<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-25491
SILKNET SOFTWARE, INC.
(Exact Name of registrant as specified in its charter)
DELAWARE 02-0478949
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
50 PHILLIPPE COTE STREET, MANCHESTER, NH 03101
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 625-0070
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
--- ---
The number of shares outstanding of the Registrant's common stock as of
December 31, 1999 was 17,090,338.
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<PAGE> 2
SILKNET SOFTWARE, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999 and June 30, 1999.......................................... 3
Consolidated Statements of Operations - Three months and six months ended December 31, 1999 and 1998....... 4
Consolidated Statements of Cash Flows - Six months ended December 31, 1999 and 1998........................ 5
Notes to Consolidated Financial Statements................................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................................... 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................. 20
Item 2. Changes in Securities and Use of Proceeds..................................................................... 20
Item 3. Defaults upon Senior Securities............................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 20
Item 5. Other Information............................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................................................................. 22
SIGNATURES.............................................................................................................. 22
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILKNET SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 48,211 $ 57,565
Accounts receivable, net of allowance for doubtful accounts of $600 and
$275 at December 31 and June 30, 1999, respectively ................... 6,707 3,985
Prepaid expenses and other current assets ............................. 1,089 689
-------- --------
Total current assets ............................................ 56,007 62,239
Property and equipment, net ............................................. 3,825 2,530
Other assets ............................................................ 1,648 252
-------- --------
Total assets .................................................... $ 61,480 $ 65,021
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank, current portion ................................. 133 133
Accounts payable ...................................................... 870 1,193
Accrued expenses ...................................................... 6,879 4,849
Deferred revenue ...................................................... 3,078 2,187
-------- --------
Total current liabilities ....................................... 10,960 8,362
Note payable to bank .................................................... 23 89
Notes payable to shareholders ........................................... -- 137
-------- --------
Total liabilities ............................................... 10,983 8,588
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value;
Authorized: 50,000,000 shares
Issued and outstanding: 17,090,338 and 16,044,094 shares at December
31, 1999 and June 30,1999, respectively ........................... 171 160
Additional paid-in capital .............................................. 78,929 78,080
Deferred compensation ................................................... (572) (1,108)
Other comprehensive income (loss) ....................................... (22) 3
Accumulated deficit ..................................................... (28,009) (20,702)
-------- --------
Total stockholders' equity ........................................ 50,497 56,433
-------- --------
Total liabilities and stockholders' equity ...................... $ 61,480 $ 65,021
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
License ..................................................... $ 5,152 $ 2,040 $ 9,369 $ 3,688
Services .................................................... 2,712 1,239 4,679 1,860
------------ ------------ ------------ ------------
Total revenue ....................................... 7,864 3,279 14,048 5,548
Cost of revenue:
License ..................................................... 162 91 232 183
Services .................................................... 2,032 981 3,538 1,519
------------ ------------ ------------ ------------
Total cost of revenue ............................... 2,194 1,072 3,770 1,702
------------ ------------ ------------ ------------
Gross margin .................................................. 5,670 2,207 10,278 3,846
Operating expenses:
Sales and marketing ......................................... 4,469 2,343 8,382 4,238
Research and development .................................... 3,452 1,499 6,563 2,748
General and administrative .................................. 2,249 760 4,019 1,453
------------ ------------ ------------ ------------
Total operating expenses ............................ 10,170 4,602 18,964 8,439
------------ ------------ ------------ ------------
Operating loss ................................................ (4,500) (2,395) (8,686) (4,593)
Interest income, net .......................................... 732 73 1,379 179
------------ ------------ ------------ ------------
Net loss ...................................................... (3,768) (2,322) (7,307) (4,414)
Accrued dividends for preferred stockholders .................. -- 439 -- 913
------------ ------------ ------------ ------------
Net loss attributable to common stockholders .................. $ (3,768) $ (2,761) $ (7,307) $ (5,327)
============ ============ ============ ============
Basic and diluted net loss per share .......................... $ (0.23) $ (0.86) $ (0.45) $ (1.68)
Shares used in computing basic and diluted net loss per share . 16,626,791 3,203,145 16,353,852 3,172,479
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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SILKNET SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (7,307) $ (4,414)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .......................... 814 323
Provision for doubtful accounts ........................ 325 200
Amortization of deferred compensation .................. 570 73
Changes in operating assets and liabilities:
Accounts receivable .................................. (3,047) (2,521)
Prepaid and other current assets ..................... (400) (338)
Other assets ......................................... 104 --
Accounts payable ..................................... (323) 484
Accrued expenses ..................................... 2,030 1,425
Deferred revenue ..................................... 891 384
-------- --------
Net cash used in operating
activities ...................................... (6,343) (4,384)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................... (2,104) (605)
Investment in Safe Harbor ................................ (1,500) --
-------- --------
Net cash used in investing activities ............. (3,604) (605)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs ........................................... (110) --
Proceeds from exercise of common stock options ........... 936 88
Payments on notes payable ................................ (203) (143)
-------- --------
Net cash provided by (used in) financing activities 623 (55)
-------- --------
Net decrease in cash and cash equivalents .................. (9,324) (5,044)
Effect of exchange rate changes on cash and cash equivalents (30) 1
-------- --------
Cash and cash equivalents at beginning of period ........... 57,565 10,651
-------- --------
Cash and cash equivalents at end of period ................. $ 48,211 $ 5,608
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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SILKNET SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS - Silknet Software, Inc. ("Silknet") provides electronic
customer relationship management software, or eCRM software, that allows
companies to offer marketing, sales, e-commerce and support services through a
single Web site interface personalized for individual customers.
On October 5, 1999, Silknet completed its acquisition of InSite Marketing
Technology, Inc. ("InSite"). Silknet eSales, based upon InSite's technology, is
an e-sales application that provides the customer an electronic, or virtual,
personal sales assistant with the ability to identify the buying needs and style
of a customer. The underlying InSite technology uses demographic and
psychographic analysis, microsegmentation and probability models to personalize
the interaction between a virtual personal sales assistant and each customer.
This transaction was accounted for using the pooling-of-interests method. The
accompanying consolidated financial statements of Silknet have been restated to
include the results and balances of InSite for all periods presented.
BASIS OF PRESENTATION - The accompanying interim consolidated financial
statements are unaudited, but include all adjustments (consisting only of
normal, recurring adjustments) which Silknet's management believes to be
necessary for the fair presentation of the financial position, results of
operations, and changes in cash flows for the periods presented. 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 at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Despite management's best effort to establish good faith estimates and
assumptions, and to manage the achievement of the same, actual results may
differ.
INTERIM FINANCIAL INFORMATION - The accompanying interim financial
statements should be read in conjunction with the financial statements and
related notes included in Silknet's Annual Report to Stockholders (Form 10-K)
for the year ended June 30, 1999. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the Securities and Exchange Commission rules and regulations. The
consolidated financial statements include the accounts of Silknet and its
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. Interim results of operations for the three and six
month periods ended December 31, 1999 are not necessarily indicative of
operating results or performance levels that can be expected for the full fiscal
year.
NET LOSS PER SHARE - Net loss per share is computed under Statement of
Financial Accounting Standards ("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 three months and six months ended December 30, 1999 and 1998, options
to purchase 2,313,339 and 2,256,094 shares of common stock, respectively,
preferred stock convertible into 0 and 7,953,741 shares of common stock,
respectively, and warrants to purchase 424,340 and 750,000 shares of common
stock, respectively, were not included in the computation of diluted earnings
per share since their inclusion would be anti-dilutive.
6
<PAGE> 7
COMPREHENSIVE LOSS - The following table presents the calculation of
comprehensive loss and its components for the three and six months ended
December 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss ............................... $(3,768) $(2,322) $(7,307) $(4,414)
Foreign currency translation adjustments (32) -- (25) --
------- ------- ------- -------
Comprehensive loss ..................... $(3,800) $(2,322) $(7,332) $(4,414)
======= ======= ======= =======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("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, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management determined that SFAS No. 133 had
no significant impact on its financial position or results of operations through
December 31, 1999.
B. BUSINESS COMBINATION:
On October 5, 1999, Silknet completed its acquisition of InSite. In
connection with the transaction, an aggregate of 590,708 shares of Silknet
common stock will be issued or reserved in exchange for all the shares of InSite
common stock issued and outstanding and all options to purchase InSite common
stock at the effective time of the merger. This merger was accounted for as a
pooling of interests. Silknet's consolidated financial statements beginning with
the fiscal year ended June 30, 1997 have been restated to include the results
and balances of InSite. Results for the six months ended December 31, 1999 and
1998 on a stand-alone basis were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1999 SILKNET INSITE COMBINED
-------- -------- --------
<S> <C> <C> <C>
Revenues .......................... $ 13,795 $ 253 $ 14,048
Operating loss .................... (6,836) (1,850) (8,686)
Net loss .......................... (5,449) (1,858) (7,307)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1998 SILKNET INSITE COMBINED
------- ------- -------
<S> <C> <C> <C>
Revenues .......................... $ 5,543 $ 5 $ 5,548
Operating loss .................... (3,959) (634) (4,593)
Net loss .......................... (3,809) (605) (4,414)
</TABLE>
Expenses related to the merger were expensed as incurred or were recorded
when it became probable that the transaction would occur and the expense could
be reasonably estimated. Merger-related costs incurred for the six months ended
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Amortization of deferred compensation upon acceleration of stock option vesting $393
Legal ......................................................................... 224
Accounting/Tax ................................................................ 40
Printing ...................................................................... 4
----
Total ......................................................................... $661
====
</TABLE>
C. INVESTMENT IN SAFE HARBOR:
In October 1999, Silknet invested $1.5 million in Safe Harbor, Inc., an
unrelated private company. In exchange for its investment, Silknet received an
approximate 11% ownership interest in Safe Harbor and a seat on the board of
directors. This investment was recorded using the cost basis of accounting.
7
<PAGE> 8
D. SUBSEQUENT EVENT:
On February 6, 2000, Silknet entered into an Agreement and Plan of
Reorganization with Kana Communications, Inc ("Kana"). Pursuant to the merger
agreement, holders of outstanding shares of Silknet common stock will receive,
in exchange for each share of Silknet common stock held, 0.83 shares of common
stock of Kana. In addition, Kana will assume all outstanding options and
warrants to purchase Silknet common stock and will assume all purchase rights
outstanding under Silknet's employee stock purchase plan. The merger will be
accounted for as a purchase and is intended to qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue code of 1986,as
amended. The transaction has been approved by both the Kana and Silknet Boards
of Directors and the closing of the merger is subject to approval by Kana and
Silknet stockholders and certain other customary closing conditions.
ITEM 2. 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 numerous risks and uncertainties, certain of which are beyond our
control. These statements relate to future events or our future financial
performance, and are identified by terminology such as "may," "will," "should,"
"expects," "scheduled," "plans," "intends," "anticipates," "believes,"
"estimates," "potential," or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual results
could differ materially. In evaluating these forward-looking statements you
should specifically consider 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-Q.
OVERVIEW
We provide electronic customer relationship management software, or eCRM
software, that allows companies to offer marketing, sales, e-commerce and
support services through a single Web site interface personalized for individual
customers. Our products enable a company to deliver these services to our
customers over the Web through customer self-service, assisted service or
immediate, direct collaboration among that company and our customer, partners,
employees and suppliers. These users can choose from a variety of communication
media, such as the Web, e-mail and the telephone, to do business with that
company. Our software can capture and consolidate data derived from all of these
sources and distribute it throughout a company and to our partners to provide a
single view of the customer's interaction with that company.
On October 5, 1999, we completed the acquisition of InSite. Silknet issued
or reserved for issuance 590,708 shares of common stock in exchange for all of
the outstanding shares of InSite common stock and options for the issuance of
InSite common stock. The transaction was accounted for using the
pooling-of-interests method. The accompanying consolidated financial statements
of Silknet have been restated to include the results and balances of InSite for
all periods presented.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUE
Since the beginning of fiscal year 1997, our revenue has been 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 our 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 acceptance
clause is deferred until acceptance is received from the customer. Revenue under
arrangements where multiple products or services are sold together under one
contract is allocated to each element based on its relative fair value, with
these fair values being determined using the price charged when that element is
sold separately. 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.
8
<PAGE> 9
We generate our license revenue through direct sales to our customers and
sales through our relationships with systems integrators and consulting firms.
Total revenue increased 140% during the current quarter ended December 31,
1999 to $7.9 million from $3.3 million for the quarter ended December 31, 1998.
For the six months ended December 31, 1999, total revenue increased 153% to $14
million from $5.5 million for the six months ended December 31, 1998.
License Revenue. License revenue increased 153% during the current quarter
ended December 31, 1999 to $5.2 million from $2.0 million for the quarter ended
December 31, 1998. For the six months ended December 31, 1999, license revenue
increased 154% to $9.4 million from $3.7 million for the six months ended
December 31, 1998.
The increase was primarily due to an increase in the number of licenses sold
for Silknet eService, and other new products introduced prior to December 31,
1999. These new products included Silknet eBusiness and Silknet eCommerce
released in October 1998 and January 1999, respectively.
Services Revenue. Services revenue increased 119% during the current quarter
ended December 31, 1999 to $2.7 million from $1.2 million for the quarter ended
December 31, 1998. For the six months ended December 31, 1999, services revenue
increased 152% to $4.7 million from $1.9 million for the six months ended
December 31, 1998.
The increase in services revenue is a result of our increased business
volume and a higher level of customer support revenue derived from an increasing
installed customer base. We have continued to add internal headcount within our
service organization to support the higher business volumes. For the current
quarter ended December 31, 1999, maintenance revenue increased to $1.0 million
from $306,000 for the quarter ended December 31, 1998; and revenue for
consulting and training services increased to $1.7 million from $933,000. The
total number of customers increased to 70 as of December 31, 1999 from 24 as of
December 31, 1998.
COST OF REVENUE
Cost of License Revenue. Cost of license revenue includes royalties paid to
third parties under technology license arrangements. Cost of license revenue
increased 78% in absolute dollars during the current quarter ended December 31,
1999 to $162,000, or 3% of license revenue, from $91,000, or 4% of license
revenue, for the quarter ended December 31, 1998. For the six months ended
December 31, 1999, cost of license revenue increased 27% to $232,000, or 2% of
license revenue, from $183,000, or 5% of license revenue, for the six months
ended December 31, 1998.
The increase in absolute dollars was due to an increase in licenses sold
with royalty obligations to third parties whose products are incorporated into
our products. We anticipate that the cost of license revenue will continue to
increase in absolute dollars. Cost of license revenue as a percent of license
revenue has varied in the past due to the timing and volume of product sales and
the nature of royalty agreements in place at the time.
Cost of Services Revenue. Cost of services revenue consists primarily of
employee-related costs and third-party consultant fees incurred to provide
services for consulting projects, post-contract customer support and training.
Cost of services revenue increased 107% during the current quarter ended
December 31, 1999 to $2.0 million, or 75% of services revenue, from $1.0
million, or 79% of services revenue, for the quarter ended December 31, 1998.
For the six months ended December 31, 1999, cost of services increased 133% to
$3.5 million, or 76% of services revenue from $1.5 million, or 82% of services
revenue, for the six months ended December 31, 1998.
The dollar increase resulted primarily from the hiring of additional
employees and the use of contractors to support increased customer demand for
maintenance and consulting services. The number of customer services employees
increased to 43 as of December 31, 1999 from 18 as of December 31, 1998, and we
anticipate that we will continue to increase the number of customer service
employees in calendar year 2000 to support higher business volumes.
The improvement in services gross margin to 24% for the six months ended
December 31, 1999 from a gross margin of 18% for the six months ended December
31, 1998 was primarily attributable to the substantial growth of maintenance and
consulting revenues from a larger installed customer base. Improvement in
services gross margins is contingent upon the future demand for the services
offered by us.
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<PAGE> 10
Overall gross margins are primarily affected by the mix of license revenue
and services revenue. We historically have realized higher gross margins on
license revenue than on services revenue. If services revenue increases as a
percentage of total revenue, our overall gross margins may be adversely
affected.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses consist primarily of
employee salaries, commissions and costs associated with marketing programs,
such as trade shows, marketing campaigns, seminars, public relations and new
product launches. Sales and marketing expenses increased 91% during the current
quarter ended December 31, 1999 to $4.5 million, or 57% of total revenue, from
$2.3 million, or 71% of total revenue, for the quarter ended December 31, 1998.
For the six months ended December 31, 1999, sales and marketing expenses
increased 98% to $8.4 million, or 60% of total revenue, from $4.2 million, or
76% of total revenue, for the six months ended December 31, 1998.
The increase was primarily attributable to an increase in the number of
sales and marketing employees to 68 as of December 31, 1999 from 32 as of
December 31, 1998. To a lesser extent, the increase was related to an increase
in marketing programs, including trade shows and public relations related to
product launch activities. Sales and marketing expenses may continue to increase
in absolute dollars as we continue to expand our marketing programs and our
sales force to support product launches and international expansion.
Research and Development. Research and development expenses consist
primarily of employee-related costs and fees for outside consultants and related
costs associated with the development of new products, the enhancement of
existing products, quality assurance, testing and documentation. Research and
development expenses increased 130% in absolute dollars during the current
quarter ended December 31, 1999 to $3.5 million, or 44% of total revenue, from
$1.5 million, or 46% of total revenue, for the quarter ended December 31, 1998.
For the six months ended December 31, 1999, research and development expenses
increased 139% in absolute dollars to $6.6 million, or 47% of total revenue from
$2.7 million, or 50% of total revenue, for the six months ended December 31,
1998.
The increase primarily resulted from salaries associated with newly hired
development personnel. The number of research and development employees
increased to 100 as of December 31, 1999 from 49 as of December 31, 1998 to
support the development of new products. We anticipate that research and
development expenses will continue to increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of employee salaries and other personnel related costs for executive
and financial personnel, as well as legal, accounting, insurance and other
professional services fees. General and administrative expenses increased 196%
during the current quarter ended December 31, 1999 to $2.2 million, or 29% of
total revenue, from $760,000, or 23% of total revenue, for the quarter ended
December 31, 1998. For the six months ended December 31, 1999, general and
administrative costs increased 177% to $4.0 million, or 29% of total revenue
from $1.5 million, or 26% of total revenue, for the six months ended December
31, 1998.
During the three and six months ended December 31, 1999, $473,000 and
$661,000, respectively, was incurred due to one-time costs associated with the
acquisition of InSite. Substantially all of the remaining increase in general
and administrative costs was due to salaries associated with newly hired
personnel and related costs required to manage our growth and facilities
expansion. The number of general and administrative employees increased to 30 as
of December 31, 1999 from 17 as of December 31, 1998. We expect that our general
and administrative expenses will increase in absolute dollars as we continues to
expand our staffing to support expanded operations and facilities and incur
expenses relating to our responsibilities as a public company.
Interest Income, Net. Interest income, net of interest expense, increased
903% during the current quarter ended December 31, 1999 to $732,000, or 9% of
total revenue, from $73,000, or 2% of total revenue, for the quarter ended
December 31, 1998. For the six months ended December 31, 1999, interest income,
net of interest expense, increased 670% to $1.4 million, or 10% of total
revenue, from $179,000, or 3% of total revenue, for the six months ended
December 31, 1998.
The increase was due to interest income earned from the investment of net
cash proceeds from our initial public offering in May 1999.
Provision for Income Taxes. We incurred aggregate operating losses of $28.0
million from inception through December 31, 1999. We have recorded a valuation
allowance for the full amount of our net deferred tax assets as the future
realization of the tax benefit is not sufficiently assured.
10
<PAGE> 11
Net Loss. As a result of the factors discussed above, net loss increased to
$3.8 million for the current quarter ended December 31, 1999 from a net loss of
$2.3 million for the quarter ended December 31, 1998; and increased to $7.3
million for the six months ended December 31, 1999 from a net loss of $4.4
million for the six months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In May 1999, we sold 3,450,000 shares of our common stock through an initial
public offering. Net proceeds from the offering were approximately $46.8 million
after deducting underwriting discounts and commissions and offering expenses.
Prior to our initial public offering, we had funded operations primarily through
net cash proceeds from private placements of preferred stock totaling $26.8
million. As of December 31, 1999, we had cash and cash equivalents totaling
$48.2 million.
Cash used for operating activities for the six-month period ended December
31, 1999 was $6.3 million, primarily due to a net loss of $7.3 million and an
increase in accounts receivable, partially offset by increases in accrued
expenses and deferred revenue.
Cash used for investing activities for the six-month period ended December
31, 1999 was $3.6 million, primarily due to purchases of equipment totaling $2.1
million, consisting largely of computer servers, workstations and networking
equipment. In addition, we invested $1.5 million in Safe Harbor, Inc., an
unrelated private company.
Cash provided by financing activities for the six-month period ended
December 31, 1999 was $623,000, primarily due to proceeds from the exercise of
options to purchase common stock, partially offset by payments on a note payable
under an equipment loan line and on notes payable to investors.
As of December 31, 1999, our primary financial commitments consisted of
obligations outstanding under operating leases and a note payable under the
equipment loan line of $156,000. Notes payable to investors were paid off in
full during the quarter ended December 31, 1999.
In March 1999, we entered into a new bank line of credit which allows us 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 and we expect to
renew the line on similar terms and conditions. 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 December 31, 1999, $3.0 million was
available for borrowing and the bank's prime rate was 8.50%.
As of June 30, 1999, we had net operating loss carryforwards of
approximately $18.6 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 our
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 our inception, we have significantly increased our operating expenses.
We anticipate that we will continue to experience significant growth in our
operating expenses for the foreseeable future and that our operating expenses
and capital expenditures will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or investments
in businesses, technologies, products or services that are complementary to our
business. We believe that our existing cash and cash equivalents, cash generated
from operations and amounts available under our credit facilities will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least 12 months. Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we 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 our 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
needed 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 our 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 our business, operating results and financial
condition.
We have experienced no material adverse effect on our products, including
any problems with third-party software and hardware incorporated into our
products or which interface with our products and products due to the transition
to Year 2000. Nevertheless, there can be no assurances that we will not
experience problems resulting from any of the foregoing which could have a
material adverse impact on our business, operating results and financial
condition the implementation of modifications to any embedded products will not
be delayed or that we will not experience unexpected Year 2000 problems with our
products.
To date, we have not incurred significant incremental costs in order to
comply with Year 2000 requirements for our products or internal systems, and we
do not believe we will incur significant incremental costs in the foreseeable
future. Our Year 2000 contingency plans, identifying mission critical functions
for our internal systems, for unanticipated Year 2000 issues were in effect
prior to the end of calendar 1999.
In October 1999, we acquired InSite Marketing Technology, Inc. We continue
the process of assessing systems and products related to this acquisition. To
date, products and processes related to the acquisition have not experienced a
material impact from the transition from 1999 to 2000. There can be no assurance
that Year 2000 issues will not be discovered in products, or any third-party
software included therein, or internal software systems or in the third-party
software or computer hardware related to this acquisition. If such issues are
discovered, there can be no assurance that such products, software or hardware
may be made Year 2000 ready or that the costs of making such products and
systems Year 2000 ready will not have a material adverse effect on our 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. Certain of the above statements in
this report are forward-looking statements that involve risks and uncertainties.
The discussion below, and in Silknet's other reports filed with the Securities
and Exchange Commission, highlight some of the risks which may affect future
operating results.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAY IMPEDE YOUR ABILITY TO VALUE OUR BUSINESS AND
ITS FUTURE PROSPECTS
Your evaluation of our business will be more
difficult because of our limited operating history
and could cause you to overpay for our common
stock. We commenced operations in March 1995 and
we recorded our first license revenue upon
delivery of Silknet eService in a trial version to
customers in January 1997. Accordingly, it is
difficult to evaluate our business and prospects.
In addition, because we are in an early stage of
development in a new and rapidly evolving market,
our prospects are difficult to predict and may
change rapidly and without warning.
WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND WE MAY NOT BE PROFITABLE IN
THE FUTURE
Since we began operations, we have incurred
substantial operating losses in every fiscal
period. We cannot be certain if or when we will
become profitable. Failure to achieve
profitability within the timeframe expected by
investors may adversely affect the market price of
our common stock. As a result of accumulated
operating losses, at December 31, 1999, we had an
accumulated deficit of $28.0 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
over the long-term.
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 17% 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
- 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
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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.
INTENSE COMPETITION FROM OTHER TECHNOLOGY COMPANIES MAY ADVERSELY AFFECT OUR
FINANCIAL CONDITION AND OPERATING RESULTS
The market for interactive, Web-based electronic
business solutions is intensely competitive. If we
are unable to compete effectively, our business,
financial condition and operating results would be
materially adversely affected. Many of our current
and potential competitors have longer operating
histories, greater name recognition and
substantially greater financial, technical,
marketing, management, service, support and other
resources than we do. Therefore, they may be able
to respond more quickly than we can to new or
changing opportunities, technologies, standards or
customer requirements.
In addition, we expect that new competitors will
enter the market with competing products as the
size and visibility of the market opportunity
increases. We also expect that competition will
increase as a result of software industry
consolidations and formations of alliances among
industry participants. Increased competition could
result in pricing pressures, reduced margins or
the failure of our products to achieve or maintain
market acceptance.
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
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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 140% in
the quarter ended December 31, 1999 from the same
period the year earlier. From January 1, 1999 to
December 31, 1999, the number of our employees
increased from 116 to 241. The rapid rate of our
recent growth has made management of that growth
more difficult. In addition, the proceeds of this
offering will be used in part to expand product
offerings and expand international operations and
sales and marketing capabilities. This additional
growth may further strain our management,
financial and other resources. To manage future
growth effectively we must maintain and enhance
our financial and accounting systems and controls,
integrate new personnel and manage expanded
operations.
WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE THE BUSINESS AND PRODUCTS OF INSITE
MARKETING TECHNOLOGY WITH OUR BUSINESS
In October 1999, Silknet acquired InSite Marketing
Technology, Inc. There can be no assurance that
the combined companies can successfully integrate
the acquired businesses, personnel, products or
technologies. Silknet's integration of the InSite
business may cause a diversion of management time
and reallocation of resources. There can be no
assurance that the InSite personalization
technology can be successfully integrated with
Silknet's product offerings and distribution
infrastructure, or that significant product
research and development, and development
expenses, will not be required to fully integrate
InSite's products with those of Silknet. There can
be no assurances that revenues, if any, from the
InSite products or the combined Silknet/InSite
products will exceed operating expenses, that
Silknet can be successful in reducing expenses to
achieve profitability, or that customers will
continue to support Silknet's new product
initiatives following the integration.
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.
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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.
WE MAY BE UNABLE TO HIRE AND RETAIN THE SKILLED PERSONNEL WE NEED TO SUCCEED
Qualified personnel are in great demand throughout
the software industry. The demand for qualified
personnel is particularly acute in the New England
area, due to the large number of software
companies and the low unemployment in the region.
Our success depends in large part upon our ability
to attract, train, motivate and retain highly
skilled employees, particularly marketing
personnel, software engineers and other senior
personnel. If we are unable to attract and retain
the highly-trained technical personnel that are
integral to our product development, the rate at
which we can develop new products or product
enhancements could be limited. In addition, if we
are unable to attract and retain professional
services support personnel, our ability to install
products at customer sites could be limited.
OUR RECENTLY ANNOUNCED MERGER WITH KANA COMMUNICATIONS, INC. MAY NOT BE
COMPLETED
On February 6, 2000 we signed an agreement with
Kana Communications, Inc. ("Kana") pursuant to
which Silknet will be merged with and into a
wholly-owned subsidiary of Kana. Upon completion
of the merger, each share of Silknet common stock
then issued and outstanding will be converted
automatically into the right to receive 0.83
shares of Kana common stock.
There is no guarantee that the merger with Kana
will be completed, or if it is completed, there is
no guarantee that it will be on the same terms as
currently negotiated. Several conditions must be
met in order for the merger to be completed
including, among others, approval of the merger by
the stockholders of Silknet and approval of the
issuance of Kana common stock by the stockholders
of Kana. There is no guarantee that these
conditions will be met. The failure to complete
the conditions precedent to the completion of the
merger may delay completion of the merger or may
cause its termination. The failure to complete
the merger may have a negative affect on our
business, operating results and financial
condition and could result in a significant
decrease in the trading price of our stock.
In addition, the failure to complete the merger in
a timely fashion could delay expected product,
personnel and technology integration and could
have a negative effect on our business, operating
results and financial condition. Our business may
also be negatively effected as a result of (1)
delays, reductions or cancellations or changes in
the terms or timing of product orders or product
implementations by our customers, (2) attrition of
our employees, (3) litigation brought or
threatened against us, any of our principal
stockholders or a member of our Board of
Directors, and (4) the refusal by any of our
suppliers to continue to do business with us, each
as a result of the proposed merger with Kana or
the announcement of such proposed merger.
OUR MANAGEMENT RESOURCES MAY BE DIVERTED IN COMPLETING THE MERGER AND
INTEGRATING OPERATIONS
Completion of the merger and the integration of
our products, personnel and technology with Kana
will require the commitment of significant
management resources. The diversion of management
resources away from the day to day operations of
the business may have a negative affect on our
business, operating results and financial
condition.
OUR TRADING PRICE NOW TRENDS WITH KANA'S TRADING PRICE AND AN ASSESSMENT BY THE
MARKET OF WHETHER THE MERGER WILL BE COMPLETED
As each issued and outstanding share of Silknet
common stock is to be exchanged into a fixed
number of shares of Kana common stock in
connection with the merger, our stock price trends
directly with the trading price of Kana common
stock. The price of Kana common stock may be
affected by factors different from those that may
affect the price of our common stock. A decline in
the trading price of Kana common stock would have
a negative effect on our trading price and may
have a negative effect on our business, operating
results and financial condition. A decline in the
trading price of Kana common stock may also impact
the completion of the merger.
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Factors that may affect both the trading price of
Kana common stock and Silknet common stock include
the following:
- changes in the business, operations or
prospects of Kana;
- market assessments of the likelihood
that the merger will be completed;
- the timing of the completion of the
merger;
- the prospects of post-merger operations;
- regulatory considerations; and
- general market and economic conditions.
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.
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.
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, Singapore, Australia, China,
Estonia, Iceland, Indonesia, South Korea, Latvia,
Lithuania, New Zealand, Norway, Poland and South
Africa. Most of these applications have not been
approved. Our applications for the registration of
"Silknet" and "Silknet" combined with the Silknet
logo have received preliminary refusals in Canada
because another 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."
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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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ITEM 3. 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
December 31, 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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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Silknet is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Silknet sold 3,450,000 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. All shares covered by the Registration Statement were
sold. The initial public offering closed on May 10, 1999. Silknet's net proceeds
from the offering were approximately $46.9 million after deducting underwriting
discounts and commissions and offering expenses. None of the net proceeds from
the initial public offering were used to pay, directly or indirectly, directors,
officers, persons owning ten percent or more of Silknet's equity securities, or
affiliates of Silknet, with the exception of compensation-related payments to
officers made in the normal course of business. From the effective date of the
offering through December 31, 1999, Silknet used approximately $300,000 of the
net proceeds to fund operating losses and working capital requirements. As of
December 31, 1999, Silknet had approximately $46.6 million of net proceeds
remaining which are invested primarily in high quality securities with
maturities not exceeding ninety days.
On October 5, 1999, Silknet acquired all of the outstanding capital
stock of InSite Marketing Technology, Inc., a Delaware corporation. In
connection with this acquisition, an aggregate of 590,708 shares of Silknet's
common stock, $.01 par value per share, ("Silknet Common Stock") were issued in
exchange for all of the outstanding capital stock and options to purchase
capital stock of InSite. The shareholders of InSite received, in the aggregate,
497,128 shares of Silknet Common Stock (the "Shares") in exchange for their
shares of InSite common stock. In addition, the option holders of InSite
received, in the aggregate, options to purchase 93,580 shares of Silknet common
stock (the "Option Shares") in exchange for their options to purchase common
stock of InSite. All of such options are fully vested.
No underwriters were involved in the foregoing sale of securities. The
Shares were issued in reliance upon an exemption from the registration
provisions of the Securities Act of 1933, as amended (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. The Shares are deemed
restricted securities for purposes of the Securities Act. Silknet received no
proceeds from the issuance of the Shares.
An aggregate of 83,283 Option Shares were registered with the
Commission pursuant to a Form S-8 filed with the Commission on November 1, 1999.
For the three month period ended December 31, 1999, an aggregate of 9,071 Option
Shares were exercised at an exercise price of $0.33 per share, which were not
registered on the Form S-8. Net proceeds to Silknet from such exercise amounted
to approximately $3,000. The remaining Option Shares are unregistered, and
unless cancelled, will be converted into unregistered securities of Silknet.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Silknet's Annual Meeting of Stockholders was held on November 12, 1999.
Holders of an aggregate of 15,600,647 shares at the close of business on
September 27, 1999 were entitled to vote at the meeting. At such meeting, the
Company's stockholders voted as follows:
Proposal 1. To elect five members to the Board of Directors, each to serve until
the Annual Meeting of Stockholders to be held in 2000, or until his successor is
elected and qualified.
20
<PAGE> 21
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Director Name Each Nominee from Each Nominee Abstentions Broker Non-Votes
- ------------- ------------ ----------------- ----------- ----------------
<S> <C> <C> <C> <C>
James C. Wood 11,045,107 6,125 N/A None
Guy Bradley 11,045,107 6,125 N/A None
Joo Hock Chua 11,045,107 6,125 N/A None
Stanley Fung 11,045,107 6,125 N/A None
Andrew Goldfarb 11,045,107 6,125 N/A None
</TABLE>
No other persons were nominated, or received votes, for election as directors of
Silknet at the 1999 Annual Meeting of Stockholders. The other director of
Silknet whose term of office continued after the 1999 Annual Meeting was Mr.
Glen Urban.
Proposal 2. To ratify the selection of the firm of PricewaterhouseCoopers LLP,
independent public accountants, as auditors for the fiscal year ending June 30,
2000.
<TABLE>
<CAPTION>
Total Vote Against
Total Vote for Proposal 2 Proposal 2 Abstentions from Proposal 2 Broker Non-Votes
- ------------------------- ---------- --------------------------- ----------------
<S> <C> <C> <C>
11,047,954 1,153 2,125 None
</TABLE>
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next annual meeting of
stockholders to be held in 2000 must be received at Silknet's principal
executive offices not later than June 10, 2000. Silknet's by-laws establish an
advance notice procedure with regard to proposals that stockholders otherwise
desire to introduce at the annual meeting without inclusion in the proxy
statement for that meeting. Written notice of such stockholder proposals for the
next annual meeting to be held in 2000 must be received by Silknet's Secretary
at Silknet's principal executive offices no earlier than the close of business
on May 11, 2000 and no later than the close of business on June 10, 2000 in
order to be considered timely, and must contain specified information concerning
the matters proposed to be brought before such meeting and concerning the
stockholder proposing such matters. The matters proposed to be brought before
the meeting must also be proper matters for stockholder action.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-Q:
(1) Exhibits
The following exhibits are filed as part of and incorporated by reference
into this Form 10-Q:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization dated as of October
5, 1999, by and among Silknet Software, Inc., InSite Acquisition
Corp., InSite Marketing Technology, Inc., Stefania Nappi as
Indemnification Representative and the shareholders named therein
(filed as Exhibit 2.1 to Silknet's Current Report on Form 8-K filed
with the Commission on October 20, 1999 and incorporated herein by
reference).
4.1 Escrow Agreement dated as of October 5, 1999 by and among Silknet
Software, Inc., American Stock Transfer & Trust Company as escrow
agent, Stefania Nappi as Indemnification Representative and the
shareholders of InSite Marketing Technology, Inc. (filed as Exhibit
2.2 to Silknet's Current Report on Form 8-K filed with the
Commission on October 20, 1999 and incorporated herein by
reference).
4.2 Registration Rights Agreement dated as of October 5, 1999 by and
among Silknet Software, Inc. and the shareholders of InSite
Marketing Technology, Inc. named therein (filed as Exhibit 4.1 to
Silknet's Current Report on Form 8-K filed with the Commission on
October 20, 1999 and incorporated herein by reference).
27.01* Financial Data Schedule.
</TABLE>
- ----------
* Filed herewith
(b) Reports on Form 8-K.
Current Report on Form 8-K filed with the Commission on October 20, 1999,
which summarizes the terms of Silknet's acquisition of the outstanding stock
and options of InSite Marketing Technology, Inc. on October 5, 1999.
Current Report on Form 8-K filed with the Commission on February 7, 2000,
which summarizes the terms of the Agreement and Plan of Reorganization dated as
of February 6, 2000 by and between Kana Communications, Inc., Pistol Acquisition
Corp., a wholly-owned subsidiary of Kana, and Silknet.
SIGNATURES
Pursuant to the requirements 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: February 14, 2000
By: /s/ PATRICK J. SCANNELL, JR.
--------------------------------
Vice President, Chief Financial
Officer, Treasurer and Secretary
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SILKNET
SOFTWARE INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0001079451
<NAME> SILKNET SOFTWARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 48,211
<SECURITIES> 0
<RECEIVABLES> 7,307
<ALLOWANCES> 600
<INVENTORY> 0
<CURRENT-ASSETS> 56,007
<PP&E> 5,841
<DEPRECIATION> 2,016
<TOTAL-ASSETS> 61,480
<CURRENT-LIABILITIES> 10,960
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 50,326
<TOTAL-LIABILITY-AND-EQUITY> 61,480
<SALES> 9,369
<TOTAL-REVENUES> 14,048
<CGS> 232
<TOTAL-COSTS> 3,770
<OTHER-EXPENSES> 18,639
<LOSS-PROVISION> 325
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (7,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,307)
<EPS-BASIC> (0.45)
<EPS-DILUTED> 0
</TABLE>
