 1,270 1,005 813 651 501 443
General and
administrative............ 1,234 883 660 630 388 306 322 172
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 7,245 5,167 4,273 3,527 2,980 2,166 1,805 1,447
------- ------- ------- ------- ------- ------- ------- -------
Operating loss................ (3,671) (2,380) (2,071) (1,888) (1,894) (1,048) (1,669) (1,526)
Interest income, net.......... 412 74 59 91 64 4 21 45
------- ------- ------- ------- ------- ------- ------- -------
Net loss...................... $(3,259) $(2,306) $(2,012) $(1,797) $(1,830) $(1,044) $(1,648) $(1,481)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
50
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 18, 1998, Silknet engaged PricewaterhouseCoopers LLP as its
independent accountants, to replace KPMG Peat Marwick LLP. The decision was made
by Silknet's Board of Directors, upon the recommendation of management, and was
not due to any disagreement with KPMG Peat Marwick LLP. During the fiscal years
ended June 30, 1998 and 1997 and the subsequent interim period immediately
preceding the date of this change, Silknet had no disagreements with KPMG Peat
Marwick LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused them to
make reference thereto in their report on Silknet's financial statements. The
reports of KPMG Peat Marwick LLP on Silknet's financial statements for fiscal
1996 and 1997 (the last fiscal year audited by KPMG Peat Marwick LLP) did not
contain any adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the Sections "Election of Directors," "Occupations of
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" from the registrant's definitive proxy statement for the
annual meeting of stockholders to be held on November 12, 1999, which is to be
filed with the Securities and Exchange Commission not later than 120 days after
the close of the registrant's fiscal year ended June 30, 1999, is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Stock Performance Graph" from the
registrant's definitive proxy statement for the annual meeting of stockholders
to be held on November 12, 1999, which is to be filed with the Securities and
Exchange Commission not later than 120 days after the close of the registrant's
fiscal year ended June 30, 1999, is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the Section "Securities Ownership of Certain
Beneficial Owners and Management" from the registrant's definitive proxy
statement for the annual meeting of stockholders to be held on November 12,
1999, which is to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the registrant's fiscal year ended June 30,
1999, is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the Sections "Compensation and Other Information
Concerning Directors and Officers" and "Certain Relationships and Related
Transactions" from the registrant's definitive proxy statement for the annual
meeting of stockholders to be held on November 12, 1999, which is to be filed
with the Securities and Exchange Commission not later than 120 days after the
close of the registrant's fiscal year ended June 30, 1999, is hereby
incorporated by reference.
51
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements (see "Financial Statements and Supplementary
Data" at Item 8 and incorporated herein by reference).
(2) Financial Statement Schedules (Schedules to the Financial Statements
have been omitted because the information required to be set forth
therein is not applicable or is shown in the accompanying Financial
Statements or notes thereto).
(3) Exhibits
The following exhibits are filed as part of and incorporated by reference
into this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.01(1) Certificate of Incorporation of Silknet.
3.02(1) By-laws, as amended, of Silknet.
4.01(1) Specimen Certificate for shares of Silknet's Common Stock.
4.02(1) Description of Capital Stock (contained in the Certificate
of Incorporation filed as Exhibit 3.01).
4.03(1) Form of Warrant Agreement dated as of May 17, 1996 between
Silknet and Zero Stage Capital V, L.P.
4.04(1) Form of Warrant Agreement dated as of June 11, 1997 between
Silknet and certain investors.
10.01*(1) Employee Stock Option Plan, as amended.
10.02*(1) 1999 Stock Option and Incentive Plan.
10.03*(1) 1999 Non-Employee Director Stock Option Plan.
10.04* ** 1999 Employee Stock Purchase Plan, as amended.
10.05(1) 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(1) 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(1) 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(1) Loan and Modification Agreement dated March 2, 1999 by and
between Silknet and Silicon Valley Bank.
10.09(1) Loan and Security Agreement dated March 5, 1997 by and
between Silknet and Silicon. Valley Bank, as amended
pursuant to a Loan Modification Agreement dated December 1,
1997.
10.10*(1) Employment Agreement dated April 13, 1999 by and between the
Company and James C. Wood.
10.11*(1) Employment Agreement dated April 13, 1999 by and between the
Company and Nigel K. Donovan.
10.12*(1) Employment Agreement dated April 13, 1999 by and between the
Company and Patrick J. Scannell, Jr.
16.01(1) Letter from KPMG Peat Marwick dated March 3, 1999.
21.01(1) Subsidiaries.
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
23.01** Consent of PricewaterhouseCoopers LLP.
24.01** Power of Attorney (see signature page hereto).
27.01** Financial Data Schedule.
</TABLE>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith
(1) Incorporated herein by reference to the exhibits to Silknet's Registration
Statement on Form S-1 (File No. 333-73295).
(b) Reports on Form 8-K.
No reports on form 8-K were filed on behalf of the Company during the
quarter ended June 30, 1999.
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
SILKNET SOFTWARE, INC.
(Registrant)
Date: September 24, 1999
By: /s/ 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 and in our names in the capacities
indicated below, any amendments to this Annual Report on Form 10-K, 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
Exchange Act of 1934, as amended, and all the requirements of the Securities
Exchange Commission.
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ JAMES C. WOOD President, Chief Executive September 24, 1999
- --------------------------------------------------- Officer and Chairman of the
James C. Wood Board (Principal Executive
Officer)
/s/ PATRICK J. SCANNELL, JR. Vice President, Chief September 24, 1999
- --------------------------------------------------- Financial Officer, Treasurer
Patrick J. Scannell, Jr. and Secretary (Principal
Financial and Accounting
Officer)
/s/ STANLEY FUNG Director September 24, 1999
- ---------------------------------------------------
Stanley Fung
/s/ GUY BRADLEY Director September 24, 1999
- ---------------------------------------------------
Guy Bradley
/s/ JOO HOCK CHUA Director September 24, 1999
- ---------------------------------------------------
Joo Hock Chua
/s/ ANDREW GOLDFARB Director September 24, 1999
- ---------------------------------------------------
Andrew Goldfarb
</TABLE>
54
<PAGE> 55
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.01(1) Certificate of Incorporation of Silknet.....................
3.02(1) By-laws, as amended, of Silknet.............................
4.01(1) Specimen Certificate for shares of Silknet's Common Stock...
4.02(1) Description of Capital Stock (contained in the Certificate
of Incorporation filed as Exhibit 3.01).....................
4.03(1) Form of Warrant Agreement dated as of May 17, 1996 between
Silknet and Zero Stage Capital V, L.P. .....................
4.04(1) Form of Warrant Agreement dated as of June 11, 1997 between
Silknet and certain investors...............................
10.01*(1) Employee Stock Option Plan, as amended......................
10.02*(1) 1999 Stock Option and Incentive Plan........................
10.03*(1) 1999 Non-Employee Director Stock Option Plan................
10.04* ** 1999 Employee Stock Purchase Plan, as amended...............
10.05(1) 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(1) 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(1) 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(1) Loan and Modification Agreement dated March 2, 1999 by and
between Silknet and Silicon Valley Bank.....................
10.09(1) Loan and Security Agreement dated March 5, 1997 by and
between Silknet and Silicon. Valley Bank, as amended
pursuant to a Loan Modification Agreement dated December 1,
1997........................................................
10.10*(1) Employment Agreement dated April 13, 1999 by and between the
Company and James C. Wood...................................
10.11*(1) Employment Agreement dated April 13, 1999 by and between the
Company and Nigel K. Donovan................................
10.12*(1) Employment Agreement dated April 13, 1999 by and between the
Company and Patrick J. Scannell, Jr. .......................
16.01(1) Letter from KPMG Peat Marwick dated March 3, 1999...........
21.01(1) Subsidiaries................................................
23.01** Consent of PricewaterhouseCoopers LLP.......................
24.01** Power of Attorney (see signature page hereto)...............
27.01** Financial Data Schedule.....................................
</TABLE>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith
(1) Incorporated herein by reference to the exhibits to Silknet's Registration
Statement on Form S-1 (File No. 333-73295).
<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
-2-
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 shall be eligible to receive options
under this Plan to purchase common stock of the Company, and all eligible
employees shall have the same rights and privileges hereunder. Persons who are
eligible employees on the first business day of any Payment Period (as defined
in Article 5) shall receive their options as of such day. Persons who become
eligible employees after any date on which options are granted under this Plan
shall be granted options on the first day of the next succeeding Payment Period
on which options are granted to eligible employees under this Plan. Directors
who are not employees of the Company shall not be eligible to receive options
under the Plan. In no event, however, may an employee be granted an option if
such employee, immediately after the option was granted, would be treated as
owning stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or of any parent
corporation or subsidiary corporation, as the terms "parent corporation" and
"subsidiary corporation" are defined in Section 424(e) and (f) of the Code. For
purposes of determining stock ownership under this paragraph, the rules of
Section 424(d) of the Code shall apply, and stock which the employee may
purchase under outstanding options shall be treated as stock owned by the
employee.
ARTICLE 4 - STOCK SUBJECT TO THE PLAN.
The stock subject to the options under this Plan shall be shares of the
Company's authorized but UNISSUED Common Stock, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company, including
shares purchased in the open market. The aggregate number of shares which may be
issued pursuant to this Plan is 350,000 (after giving effect to a 1-for-2
reverse stock split in connection with the Company's reincorporation from the
State of New Hampshire to the State of Delaware), subject to adjustment as
provided in Article 12. If any option granted under this Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part, the unpurchased shares
subject thereto shall again be available under this Plan.
ARTICLE 5 - EFFECTIVENESS; PAYMENT PERIOD AND STOCK OPTIONS.
The first Payment Period during which payroll deductions will be
accumulated under this Plan shall commence immediately upon the initial offering
of the Common Stock to the public (the "Offering"), and shall end on December
31, 1999 (the "First Payment Period"). For the remainder of the duration of this
Plan, Payment Periods shall consist of the six-month periods commencing on
February 1 and August 1 and ending on June 30 and December 31 of each calendar
year.
Twice each year, on the first business day of each Payment Period, the
Company will grant to each eligible employee who is then a participant in this
Plan an option to purchase on the
<PAGE> 3
-3-
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
-4-
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
-5-
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
and any overtime, bonuses and 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
-6-
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
-7-
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
-8-
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
-9-
under this Plan, and each participant agrees that the Company and its
participating subsidiaries may deduct additional amounts from the participant's
compensation, when amounts are added to the participant's account, used to
purchase Common Stock or refunded, in order to satisfy such withholding
obligations. Each participant further acknowledges that when Common Stock is
purchased under this Plan the Company and its participating subsidiaries may be
required to withhold taxes with respect to all or a portion of the difference
between the fair market value of the Common Stock purchased and its purchase
price, and each participant agrees that such taxes may be withheld from
compensation otherwise payable to such participant. It is intended that tax
withholding will be accomplished in such a manner that the full amount of
payroll deductions elected by the participant under Article 7 will be used to
purchase Common Stock. However, if amounts sufficient to satisfy applicable tax
withholding obligations have not been withheld from compensation otherwise
payable to any participant, then, notwithstanding any other provision of this
Plan, the Company may withhold such taxes from the participant's accumulated
payroll deductions and apply the net amount to the purchase of Common Stock,
unless the participant pays to the Company, prior to the exercise date, an
amount sufficient to satisfy such withholding obligations. Each participant
further acknowledges that the Company and its participating subsidiaries may be
required to withhold taxes in connection with the disposition of stock acquired
under this Plan and agrees that the Company or any participating subsidiary may
take whatever action it considers appropriate to satisfy such withholding
requirements, including deducting from compensation otherwise payable to such
participant an amount sufficient to satisfy such withholding requirements or
conditioning any disposition of Common Stock by the participant upon the payment
to the Company or such subsidiary of an amount sufficient to satisfy such
withholding requirements.
ARTICLE 22 - GOVERNMENTAL REGULATIONS.
The Company's obligation to sell and deliver shares of Common Stock
under this Plan is subject to the approval of any governmental authority
required in connection with the authorization, issuance or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company with respect to this Plan. For example, the Company may be required to
identify shares of Common Stock issued under this Plan on its stock ownership
records and send tax information statements to employees and former employees
who transfer title to such shares.
ARTICLE 23 - GOVERNING LAW.
The validity and construction of this Plan shall be governed by the
laws of the State of Delaware, without giving effect to the principles of
conflicts of law thereof.
* * * *
Register of Amendments
Date Section Affected Change
- ---- ---------------- ------
April 13, 1999 Art. 5 Change commencement date
of each payment period from
January 1 and July 1 to
February 1 and August 1
May 20, 1999 Art. 3 Eliminate three month
waiting period for
eligibility.
June 25, 1999 Art. 8 Change provision to
include any overtime,
bonuses and commissions
in the maximum amount of
payroll deductions.
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-77789) of Silknet Software, Inc. of our report
dated July 19, 1999 relating to the financial statements, which appears in this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
September 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SILKNET
SOFTWARE, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001079451
<NAME> SILKNET SOFTWARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
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0
0
<COMMON> 155
<OTHER-SE> 56,255
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<SALES> 10,050
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<INCOME-PRETAX> (9,374)
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