<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 2000
REGISTRATION STATEMENT NO. 333-30476
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SERVICESOFT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 52-1522481
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
TWO APPLE HILL DRIVE
NATICK, MASSACHUSETTS 01760
(508) 653-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
CHRISTOPHER M. BUTLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SERVICESOFT TECHNOLOGIES, INC.
TWO APPLE HILL DRIVE
NATICK, MASSACHUSETTS 01760
(508) 653-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JOHN J. EGAN III, P.C. JAY K. HACHIGIAN, ESQ.
DAVID J. POWERS, ESQ. GUNDERSON DETTMER STOUGH
MCDERMOTT, WILL & EMERY VILLENEUVE FRANKLIN & HACHIGIAN, LLP
28 STATE STREET 1000 WINTER STREET, SUITE 1100
BOSTON, MASSACHUSETTS 02109-1775 WALTHAM, MASSACHUSETTS 02451
(617) 535-4000 (781) 890-8800
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED AMOUNT TO BE REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par
value per share.......... 4,025,000 $15.00 $60,375,000 $15,939(3)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 525,000 shares which the underwriters have an option to purchase
from Servicesoft to cover over-allotment, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act.
(3) $19,800 was paid by Servicesoft in connection with the initial filing.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 2000
[ ] SHARES
SERVICESOFT LOGO
COMMON STOCK
------------------------
SERVICESOFT TECHNOLOGIES, INC. IS OFFERING 3,500,000 SHARES OF ITS COMMON STOCK.
THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR
OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN
$13.00 AND $15.00 PER SHARE.
------------------------
WE HAVE APPLIED TO HAVE THE COMMON STOCK APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "SRVS."
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS SERVICESOFT
--------- -------------- -----------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total.................................. $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Servicesoft Technologies, Inc. has granted the underwriters the option to
purchase up to an additional 525,000 shares to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares of common stock to
purchasers on , 2000.
------------------------
MORGAN STANLEY DEAN WITTER
ROBERTSON STEPHENS
SG COWEN
, 2000
<PAGE> 3
Our art work will consist of diagrams displaying how our clients and their
customers, employees and business partners interact with the e-service
applications that compose our Servicesoft 2000 suite of products. Descriptive
captions will be used to describe the diagrams. In addition, we plan to use our
corporate logo which contains the word "Servicesoft."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Note on Forward-Looking Statements.... 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Consolidated Financial
Data................................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 27
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management............................ 41
Certain Transactions.................. 51
Principal Stockholders................ 53
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 58
Underwriting.......................... 60
Legal Matters......................... 62
Experts............................... 62
Where You Can Find More Information... 62
Index to Financial Statements......... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Servicesoft and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this prospectus.
SERVICESOFT TECHNOLOGIES, INC.
We develop, market and deliver sophisticated software products and
professional services that help both traditional and Internet businesses provide
superior Internet-based service, or e-service, to their customers, employees and
business partners. We believe that our Servicesoft 2000 suite of products helps
our clients build personalized and sustainable on-line customer relationships
that maximize lifetime customer value. Our Servicesoft 2000 suite enables our
clients to design their Websites to more easily enable their customers to answer
questions on their own, known as self-service, as well as to answer their
customers' inquiries through e-mail, live Internet-based interactions and
traditional phone-based communications. Our products also enable our clients to
build a knowledge base, which is an aggregation of customer information,
transaction data and individual employee expertise, which is usually dispersed
throughout a company. The software tools used to create the knowledge base allow
our clients to index the aggregated information, create associations between
individual pieces of information and assign relevance to particular pieces of
information.
By integrating this knowledge base with self-service, e-mail and live
interaction applications and traditional phone-based communications, our
products help our clients to consistently deliver prompt, relevant and
intelligent responses that directly address issues raised by their customers,
employees and business partners. By enabling our clients' customers to escalate
their inquiries from self-help to e-mail response to live interaction, our
products help our clients to efficiently apply the appropriate level of
resources while enhancing customer satisfaction. We also believe our products
increase employee productivity and decrease cost per customer service
interaction. Our Servicesoft 2000 suite of products integrates with existing
business systems, including industry leading automated call distribution
systems, such as those provided by Lucent and Nortel, industry leading customer
relationship management applications, such as those provided by Siebel, Clarify
and Vantive, as well as leading database and e-commerce applications.
We complement our products with a professional services organization that
offers a range of services, including rapid implementation assistance, e-service
system design, knowledge engineering and project management. We have designed
these services to decrease implementation risk, shorten the time it takes to
provide superior e-service, improve our clients' competitive position and
maximize return on investment. We believe that our ability to successfully
deliver an integrated, knowledge base-enabled solution to our clients provides
us with a significant competitive advantage in the market for e-service
solutions.
We market our products through our direct sales force, third party
resellers and systems integrators to e-businesses seeking to improve their
relationships with their customers, employees and business partners. We also
leverage strategic alliances with a number of information technology and
professional services organizations to increase the penetration and market
acceptance of our e-service suite of products.
To date, we have licensed our products to clients across a variety of
industries, including telecommunications, e-commerce, financial services,
technology (software and hardware), services providers, manufacturing and
healthcare. Our clients include GTE, Eddie Bauer, American Express, Akamai,
Intel, Getronics Wang, John Deere and Shared Medical Systems.
1
<PAGE> 6
THE OFFERING
Common stock offered.......... 3,500,000 shares
Common stock to be outstanding
after the offering............ 23,783,400 shares
Use of proceeds............... Working capital and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National
Market symbol................. SRVS
The number of shares of our common stock that will be outstanding after
this offering is based on the number outstanding on February 29, 2000, and
includes 1,041,183 shares of common stock and Series H preferred stock issuable
upon the exchange of Servicesoft Technologies Canada Inc. exchangeable shares
held by former shareholders of Balisoft Technologies Inc. as a result of our
merger with Balisoft in February 1999. The number of shares that will be
outstanding after this offering excludes:
- 3,505,990 shares of common stock issuable upon exercise of stock options
outstanding as of February 29, 2000 at a weighted average price of $2.11
per share.
- 343,508 shares of common stock available as of February 29, 2000 for
future issuance under our Amended and Restated 1994 Stock Option Plan
and our 1999 Stock Option and Grant Plan.
- 161,662 shares of common stock and exchangeable common shares issuable
upon exercise of warrants outstanding as of February 29, 2000 at a
weighted average price of $4.02 per share.
ADDITIONAL INFORMATION
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their option to purchase additional shares, and also assumes
that all shares of convertible preferred stock have been automatically converted
into shares of common stock.
We own or have rights to trademarks that we use in conjunction with the
sale of our products. "Servicesoft," "WebAdvisor," "Knowledge Builder,"
"Liveline," "Livesupport," "LiveContact," "LiveChat" and "E-mailContact" are our
trademarks. All other trade names and trademarks used in this prospectus are the
property of their respective owners.
We were first incorporated in Delaware in June 1987 as Rosh Intelligent
Systems, Inc. We changed our name to ServiceSoft Corporation in October 1993. We
merged with Balisoft Technologies Inc. in February 1999 and changed our name to
Servicesoft Technologies, Inc. In December 1999, we acquired Internet Business
Advantages, Inc. Our principal executive offices are located at Two Apple Hill
Drive, Natick, Massachusetts 01760 and our telephone number is 508-653-4000.
2
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary historical and pro forma financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes appearing elsewhere in this prospectus. Our merger with
Balisoft Technologies Inc. and our acquisition of Internet Business Advantages,
Inc. were accounted for using the purchase method. Accordingly, the results of
operations of Balisoft and Internet Business Advantages are included in our
results from the applicable closing dates in 1999. Pro forma net loss per common
share reflects the assumed conversion of all outstanding convertible preferred
stock upon completion of this offering as if converted on the later of January
1, 1999 or the date of original issue. The summary pro forma combined statement
of operations presents the results of operations of Servicesoft, Balisoft and
Internet Business Advantages on a combined basis as if the transactions had
occurred on January 1, 1999. The summary balance sheet data as of December 31,
1999 includes information on an actual basis, a pro forma basis and a pro forma
as adjusted basis. Since the merger with Balisoft and the acquisition of
Internet Business Advantages were completed in 1999, the effects of these
transactions are reflected in the summary actual balance sheet data as of
December 31, 1999. The summary pro forma balance sheet data reflects the
issuance of 3,481,478 shares of Series J preferred stock in January 2000 for net
proceeds of $31.3 million and the automatic conversion of all convertible
preferred stock into common stock upon completion of this offering. The summary
pro forma as adjusted balance sheet data further adjusts the pro forma data to
reflect the net proceeds of $44.3 million from the sale of common stock in this
offering at an assumed initial offering price of $14.00 per share, after
deducting the underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
PRO
FORMA
ACTUAL COMBINED
--------------------------- ---------
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999 1999
------ ------ ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue...................................... $2,526 $4,290 $ 7,144 $10,479
Gross profit....................................... 1,649 3,041 3,363 2,923
Operating expenses................................. 2,663 6,384 27,130 35,400
Loss from operations............................... (1,014) (3,343) (23,767) (32,477)
Net loss........................................... (1,104) (3,963) (23,553) (31,872)
Net loss attributable to common stockholders....... (1,444) (4,994) (26,278) (34,669)
Pro forma basic and diluted net loss per common
share............................................ (1.99)
Shares used in computing pro forma basic and
diluted net loss per common share................ 11,862
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 6,630 $37,918 $ 82,238
Working capital.......................................... 288 31,576 75,896
Total assets............................................. 33,769 65,057 109,377
Capital lease obligations, net of current portion........ 522 522 522
Redeemable convertible preferred stock................... 52,251 -- --
Stockholders' equity (deficit)........................... (33,058) 50,481 94,801
</TABLE>
3
<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones that we face. Our business, financial condition or results of
operations could be materially adversely affected by any of the following risks.
In such case, the trading price of our common stock could decline, and you may
lose all or part of your investment. You should also refer to the other
information set forth in this prospectus, including our financial statements and
the related notes.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, EXPECT TO CONTINUE TO INCUR LOSSES AND MAY NOT
ACHIEVE PROFITABILITY IN THE FUTURE
We have never been profitable. Our failure to significantly increase our
revenue would seriously harm our business and operating results. We have
experienced quarterly and annual losses since our inception in 1987, and have
funded our business primarily through the sale of our stock and not from cash
generated by our business. We incurred a net loss of $1.1 million in 1997, $4.0
million in 1998 and $23.6 million in 1999, of which $4.6 million in 1999 was
amortization of intangible assets and stock compensation. As of December 31,
1999, we had an accumulated deficit of $46.0 million. We expect to continue to
incur losses on both a quarterly and annual basis for the foreseeable future.
Moreover, we expect to continue to incur significant sales and marketing and
research and development expenses. As a result, we will need to significantly
increase our revenue to achieve and maintain profitability. If our revenue grows
more slowly than we anticipate or if our operating expenses increase more than
we expect, we may be unable to achieve profitability.
FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE
Our quarterly revenue and operating results may fluctuate significantly as
a result of a variety of factors, many of which are outside our control. If our
quarterly revenue or operating results fall below the expectations of investors
or securities analysts, the price of our common stock could decline
substantially. Factors that might cause fluctuations in our quarterly revenue
and operating results include the following:
- the timing of execution of large contracts and product implementations
by our clients, which could impact the periods in which we are able to
recognize revenue;
- the timing of new product and service introductions or upgrades by us or
our competitors, which could impact the demand for our existing products
and services;
- the purchasing and budgeting cycles of our clients, which could result
in seasonality;
- changes in our pricing policies or those of our competitors;
- the mix of domestic and international sales, products and services sold
and the channels through which they are sold, which could all have an
impact on our operating margins and our profitability;
- increased costs related to any business expansion we may undertake or to
the customization of our products;
- global economic conditions; and
- increased costs related to possible acquisitions of technology or
businesses.
We also often offer volume-based discounts, which may affect our operating
margins. 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 total
revenue for a particular quarter are below our expectations, we will not be able
to proportionately reduce operating expenses for that quarter.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not necessarily meaningful and you
should not rely on them as an indication of our future performance.
4
<PAGE> 9
OUR PRODUCTS HAVE A LONG SALES AND IMPLEMENTATION CYCLE WHICH MAKES IT
DIFFICULT TO PREDICT OUR QUARTERLY RESULTS AND MAY CAUSE OPERATING RESULTS
TO VARY SIGNIFICANTLY
The sales and implementation cycle for our products is long, typically
ranging from five to nine months. Our products have a relatively high sales
price per unit, and often are part of a significant strategic decision by our
clients regarding their information systems infrastructure. We spend significant
time educating and providing information to prospective clients regarding the
use and benefits of our products. The decision to purchase our products
typically requires significant pre-purchase evaluation and is subject to delays
over which we have little or no control. Our long sales cycle makes it difficult
to predict the quarter in which sales and revenue recognition may occur, and our
operating results may vary significantly from quarter to quarter.
WE EXPECT TO DERIVE SUBSTANTIALLY ALL OF OUR REVENUE FOR THE FORESEEABLE
FUTURE FROM OUR SERVICESOFT 2000 SUITE OF PRODUCTS AND PROFESSIONAL
SERVICES, AND IF THESE PRODUCTS AND SERVICES ARE NOT WIDELY ACCEPTED BY THE
MARKET, WE MAY BE UNABLE TO SUSTAIN OR INCREASE OUR REVENUE
We expect to derive substantially all of our revenue in the future from
sales of our Servicesoft 2000 suite of products, which were released in their
current versions in the fourth quarter of 1999, and our professional services.
Our target clients may not widely adopt and deploy our suite of products and
services, because they may not value the differentiating features of our
products and services, such as our knowledge base. Furthermore, our competitors
may introduce e-service products that are more appealing to our target clients.
If our products do not achieve and maintain broad market acceptance, we may be
unable to sustain or increase our revenue.
THE MARKET FOR OUR PRODUCTS AND SERVICES IS IN THE EARLY STAGES OF
DEVELOPMENT AND OUR BUSINESS WILL SUFFER IF IT FAILS TO DEVELOP AS WE
EXPECT
Our products and services enable companies doing business online to provide
enhanced customer service. The market for our software and related services is
in the early stages of development and is rapidly evolving. A viable market may
fail to emerge or be sustainable, in which case we would be unable to grow our
business and increase our revenue.
IF WE FAIL TO EFFECTIVELY MANAGE AND SUPPORT THE ANTICIPATED RAPID GROWTH
AND EXPANSION OF OUR BUSINESS AND OPERATIONS, OUR FINANCIAL RESULTS WILL BE
HARMED
We intend to expand our operations internationally and domestically, grow
our client base and pursue market opportunities through multiple growth
strategies. The rapid growth and expansion that we anticipate will place
significant demands on our managerial, administrative, operational, financial
and other resources.
WE FACE INTENSE COMPETITION IN OUR MARKET, AND OUR FAILURE TO COMPETE
SUCCESSFULLY COULD MAKE IT DIFFICULT FOR US TO ACQUIRE AND RETAIN CUSTOMERS
The market for e-service solutions is intensely competitive. Increased
competition could result in pricing pressures, reduced margins or the failure of
our products to achieve or maintain market acceptance. If we are unable to
compete effectively, it will be difficult for us to acquire and retain
customers. Our competitors include companies providing similar solutions,
including Brightware, Inc., eGain Communications Corp., Inference Corporation,
Kana Communications, Inc., Primus Knowledge Solutions, Inc., Quintus
Corporation, Serviceware, Inc. and Silknet Software, Inc. In addition, we may
compete with companies providing customer relationship management, e-commerce
and communications solutions, such as Broadvision, Inc., E.piphany, Inc., Lucent
Technologies, Inc., Oracle Corporation, Siebel Systems, Inc., Vantive
Corporation and Vignette Corporation. 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. They may be able to respond more quickly
than we can to new or changing opportunities, technologies, standards or
customer requirements. In addition, many of our competitors have
well-established relationships with our current or potential clients and an
extensive knowledge of our industry. 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. Competitors with large market
5
<PAGE> 10
capitalizations or cash reserves would be better positioned than we are to
acquire such new technologies or products. For example, Kana recently announced
its planned acquisition of Silknet. For more information on the competition we
face, see "Business--Competition."
WE MAY NOT ACHIEVE THE EXPECTED BENEFITS OF OUR RECENT MERGER AND
ACQUISITION
In February 1999, we merged with Balisoft and in December 1999, we acquired
Internet Business Advantages. We will be devoting significant resources to the
development and marketing of products based on the acquired technologies. If we
are unable to successfully integrate and manage the Balisoft and Internet
Business Advantages operations, we may not achieve enhanced revenue or other
anticipated benefits that we expect.
WE MAY BE UNABLE TO DEVELOP A PROFITABLE PROFESSIONAL SERVICES
ORGANIZATION, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND OUR
ABILITY TO ASSIST OUR CLIENTS WITH IMPLEMENTATION OF OUR PRODUCTS
We may be unable to attract or retain the number of the highly qualified
services personnel that we need for our business, and our services business may
never achieve profitability. Clients that license our software typically engage
our professional services organization to assist with support, training,
consulting and implementation of their e-service solutions. We believe that in
order to increase our product sales we must provide our clients with these
services and educate third-party systems integrators and distributors on how to
use and implement our products. To meet these needs, we plan to increase the
number of our services personnel, and we will be required to devote significant
resources to the training of these new employees. In addition, we may also need
to use more costly third-party consultants to supplement our own professional
services organization. To date, our cost of services revenue has been
significantly higher than our services revenue, and we expect that trend to
continue for the foreseeable future. In addition, the competition for qualified
services personnel with the appropriate Internet-specific knowledge is intense,
and we may not be able to attract and retain people who have the skills needed
to provide the services that our clients demand.
Failure to offer adequate integration, consulting and other professional
services in connection with the implementation of our products, and ongoing
customer support could harm our reputation and cause demand for our products to
decline.
WE MAY MAKE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND HARM OUR
FINANCIAL CONDITION
In order to remain competitive, we may find it necessary to acquire
additional businesses, products and technologies. In the event that we do
complete an acquisition, we could be required to do one or more of the
following:
- issue equity securities, which would dilute current stockholders'
percentage ownership;
- incur substantial debt;
- assume contingent liabilities;
- incur a one-time charge; or
- amortize goodwill and other intangible assets.
We may not be able to successfully integrate any technologies, products,
personnel or operations of companies that we acquire. These difficulties could
disrupt our ongoing business, divert management resources and increase our
expenses.
INTEGRATION OF A NEW MANAGEMENT TEAM AND NEW PERSONNEL MAY STRAIN OUR
OPERATIONS
All members of our senior management team have joined us since September
1998. On January 31, 2000, we had a total of 250 full-time employees compared to
54 full-time employees on January 31, 1999. A significant turnover of our
employees occurred in conjunction with our merger with Balisoft in February
1999. Our new employees include a number of key managerial, sales, marketing,
planning, technical and operations personnel who have not yet been fully
integrated into our organization.
6
<PAGE> 11
A SMALL NUMBER OF CLIENTS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUE,
AND IF WE LOSE ONE OR MORE OF THESE CLIENTS, OUR REVENUE WILL BE MATERIALLY
ADVERSELY AFFECTED
Historically, we have derived a significant portion of our revenue from
providing products and services to a limited number of clients. For the year
ended December 31, 1999, our five largest clients, the United Kingdom Post
Office, Eddie Bauer, Merant, Akamai and GTE, accounted for approximately 20% of
our revenue. We expect that a limited number of clients will continue to account
for a substantial portion of these revenue for the foreseeable future. As a
result, if we lose a major client or if a contract with a major client or
prospect is delayed, cancelled, reduced or deferred, our revenue will decline
substantially.
WE MAY LOSE MONEY ON FIXED-FEE CONTRACTS
We derive a portion of our revenue from fixed-fee contracts. When we used a
fixed-fee contract, we determine the fee that we will charge our client prior to
commencing work on a specific project. If we misjudge the time and resources
necessary to complete that project, we may incur a loss. This risk is heightened
because we work with complex technologies in compressed time frames.
IF WE FAIL TO SUCCESSFULLY UPGRADE OUR CURRENT PRODUCTS AND INTRODUCE NEW
PRODUCTS, OUR FINANCIAL RESULTS MAY BE HARMED
Our future financial performance will depend, in significant part, on our
successful development and sale of new and enhanced versions of our Servicesoft
2000 suite of products, and other new products. We may be unable to upgrade and
continue to market our current products. We may not be able to successfully
develop new products and new products may not achieve market acceptance.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS THAT COULD RESULT IN
LOST REVENUE OR DELAYED OR LIMITED MARKET ACCEPTANCE
Complex software products such as ours may contain undetected errors, or
bugs, which cause them to fail to perform in accordance with customer
expectations. The latest versions of our products have only recently been
generally released. As a result, these products may be particularly susceptible
to bugs. Product performance problems could result in:
- loss of or delay in revenues;
- loss of market share;
- failure to achieve market acceptance;
- diversion of development resources; or
- injury to our reputation.
IF WE FAIL TO RESPOND EFFECTIVELY TO RAPIDLY CHANGING TECHNOLOGY AND
EVOLVING INDUSTRY STANDARDS, OUR PRODUCTS MAY BECOME OBSOLETE
The market for software and services that enable enterprise e-business
initiatives is characterized by rapid technological change, changes in customer
requirements, frequent new product and service introductions and enhancements,
and evolving industry standards. Competing products based on new technologies or
new industry standards may perform better or cost less than our products and
could render our products obsolete and unmarketable. In addition, delays in our
ability to adapt our products to a new software language or operating system
that becomes standard or is widely adopted in our industry would impede our
ability to remain competitive. If we are unable to develop new and enhanced
products on a timely basis that respond to changing technology and satisfy the
increasingly sophisticated needs of our clients, we may be unable to sustain or
increase sales of our products.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY IMPEDE OUR ABILITY TO
COMPETE EFFECTIVELY
The success of our business is largely dependent upon our ability to
protect our proprietary technology. We rely on a combination of copyright,
trademark, trade secret and other intellectual property laws, as well as
confidentiality and assignment of invention agreements and licensing
arrangements, to establish and protect
7
<PAGE> 12
our proprietary rights. However, existing copyright, trademark and trade secret
laws afford only limited protection. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. Unauthorized third parties may attempt to copy or
otherwise obtain and use our software or other proprietary information. Policing
the unauthorized use of our products is difficult. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
management resources.
WE MAY BECOME SUBJECT TO CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT,
WHICH COULD RESULT IN SIGNIFICANT COSTS, LOSS OF SIGNIFICANT RIGHTS AND
HARM TO OUR REPUTATION
Third parties may claim that we have infringed their patent, copyright,
trademark and other intellectual property rights. For example, we were subject
to a patent infringement claim, which we subsequently settled by entering into a
license agreement. This risk may increase as the number of entrants in our
market increases and the functionality of our products is enhanced and overlaps
with the products of other companies. Any claims, whether or not valid, could be
time-consuming, result in costly litigation, divert the efforts of our technical
and management personnel, cause product shipment delays, require us to develop
non-infringing technology, disrupt our relationships with our clients or require
us to enter into royalty or licensing agreements, any of which could have a
material adverse effect upon our operating results. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, if at
all. In the event a claim against us is successful and we cannot obtain a
license to the relevant technology on acceptable terms or license a substitute
technology, we would be forced to redesign our products or cease selling,
incorporating or using products or services that incorporate the challenged
intellectual property.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, AND THE LOSS OF
THIS TECHNOLOGY COULD DELAY IMPLEMENTATION OF OUR PRODUCTS, INJURE OUR
REPUTATION OR FORCE US TO PAY HIGHER ROYALTIES
We rely in part on technology that we license from a small number of
software providers for use with our products. This technology may not continue
to be available on commercially reasonable terms, if at all. Some of this
technology would be difficult to replace. The loss of any of these technology
licenses could result in delays in introducing our products until equivalent
technology, if available, is identified, licensed and integrated. In addition,
any defects in this licensed technology could prevent the implementation or
impair the functionality of our products, delay new product introductions or
injure our reputation. If we are required to enter into license agreements with
third parties for replacement technology, we could be subject to higher royalty
payments and a loss of product differentiation.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A DEVELOPER OF E-SERVICE
SOFTWARE, OUR FUTURE SUCCESS IS UNCERTAIN
Although we were formed in 1987, we have operated as a developer of
e-service software only since 1996. As a result of our limited operating history
in our current field, it is difficult to accurately forecast our revenue. If our
revenue falls short of our expectations and those of securities analysts and
investors, the price of our common stock could decline substantially.
OUR FAILURE TO EXPAND OUR DIRECT SALES FORCE AND THIRD-PARTY DISTRIBUTION
CHANNELS WILL IMPEDE OUR GROWTH
To date, we have sold our products primarily through our direct sales
force. Our ability to achieve significant revenue growth in the future will
largely depend on our success in recruiting and training sufficient direct sales
personnel and establishing and maintaining relationships with distributors,
value-added resellers, systems integrators, consultants and other third-party
resellers. Our products and services require a sophisticated sales effort
targeted at the senior management of our prospective clients. New hires require
training and take time to achieve full productivity. Our recent hires and
planned new hires may not become as productive as necessary, and we may be
unable to hire sufficient numbers of qualified individuals in the future.
At times, we rely on distributors, value-added resellers, systems
integrators, consultants and other third-party resellers to recommend our
products to their customers and to install and support our products for their
customers. If they choose not to recommend and install our products, or develop,
market or recommend
8
<PAGE> 13
software applications that compete with our products, our business will be
harmed. Moreover, if these firms fail to implement our products successfully for
their customers, we may be unable to complete implementation on the schedule
required by the customers. If we fail to expand our direct sales force or other
distribution channels, our revenue may not grow or it may decline.
WE DEPEND ON INCREASED BUSINESS FROM OUR NEW CLIENTS AND IF WE FAIL TO GROW
OUR CLIENT BASE OR GENERATE REPEAT BUSINESS, OUR OPERATING RESULTS COULD BE
HARMED
If we fail to grow our client base or generate repeat and expanded business
from our current and future clients, our business and operating results will be
seriously harmed. Some of our clients initially make a limited purchase of our
products and services for pilot programs. These clients may not choose to
purchase additional licenses to expand their use of our products. These clients
have not yet developed or deployed initial applications based on our products.
If these clients do not successfully develop and deploy such initial
applications, they may choose not to purchase deployment licenses or additional
development licenses. The effectiveness of our e-service solution depends in
part on the widespread adoption and use of our products by customer-support
personnel. Some of our clients who have made initial purchases of our software
have deferred or suspended implementation of our products due to slower than
expected rates of internal adoption by customer support personnel. If more
clients decide to defer or suspend implementation of our products in the future,
we will be unable to increase our revenue from these clients from additional
licenses or maintenance agreements, and our financial position will be seriously
harmed. Our business model depends on the expanded use of our products within
our clients' organizations.
In addition, as we introduce new versions of our products or new products,
our current clients may not require the functionality of our new products and
may not ultimately license these products. Because the total amount of
maintenance and support fees we receive in any period depends in large part on
the size and number of licenses that we have previously sold, any downturn in
our software license revenue would negatively impact our future services
revenue. In addition, if clients elect not to renew their maintenance
agreements, our services revenue could decline significantly.
FAILURE TO DEVELOP AND EXPAND OUR MARKETING CAPABILITIES WOULD HARM OUR
BUSINESS
We need to expand our marketing operations in order to increase market
awareness of our products, market our products to a greater number of
organizations and generate increased revenue. Competition in the market for
e-service solutions is intense, and if we fail to differentiate our suite of
products from those of our competitors and acquire greater market share, our
ability to grow our business will be seriously harmed. Furthermore, we have
limited experience marketing our products broadly to a large number of clients
and may be unable to do so successfully.
OUR GROWTH WILL BE LIMITED IF WE CANNOT RETAIN CERTAIN KEY PERSONNEL AND
ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL
Our success depends to a significant degree upon the continued
contributions of our senior sales, engineering and management personnel, many of
whom would be difficult to replace. Specifically, we believe that our future
success is highly dependent on Christopher M. Butler, our President and Chief
Executive Officer, and other senior management personnel. If we lose the
services of any key personnel, particularly senior management and engineers, our
business will be seriously harmed.
We intend to significantly expand our sales, marketing, engineering and
professional services personnel over the next 12 months. The demand for
qualified personnel in the software industry is high, due to the large number of
software companies and the low unemployment rate in this industry. We may not be
able to hire or retain the necessary personnel to implement our business
strategy. In addition, we may need to pay higher compensation than we currently
expect. 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 or expand our operations.
9
<PAGE> 14
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS
Our international operations are located in the Canada, the United Kingdom
and Belgium. We are expanding our existing international operations and
establish additional facilities in other parts of the world. We may face
difficulties in accomplishing international expansion, including finding
adequate staffing and management resources for our international operations.
Expanding internationally subjects us to a number of other risks, including:
- increased expenses and delays associated with customizing our products
for foreign countries;
- increased difficulty in collecting accounts receivable, longer sales
cycles and collection periods and seasonal reductions in business
activity;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
- difficulty in complying with complex and varying international laws;
- tariffs, duties, price controls and other trade barriers;
- currency exchange rate fluctuations; and
- recently enacted privacy regulations in the European Union that may
result in limits on the collection and use of certain user information.
Even if we are able to successfully expand our international operations, we
may not be able to maintain or increase international market demand for our
products and services.
In addition, our international sales are denominated in local currencies
and as we increase our international business we will be increasingly exposed to
foreign currency exchange rate fluctuations. To date, we have not engaged in
hedging transactions to mitigate exchange rate risk and, accordingly, our
results of operations could be harmed by foreign currency exchange rate
fluctuations.
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 clients' businesses. If
one of our products fails, a client 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. Any such claims, whether or not successful, could
seriously damage our reputation and our business.
OUR BUSINESS COULD BE DISRUPTED IF ANY OF THE COMPUTER SYSTEMS OR SOFTWARE
WE RELY UPON EXPERIENCE YEAR 2000 PROBLEMS
Although we have not experienced any Year 2000 problems, it is possible
that, even after January 1, 2000, Year 2000-related issues may cause problems or
disruptions. While we believe that all of our systems are Year 2000 compliant,
we cannot assure you that we will not discover a problem that needs to be
remedied. In addition, we depend on a number of third-party vendors to provide
both information and non-information technology systems and services. While we
believe that our material third-party systems and services are Year 2000
compliant, we may experience problems. In addition, governmental agencies,
utility companies, Internet access companies and others outside of our control
may experience future Year 2000 problems.
RISKS RELATED TO THE INTERNET INDUSTRY
OUR BUSINESS DEPENDS ON THE GROWTH OF THE INTERNET AND ELECTRONIC BUSINESS
Our products address a new and emerging market for e-service solutions.
Therefore, our future success depends substantially upon the widespread adoption
of the Internet as a significant medium for commerce and business applications.
If this market fails to develop or develops more slowly than expected, demand
for our products and services will be reduced. Consumers and businesses may
reject the Internet as a viable commercial medium for a number of reasons,
including potentially inadequate network infrastructure, slow development of
enabling technologies or insufficient commercial support. The Internet
infrastructure may not
10
<PAGE> 15
be able to support the demands placed on it by increased usage and bandwidth
requirements. Moreover, critical issues such as security, reliability, cost,
accessibility and quality of service remain unresolved and may negatively affect
the attractiveness of conducting commerce and business communication over the
Internet. Even if the required infrastructure, standards, protocols or
complementary products, services or facilities are developed, we may incur
substantial expenses adapting our products and services to changing or emerging
technologies.
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS
As e-commerce, e-service and the Internet continue to evolve, we expect
that federal, state and foreign governments will adopt laws and regulations
covering issues such as user privacy, taxation of goods and services provided
over the Internet, pricing, content and quality of products and services. If
enacted, these laws and regulations could limit the market for e-commerce and
e-service and, therefore, the market for our products and services.
The Telecommunications Act of 1996 prohibits certain types of information
and content from being transmitted over the Internet. The prohibition's scope
and the liability associated with a Telecommunications Act violation are
currently unsettled. The imposition upon us and other software and service
providers of potential liability for information carried on or disseminated
through our applications could require us to implement measures to reduce our
exposure to this liability. These measures could require us to expend
substantial resources or discontinue certain services. In addition, although
substantial portions of the Communications Decency Act, the Act through which
the Telecommunications Act of 1996 imposes criminal penalties, were held to be
unconstitutional, similar legislation may be enacted and upheld in the future.
It is possible that this legislation could expose companies involved in
e-commerce to liability, which could limit the growth of e-commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth of Internet usage and decrease its acceptance as a
communications and commercial medium.
THE IMPOSITION OF SALES AND OTHER TAXES ON PRODUCTS SOLD BY OUR CUSTOMERS
OVER THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ONLINE COMMERCE AND THE
DEMAND FOR OUR PRODUCTS AND SERVICES
The imposition of new sales or other taxes could limit the growth of
Internet commerce generally and, as a result, the demand for our products and
services. Recent federal legislation limits the imposition of state and local
taxes on Internet-related sales. Congress may choose not to renew this
legislation in 2001, in which case state and local governments would be free to
impose taxes on electronically purchased goods.
We believe that most companies that sell products over the Internet do not
currently collect sales or other taxes on shipments of their products into
states or foreign countries where they are not physically present. However, one
or more states or foreign countries may seek to impose sales or other tax
collection obligations on out-of-jurisdiction companies that engage in
e-commerce. A successful assertion by one or more states or foreign countries
that companies that engage in e-commerce should collect sales or other taxes on
the sale of their products over the Internet, even though not physically in the
state or country, could indirectly reduce demand for our products.
PRIVACY CONCERNS RELATING TO THE INTERNET ARE INCREASING, WHICH COULD
RESULT IN LEGISLATION THAT ADVERSELY AFFECTS OUR BUSINESS OR REDUCED SALES
OF OUR PRODUCTS, OR BOTH
Businesses using our software capture information regarding their customers
when those customers contact them on-line with customer service inquiries.
Privacy concerns may cause visitors to resist providing the personal data
necessary to allow our clients to use our software products most effectively.
More importantly, even the perception of privacy concerns, whether or not valid,
may indirectly inhibit market acceptance of our products. In addition,
legislative or regulatory requirements may heighten these concerns if business
must notify Web site users that the data captured after visiting certain Web
sites may be used by marketing entities to unilaterally direct product promotion
and advertising to that user. While we are not aware of any such legislation or
regulatory requirements currently in effect in the United States, other
countries and political entities, such as the European Economic Community, have
adopted such legislation or
11
<PAGE> 16
regulatory requirements and the United States may do so as well. If consumer
privacy concerns are not adequately addressed, our business could be harmed.
RISKS RELATED TO THIS OFFERING
IF WE FAIL TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE WILL BE UNABLE TO
GROW OUR BUSINESS OR SUSTAIN OR INCREASE REVENUE
We expect the net proceeds from this offering, together with cash on hand,
cash equivalents, short-term investments and commercial credit facilities will
be sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that time, we may need to raise additional funds
to develop or enhance our products or services, to fund expansion, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. Additional financing may not be available on terms that are
acceptable to us. Further, if we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our
stockholders would be reduced and these securities might have rights, preference
and privileges senior to those of our current stockholders. If adequate funds,
if needed, are not available on acceptable terms, we may be unable to expand our
operations, take advantage of unanticipated opportunities, develop or enhance
products or services, or respond to competitive pressures or unanticipated
requirements.
BECAUSE OUR EXECUTIVE OFFICERS AND DIRECTORS CONTROL A SIGNIFICANT
PERCENTAGE OF OUR COMMON STOCK, THEY HAVE SUBSTANTIAL CONTROL OVER US
Upon completion of this offering, our executive officers, directors and
their affiliates will control 8,196,365 shares, or approximately 34.5% of the
outstanding shares of common stock, 33.7% if the underwriters' over-allotment
option is exercised in full. These stockholders can control substantially all
matters requiring approval by our stockholders, including the election of
directors and the approval of significant corporate transactions. This
concentration of ownership could have the effect of delaying or preventing a
change in our control or otherwise discouraging a potential acquiror from
attempting to obtain control of us, which in turn could have a material adverse
effect on the market price of our common stock. For information about the
ownership of common stock by our executive officers, directors and principal
stockholders, please refer to "Principal Stockholders."
THE PRICE OF OUR STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES BY YOU
There has previously not been a public market for our common stock. An
active trading market for our common stock may not develop or be sustained after
this offering. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may vary from the market price of the common stock after the
offering. The trading price of our common stock may fluctuate significantly. The
stock market in general, and the Nasdaq National Market and Internet and
software companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many Internet and software
companies' stocks are at or near historical highs and may not be sustained.
These broad market and industry factors may materially adversely affect the
market price of our common stock, regardless of our actual operating
performance.
IF OUR STOCK PRICE IS VOLATILE, WE MAY BE SUBJECT TO COSTLY CLASS ACTION
LITIGATION
In the past, securities class-action litigation has often been instituted
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Such
litigation, if instituted, could result in substantial costs and the diversion
of management's attention and resources.
12
<PAGE> 17
IF A SIGNIFICANT NUMBER OF SHARES BECOMES AVAILABLE FOR SALE AFTER THIS
OFFERING, OUR STOCK PRICE COULD DECLINE
Sales of a substantial number of shares of our common stock in the public
market after this offering could depress the market price of our common stock
and could impair our ability to raise capital through the sale of additional
equity securities. For a more detailed description, see "Shares Eligible for
Future Sale."
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, EVEN IF A CHANGE IN
CONTROL WOULD BE BENEFICIAL TO OUR STOCKHOLDERS
Provisions of our certificate of incorporation and by-laws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For more
information on these anti-takeover provisions, see "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter and By-Law Provisions."
WE MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH YOU DISAGREE OR
WHICH FAIL TO BENEFIT US
The net proceeds of this offering have not been allocated for any specific
purpose. Accordingly, our management will have significant discretion as to how
to spend the proceeds from this offering and may spend these proceeds in ways
with which our stockholders may not agree. We may not be successful in investing
the proceeds of this offering, in our operations or external investments, to
yield a favorable return. For more details of use of proceeds, see "Use of
Proceeds."
NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify
forward-looking statements. These risks and uncertainties include those
described in "Risk Factors" and elsewhere in this prospectus. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this prospectus. Except as
required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
13
<PAGE> 18
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the common stock
will be approximately $44.3 million, at an assumed initial offering price of
$14.00 per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us in connection with the offering.
If the underwriters' over-allotment option is exercised in full, we estimate
that our net proceeds will be approximately $51.2 million. We currently plan to
use over $20 million of the net proceeds to fund our research and development
activities over the next two years. In addition, we expect to use these
estimated net proceeds to increase our sales and services capabilities and
increase our general and administrative personnel and systems. These estimated
net proceeds may also be used for possible acquisitions of businesses, products
and technologies. From time to time, we engage in discussions with potential
acquisition candidates. However, we have no current plans, commitments or
agreements with respect to any acquisitions, and we may not make any
acquisitions. The amount and timing of these expenditures will vary depending on
a number of factors, including the amount of cash generated by our operations,
competitive and technological developments, future changes in our business
objectives, and the rate of growth, if any, of our business.
We have not identified with certainty the particular uses for the net
proceeds to be received upon completion of this offering. Accordingly, our
management will have significant flexibility in applying the net proceeds of
this offering. Pending these uses, we plan to invest the net proceeds in
short-term, investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not currently anticipate paying any cash dividends
in the foreseeable future. Future dividends, if any, will be determined by our
Board of Directors after taking into account various factors, including our
financial condition, operating results and current and anticipated cash needs.
14
<PAGE> 19
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the issuance of 3,481,478 shares
of our Series J preferred stock in January 2000 for net proceeds of $31.3
million, to reflect the automatic conversion of all outstanding shares of
convertible preferred stock into shares of common stock upon completion
of this offering, including the Series J preferred stock, and to reflect
our amended certificate of incorporation to be filed in connection with
the effectiveness of this prospectus increasing our authorized shares of
common stock to 100,000,000 and preferred stock to 5,000,000; and
- on a pro forma as adjusted basis to reflect the sale of the common stock
in this offering at an assumed initial public offering price of $14.00
per share for net proceeds of $44.3 million, after deduction of estimated
underwriting discounts and commissions and our estimated offering
expenses.
The number of shares outstanding is based on the number of shares of our
common stock outstanding on December 31, 1999. The number of shares of Series H
preferred stock outstanding as of December 31, 1999 includes 2,224,943 shares of
exchangeable preferred stock of Servicesoft Technologies Canada, and the number
of shares of common stock outstanding as of December 31, 1999 includes 973,762
shares of exchangeable common stock of Servicesoft Technologies Canada, which
are exchangeable on a one-for-one basis into our Series H preferred stock and
common stock and have the same rights and privileges as those shares. Upon
completion of this offering, the exchangeable preferred stock will convert into
exchangeable common stock. As of December 31, 1999, we have one share of Series
X special voting preferred stock outstanding and one share of Series Y special
voting preferred stock outstanding, each with a recorded value of $.01. This
stock facilitates the voting rights of the holders of the exchangeable preferred
stock and exchangeable common stock. Upon completion of this offering, under the
terms of our certificate of incorporation, we will redeem the Series Y special
voting preferred stock for an aggregate price of $1.00. The number of shares
outstanding as of December 31, 1999 excludes 2,951,680 shares subject to options
outstanding under our stock option plans at a weighted average exercise price of
$0.82 per share, 897,818 additional shares available for issuance under those
plans, and 161,662 shares issuable upon the exercise of outstanding warrants at
a weighted average exercise price of $4.02 per share. The adjusted information
set forth below is unaudited and should be read in conjunction with our
consolidated financial statements and notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Capital lease obligations, net of current portion........... $ 522 $ 522 $ 522
------- ------- -------
Redeemable convertible preferred stock, $.01 par value:
Series J; no shares authorized, issued and
outstanding - actual, pro forma and pro forma
adjusted................................................ -- -- --
Series I; 4,450,000 shares authorized, 3,982,271 shares
issued and outstanding - actual; no shares authorized,
issued and outstanding - pro forma and pro forma as
adjusted................................................ 17,211 -- --
Series H; 8,000,000 shares authorized, 7,605,073 shares
issued and outstanding - actual; no shares authorized,
issued and outstanding - pro forma and pro forma as
adjusted................................................ 35,040 -- --
------- ------- -------
Total redeemable convertible preferred stock............ 52,251 -- --
------- ------- -------
Stockholders' equity (deficit):
Preferred stock, $.01 par value; no shares authorized,
issued or outstanding - actual; 5,000,000 shares
authorized, no shares issued and outstanding - pro forma
and pro forma as adjusted............................... -- -- --
Common stock, $.01 par value; 17,450,000, 30,000,000 and
100,000,000 shares authorized - actual, pro forma and
pro forma as adjusted; 5,152,352, 20,221,174 and
23,721,174 shares issued and outstanding - actual, pro
forma and pro forma as adjusted......................... 51 202 237
Additional paid-in capital................................ 30,450 113,838 158,123
Accumulated deficit....................................... (46,032) (46,032) (46,032)
Notes receivable from stockholders........................ (1,117) (1,117) (1,117)
Deferred stock compensation............................... (16,298) (16,298) (16,298)
Accumulated other comprehensive loss...................... (112) (112) (112)
------- ------- -------
Total stockholders' equity (deficit).................... (33,028) 50,481 94,801
------- ------- -------
Total capitalization.................................... $19,715 $51,003 $95,232
======= ======= =======
</TABLE>
15
<PAGE> 20
DILUTION
As of December 31, 1999, we had a pro forma net tangible book value of
$34.4 million, or $1.70 per share. Pro forma net tangible book value per share
is equal to our total tangible assets less total liabilities, divided by the
number of outstanding shares of our common stock, after giving effect to the
sale of our Series J preferred stock in January 2000 and the automatic
conversion of all shares of convertible preferred stock into common stock upon
completion of this offering. After giving effect to our receipt of the estimated
net proceeds from the sale of the shares of common stock in this offering at an
assumed initial public offering price of $14.00 per share after deducting the
estimated underwriting discounts and commissions and the estimated expenses
relating to this offering, our pro forma net tangible book value as of December
31, 1999 would have been $78.8 million, or $3.32 per share. This represents an
immediate increase in pro forma net tangible book value of $1.62 per share to
existing stockholders and an immediate dilution of $10.68 per share to new
investors purchasing shares in this offering. If the initial public offering
price is higher or lower than $14.00 per share, the dilution to new investors
will be higher or lower. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 14.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.70
Increase per share attributable to new investors.......... 1.62
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.32
-------
Dilution per share to new investors......................... $ 10.68
=======
</TABLE>
The following table summarizes, as of December 31, 1999, on the pro forma
basis described above, the difference between the number of shares of common
stock purchased from us, the total consideration paid and the average price per
share paid by the existing stockholders and by new public investors purchasing
shares from us in this offering before deducting estimated underwriting
discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 20,221,174 85% $ 93,725,000 66% $ 4.63
New investors............... 3,500,000 15 49,000,000 34 14.00
---------- --- ------------ ---
Total..................... 23,721,174 100% $142,725,000 100%
========== === ============ ===
</TABLE>
The foregoing computations are based on the number of common shares
outstanding as of December 31, 1999 and include 3,198,705 shares of our common
stock and Series H preferred stock issuable upon conversion of exchangeable
stock of Servicesoft Technologies Canada and 12,843,879 shares of our common
stock issuable upon conversion of our preferred stock, and exclude 2,951,680
shares of common stock subject to outstanding options at December 31, 1999 at a
weighted average exercise price of $0.82 per share and 161,662 shares of common
stock, exchangeable common stock and Series H preferred stock issuable upon
exercise of warrants outstanding as of December 31, 1999 at a weighed average
exercise price of $4.02 per share.
To the extent stock is issued upon the exercise of outstanding stock
options under our stock option plans, there will be further dilution to new
investors. For a description of our stock plans, see "Management--1999 Stock
Option and Grant Plan" and "--Amended and Restated 1994 Stock Option Plan."
16
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this prospectus. The statement of operations data
for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data
as of December 31, 1998 and 1999 are derived from our audited consolidated
financial statements appearing elsewhere in this prospectus. The statement of
operations data for the year ended December 31, 1996 and the balance sheet data
as of December 31, 1996 and 1997 are derived from our audited consolidated
financial statements not included in this prospectus. The statement of
operations data for the year ended December 31, 1995 and the balance sheet data
as of December 31, 1995 are derived from our unaudited consolidated financial
statements not included in this prospectus. The unaudited consolidated financial
statements, in the opinion of management, have been prepared on the same basis
as the audited consolidated financial statements and reflect all adjustments
necessary for a fair presentation of that data. There is no difference between
historical basic and diluted net loss per common share since potential common
shares from the conversion of preferred stock and the exercise of options and
warrants are anti-dilutive for all periods presented. Unaudited pro forma net
loss per common share reflects the assumed conversion of all outstanding
redeemable convertible preferred stock upon completion of this offering as if
converted on the later of January 1, 1999 or the date of original issue.
Our results for the year ended December 31, 1999 reflect the February 12,
1999 merger with Balisoft and the December 17, 1999 acquisition of Internet
Business Advantages which were accounted for using the purchase method.
Accordingly, the results of operations of Balisoft and Internet Business
Advantages are included in our results from the applicable closing dates. Since
the merger with Balisoft and the acquisition of Internet Business Advantages
were completed in 1999, the effects of these transactions are reflected in the
balance sheet data as of December 31, 1999. The unaudited pro forma combined
consolidated statement of operations data presents the results of operations of
Servicesoft, Balisoft and Internet Business Advantages on a combined basis as if
the transactions had occurred on January 1, 1999. The unaudited pro forma
combined consolidated results reflect adjustments for the purchase price
allocations and amortization of goodwill and other intangible assets.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL COMBINED
---------------------------------------------------- ---------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Software license.......................................... $880 $706 $2,139 $2,508 $4,210 $4,210
Services.................................................. 1,618 498 387 1,782 2,934 6,269
-------- -------- -------- -------- -------- --------
Total revenue....................................... 2,498 1,204 2,526 4,290 7,144 10,479
-------- -------- -------- -------- -------- --------
Cost of revenue:
Cost of software license.................................. 106 148 252 148 406 406
Cost of services.......................................... 673 667 625 1,101 3,375 7,150
-------- -------- -------- -------- -------- --------
Total cost of revenue............................... 779 815 877 1,249 3,781 7,556
-------- -------- -------- -------- -------- --------
Gross profit................................................ 1,719 389 1,649 3,041 3,363 2,923
-------- -------- -------- -------- -------- --------
Operating expenses:
Research and development.................................. 1,048 787 930 1,174 4,205 4,420
Sales and marketing....................................... 891 890 977 3,598 13,310 15,119
General and administrative................................ 608 588 756 1,612 5,044 7,606
Amortization of goodwill and other intangible assets...... -- -- -- -- 2,671 6,355
Stock compensation........................................ -- -- -- -- 1,900 1,900
-------- -------- -------- -------- -------- --------
Total operating expenses............................ 2,547 2,265 2,663 6,384 27,130 35,400
-------- -------- -------- -------- -------- --------
Loss from operations........................................ (828) (1,876) (1,014) (3,343) (23,767) (32,477)
Interest and other income (expense), net.................... 7 61 (90) (620) 214 605
-------- -------- -------- -------- -------- --------
Net loss.................................................... (821) (1,815) (1,104) (3,963) (23,553) (31,872)
Accretion on redeemable convertible preferred stock......... (57) (230) (340) (1,031) (2,725) (2,797)
-------- -------- -------- -------- -------- --------
Net loss attributable to common stock....................... $(878) $(2,045) $(1,444) $(4,994) $(26,278) $(34,669)
======== ======== ======== ======== ======== ========
Basic and diluted net loss per common share................. $(109.75) $(227.22) $(144.40) $(262.84) $(11.02)
Shares used in computing basic and diluted net loss per
common share.............................................. 8 9 10 19 2,385
Pro forma basic and diluted net loss per common share....... $(1.99)
Shares used in computing pro forma basic and diluted net
loss per common share..................................... 11,862
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $289 $604 $206 $2,016 $6,630
Working capital (deficit)................................... (399) (439) (1,487) 2,398 288
Total assets................................................ 720 1,068 1,237 4,328 33,769
Capital lease obligations, net of current portion........... 37 -- -- 80 522
Redeemable convertible preferred stock...................... 14,015 15,976 16,316 25,441 52,251
Stockholders' deficit....................................... (14,358) (16,363) (17,784) (22,759) (33,058)
</TABLE>
17
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in such
forward-looking statements. See "Note on Forward-Looking Statements."
OVERVIEW
Servicesoft develops, markets and delivers software products and
professional services that help businesses provide superior e-service to their
customers, employees and business partners. We license our software products to
clients across a variety of industries, including telecommunications,
e-commerce, financial services, technology, manufacturing and healthcare.
We derive our revenue from three sources: the sale of software licenses,
implementation assistance and other professional services and software
maintenance services. We plan to generate future revenue from both existing and
new clients. As existing clients either expand their usage or implement new
Servicesoft products, they may be required to pay additional license fees under
existing license agreements or license additional copies of our software. We
recognize software license fees and implementation assistance fees on a
percentage of completion basis when we assist our clients in implementing our
products, there is evidence of a binding arrangement, the fees are fixed or
determinable and collection is probable. If we are not implementing our software
solution, we recognize software license fees when the software is delivered to
the end user, so long as the fees are fixed or determinable, there is evidence
of a binding arrangement and collection is probable. Professional services other
than implementation assistance or maintenance services are contracted for on
either a time-and-materials or fixed-price basis. We recognize service fees
contracted for on a time-and-materials basis as the services are performed. We
recognize service fees contracted for on a fixed-price basis on an estimated
percentage of completion as work progresses. Clients purchasing maintenance
services receive unspecified product upgrades and unlimited e-service and
telephone technical support. Our clients typically purchase maintenance services
annually, and we price maintenance services based on a fixed percentage of our
current product list price. We recognize revenue on maintenance services ratably
over the term of the period covered, typically one year. We record cash receipts
and contracted amounts due from clients in excess of revenue recognized as
deferred revenue. The timing and amount of cash receipts from clients can vary
significantly depending on specific contract terms and can therefore have a
significant impact on the amounts of receivables due or deferred revenue in any
given period.
Our cost of software license revenue includes royalties due to third
parties for technology included in our products, the cost of manuals and product
documentation, media used to deliver our products, shipping and fulfillment
costs. Our cost of services revenue includes salaries and related costs for our
consulting and support organizations and costs of third parties contracted to
provide consulting services to our clients.
Our operating expenses are classified as sales and marketing, research and
development, general and administrative, amortization of goodwill and other
intangible assets and stock compensation expense for issuance of and
modification to stock options and restricted stock. Sales and marketing expenses
consist primarily of salaries and other related costs for sales and marketing
personnel, sales commissions, travel, public relations, advertising, promotional
materials and tradeshows. Research and development expenses consist primarily of
salaries and related costs for product development personnel and for consulting
fees to support our product development. To date, we have not capitalized any
research and development costs. General and administrative expenses consist
primarily of salaries and other related costs for finance, human resources,
internal systems and other administrative employees, legal and accounting fees
and insurance premiums. Stock compensation expenses for the issuance of stock
options and restricted stock represent the difference between the exercise price
or purchase price of options or restricted stock granted and the estimated fair
market value for financial reporting purposes of the common stock on the date of
the grant or modification.
Over the past several years, we have incurred substantial costs to develop
and acquire our technology and products, to recruit and train personnel for
engineering, sales, marketing and professional services departments
18
<PAGE> 23
and to establish an administrative organization. As a result, we have incurred
significant losses during this period and as of December 31, 1999, we had an
accumulated deficit of $46.0 million. We believe our success depends on
increasing our client base and on the emerging e-service market. Accordingly, we
intend to continue to invest heavily in sales, marketing, professional services,
research and development and in our operational and financial systems.
Furthermore, we expect to continue to incur substantial operating losses at
least through 2001, and our increase in operating expenses will require a
significant increase in revenue before we become profitable.
We had 250 full-time employees at January 31, 2000, up from 54 at January
31, 1999. This rapid growth places a significant demand on our management and
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems, procedures and controls on a timely basis.
In addition, we expect that future expansion will continue to challenge our
ability to hire, train, motivate and manage our employees. Competition is
intense for highly qualified technical, sales, marketing, administrative and
management personnel. If our revenue does not increase relative to our operating
expenses, our management systems do not expand to meet increasing demands, we
fail to attract, assimilate and retain qualified personnel, or our management
otherwise fails to manage our expansion effectively, there would be a material
adverse effect on our business, operating results and financial condition.
In February 1999, we merged with Balisoft, a developer of e-mail management
and real-time Internet collaboration applications, in exchange for 2.2 million
shares of exchangeable common stock and 2.3 million shares of exchangeable
preferred stock; we also issued employee stock options and warrants to purchase
approximately 671,000 shares of our common stock. The total cost of the merger,
including transaction costs, was $12.6 million. We accounted for the merger as a
purchase business combination. Accordingly, the results of operations of
Balisoft have been included with our results of operations for periods
subsequent to the date of the merger and the acquired net assets were recorded
at their estimated fair values at the effective date of the merger, resulting in
$8.6 million recorded as goodwill and other intangibles.
In December 1999, we acquired Internet Business Advantages, an e-services
consulting organization, in exchange for $1.2 million in cash and 1.1 million
shares of our common stock; we also issued to former employees and warrant
holders of Internet Business Advantages stock options and warrants to purchase
approximately 470,000 shares of our common stock. The total cost of the
acquisition, including transaction costs, was $13.2 million. We accounted for
the acquisition as a purchase business combination. Accordingly, the results of
operations of Internet Business Advantages have been included with our results
of operations for periods subsequent to the date of acquisition and the acquired
net assets were recorded at their estimated fair values at the effective date of
the acquisition, resulting in $12.4 million recorded as goodwill and other
intangibles.
Of the $25.8 million total cost of the Balisoft and Internet Business
Advantages transactions, we allocated $21.0 million of the combined transaction
prices to goodwill and other intangible assets to be amortized over three years
commencing on the date of the respective transactions.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR
ENDED
DECEMBER 31, 1998
REVENUE
Total revenue increased $2.9 million, or 67%, to $7.1 million in 1999 from
$4.3 million in 1998. Software license revenue increased $1.7 million, or 68% to
$4.2 million in 1999, from $2.5 million in 1998. Revenue from services increased
$1.2 million, or 65%, to $2.9 million in 1999 from $1.8 million in 1998. The
increase in total revenue was primarily due to increased market demand for and
acceptance of our products, the expansion of our product offering and an
expanding customer base. In August 1999, we released our Servicesoft 2000 suite
of products, including self-service, e-mail management and live interaction
applications. This expanded product offering has been a significant factor in
the increased demand for our products. We believe that growth in software
license revenue depends on our ability to provide our clients with the support,
training, consulting and implementation services they require to successfully
build, deploy and maintain e-service applications. Accordingly, we expect that
services revenue will increase in the future to the extent that additional
clients
19
<PAGE> 24
license our products and as we expand both our capacity to deliver professional
services and the scope of our professional services offerings.
COST OF REVENUE
Cost of software license revenue increased $258,000, or 174%, to $406,000
in 1999 from $148,000 in 1998. The increase is directly attributable to the
increase in licenses sold during 1999 and the increase in third-party products
embedded in or licensed with our Servicesoft 2000 suite of products. Cost of
services revenue increased $2.3 million, or 207%, to $3.4 million in 1999 from
$1.1 million in 1998. Of this increase, $1.3 million was due to the expansion of
the professional services workforce to meet customer demand and to provide
support to the increased number of clients. The remainder of the increase was
related to an increase in recruitment, facilities, computers and communications
expenses related to the increase in headcount. We expect the cost of software
license revenue to increase in the future in absolute dollar terms as additional
clients license our products and as we license technology that we may choose to
embed in or license with our products. We further expect the cost of services
revenue to increase in the future to the extent that we continue to generate new
clients. Except for 1998, our cost of services revenue has been significantly
higher than our services revenue. Cost of services revenue can be expected to
vary significantly from period to period, depending on the mix of services we
provide, whether such services are provided by us or third-party contractors,
and overall utilization rates.
OPERATING EXPENSES
Research and development. Research and development expenses increased $3.0
million, or 258%, to $4.2 million in 1999 from $1.2 million in 1998. Of this
increase, $2.4 million was due to an increase in headcount relating to the
merger with Balisoft and new hires. The remainder of the increase was due to an
increase in recruitment, travel, facilities, computers and communications
expenses related to the increase in headcount. We believe that continued
investment in research and development will be crucial to achieving and
maintaining leadership in the market for e-service software. As a result, we
expect research and development costs to increase in future periods.
Sales and marketing. Sales and marketing expenses increased $9.7 million,
or 270%, to $13.3 million in 1999 from $3.6 million in 1998. Of this increase,
$2.4 million was due to the expansion of the sales and marketing workforce, $1.7
million was due to increased marketing promotions, $1.6 million resulted from
increased commissions and $797,000 was due to increased travel expenses. The
remainder of the increase was due to the development of satellite offices and an
increase in computers and communications expenses related to the increase in
headcount. We believe that sales and marketing expenses will increase in future
periods as we continue to expand our sales and marketing efforts. Sales and
marketing expenses can be expected to fluctuate as a percentage of total revenue
from period to period resulting from the hiring and training of new sales
personnel and the timing of our marketing activities.
General and administrative. General and administrative expenses increased
$3.4 million, or 213%, to $5.0 million in 1999 from $1.6 million in 1998. Of
this increase, $2.0 million was due to increased personnel. The remainder of the
increase was due to the increase in accounting fees, legal fees, taxes,
facilities, computers and communication. We believe that general and
administrative costs will increase as we invest in the personnel and systems
necessary to support our expanding operations and in connection with the growth
of our business, and as we assume the expenses and responsibilities of a public
company.
Amortization of goodwill and other intangible assets. In February 1999, we
merged with Balisoft for total consideration of $12.6 million. In December 1999,
we acquired Internet Business Advantages for total consideration of $13.2
million. In 1999, we incurred amortization expense of $2.7 million. In 2000, we
expect to incur amortization expense of approximately $7.0 million in connection
with these transactions.
Stock compensation. We incurred a charge of $1.9 million in 1999 related
to the issuance of stock options and restricted stock with exercise or purchase
prices below the deemed fair market value of the common stock for financial
reporting purposes on the date of the grant and related to modifications of
certain stock options. We incurred no stock compensation charges in 1998.
Additional unvested outstanding options
20
<PAGE> 25
and restricted stock will continue to vest over the next four years, which will
result in additional compensation expense of approximately $13.3 million in the
aggregate over the next four years.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net was $214,000 of net income in 1999
and was $620,000 of net expense in 1998. Interest income increased $152,000 to
$320,000 in 1999 from $168,000 in 1998. The increase is directly attributable to
the investment of funds received as part of the Balisoft merger and funds raised
in the Series I convertible preferred stock financing. Interest expense
decreased $503,000 to $35,000 in 1999 from $538,000 in 1998. Of the $538,000
recorded in 1998, $530,000 related to the conversion of bridge loans at a value
below the then deemed fair market value of the equity issued. The balance of the
1998 expense and the majority of the 1999 expense relates to interest charges on
capitalized equipment leases. Other expense, net decreased $179,000 to $71,000
in 1999 from $250,000 in 1998. The majority of this expense in both 1998 and
1999 related to the settlement of a patent infringement dispute. Under the terms
of the settlement, we expended $250,000 in 1998 and $50,000 in 1999. In
addition, under the terms of the settlement we are obligated to make an
additional $250,000 payment if we are acquired.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED
DECEMBER 31, 1997
REVENUE
Total revenue increased $1.8 million, or 70%, to $4.3 million in 1998 from
$2.5 million in 1997. Software license revenue increased $369,000, or 17%, to
$2.5 million in 1998 from $2.1 million in 1997. Revenue from services increased
$1.4 million, or 360%, to $1.8 million in 1998 from $387,000 in 1997. This
increase in total revenue was primarily due to increase in the implementation
services rendered.
COST OF REVENUE
Cost of software license revenue decreased $104,000, or 41%, to $148,000 in
1998 from $252,000 in 1997. The decrease is directly attributable to a decrease
in third-party products which were embedded in our products. Cost of services
revenue increased $476,000, or 76%, to $1.1 million in 1998 from $625,000 in
1997. Of this increase, $378,000 was due to the expansion of our professional
services workforce to meet customer demand and to provide support to the
increased number of clients. The remainder of the increase was due to an
increase in facilities, computers and communications expenses related to the
increase in headcount.
OPERATING EXPENSES
Research and development. Research and development expenses increased
$244,000, or 26%, to $1.2 million in 1998 from $930,000 in 1997. Of the
increase, $198,000 was due to the expansion of research and development
personnel to upgrade the then existing products and develop new products. The
remainder of the increase was due to an increase in facilities, computers and
communications expenses related to the increase in headcount.
Sales and marketing. Sales and marketing expenses increased $2.6 million,
or 268%, to $3.6 million in 1998 from $977,000 in 1997. Of this increase, $1.2
million was due to the expansion of the sales and marketing workforce, $475,000
was due to increased marketing materials, $274,000 was related to increased
travel expenses, and $250,000 was due to increased commissions. The remainder of
the increase was due to an increase in facilities, computers and communications
expenses related to the increase in headcount.
General and administrative. General and administrative expenses increased
$856,000, or 113%, to $1.6 million in 1998 from $756,000 in 1997. Of this
increase, $273,000 was due to an increase in administrative personnel, $263,000
was due to an increase in recruiting costs and $118,000 was due to an increase
in legal fees. The remainder of the increase was due an increase in facilities,
computers and communications expenses related to the increase in headcount.
21
<PAGE> 26
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other expense, net increased $530,000, or 589%, to $620,000 of
net expense in 1998 from $90,000 of net expense in 1997. Interest income
increased $161,000 to $168,000 in 1998 from $7,000 in 1997. The increase is
directly attributable to the investment of funds raised in the Series G
convertible preferred stock financing. Interest expense increased $441,000 to
$538,000 in 1998 from $97,000 in 1997. Of the $538,000 recorded in 1998,
$530,000 related to the conversion of bridge loans at a value below the then
deemed fair market value of the equity issued. The majority of the 1997 expense
relates to interest expense on notes payable and the balance of the 1998 expense
relates to interest charges on capitalized equipment leases. Other expense in
1998 totaled $250,000. This expense related to the settlement of a patent
infringement dispute. Under the terms of the settlement, we expended $250,000 in
1998. There was no additional other expense in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated quarterly statements
of operations data for each of the four quarters in the year ended December 31,
1999. The unaudited consolidated financial statements, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments necessary for a fair
presentation of that data. The quarterly consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus. The results of
operations for any quarter are not necessarily indicative of the results of
operations for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Software license.................................. $ 496 $ 814 $ 1,251 $ 1,649
Services.......................................... 308 595 850 1,181
------- ------- ------- -------
Total revenue.................................. 804 1,409 2,101 2,830
------- ------- ------- -------
Cost of revenue:
Cost of software license.......................... 62 96 130 118
Cost of services.................................. 457 565 773 1,580
------- ------- ------- -------
Total cost of revenue.......................... 519 661 903 1,698
------- ------- ------- -------
Gross profit........................................ 285 748 1,198 1,132
------- ------- ------- -------
Operating expenses:
Research and development.......................... 661 1,032 1,134 1,378
Sales and marketing............................... 2,098 2,405 3,423 5,384
General and administrative........................ 702 881 1,390 2,071
Amortization of goodwill and other intangible
assets......................................... 357 713 713 888
Stock compensation................................ 8 19 1,080 793
------- ------- ------- -------
Total operating expenses....................... 3,826 5,050 7,740 10,514
------- ------- ------- -------
Loss from operations................................ (3,541) (4,302) (6,542) (9,382)
Interest and other income (expense), net............ (16) 15 82 133
------- ------- ------- -------
Net loss............................................ $(3,557) $(4,287) $(6,460) $(9,249)
======= ======= ======= =======
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(UNAUDITED, AS A PERCENTAGE OF TOTAL REVENUE)
<S> <C> <C> <C> <C>
Revenue:
Software license.................................. 61.7% 57.8% 59.5% 58.3%
Services.......................................... 38.3 42.2 40.5 41.7
------- ------- ------- -------
Total revenue.................................. 100.0 100.0 100.0 100.0
======= ======= ======= =======
Cost of revenue:
Cost of software license.......................... 7.7 6.8 6.2 4.2
Cost of services.................................. 56.8 40.1 36.8 55.8
------- ------- ------- -------
Total cost of revenue.......................... 64.5 46.9 43.0 60.0
------- ------- ------- -------
Gross profit........................................ 35.5 53.1 57.0 40.0
------- ------- ------- -------
Operating expenses:
Research and development.......................... 82.2 73.2 54.0 48.7
Sales and marketing............................... 260.9 170.7 162.9 190.2
General and administrative........................ 87.3 62.5 66.2 73.2
Amortization of goodwill and other intangible
assets......................................... 44.5 50.7 33.9 31.4
Stock compensation................................ 1.0 1.3 51.4 28.0
------- ------- ------- -------
Total operating expenses....................... 475.9 358.4 368.4 371.5
------- ------- ------- -------
Loss from operations................................ (440.4) (305.3) (311.4) (331.5)
Interest and other income (expense), net............ (2.0) 1.0 3.0 4.7
------- ------- ------- -------
Net loss............................................ (442.4)% (304.3)% (307.5)% (326.8)%
======= ======= ======= =======
</TABLE>
Our total revenue has increased in each quarter of 1999 due to an expanding
e-service market and as we increased our product and services offerings and our
sales and marketing activities. Particularly, we have seen a significant
increase in customer demand since we released our Servicesoft 2000 suite of
products in the third quarter of 1999.
Cost of revenue has increased each quarter in conjunction with our
increases in total revenue. Cost of software license revenue was
disproportionately higher in the quarter ended September 30, 1999 primarily due
to higher than normal sales of a third-party product. Cost of services revenue
increased during each quarter of 1999 as we increased the number of professional
services consultants and customer care representatives in response to our
growing customer base.
Operating expenses have generally increased in absolute dollars each
quarter as we have increased staffing in sales and marketing, research and
development and general and administrative functions. In addition, the merger
with Balisoft in February 1999 significantly increased our research and
development costs commencing in the second quarter. With the release of our
Servicesoft 2000 suite of products early in the third quarter, we increased our
marketing activities, which has had a significant impact on sales and marketing
expenses. As part of the purchase accounting for the Balisoft merger in February
and the Internet Business Advantages acquisition in December, we recorded
goodwill and other intangible assets of $21.0 million. These intangible assets
are being amortized over a three year period as reflected in amortization of
goodwill and other intangible assets. Also, during 1999 we recorded deferred
stock compensation charges totaling $13.9 million in connection with stock
options and restricted stock granted during 1999. We are amortizing this amount
over the vesting periods of the applicable options or restricted stock, and we
have recognized other stock compensation charges resulting in stock compensation
expense of $8,000, $19,000, $1.1 million and $793,000 in the four quarters of
1999. The increased amounts in the third and fourth quarters of 1999 are due to
the significant increase in the deemed fair market value of our stock for
financial reporting purposes during 1999 and in the increase in the number of
stock options and restricted stock granted.
Because of the significant changes to our business in 1999, we cannot
forecast operating expenses based on historical results. Accordingly, we base
our expenses in part on future revenue projections. Most of these expenses are
fixed in the short term, and we may not be able to quickly reduce spending if
revenue is lower than we have projected. Our availability to forecast accurately
our quarterly revenue is limited due to the long sales cycle of our software
products, which makes it difficult to predict the quarter in which license sales
will
23
<PAGE> 28
occur, and the variability of client demand for professional services. We would
expect our business, operating results and financial condition to be materially
adversely affected if revenue does not meet projections and that net losses in a
given quarter would be even greater than expected.
We expect our revenue and operating results may vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- demand for our products and services;
- the timing of sales of our products and services;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, product
development or administration;
- changes in the rapidly evolving market for e-service solutions;
- the mix of product license and services revenue;
- the mix of services provided and whether services are provided by our
staff or third-party contractors;
- the mix of domestic and international sales; and
- costs related to possible acquisitions of technology or business.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful. We plan to increase our
operating expenses to expand sales and marketing operations, develop new
distribution channels, fund greater levels of research and development, broaden
professional services and support and improve operational financial systems. If
our revenue does not increase along with these expenses, our business, operating
results or financial condition could be materially adversely affected and net
losses in a given quarter would be even greater than expected. Investors should
not rely on the results of one quarter as an indication of future performance.
NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS
As a result of taxable losses generated, we have not recorded any
provisions for income taxes for the years ended December 31, 1997, 1998 and
1999. As of December 31, 1999, we had net operating loss carryforwards of $37.6
million, $29.1 million and $5.1 million for federal, state and foreign income
tax purposes. The net operating loss carryforwards will expire at various dates
through 2019, if not used. Under the provisions of the Internal Revenue Code,
substantial changes in our ownership may limit the amount of net operating loss
carryforwards that could be utilized annually in the future to offset taxable
income. We have established a full valuation allowance in our consolidated
financial statements reflecting the uncertainty of our ability to use available
net operating loss carryforwards and other deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily funded our operations and met our
capital expenditure requirements through the private sale of equity securities,
resulting in net proceeds of $48.5 million through December 31, 1999. In
addition, in January 2000, we sold additional equity securities in a private
sale resulting in additional net proceeds of $31.3 million. Cash used in
operating activities was $1.2 million, $3.6 million, and $13.8 million in 1997,
1998 and 1999. The $13.8 million of cash used in operating activities for the
year ended December 31, 1999 results from net loss before non-cash charges and
includes an increase in client accounts receivables of approximately $4.2
million from December 31, 1998. This increase is directly attributable to
increased client contracts signed at the close of the quarter ended December 31,
1999 containing immediate invoicing terms.
To date, our investing activities have consisted primarily of capital
expenditures totaling $25,000 and $537,000 in 1997 and 1998. In 1999, capital
expenditures of $2.3 million were offset by cash acquired in the Balisoft merger
and Internet Business Advantages acquisition which totaled $3.4 million after
cash paid in the Internet Business Advantages acquisition and for transaction
expenses. Capital expenditures consist primarily
24
<PAGE> 29
of property and equipment, mainly furniture and computer hardware and software,
for our growing employee base. We expect that our capital expenditures will
increase as our employee base grows. At December 31, 1999, we did not have any
material commitments for capital expenditures.
At December 31, 1999, we had $6.6 million in cash and cash equivalents and
$288,000 in working capital. Net cash provided by financing activities in 1997,
1998, and 1999 were $817,000, $6.0 million and $17.2 million. We have a $2.0
million revolving and a $750,000 equipment line of credit with Fleet Bank that
bear interest at the bank's prime rate plus .50% and .75%. At December 31, 1999,
$1.0 million was outstanding under the revolving line of credit. We had no
borrowings against the equipment line of credit as of December 31, 1999. Under
the revolving line of credit we are required to maintain, as at the end of each
fiscal quarter, a debt to worth ratio of not more than 1.0 to 1.0, a ratio of
net quick assets to adjusted current liabilities of not less than 1.5 to 1.0,
and a minimum variable capital base. In addition, we are required to incur
quarterly consolidated net losses of less than $750,000 for the quarter ended
March 31, 2000, and achieve quarterly consolidated net income of at least $1.00
for each quarter thereafter. We are also bound by financial reporting and notice
requirements and additional covenants. As of January 31, 2000 we had no
outstanding borrowings under this revolving line of credit.
We believe that the net proceeds of this offering, together with cash on
hand, cash equivalents, short-term investments and commercial credit facilities
will be sufficient to meet our working capital requirements for at least the
next 12 months. Thereafter, we may require additional funds to support out
working capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financings or from other
sources. Such additional financing may not be available at all or, if available,
such financing may not be obtainable on terms favorable to us and may be
dilutive.
YEAR 2000 ISSUES
We are unaware of any problems that have arisen with respect to Year 2000
issues in our current software products, our internal computer systems or in the
computer systems of our vendors. Prior to January 1, 2000, we conducted a review
of the potential impact that the change in the date to the year 2000 would have
on our current products and computer systems. Based on this review, we
determined that all of our current products and major computer systems are able
to recognize and appropriately process dates commencing in the year 2000. Our
historical costs to assess our Year 2000 readiness have not been significant.
The majority of the costs required to complete our Year 2000 compliance process
were incurred as part of our normal capital asset acquisition program, and would
have been incurred without consideration of Year 2000 issues. We are not
currently able to estimate the final aggregate cost of addressing the Year 2000
issue, because funds may be required as a result of future findings. However,
given the lack of any problems related to the year 2000 since the year change,
we do not anticipate that we will experience any material problems related to
the year 2000 in the future. As a result, we do not expect costs associated with
these problems to have an adverse effect on our business and financial results.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. SOP 98-9 is
effective for transactions entered into during fiscal years beginning after
March 15, 1999 (fiscal year 2000 for Servicesoft), however early adoption is
permitted. Servicesoft has adopted SOP 98-9.
25
<PAGE> 30
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended, is effective for fiscal years beginning after
June 15, 2000. Because we do not currently hold any derivative instruments and
do not currently engage in hedging activities, we expect the adoption of SFAS
No. 133 will not have a material impact on our financial position or operating
results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in Canada and the United States. We sell our
products globally, primarily through our direct sales force. As a result, our
financial results are affected by factors such as changes in foreign currency
exchange rates and weak economic conditions in foreign markets. In the future,
we expect to increase our international operations in our existing markets and
in geographic locations where we do not have any operations now.
We collect a portion of our revenue and pay a portion of our operating
expenses in foreign currencies. As a result, changes in currency exchange rates
from time to time may affect our operating results. Currently, we do not engage
in hedging transactions to reduce our exposure to changes in currency exchange
rates, although we may do so in the future. We cannot assure you, however, that
any efforts we may make in the future to hedge our exposure to currency exchange
rate change will be successful.
26
<PAGE> 31
BUSINESS
OVERVIEW
We develop, market and deliver sophisticated software products and
professional services that enable our clients to build and deploy e-service
applications. These e-service applications help our clients build sustainable
customer relationships utilizing multiple communication channels, thereby
maximizing lifetime customer value. Using our Servicesoft 2000 suite, clients
can also develop a knowledge base that aggregates customer information,
transaction data and individual employee expertise from across their
organization which can be accessed by our clients' e-service applications. By
integrating their e-service applications with their knowledge base, our
Servicesoft 2000 suite enables our clients to consistently deliver prompt,
personalized and intelligent responses that directly address issues raised by
their customers, employees and business partners. Our Servicesoft 2000 suite of
products integrates with existing business systems, including industry leading
automated call distribution systems, customer relationship management
applications, as well as database and e-commerce applications.
In addition to our products we offer a range of professional services
including rapid implementation assistance, e-service system designs, knowledge
engineering and project management. We provide these services to help our
clients decrease implementation risk, shorten the time it takes to provide
superior e-service, improve their competitive position and maximize return on
investment.
INDUSTRY BACKGROUND
GROWTH IN INTERNET USAGE
The growth in the number of Internet users has led to a shift in the way
that people communicate and conduct business. International Data Corporation
projects that the number of Internet users worldwide will grow from 196 million
in 1999 to 502 million users in 2003. The rapid adoption of the Internet as a
communications medium has placed e-mail, chat and Web sites alongside
traditional media such as television, telephony, radio, print and face-to-face
communications. Businesses are increasingly using the Internet, both to
communicate and conduct business with customers, business partners and
employees. Based on information provided to Servicesoft, we believe that by 2001
businesses will receive 25% of all customer contacts and inquiries over the
Internet.
EVOLUTION OF E-BUSINESS
The growth in the number of users on the Internet together with increased
Internet usage per person has led to the rapid development of business conducted
on-line, otherwise known as e-business. Based on information provided to
Servicesoft by industry analysts, we believe that the total value of
business-to-business e-commerce will reach approximately $2.7 trillion in 2004.
The first phase of e-business involved forays by businesses onto the Internet
that were primarily informational in nature, delivering predominantly static
information about a company and its products. Building on the success of these
on-line brochures, in the second phase of e-business these efforts were quickly
augmented by on-line storefronts that provided transactional capabilities.
Initially, on-line competition was waged primarily along the variables of
price and selection. E-businesses focused on maximizing the number of visitors
and first-time customers to their Web sites, often expending substantial sums of
money on advertising, marketing and inventory expansion. In today's increasingly
competitive environment, price and selection are no longer sufficient for
e-businesses, whether business-to-consumer, business-to-employee or
business-to-business, to distinguish themselves.
THE NEED FOR COMPREHENSIVE E-SERVICE SOLUTIONS
In the third phase of e-business evolution, e-businesses are looking to
provide superior e-service as an increasingly important means of competitive
differentiation. This shift in competitive focus is being driven by customer
demand for prompt, accurate and personalized resolution of all inquiries,
ranging from product information requests and order status updates to support
questions and service complaints. Customers are
27
<PAGE> 32
coming to expect at least the same level of service that they are used to
receiving from traditional businesses. E-businesses realize that superior
e-service can create long-term customer satisfaction and loyalty, thereby
increasing profitability per customer and reducing the need for continuous,
substantial expenditures on marketing and other customer acquisition efforts.
Providing quality e-service to customers is further complicated by the
variety of communication channels used by today's customers. Self-service
options allow customers to find answers to their questions using an e-business
Web site. E-mail allows customers to send their questions and inquiries
electronically, rather than through traditional means. Interactive chat allows
customers to log into an electronic forum, where on-line customer service
representatives can provide interactive responses. Customers also use call
centers to speak directly with customer service representatives. The
communication channel chosen is a function of a customer's own schedule, sense
of urgency, access to technology, inability to resolve an issue through other
channels and level of frustration.
The growing variety of communication channels requires that e-businesses
turn their traditional, telephone-based call centers into full-service,
Internet-enabled contact centers that provide customers, business partners and
employees with fast, expert service and support through a variety of channels.
The emergence of the contact center allows customers to choose the service
method most convenient and effective for their specific needs. With the growth
of the Internet and the increasing number of businesses launching their
e-commerce efforts, e-service is driving the next generation of e-business.
International Data Corporation forecasts that demand for e-service software and
services will grow from $11 billion in 1998 to $43 billion by 2003.
Despite this growing sense of urgency among e-businesses, service has not
kept up with the rapid evolution of e-business, leaving many customers
dissatisfied with the level of service provided on-line. Customers find that
existing e-business Web sites do not address specific inquiries or are difficult
to navigate successfully to find the needed information. This often results in
increased call center volumes and e-mail traffic, threatening to overwhelm call
centers leading to inaccurate and delayed responses. Based on a survey of Web
sites conducted by industry analysts and provided to us, approximately half of
the Web sites surveyed either took five or more days to respond, never responded
or failed to post an e-mail address on their Web site to address support
requests via e-mail. Customers also find that switching from one communication
channel to another often results in having to describe the problem at each stage
of the process, as the customer information obtained from a self-service search
is not transferred to the e-mail or call center resulting in further customer
frustration.
Effective e-service goes beyond providing a Web site with basic frequently
asked questions, chat and e-mail, or staffing a call center. Truly
differentiating e-service requires that all communication channels access a
common knowledge base that aggregates customer information, transaction data and
the expertise of individual employees who interact with customers on a daily
basis. A customer's name, address and order history, and information about the
company, its products, services and business rules all can form components of
the knowledge base. By consolidating a company's intellectual capital and making
it available across multiple departments and communication channels,
e-businesses are able to provide prompt, relevant, intelligent responses that
directly address issues raised by their customers. Superior e-service further
requires that e-businesses present customers with the option of escalating to a
higher service level if they are unable to resolve their queries through a
particular communication channel. More importantly, any escalation or change in
communication channels should include a seamless transfer of the customer's
interaction with the e-business to date, thereby presenting a continuous and
personalized dialogue with the customer. Finally, e-service requirements must be
met 24 hours-a-day, 7 days-a-week.
To date, companies that have attempted to address the emerging needs of
e-businesses for e-service solutions have only offered point solutions that
focus on particular communication channels between e-commerce companies and
their customers. These point solutions ignore the wide variety of means through
which a customer may choose to interact with e-businesses, necessitating the
implementation and deployment of applications by multiple vendors. More
importantly, the use of multiple vendors' solutions further presents
e-businesses with the additional challenges of building, integrating and
maintaining these point solutions on a
28
<PAGE> 33
common knowledge base of enterprise and customer information. Without such a
unified approach to customer service, e-businesses are limited in their ability
to achieve meaningful differentiation through superior e-service.
THE SERVICESOFT SOLUTION
Our Servicesoft 2000 suite of products provides our clients the ability to
offer superior e-service which helps them to build relationships with their
customers, employees and business partners, and provide the following benefits:
- Enhanced Customer Relationships. Our products and services enable
e-businesses to provide their customers with interactive, intelligent
and prompt responses to their questions and inquiries. Our Servicesoft
2000 suite of products allows our clients to create personalized
e-service experiences for their customers. These personalized
interactions occur in real time, 24 hours-a-day, and are designed to
increase the level of customer satisfaction. Our software also provides
e-businesses with the ability to accurately track and efficiently manage
customer interactions across communication channels to build and sustain
lasting customer relationships.
- Integrated Access to Extensive Knowledge Base. Our Servicesoft 2000
suite of products enables our clients to develop a common knowledge base
of intellectual capital, which is collected from their business systems
and experts throughout their organization. All communications from an
e-business to its customers, employees or business partners, whether
through self-service, e-mail, chat or live interaction, draw from this
knowledge base. By aggregating a company's intellectual capital into a
single, unified knowledge base, our Servicesoft 2000 suite ensures that
our clients provide consistent, accurate and up-to-date answers to all
of their customers' and business partners' inquiries, regardless of the
communication channel chosen.
- Unified and Personalized View of the Organization. A unified knowledge
base also allows an e-business to track the progress of a customer's
interactions with the company through any of the communication channels
used. At any point in time, any authorized customer service
representative, salesperson or marketing staff member can obtain the
history of each interaction with the company, the potential resolutions
or answers suggested, and any special needs of the customer. The linkage
between communication channels through a knowledge base enables our
clients to provide customer service that is highly personalized and
efficient.
- Intelligent Responses and Escalation. Our proprietary software also
enables customers to easily transfer inquiries from self-help to e-mail
responses to live interaction. Escalation of customer inquiries helps
ensure that our clients efficiently apply the appropriate level of
resources towards customer satisfaction while reducing the risk of
losing a customer because of perceived unresponsiveness.
- Rapid and Measurable Return on Investment. Our Servicesoft 2000 suite
of products helps our clients enhance customer acquisition and retention
in an efficient and cost-effective manner. Through our solution, our
clients are able to achieve a proportional reduction in the volume of
customer calls and e-mail messages in favor of less costly self-service
features, while maintaining customer satisfaction through timely and
accurate responsiveness to customer concerns. By enabling customers to
service themselves and by aiding our clients to more effectively handle
each customer transaction, our clients often experience cost
efficiencies, including savings associated with reduced volume of phone
calls and e-mails, and the ability to process more customer interactions
per employee. In addition, the use of the knowledge base can reduce the
level of employee training and associated costs required to provide
e-service.
- Scalability. Our Servicesoft 2000 suite of products addresses the
customer service needs of large organizations as well as rapidly growing
companies that require solutions to automate and manage
29
<PAGE> 34
high volumes of customer interactions across traditional as well as
Internet-based communication channels. Architecturally, our products can
provide automated intelligent responses and escalation for increasing
volumes of traffic through increasing the capacity of the servers on
which they are run.
- Rapid Deployment. Our Servicesoft 2000 suite of products is designed
for rapid deployment, typically eight to twelve weeks, and some of our
clients have implemented our solutions in as little as three weeks. Our
professional services group provides on-site training and guidance
during the implementation and testing phases. This program is designed
to speed implementation, maximize efficiency and reduce the expense and
time associated with deployment.
- Integration with Business Applications and Systems. Our software
enables organizations to aggregate, incorporate and utilize relevant
data contained within existing corporate databases and systems. Our open
standards architecture can be integrated with leading e-commerce
platforms, automated call distribution systems, databases and customer
relationship management applications. Our clients' e-services
applications can efficiently access disparate applications and systems
to provide their customers, business partners and employees with the
information and service they need.
STRATEGY
Our objective is to enhance our position as a leading provider of
intelligent e-service software solutions and related services. To achieve this
goal, we are pursuing the following strategies:
Extend Technology Leadership. We intend to extend our leadership position
in the e-service solutions market by continuing to increase the performance,
functionality, and scalability of our Servicesoft 2000 suite of products. Our
Servicesoft 2000 suite is designed to offer the best solution for each
communication channel thereby allowing businesses to strengthen their customer
relationships by providing high quality service which leads to increased
customer loyalty and retention, and increased return on investment. We plan to
continue to devote substantial resources to the development of new and
innovative product capabilities, and where appropriate, may make acquisitions to
purchase new or complementary technologies.
Expand and Leverage Strategic Alliances. In order to broaden our market
presence, reach new geographic and vertical markets, and increase adoption of
our solutions, we will continue to pursue strategic alliances with consultants,
systems integrators, value-added resellers, and independent software vendors of
complementary products. We intend to use these indirect channels to increase our
sales by leveraging our partners' industry expertise, business relationships,
and sales and marketing resources. Currently, we have consulting, technology,
web integration and outsourcing alliances with EDS, IBM Global Services, Nortel,
through its acquisition of Clarify, Remedy, Peoplesoft, through its acquisition
of Vantive, Onyx, Barnhill Associates, Sol-S, Tertio, Logicasiel and CorporaTel.
We intend to continue to aggressively develop new relationships to broaden our
market presence and accelerate our growth. In addition, we plan to expand our
professional services capabilities by developing strategic relationships with
local systems integrators and consultants.
Expand Worldwide Presence and Distribution Capabilities. To expand our
sales to both new and existing customers, we intend to increase our sales effort
by adding direct sales personnel and new office locations. We currently have
eight offices throughout North America and plan to continue to expand our North
American sales staff. In addition, to capitalize on international opportunities
for our products and services, we also plan to continue expansion of our
international presence by establishing additional overseas offices, adding
direct sales personnel and increasing our relationships with local distributors
and systems integrators. We currently have offices in the United Kingdom and
Belgium and plan to open offices and in other European cities and Asia to meet
the e-service needs of e-business throughout the world.
Leverage Professional Services Capabilities. Through our recent
acquisition of Internet Business Advantages, we are now able to provide an
extensive set of professional services. We have established successful
relationships with our clients by providing professional services to facilitate
in the development and
30
<PAGE> 35
deployment of effective e-service solutions. By providing clients with a full
range of complementary services, we promote the success of projects and create
opportunities to sell additional products. Our professional services
organization provides clients with implementation, project management, training
and support to ensure that clients quickly realize the maximum benefits from
their investment in our products.
Increase Brand Awareness. To increase the effectiveness of our direct
selling efforts and our penetration of the e-service market, we believe it is
important to build awareness of the Servicesoft brand. We plan to increase our
marketing efforts by expanding the number of trade shows we participate in,
increasing advertising and publication efforts, and expanding our interactive
marketing and telemarketing activities. We believe our marketing programs will
highlight the advantages of our Servicesoft 2000 suite of products relative to
our competitors.
31
<PAGE> 36
SERVICESOFT PRODUCTS
Our Servicesoft 2000 suite of products integrates our leading applications
for self-service, e-mail and live interaction capabilities with our proprietary
knowledge-base technology, offering our clients a complete e-service solution.
In addition, our products may be purchased separately or in combination. By
offering our products individually, a client may purchase the products that best
suit its current needs. A client can subsequently add products from our suite to
enhance e-service functionality. Our integrated e-service solution enables our
clients to provide interactive self service, e-mail service, chat and live
interaction to their customers, business partners and employees. The following
table summarizes the current products which compromise our Servicesoft 2000
suite, the latest versions of which were all shipped in the fourth quarter of
1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PRODUCT FEATURES
- ------------------------------------------------------------------------------------------------
<S> <C>
Servicesoft WebAdvisor Knowledge-base solution that enables e-businesses to capture
knowledge from business systems, employees, partners and
customers and publish knowledge on intranets or internets.
Provides advanced search capabilities and automated guidance
and advice to focus and expedite self-service inquiries. In
addition, WebAdvisor serves as an integration platform that
allows all our products to access a common knowledge base.
Servicesoft E-MailContact E-mail management solution that improves productivity and
responsiveness to e-mails through auto-response,
auto-suggest and queue management. When integrated with
Servicesoft WebAdvisor, Servicesoft E-MailContact enables
e-businesses to take advantage of the knowledge base and
provide prompt, intelligent responses to their customers,
business partners and employees. In addition, if the
customer chooses to escalate to a customer service
representative, WebAdvisor escalates the session history to
the representative. Knowledge base-ready for integration
with Servicesoft WebAdvisor.
Servicesoft LiveContact Enables e-businesses to provide collaboration over the
Internet, using Internet communication technologies such as
text chat, voice over the Internet, call back and web page
and brochure push. Text chat allows on-line real-time
written communications. Voice over Internet Protocol
utilizes the Internet for voice communications. Call back
gives customers the ability to request a telephone call from
the first available contact center representative. Web page
push enables a contact center representative, customer or
business partner to present a Web page for simultaneous
viewing and navigation. Brochure push enables e-businesses
to interactively customize a collection of related Web pages
into a brochure that can be viewed by their customers
on-line. Allows business managers, technical managers,
marketing, support and partners to work collaboratively to
resolve e-service issues. Knowledge base-ready for
integration with Servicesoft WebAdvisor.
Servicesoft Connectors Enables e-businesses to integrate their e-service
applications with their legacy applications and systems.
Pre-packaged connectors are currently available for customer
relationship management applications by Siebel, Clarify,
Remedy, Vantive and Onyx and automated call distribution
systems by Lucent and Nortel.
Servicesoft Development Server Enables e-businesses to develop, stage, deploy and maintain
our products without affecting production environments.
- ------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 37
SERVICESOFT PROFESSIONAL SERVICES
Our professional services organization enhances our ability to provide our
clients with innovative and extensive e-service solutions. Professional services
help our clients to define, design, implement, and deploy our Servicesoft 2000
suite of products, speed the implementation and maximize the effectiveness of
our solutions. Our professional services organization also educates our clients
on how they can create and deliver intelligent e-service solutions to their
customers, business partners and employees. Our professional services
organization mitigates initial implementation risks and assures the integrity of
our solution. We charge our clients on either a fixed-fee or time-and-materials
basis. As of January 31, 2000, our professional services organization consisted
of 67 full-time employees.
We currently offer our clients a broad spectrum of services across design,
implementation and e-service improvement services. The following graphics
depicts the services we provide during the stages of e-service deployment and
usage.
[FLOW CHART]
In the design stage, we provide a variety of services to help ensure that
our clients' business objectives are defined and understood, and the technical
requirements and architecture are agreed upon. In the implementation stage, we
use our methodology and project management expertise to assure that the project
is well managed and satisfies the client's requirements. At this stage, our
expertise with e-service implementation reduces project risk and facilitates
integration with third-party software. Our professional services organization
offers education, training and technology transfer to enable our clients'
internal team to support the implementation of our Servicesoft 2000 suite of
products.
In addition to providing services through our professional services
organization, we have established complementary relationships with several
leading professional services companies, including IBM, EDS and Keane.
CLIENT SUPPORT
We believe that we must provide a superior level of client support services
to our clients. Our client support uses our Servicesoft 2000 suite of products,
allowing clients to interact with Servicesoft WebAdvisor to achieve prompt
resolution to their issues. In addition to the self service component of our
support web site, which is available to our clients on a 24 hours-a-day, 7
days-a-week basis, our clients can use Servicesoft E-mailContact or Servicesoft
LiveContact to interact with our technical support engineers. Clients can also
obtain service by working directly with a support engineer via telephone, e-mail
or text chat. Our support engineers use the same knowledge base that is used by
our support web site.
33
<PAGE> 38
TECHNOLOGY
We believe our technology enables our clients, partners, and consultants to
build, deliver and manage enterprise-class, scalable e-service applications in
less time, at lower cost and with better results than existing alternatives.
PRODUCT ARCHITECTURE
We believe that we have developed a unique, component and Internet-based
architecture for meeting the demands of e-service applications. By placing
emphasis on the integration of communications channels with knowledge-base
technology, our products effectively accommodate web customer interaction, and
assist in customer acquisition and retention. Our design is an efficient and
highly scalable architecture, which enables e-businesses to implement quickly
and cost effectively e-service applications that can handle large volumes of
customer interactions. Additionally, we believe this architecture provides a
strong foundation on which we can develop future e-service products.
SERVICESOFT 2000 SYSTEM ARCHITECTURE
[CHART]
SERVICESOFT KNOWLEDGE PLATFORM
We have developed proprietary knowledge-base technology designed to manage
the high volume of interactions with many concurrent Internet visitors who seek
e-service. The knowledge-base technology provides the following key functions:
Knowledge Model. We have developed a proprietary knowledge representation
model that allows diverse domains of knowledge to be easily and accurately
represented. We have a unique object-oriented representation of knowledge that
links related pieces of information together and promotes re-use of knowledge in
multiple contexts. The foundation of our knowledge representation lies in using
terms and associations familiar to the authors within an organization.
34
<PAGE> 39
Knowledge Engine. We have developed a unique knowledge engine which
combines multiple knowledge access strategies and algorithms into a single
knowledge engine. We combine search, case-based reasoning, decision trees, and
expert models into a seamlessly presented experience for the end user.
Knowledge Acquisition Services. We allow e-service application developers
to build and deploy applications that can manage multiple types of data
including content, relations data and flat files through a single knowledge
engine and a single application programming interface model. This simplifies
knowledge authoring and significantly reduces time to deployment by uncoupling
decisions about storage and data formats from authoring.
Authoring can be both automatic, using filters, and manual. We provide an
authoring environment that allows our clients to set up a knowledge framework
that is specific to their domain. The authoring tools enable teams with
different skills and roles to easily collaborate on creation of knowledge in a
way that is appropriate for them. Authors are empowered to create or review
knowledge without needing to be computer scientists or knowledge engineers.
Browser-based authoring enables authoring by employees, business partners and
customers.
Publishing Services. We combine an innovative and customizable workflow
management system with our knowledge engine to enable our clients to establish a
publishing process that best fits their business processes and practices. This
allows our clients to separate the authoring process from the publishing and
deployment process.
SERVICESOFT INTERACTION SERVICES
Our interaction services are designed to help businesses provide
multi-channel e-service to their customers. The services are designed to help
e-businesses improve their responsiveness to their customers while they manage
their costs. These services include:
Support of HTML and Java User Interfaces. Our products provide the
capability to generate HTML, Java, Java Script, or Visual Basic Script user
interfaces. This provides the capability for the customer to have a single look
and feel on their Web site and facilities integration with any Web accessible
application.
Intelligent Routing and Queuing. We provide managers and administrators
the capability to customize and configure the system to intelligently route
their customers queries to the appropriate channels and appropriate customer
service representative.
Dynamic Generation of Web Pages. Unlike many Web sites that have sets of
pre-defined static pages, our products create Web pages dynamically. The pages
are created from the information in the knowledge base, the information about
the user and their environment and information from the users dialogue.
Escalation across Multiple-Communication Channels. Servicesoft WebAdvisor
provides escalation services that help escalate a session to Sevicesoft
E-mailContact, Servicesoft LiveContact or third party systems.
Session Capture and Management. Our products help our clients capture
their customers' on-line interaction. The session information is captured and
saved to provide a history of customer interactions.
PERFORMANCE AND SCALABILITY
We believe that one of our key technological strengths is the ability of
our Servicesoft 2000 suite of products to deliver e-service interaction over the
Internet, with industry leading web page delivery performance and scalability
running on low cost hardware. The ability of our Servicesoft 2000 suite to
deliver unique performance and scalability characteristics is achieved using the
following techniques:
- a unique and proprietary caching mechanism that is integrated with the
knowledge delivery architecture which allows our application to deliver
web-based service at the same speed as static web page delivery;
- integration of the caching mechanism with a component-based Internet
protocol architecture;
35
<PAGE> 40
- the ability to distribute components of our suite of products across
multiple physical servers allowing sites to scale up performance and
improve system availability as a result; and
- the ability to operate in load-balanced clusters, which allows
businesses to handle increased load simply by adding more hardware to
the cluster.
ADHERENCE TO INDUSTRY STANDARDS
We have invested significant resources in developing our architecture to
comply with widely accepted software industry standards for building large-scale
Internet applications. Our products use SQL for accessing relational database
systems, HTTP for Internet access, ISAPI and CGI for access to Internet servers,
SMTP and Pop3 for e-mail protocols, and XML and HTML for publishing. Our
software is written in C++ and Java, two widely accepted development languages
for developing object-oriented applications.
CLIENTS
Our client base spans multiple industry segments. The following is a
representative list of our clients who have purchased at least $50,000 of our
products in the last two years. We do not intend the identification of these
clients to imply that these clients are actively endorsing or promoting our
products.
E-COMMERCE
Acxiom
Dade Behring
Eddie Bauer
Host Logic
GOVERNMENT
DMC Chambersburg Plans
UK Post Office
Westchester County
INDEPENDENT SOFTWARE VENDORS
Centrobe
Creative Labs
Creative Solutions
Merant
TECHNOLOGY
Akamai Technologies
Black Box
Intel
Philips Mobile Computing
SERVICES PROVIDERS
EDS
Entex
Getronics Wang
IBM
Intelligroup
Lockheed Martin
National TechTeam
HEALTHCARE
IDX Systems
Shared Medical Systems
TELECOMMUNICATIONS
GTE
Pagenet
Verio
MANUFACTURING
Abbott Laboratories
John Deere
Ricoh
FINANCIAL SERVICES
American Express
AON Innovative Solutions
CASE STUDIES
The following case studies illustrate the issues faced by three
representative clients in providing quality e-service and the benefits from
deploying our products.
EDDIE BAUER
Eddie Bauer, a leading specialty retailer, offers active, casual lifestyle
clothing, accessories and home furnishings and decor for the bed and bath
through its two concepts: Eddie Bauer and Eddie Bauer Home. Renowned for its
commitment to customer service through its retail stores and catalog, Eddie
Bauer sought to offer the same level of personalized service at eddiebauer.com.
Specific objectives included improving e-mail
36
<PAGE> 41
response times, providing effective self-service, offering text chat and
enhancing the overall on-line shopping experience.
After evaluating competitive products, Eddie Bauer selected our Servicesoft
2000 suite of products because they wanted integrated solutions to maintain its
commitment to customer service. Implemented in October 1999, Servicesoft
WebAdvisor sessions grew from 5,000 sessions in October to over 25,000 sessions
in December. In addition, Servicesoft E-mailContact responded to over 20,000
queries during the month of December, enhancing overall service and freeing
customer service representatives to focus on other customer needs. The addition
of self-service and other Web site improvements helped reduce the company's
ratio of e-mails to orders by a factor of two. Most importantly, our Servicesoft
2000 suite enabled Eddie Bauer to extend its reputation for offering superior
customer service to its on-line customers.
WANG GLOBAL SERVICES
Wang Global Services, now a part of Getronics, one of the world's leading
providers of solutions and services to the professional users of information and
communication technology, provides help desk services to its strategic
enterprise customers. To keep customers satisfied, Getronics wanted a solution
that would enable their service agents to provide consistent responses, faster
problem resolution and a single means to access existing information. Additional
requirements for the new system included that it be cost effective, easily
customized and Web-enabled.
After evaluating competitive products, Getronics decided to purchase
Servicesoft WebAdvisor because it featured a knowledge base that could be built
and maintained easily by call center agents. Soon after deployment, 150 service
center agents were accessing the knowledge base approximately 1,000 times a day.
Servicesoft WebAdvisor allowed each of the company's agents to handle
approximately 80% more calls per day and answer 60% more questions without
escalation to a higher level of support. In addition, Servicesoft WebAdvisor
allowed Getronics to significantly reduce the training time for new agents.
Based on the initial success of Servicesoft WebAdvisor implementation, Getronics
recently placed an order to roll out our Servicesoft 2000 suite of products to
its help desk professionals globally.
GTE
GTE, a leading telecommunications provider with one of the industry's
broadest arrays of products and services, entered the Internet service provider
marketplace. The new service, GTE Internetworking, became the company's fastest
growing division, which brought a commensurate increase in phone calls to the
company's customer service center. GTE estimated that each customer phone call
cost the company $5 to $30, depending on the time required to resolve the
caller's problem, and that 80% of the calls were for questions that the customer
service staff had answered many times before. GTE was seeking to reduce call
volume into its call centers, minimize turnover among its Internet subscribers
and gain a competitive edge by keeping its customers satisfied.
After a thorough evaluation of a number of e-service software providers,
the company purchased Servicesoft WebAdvisor because of its ability to capture,
organize, and deliver answers through a knowledge base-enabled solution. With
our help, the company deployed the solution in just three months. Key features
of the system included the ability to let customers ask questions in everyday
language, select the answer that best fits their needs, track whether questions
were answered to their satisfaction, and allow them to request a return e-mail
or phone call from a service representative. After installing Servicesoft
WebAdvisor, GTE Internetworking quickly saw the number of self-service sessions
grow to more than 15,000 per week. Based on this initial success, GTE extended
Servicesoft WebAdvisor to its GTE Wireless site, which is now handling over
30,000 self-service sessions per week, and achieving significant monthly savings
by solving 65 to 75% of customer issues on-line. The success of these initial
implementations led the company to roll out Servicesoft WebAdvisor for its
Network Services, Digital Cable TV, and GTE Unlimited business units. In
addition, the company plans to launch Servicesoft WebAdvisor for its Long
Distance business unit in March 2000.
37
<PAGE> 42
SALES AND MARKETING
We market our solutions primarily through a direct sales force and
expanding indirect sales channels consisting primarily of distributors, system
integrators, value-added resellers, consultants and third-party resellers. We
use an assortment of marketing programs to create market awareness of
Servicesoft and our solutions and to generate leads. Programs range from
advertising, direct mail, trade shows, seminars, product and strategy updates to
industry analysts, public relationship activities, speaking engagements and
telemarketing to Web site and Web syndication efforts. Our marketing
organization creates materials to support the sales process, including
brochures, data sheets, case histories, return on investment analysis,
presentations, white papers, and demonstrations.
Initial sales activities typically include a rapid needs assessment, sales
presentation and demonstration followed by detailed technical reviews and
mapping of solutions to requirements. As of January 31, 2000, our direct sales
team consisted of 47 sales executives and support personnel. We have sales
personnel throughout North America with sales offices located domestically in
Natick and Concord, Massachusetts; San Francisco, California; Huntington Beach,
California; Oakbrook Terrace, Illinois; Independence, Ohio; and Plano, Texas;
and internationally in Toronto, Canada; London and Swindon, England; and
Antwerp, Belgium.
RESEARCH AND DEVELOPMENT
We have made substantial investments in research and development. We plan
to continue evaluating externally developed technologies for integration into
our product line, but we expect that most enhancements to existing and new
products will be developed internally.
In 1999, we directed the majority of our research and development
expenditure towards fully integrating our product offerings and platform changes
that provide us with the capability of building new applications and expanding
into new markets while doing so more quickly.
The market for our solutions is characterized by rapid technological
change, frequent new product introductions, evolving standards and changing
customer requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Our future success will depend in part on
our ability to anticipate changes, enhance our current products, develop and
introduce new products that keep pace with technological advancements and
address the increasingly sophisticated needs of our clients.
In order to keep pace with this rapidly changing environment, we devote
significant resources toward research and development. Our research and
development expenditures for fiscal 1997, 1998 and 1999 were approximately
$930,000, $1.2 million and $4.2 million. We expect that we will continue to
commit significant resources to research and development in the future. All
research and development expenses have been expensed as incurred.
COMPETITION
The market for our products and services is intensely competitive, evolving
and subject to rapid technological change. We expect the intensity of
competition to increase as current competitors expand their product offerings
and new competitors enter the market. We currently face competition for our
products primarily from systems designed by other e-service software vendors. We
expect that these vendors will continue to be a principal source of competition
for the foreseeable future. Competitors providing e-service solutions include
Brightware, eGain, Inference, Kana, Primus, Quintus, Serviceware and Silknet. In
addition, from time to time, we also compete with companies providing customer
relationship management, e-commerce and communications software such as
Broadvision, E.piphany, Lucent, Oracle, Siebel, Vantive, Vignette and others.
We believe that the principal competitive factors affecting our market
include referenceable customers, the breadth and depth of a given solution
including the integration of a knowledge base, product quality and performance,
customer service, core technology, product scalability and reliability, product
features, the ability to implement solutions quickly and the value of a given
solution. Although we believe that our solution
38
<PAGE> 43
currently competes favorably with respect to these factors, our market is
relatively new and is evolving rapidly. We may not be able to maintain our
competitive position against current and potential competitors, especially those
with significantly greater financial, marketing, service, support, technical and
other resources.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition and a larger installed based of customers than do we.
In addition, many of our competitors have well-established relationships with
our current and potential clients and have extensive knowledge of our industry.
It is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We also expect that competition
will increase as a result of industry consolidations.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely upon a combination of
copyright, trade secret and trademark laws and contractual restrictions. These
legal protections afford only limited protections for our proprietary rights. We
currently have ten trademark registrations and six pending trademark
applications in the United States and Canada.
Although we rely on copyright, trade secret and trademark law to protect
our technology, we believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product enhancements
and reliable product maintenance are more essential to establishing and
maintaining a technology leadership position. Competitors may develop
technologies that are similar or superior to our technology.
We license our software pursuant to signed license or shrink-wrap
agreements, which impose certain restrictions on the licensee's ability to
utilize the software. We seek to avoid disclosure of our intellectual property
by generally entering into confidentiality or license agreements with our
employees, consultants and alliance partners, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology or to develop products with the same functionality as our products.
Policing unauthorized use of our products is difficult, and we cannot be certain
that the steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect proprietary
rights as fully as do the laws of the United States. Litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such resulting
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, operating results and
financial condition.
In addition, substantial litigation regarding intellectual property rights
exists in the software industry. We have been subject to a claim of patent
infringement by a third party, which we subsequently settled by entering into a
license agreement. Our software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. Some of our competitors in the market for e-service software may have
filed or may intend to file patent applications covering aspects of their
technology that they may claim our technology infringes. Some of these
competitors may make a claim of infringement against us with respect to our
products and technology. Any resulting litigation could result in substantial
costs and diversion of resources, cause shipment delays or require us to enter
into licensing or royalty agreements. Such licensing or royalty agreements, if
required, may not be available on terms acceptable to us or at all.
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms.
These licensed components enhance features in our products but are not critical
to the operation of our products. Some of these components are available, at no
charge, to our customers from the supplier but are included in our products for
customer convenience. In cases where the licensed component provides an
operating feature, we believe there are alternative suppliers for the technology
from whom we may license the software. In addition, if we cannot maintain
licenses to the other third-party software included in our products,
distribution of our products could be delayed until equivalent software could
39
<PAGE> 44
be developed or licensed and integrated into our products, which could
materially adversely affect our business, operating results and financial
condition.
EMPLOYEES
As of January 31, 2000, we had a total of 250 employees. Of the total
employees, 78 were in sales, strategic alliances and marketing, 84 in research
development and technical support, 67 in professional services and 21 in finance
and administration. Our future performance depends in significant part upon the
continued service of our key technical, sales and marketing, and senior
management personnel, none of whom is bound by an employment agreement requiring
service for any defined period of time. The loss of the services of one or more
of our key employees could harm our business.
Our future success also depends on our continuing ability to attract, train
and retain highly qualified technical, sales and managerial personnel.
Competition for these personnel is intense. Due to the limited number of people
available with the necessary technical skills and understanding of the Internet,
we may have difficulty retaining or attracting key personnel in the future. None
of our employees is represented by a labor union. We have not experience any
work stoppages and consider our relations with our employees to be good.
FACILITIES
Our principal executive offices are located in Natick, Massachusetts, where
we lease approximately 44,000 square feet under a lease that expires in July
2005. In addition, we lease facilities and offices domestically in Concord,
Massachusetts; San Francisco, California; Huntington Beach, California; Oakbrook
Terrace, Illinois; Independence, Ohio; and Plano, Texas; and internationally in
Toronto, Canada; London and Swindon, England; and Antwerp, Belgium. We believe
that our facilities will be sufficient to meet our needs through at least the
next 12 months.
LEGAL PROCEEDINGS
Although we are from time to time engaged in legal proceedings incidental
to the conduct of our business, we are not currently a party to any material
legal proceedings.
40
<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, their ages and positions as of
February 14, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Christopher M. Butler..................... 45 President, Chief Executive Officer and Director
Daniel J. Kossmann........................ 43 Chief Financial Officer and Treasurer
Massood Zarrabian......................... 50 Executive Vice President, Product Operations
Chester S. Barnard, Jr.................... 47 Senior Vice President, Servicesoft Professional
Services
James S. Keller........................... 38 Senior Vice President, Strategic Alliances
Paul R. Maguire........................... 40 Vice President, Sales
Alf Saggese............................... 37 Managing Director, Europe
Jeffrey L. Whitney........................ 45 Vice President, Marketing
Mark S. Skapinker......................... 45 Chairman of the Board of Directors
Robert E. Davoli.......................... 51 Director
Sophie Forest............................. 31 Director
Christopher H. Greendale.................. 48 Director
Gary Rubinoff............................. 38 Director
</TABLE>
Christopher M. Butler has served as our President, Chief Executive Officer
and Director since August 1999. From March 1999 until joining Servicesoft, Mr.
Butler served as an independent consultant in the Internet service industry. In
June 1990, Mr. Butler founded Interactive Solutions, Inc., an Internet strategy
and services company that grew to 150 employees, where he served as President
until it was sold to Omnicom in March 1999.
Daniel J. Kossmann has served as our Chief Financial Officer and Treasurer
since December 1999. From June 1992 until joining Servicesoft, Mr. Kossmann was
Chief Financial Officer for Infinium, Inc., a company offering e-business
solutions, where he was responsible for finance, investor relations, information
systems, mergers and acquisitions, strategic partnerships, human resources and
operations.
Massood Zarrabian has served as our Executive Vice President, Product
Operations since July 1999. From January 1999 until joining Servicesoft, Mr.
Zarrabian served as the Vice President of Product Operations responsible for
product development, data collection and product management for Lewtan
Technologies, Inc., a software company specializing in securitized transactions,
and from October 1998 until January 1999, Mr. Zarrabian served as the Vice
President of Product Development at Lewtan. From July 1997 to October 1998, Mr.
Zarrabian held the positions of Executive Vice President and Chief Operating
Officer, responsible for product development, worldwide support, corporate
marketing, product management and information technology, and from July 1996 to
July 1997, he served as Executive Vice President, Product Operations,
responsible for product development, worldwide support and product management,
for Cayenne Software, Inc., a case tools company. From February 1994 to July
1996, Mr. Zarrabian held the positions of Vice President, Research and
Development and Vice President, Product Operations at Cayenne's predecessor
company, Bachman Information System.
Chester S. Barnard, Jr. has served as Senior Vice President, Servicesoft
Professional Services since joining Servicesoft in connection with the
acquisition of Internet Business Advantages in December 1999. From February 1999
until joining Servicesoft, Mr. Barnard served as the President and Chief
Executive Officer of Internet Business Advantages. He served as President of
Excalibur Group, a leading systems integration firm, from February 1997 to until
its acquisition by Baan/Vanenberg Ventures Company in May 1998. After the
acquisition, Mr. Barnard served as Vice President, Baan MidMarket Outsourcing
until February 1999. From April 1993 through January 1997, Mr. Barnard was a
Director of Business Development for Arthur Andersen & Co.
41
<PAGE> 46
James S. Keller has served as Senior Vice President, Strategic Alliances
since October 1999. From July 1999 to October 1999, Mr. Keller served as an
independent consultant in the Internet services industry. From October 1998
until July 1999, Mr. Keller served as Vice President, Worldwide Professional
Services for Open Market, Inc., an e-business software company. From October
1996 to October 1998, Mr. Keller held the position of Vice President,
Outsourcing, Services Division at Genesys Software Systems, Inc., a human
resources software company. From June 1993 to October 1996, Mr. Keller served as
a Director of Consulting Services for Hyperion Software, Inc., a business
analysis software company that acquired Pillar Corporation in 1994.
Paul R. Maguire has served as Vice President, Sales since February 1999.
From January 1997 through January 1999, Mr. Maguire served as Vice President of
World-Wide Business Development at Segue Software, Inc., a provider of
e-business reliability solutions. From January 1994 to January 1997 he served as
Vice President of Sales for Segue.
Alf Saggese has served as Managing Director, Europe since December 1999.
From August 1999 to November 1999, he served as Managing Director, Europe,
Middle East and Africa for Webline Communication, a customer Internet management
software company. From November 1995 through July 1999, Mr. Saggese served as
the Managing Director, Italy, Central Europe, Middle East and Africa for Genesys
Telecommunications, Ltd., a leading computer telephony integration software
applications company. From January 1992 to November 1995, Mr. Saggese served as
the European Sales and Marketing Director for Rockwell Electronic Commerce, a
manufacturer of automatic call distributors and computer telephony integration
middleware applications.
Jeffrey L. Whitney has served as Vice President, Marketing since September
1998. From May 1998 through August 1998 he served as an independent management
consultant. From October 1997 through April 1998, Mr. Whitney was Vice President
of Marketing of Prophet 21, a provider of enterprise distribution software, and
from February 1995 to October 1997 he was Vice President of Marketing of
Bluestone Software, Inc., a provider of Web application development and
deployment solutions.
Mark S. Skapinker has served as Chairman of the Board of Directors of
Servicesoft since our merger with Balisoft in February 1999 and served as our
Chief Executive Officer from February 1999 to August 1999. Since November 1999,
Mr. Skapinker has also served as Managing Director at Brightspark, Inc., a
venture capital and Internet incubation firm located in Toronto, Canada. Mr.
Skapinker founded and served as the Chief Executive Officer of Balisoft from
June 1997 until our merger with Balisoft. From April 1996 to June 1997, Mr.
Skapinker served as an independent consultant to software and Internet
companies. From May 1988 to November 1995, Mr. Skapinker served as president of
Delrina Corporation, an electronics forms and fax software company that he
co-founded and sold to Symantec Corporation in July 1995, and from November 1995
through March 1996, he served as Vice President for Symantec. Mr. Skapinker is a
director of Newkidco International Inc., a developer and publisher of video
games, and Multiactive Software, Inc., a developer of e-business front office
solutions. He also serves as a director of several privately held companies.
Robert E. Davoli has served as a director of Servicesoft since March 1998.
Since January 1995, Mr. Davoli has served as General Partner at Sigma Partners,
a venture capital firm. Mr. Davoli is a director of Vignette Corporation,
Versata, Inc., and ISS Group, Inc., and he also serves as a director of several
privately held companies.
Sophie Forest has served as a director of Servicesoft since June 1999.
Since October 1996, Ms. Forest has served as a Director, Information Technology
Investments for Sofinov, Societe Financiere d'Innovation Inc., a high tech
investment group and wholly owned subsidiary of Caisse de Depot et Placement du
Quebec. From January 1996 to October 1996, Ms. Forest served as a Director,
Mergers and Acquisitions for Bell Canada, a telecommunications company. From
October 1992 to January 1996, Ms. Forest served as a portfolio manager for GTI
Capital, a venture capital firm. Ms. Forest also serves as a director of several
privately held companies.
Christopher H. Greendale has served as a director of Servicesoft since July
1998. Since January 1999, Mr. Greendale has served as a Managing Director of
Internet Capital Group, Inc., a business-to-business
42
<PAGE> 47
e-commerce company. From January 1998 to December 1998, Mr. Greendale was
engaged as an independent investor. In 1991, Mr. Greendale co-founded Cambridge
Technology Partners, where he served in various capacities from 1991 through
December 1997, most recently as Executive Vice President, Marketing. Mr.
Greendale serves as a director of Clarify Inc. and as Chairman of Breakaway
Solutions Inc. and numerous privately held corporations.
Gary Rubinoff has served as a director of Servicesoft since our merger with
Balisoft in February 1999. Since April 1997, Mr. Rubinoff has served as a
partner of J.L. Albright Venture Partners, a venture capital fund. From July
1993 to April 1997, Mr. Rubinoff served as a Vice President for Jefferson
Partners Capital Inc., a venture capital fund. Mr. Rubinoff intends to resign
from his position as a director of Servicesoft prior to the completion of this
offering.
BOARD OF DIRECTORS AND COMMITTEES
Following this offering, our Board of Director will consist of six
directors divided into two classes, with each class serving for a term of two
years. At each annual meeting of stockholders, directors will be elected for a
two-year term to succeed the directors whose terms are expiring. Sophie Forest,
Christopher H. Greendale and Mark Skapinker are Class I directors whose terms
will expire in 2001, and Christopher M. Butler and Robert E. Davoli are Class II
directors whose terms will expire in 2002.
The Board of Directors has an audit committee which reviews and supervises
our financial controls, including the selection of our auditors, reviews our
books and accounts, meets with our officers regarding financial controls, acts
upon recommendations of the auditors and takes any further actions the audit
committee deems necessary to complete an audit of our books and accounts, as
well as addressing other matters that may come before it or as directed by the
Board of Directors. The audit committee currently consists of three directors,
Sophie Forest and Christopher H. Greendale and Robert Davoli.
The Board of Directors also has a compensation committee, which reviews and
recommends the compensation and benefits for our executive officers, administers
our stock plans and performs other duties as may from time to time be determined
by the Board of Directors, except that the full Board of Directors will grant
any options to our officers or executive officers. The compensation committee
currently consists of two directors, Robert E. Davoli and Sophie Forest.
The Board of Directors may establish, from time to time, other committees
to facilitate the management of our business.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable and necessary expenses
incurred in connection with attendance at meetings of the Board of Directors or
its committees. We may, in our discretion, grant stock options and other equity
awards to our non-employee directors from time to time under our stock incentive
plans. In June 1999, we issued options to purchase 25,000 shares of our common
stock to Sophie Forest pursuant to our Amended and Restated 1994 Stock Option
Plan. Under the option agreement, these options vest one-third upon the first
anniversary of the commencement of her service with us and quarterly thereafter
over two years so long as a service relationship exists between us and Ms.
Forest. Under the Amended and Restated 1994 Stock Option Plan, if we are
acquired, one-half of her unvested options will vest.
In November 1999, we issued restricted common stock pursuant to our 1999
Stock Option and Grant Plan to certain of our directors as follows:
<TABLE>
<CAPTION>
AGGREGATE
DIRECTOR NUMBER OF SHARES PURCHASE PRICE
-------- ---------------- --------------
<S> <C> <C>
Robert E. Davoli......................................... 25,000 $25,000
Christopher H. Greendale................................. 12,000 12,000
Gary Rubinoff............................................ 10,000 10,000
</TABLE>
43
<PAGE> 48
Under the restricted stock agreements, these shares vest one-third in April
2000, and quarterly thereafter over two years so long as a service relationship
exists between us and the director. We have the right to repurchase any unvested
shares at cost upon the termination of the director's service relationship with
us. Under the 1999 Stock Option and Grant Plan, if we are acquired, one-half of
the unvested shares under each award will vest in full.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves on the Board of Directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our Board of Directors or compensation committee. Mark S.
Skapinker, our former Chief Executive Officer, served on our compensation
committee while serving as our Chief Executive Officer.
EXECUTIVE OFFICERS
Each officer serves at the discretion of our Board of Directors and holds
office until his or her successor is elected and qualified or until his earlier
resignation or removal. There are no family relationships among any of our
directors or executive officers.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
earned for services rendered to us by our current Chief Executive Officer, our
former Chief Executive Officers, our former Chief Financial Officer and each of
our three other most highly compensated executive officers whose salary and
bonus compensation for the fiscal year ended December 31, 1999 exceeded
$100,000. We refer to these executives collectively as our Named Executive
Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL -------------------------
COMPENSATION SECURITIES
------------------ OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
- ------------------------- -------- ------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Christopher M. Butler......... $ 72,051 $33,333 -- --(b) -- --
President and Chief
Executive Officer(a)
Mark S. Skapinker............. 141,697 27,108 $36,145 -- -- --
Former Chief
Executive Officer(c)
David P. Tarrant.............. 125,000 33,334 -- -- -- $85,538(e)
Former Chief
Executive Officer(d)
Paul R. Maguire............... 125,731 -- 84,669 -- 110,000 --
Vice President, Sales
Jeffrey L. Whitney............ 140,000 42,000 -- -- 18,572 --
Vice President,
Marketing
Massood Zarrabian............. 85,269 24,000 -- -- 180,000 --
Executive Vice
President, Product
Operations
Stephen M. Harrison........... 124,583 26,000 -- -- -- 5,417(e)
Former Chief
Financial Officer
</TABLE>
- ------------
(a) Mr. Butler joined us as our President and Chief Executive Officer in August
1999 and earns an annual salary of $200,000.
44
<PAGE> 49
(b) At the end of the fiscal year ended December 31, 1999, Mr. Butler held
833,502 shares of restricted stock, with an aggregate value of $6,668,016.
The value of the restricted stock holdings was calculated on the basis of
the fair market value of $8.00 per share at December 31, 1999, as determined
by the Board of Directors for financial reporting purposes, minus the
consideration paid for such shares. Dividends are payable on restricted
stock to the extent payable on shares of our common stock. Of these shares,
208,375 will vest in August 2000, and the remainder will vest quarterly
thereafter over three years.
(c) Mr. Skapinker served as our Chief Executive Officer from February 1999 until
August 1999.
(d) Mr. Tarrant served as our Chief Executive Officer until February 1999.
(e) Consists of severance payment.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
during the fiscal year ended December 31, 1999 to the Named Executive Officers.
The amounts described in the following table under the heading "Potential
Realizable Value at Assumed Rates of Stock Price Appreciation for Option Term"
represents hypothetical gains that could be achieved for the options if
exercised at the end of the option term. These gains are based on assumed rates
of stock appreciation of 0%, 5% and 10% compounded annually from the date the
options were granted at their expiration date. Actual gains, if any, on stock
option exercises will depend on the future performance of the common stock and
the date on which the options are exercised.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF TOTAL AT ASSUMED ANNUAL RATES
SHARES OPTIONS GRANTED OF STOCK PRICE APPRECIATION
UNDERLYING TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------------
NAME GRANTED FISCAL YEAR(A) PER SHARE DATE 0% 5% 10%
---- ---------- ---------------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher M. Butler... -- -- -- -- -- -- --
Mark S. Skapinker....... -- -- -- -- -- -- --
David P. Tarrant(b)..... -- -- -- -- -- -- --
Paul R. Maguire......... 94,150(c) 3.3% $0.18 03/05/09 $143,108 $243,848 $ 398,255
15,850(d) .6 1.00 12/01/09 110,950 190,676 313,038
Jeffrey L. Whitney...... 18,572(d) .6 1.00 12/01/09 130,004 223,421 366,797
Massood Zarrabian....... 120,000(c) 4.2 0.50 08/19/09 300,000 526,800 873,600
60,000(d) 2.1 1.00 12/01/09 420,000 721,800 1,185,000
Stephen M. -- -- -- -- -- -- --
Harrison(d)...........
</TABLE>
- ------------
(a) Based on options to purchase an aggregate of 2,874,651 shares granted to
officers and employees during the fiscal year ended December 31, 1999.
(b) On September 15, 1999, Mr. Tarrant exercised options to purchase 368,122
shares of common stock. All of Mr. Tarrant's options were vested pursuant to
the terms of a letter agreement dated as of July 1999. On November 30, 1999,
Mr. Harrison exercised options to purchase 35,746 shares of common stock.
The remaining unvested portions of Mr. Harrison's unexercised options were
cancelled.
(c) Each of these option grants vest one-fourth on the first anniversary of the
grant date, and monthly thereafter over three years. One-half of the
outstanding unvested option shares will vest if the optionee is terminated
without cause on or within one year of our acquisition. Each of the options
has a ten-year term, subject to earlier termination in the event of the
optionee's cessation of service with us.
(d) Each of these option grants vest 28% on the six-month anniversary of the
grant date, and 2% monthly thereafter over three years. One-half of the
outstanding unvested option shares will vest if the optionee is terminated
without cause on or within one year of our acquisition. Each of the options
has a ten-year term, subject to earlier termination in the event of the
optionee's cessation of service with us.
45
<PAGE> 50
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options to purchase common stock held by the Named Executive
Officers. There was no public trading market for our common stock as of December
31, 1999. Accordingly, the values of the unexercised in-the-money options have
been calculated on the basis of the fair market value at that time of $8.00 per
share, as determined by the Board of Directors for financial reporting purposes.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED VALUE --------------------------- ---------------------------
NAME IN EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Christopher M. Butler......... -- -- -- -- -- --
Mark S. Skapinker............. -- -- 10,543 28,385 $ 82,446 $ 221,971
David P. Tarrant.............. 368,122 $1,038,104(a) -- -- -- --
Paul R. Maguire............... -- -- -- 110,000 -- 847,203
Jeffrey L. Whitney............ -- -- 26,667 83,333 208,536 636,435
Massood Zarrabian............. -- -- -- 180,000 -- 1,320,000
Stephen M. Harrison........... 35,746 216,978(b) -- -- -- --
</TABLE>
- ---------------
(a) The value realized was calculated on the basis of the fair market value at
the time of exercise of $3.00 per share, as determined by the Board of
Directors for financial reporting purposes.
(b) The value realized was calculated on the basis of the fair market value at
the time of exercise of $6.25 per share, as determined by the Board of
Directors for financial reporting purposes.
1999 STOCK OPTION AND GRANT PLAN
Our 1999 Stock Option and Grant Plan permits us to grant incentive stock
options, non-qualified stock options and restricted and unrestricted stock to
our officers, employees, independent directors, consultants, advisors and key
persons. The 1999 Stock Option and Grant Plan initially allows for the issuance
of 1,876,498 shares of common stock. Upon completion of this offering and on
each January 1st afterwards, the number of reserved shares will automatically
increase by the greater of four percent of our issued and outstanding capital
stock on a fully-diluted basis or that number of shares as would be necessary to
maintain the reserved number of shares at 20% of our issued and outstanding
capital stock on a fully-diluted basis. The number of shares reserved for
issuance under the 1999 Stock Option and Grant Plan will not at any time exceed
10,000,000 shares. As of February 29, 2000, 1,675,895 shares were issued and
outstanding under the 1999 Stock Option and Grant Plan.
The 1999 Stock Option and Grant Plan is administered by our compensation
committee, except with respect to reporting persons under Section 16 of the
Securities Exchange Act of 1934, as amended, for which the 1999 Stock Option and
Grant Plan is administered by our Board of Directors. Subject to the provisions
of the 1999 Stock Option and Grant Plan, the compensation committee may select
the individuals eligible to receive awards, determine the terms and conditions
of the awards granted, accelerate the vesting schedule of any award and
generally administer and interpret the plan.
The exercise price of options granted under the 1999 Stock Option and Grant
Plan is determined by the compensation committee at the time of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code
of 1986, as amended, may not be granted at an exercise price less than the fair
market value of the common stock on the date of grant, or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of the company. Non-qualified stock
options may be granted at prices that are less than the fair market value of the
underlying shares on the date granted.
46
<PAGE> 51
Options are typically subject to vesting schedules and terminate ten years
from the date of grant. The vesting date and requirements of each restricted
stock award are determined by the compensation committee. The compensation
committee may place conditions on the restricted stock awards such as continued
employment or the achievement of performance goals or objectives in a grant
document.
Upon the exercise of options, the option exercise price must be paid in
full either in cash or by certified or bank check or other instrument acceptable
to the compensation committee or, in the sole discretion of the committee, by
delivery of shares of common stock that have been owned by the optionee free of
restrictions for at least six months. The exercise price may also be delivered
to us (a) by the optionee in the form of a promissory note if the loan of such
funds to the optionee has been authorized by the Board of Directors and the
optionee pays so much of the exercise price as represents the par value of the
common stock acquired in a form other than a promissory note and (b) by a broker
under irrevocable instructions to the broker selling the underlying shares from
the optionee.
Restricted stock may not be sold, assigned, transferred or pledged except
as specifically provided in the grant document. If a restricted stock award
recipient's employment or other relationship with us terminates or other events
specified in the grant document occur, we have the right to repurchase some or
all of the shares of stock subject to the award at the purchase price of the
stock.
In the event of any merger, reorganization or sale in which the outstanding
awards issued under the 1999 Stock Option and Grant Plan are not assumed by the
surviving entity, or equivalent substitute awards are not issued by such issuing
entity, 50% of the outstanding awards issued under the 1999 Stock Option and
Grant Plan that are not then vested will become fully vested and exercisable
upon the closing of the transaction. In such event, all awards issued under the
1999 Stock Option and Grant Plan will terminate upon the closing of the
transaction. In the event of any merger, reorganization or sale, 50% of the
outstanding unvested options held by employees that are terminated without cause
on or within twelve months following the merger, reorganization or sale will
become fully vested. In addition, 50% of the outstanding unvested options held
by non-employee directors will become fully vested and exercisable upon the
closing of the merger, reorganization or sale. All participants under the 1999
Stock Option and Grant Plan will be permitted to exercise, for a period of 15
days before any termination, all awards held by them which are then exercisable
or will become exercisable upon the closing of the transaction.
AMENDED AND RESTATED 1994 STOCK OPTION PLAN
The Amended and Restated 1994 Stock Option Plan permits us to grant
incentive stock options and nonstatutory stock options to our employees,
consultants and other key personnel including our directors. The Amended and
Restated 1994 Stock Option Plan allows for the issuance of 2,200,000 shares of
common stock. As of February 29, 2000, 2,057,095 shares or options to purchase
shares were issued and outstanding under the Amended and Restated 1994 Stock
Option Plan.
The Amended and Restated 1994 Stock Option Plan is administered by our
compensation committee. Subject to the provisions of the Amended and Restated
1994 Stock Option Plan, the compensation committee may select the individuals
eligible to receive awards, determine the number of shares to be covered by each
option, the terms and conditions of the option granted and the option exercise
price of each option granted, and generally administer and interpret the plan.
Under present law, incentive stock options and options intended to qualify as
performance-based compensation may not be granted at an exercise price less than
the fair market value of the common stock at the date of grant, or less than
110% of the fair market value in the case of incentive stock options granted to
optionees holding more than 10% of the voting power of the company.
Non-qualified stock options may be granted at prices that are less than the fair
market value of the underlying shares or the date granted.
When we become subject to Section 162(m) of the Internal Revenue Code,
which denies a deduction to publicly held corporations for compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1,000,000 for any covered employee, no person may be granted options
under the Amended and Restated 1994 Stock Option Plan covering more than
1,000,000 shares of common stock in any calendar year.
47
<PAGE> 52
Options are typically subject to vesting schedules, terminate ten years
from the date of grant and, in the case of incentive stock options, may be
exercised for specified periods after termination of the optionee's employment.
In the event of any merger, reorganization or sale, 50% of the outstanding
unvested options held by employees that are terminated without cause on or
within twelve months following the merger, reorganization or sale will become
fully vested. In addition, 50% of the outstanding unvested options held by
non-employee directors will become fully vested and exercisable upon the closing
of the merger, reorganization or sale.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our Board of Directors has adopted our 2000 Employee Stock Purchase Plan
subject to stockholder approval. We will commence purchasing stock under the
2000 Employee Stock Purchase Plan subject to the effectiveness of this offering
to encourage our employees to remain with us. We intend for this plan to qualify
under Section 423 of the Internal Revenue Code.
The 2000 Employee Stock Purchase Plan permits our eligible employees to
purchase common stock through payroll deductions of up to 10% of their
compensation. Under this Plan, no employee may purchase common stock worth more
than $25,000 in any calendar year. Further, no employee may purchase more than
500 shares in any six-month purchase period.
We will implement the 2000 Employee Stock Purchase Plan with six-month
offering periods, with the first offering period starting on April 1. Subsequent
offering periods will begin on each October 1 and April 1. The price of the
common stock purchased under the 2000 Employee Stock Purchase Plan will be the
lesser of 85% of the fair market value on the first day of an offering period
and 85% of the fair market value on the last day of a purchase period. This Plan
terminates ten years after the date of adoption by our Board of Directors. The
Board of Directors may amend or terminate the Plan at any time. We have not
issued any shares of common stock under this Plan.
Employees of Servicesoft and certain participating foreign subsidiaries
generally will be eligible to participate in the Plan if they are customarily
employed by us for more than 20 hours per week, and are not, and would not
become as a result of being granted an option under this Plan, five percent
stockholders of us or our subsidiaries. We have reserved 500,000 shares of
common stock for issuance under the 2000 Employee Stock Purchase Plan.
INTERNET BUSINESS ADVANTAGES STOCK OPTION PLAN
In connection with the Internet Business Advantages acquisition, we assumed
all of the outstanding options to purchase Internet Business Advantages stock,
and we have reserved 53,760 shares of our common stock for issuance upon
exercise of these assumed options.
EMPLOYMENT ARRANGEMENTS
Christopher M. Butler's offer letter, dated August 9, 1999, provides for an
initial annual salary of $200,000 and an annual bonus of up to $100,000, based
on the achievement of established quarterly goals. In October 1999, we issued to
Mr. Butler 833,502 shares of our common stock pursuant to a stock restriction
agreement at a purchase price of $1.00 per share. Under the terms of the
agreement, 208,375 shares vest in August 2000, and the remainder vests quarterly
over three years, so long as Mr. Butler remains employed by us. The unvested
shares are subject to repurchase by us at cost upon termination of employment.
If we are acquired, 416,751 shares will vest in full and our right to repurchase
those unvested shares will automatically lapse. If Mr. Butler is demoted or
terminated within one year of our acquisition, his unvested shares will vest in
full and our right to repurchase all of his shares will automatically lapse.
Daniel J. Kossmann's offer letter, dated November 23, 1999, provides for an
initial annual salary of $180,000. In November 1999, we issued to Mr. Kossmann
180,000 shares of our common stock pursuant to a restricted stock agreement at a
price of $1.00 per share. Under the terms of the agreement, 45,000 shares vest
in November 2000, and the remainder vests monthly over a three-year period. The
unvested shares are subject
48
<PAGE> 53
to repurchase by us at cost upon termination of employment. If we are acquired,
one-half of the unvested shares will vest in full and our right to repurchase
those shares will automatically lapse. If Mr. Kossmann is demoted or terminated
within one year of our acquisition, his unvested shares will vest in full and
our right to repurchase all of his shares will automatically lapse.
Massood Zarrabian's offer letter, dated June 9, 1999, provides for an
initial annual salary of $180,000. In August 1999, we issued to Mr. Zarrabian
options to purchase 120,000 shares of common stock at an exercise price of $.50
per share. These options vest at the rate of 25% on August 19, 2000 and 2.08%
per month thereafter. In December 1999, we issued to Mr. Zarrabian options to
purchase an additional 60,000 shares of common stock at an exercise price of
$1.00 per share. These options vest at the rate of 28% on June 1, 2000 and 2%
per month thereafter. If Mr. Zarrabian is terminated on or within one year of
our acquisition, under the terms of our Amended and Restated 1994 Stock Option
Plan, one-half of his unvested shares will vest in full.
Jeffrey L. Whitney's offer letter, dated August 30, 1998, provides for an
initial annual salary of $140,000. In October 1998, we issued to Mr. Whitney
options to purchase 91,428 shares of common stock at an exercise price of $.18
per share. These options vest at the rate of 25% on October 6, 1999 and 2.08%
per month thereafter. In December 1999, we issued to Mr. Whitney options to
purchase an additional 18,572 shares of common stock at an exercise price of
$1.00 per share. These options vest at the rate of 28% on June 1, 2000 and 2%
per month thereafter. If Mr. Whitney is terminated on or within one year of our
acquisition, under the terms of our Amended and Restated 1994 Stock Option Plan,
one-half of his unvested shares will vest in full.
Paul R. Maguire's offer letter, dated January 20, 1999, provides for an
initial annual salary of $140,000. In March 1999, we issued to Mr. Maguire
options to purchase 94,150 shares of common stock at an exercise price of $.18
per share. These options vest at the rate of 25% on March 5, 2000 and 2.08% per
month thereafter. In December 1999, we issued to Mr. Maguire options to purchase
an additional 15,850 shares of common stock at an exercise price of $1.00 per
share. These options vest at the rate of 28% on June 1, 2000 and 2% per month
thereafter. If Mr. Maguire is terminated on or within one year of our
acquisition, under the terms of our Amended and Restated 1994 Stock and Option
Plan, one-half of his unvested shares will vest in full.
SEVERANCE AGREEMENTS
In connection with our merger with Balisoft, David P. Tarrant, our then
President and Chief Executive Officer, relinquished his role as Chief Executive
Officer. In July 1999, Mr. Tarrant resigned as President of Servicesoft. Under
the terms of a letter agreement, Mr. Tarrant is entitled to receive his annual
salary of $200,000 per year through August 2000. We also paid Mr. Tarrant a
bonus of $33,334 for 1999. In addition, all of Mr. Tarrant's unvested options
immediately vested. Mr. Tarrant exercised options to purchase 368,122 shares of
common stock for an aggregate exercise price of $68,471. In connection with the
exercise by Mr. Tarrant of his options, we loaned him an amount equal to the
aggregate purchase price at a per annum rate of interest at 6%. We have forgiven
in full our loan to Mr. Tarrant.
In connection with our merger with Balisoft, Mark S. Skapinker, the then
Chief Executive Officer of Balisoft, became our Chief Executive Officer. In
August 1999, Mr. Skapinker relinquished his role as our Chief Executive Officer,
while continuing to serve as our Chairman. Under a letter agreement, Mr.
Skapinker received his annual salary of $180,000 through November 1999. Mr.
Skapinker's unvested options continue to vest so long as he remains a director
of Servicesoft.
On November 30, 1999, Stephen M. Harrison, our Chief Financial Officer,
resigned. Under the terms of a letter agreement, Mr. Harrison is entitled to
receive his annual salary of $175,000 through July 7, 2000. In addition, 9,750
of Mr. Harrison's unvested options to purchase our common stock immediately
vested and the remaining unvested portion of his options was cancelled. On
November 30, 1999, Mr. Harrison exercised the vested portion of his outstanding
options for 35,746 shares of common stock for an aggregate purchase price of
$6,434.
49
<PAGE> 54
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors to us or our
stockholders for monetary damages for breaches of their fiduciary duty,
including breaches involving negligence or gross negligence in business
combinations, unless the director has breached his or her duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or a knowing
violation of law, paid a dividend or approved a stock repurchase in violation of
the Delaware General Corporation Law or obtained an improper personal benefit.
This provision does not alter a director's liability under the federal
securities laws or to parties other than us or our stockholders and does not
affect the availability of equitable remedies, such as an injunction or
rescission, for breach of fiduciary duty.
Our by-laws provide that directors and officers shall be, and in the
discretion of the Board of Directors, non-officer employees may be, indemnified
by us to the fullest extent authorized by Delaware law, as it now exists or may
in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on our behalf. The by-laws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any by-law, agreement, vote of stockholders or
otherwise. We also have directors' and officers' insurance against certain
liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or controlling persons as described
above, we have been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
50
<PAGE> 55
CERTAIN TRANSACTIONS
Series G Preferred Stock. In February 1998, we raised capital to finance
our operations through the sale of an aggregate of 4,667,969 shares of Series G
preferred stock to various investors for $1.28 per share for an aggregate of
$5,975,000.
The following table summarizes the shares of Series G preferred stock
purchased by our executive officers, directors and principal stockholders during
this time period. For more detail on shares held by these purchasers, see
"Principal Stockholders."
<TABLE>
<CAPTION>
SHARES OF
SERIES G AGGREGATE
PRINCIPAL STOCKHOLDERS PREFERRED STOCK CONSIDERATION
- ---------------------- --------------- -------------
<S> <C> <C>
Internet Capital Group, Inc. ............................... 1,171,875 $1,500,000
Sigma Associates IV, L.P. .................................. 315,532 403,881
Sigma Investors IV, L.P. ................................... 39,192 50,166
Sigma Partners IV, L.P. .................................... 1,207,776 1,545,953
DIRECTORS
- ------------------------------------------------------------
Christopher H. Greendale.................................... 97,656 125,000
</TABLE>
Balisoft Merger; Series H Preferred Stock. In February 1999, we merged
with Balisoft. In connection with the merger, our Series H preferred stock was
created and our Series G preferred stock and Series F preferred stock were
converted into Series H preferred stock. Also as a result of the merger, all
outstanding shares of Balisoft common and preferred stock were converted into
shares of exchangeable common stock and exchangeable preferred stock of our
subsidiary, Servicesoft Technologies Canada Inc.
The following table summarizes the shares of exchangeable common and
exchangeable preferred stock of Servicesoft Canada received by our executive
officers, directors and principal stockholders as a result of these
transactions. For more detail on shares held by these purchasers, see "Principal
Stockholders."
<TABLE>
<CAPTION>
SHARES OF SHARES OF
EXCHANGEABLE EXCHANGEABLE
PRINCIPAL STOCKHOLDERS PREFERRED STOCK COMMON STOCK
- ---------------------- --------------- ------------
<S> <C> <C>
Gemini Israel, L.P. ........................................ 226,820
Gemini Israel II Parallel Fund L.P. ........................ 34,023
Advent PGGM Gemini L.P. .................................... 306,207
J.L. Albright II Venture Fund L.P. ......................... 708,808
Sofinov, Societe Financiere d'Innovation.................... 708,808
DIRECTORS AND OFFICERS
- ------------------------------------------------------------
3007618 Canada, Inc. ....................................... 56,710(a) 97,319(b)
Mark S. Skapinker........................................... 1,109,434(b)
</TABLE>
- ------------
(a) Subsequently converted into 56,710 shares of Series H preferred stock, and,
in April 1999, transferred to LRJ Technologies, Inc.
(b) Subsequently converted into an aggregate of 1,206,753 shares of our common
stock, and, in April 1999, transferred to LRJ Technologies, Inc.
Series I and Series J Preferred Stock. In June and August 1999, we issued
an aggregate of 3,982,271 shares of our Series I convertible preferred stock at
a price of $4.10 per share for an aggregate of $16,327,310. In January 2000, we
issued an aggregate of 3,481,478 shares of our Series J convertible preferred
stock at a price of $9.03 per share for an aggregate of $31,437,989.
51
<PAGE> 56
The following table summarizes the shares of Series I and J preferred stock
purchased by our executive officers, directors and principal stockholders. For
more detail on shares held by these purchasers, see "Principal Stockholders."
<TABLE>
<CAPTION>
SHARES OF SERIES I AGGREGATE SHARES OF SERIES J AGGREGATE
PRINCIPAL STOCKHOLDERS PREFERRED STOCK CONSIDERATION PREFERRED STOCK CONSIDERATION
---------------------- ------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
CIBC WMV Inc...................... 1,219,512 $5,000,000 350,831 $3,168,004
Financial Technologies Ventures... 975,610 4,000,000 280,731 2,535,001
Gemini Capital Fund............... 487,805 2,000,000 306,423 2,766,997
Internet Capital Group, Inc....... 92,868 380,761 208,084 1,878,999
J.L. Albright II Venture Fund,
L.P............................. 104,445 428,223 147,287 1,330,002
Sigma Partners.................... 123,825 507,683 385,271 3,478,997
Sofinov, Societe Financiere
d'Innovation.................... 853,659 3,500,000 442,967 3,999,992
DIRECTORS AND OFFICERS
Mark S. Skapinker................. 27,685 249,996
Christopher M. Butler............. 55,371 500,000
Daniel J. Kossmann................ 16,611 149,997
Massood Zarrabian................. 22,148 199,996
Chester S. Barnard, Jr............ 2,769 25,004
Alf Saggese....................... 9,967 90,002
Paul R. Maguire................... 5,537 49,999
Jeffrey L. Whitney................ 5,537 49,999
James Keller...................... 9,967 90,002
</TABLE>
Director Representation. Five of the principal stockholders holding
exchangeable preferred stock of Servicesoft Canada and Series H, Series I and
Series J preferred stock are represented on our Board of Directors. Christopher
H. Greendale is a Managing Director of Internet Capital Group. Gary Rubinoff,
who intends to resign from his position as a Servicesoft director prior to the
completion of this offering, is a partner of J.L. Albright Venture Partners.
Robert E. Davoli is a General Partner of Sigma Partners. Sophie Forest serves as
Director, Information Technology of Sofinov, Societe Financiere d'Innovation.
Mark Skapinker is the controlling shareholder of LRJ Technologies, Inc.
Internet Business Advantages Acquisition. In December 1999, we acquired
Internet Business Advantages. In connection with the merger, we hired the Chief
Executive Officer of Internet Business Advantages, Chester S. Barnard, Jr., as
our Senior Vice President, Servicesoft Professional Services. Mr. Barnard
received 48,780 shares of our common stock in connection with the merger. Robert
E. Davoli, currently a Director of Servicesoft, also served on the Board of
Directors of Internet Business Advantages.
Employee Loans. In October 1999, we loaned $833,502 to Christopher M.
Butler, our Chief Executive Officer, for the purchase by Mr. Butler of 833,502
shares of our common stock. Mr. Butler issued a promissory note to us bearing
interest at the rate of 7.00% per annum, which note is secured by a pledge of
the shares acquired. In November 1999, we loaned $180,000 to Daniel J. Kossmann,
our Chief Financial Officer, for the purchase by Mr. Kossmann of 180,000 shares
of our common stock. Mr. Kossmann issued a promissory note to us bearing
interest at the rate of 7.00% per annum, which note is secured by a pledge of
the shares acquired.
52
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock as of January 31, 2000 and as adjusted to reflect the
sale of the common stock offered hereby, by:
- all persons who own beneficially 5% or more of our common stock;
- each of the Named Executive Officers and our Chief Financial Officer;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned,
subject to community property laws, where applicable. Beneficial ownership is
determined in accordance with the rules issued by the SEC. Under these rules,
beneficial ownership includes any shares which the individual or entity has sole
or shared voting or investment power and shares of common stock subject to
options held that are currently exercisable or exercisable within 60 days of
January 31, 2000. The applicable percentage of "beneficial ownership" after the
offering is based upon 23,721,174 shares of common stock outstanding, which
includes shares issuable upon conversion of all outstanding shares of
convertible preferred stock upon completion of this offering and shares issuable
upon exchange of the exchangeable common stock of Servicesoft Technologies
Canada, plus any shares subject to options or warrants held by each individual
or entity.
The addresses of the listed stockholders are as follow:
- CIBC WMV Inc., 161 Bay Street, 8th Floor, BCE Place, Toronto, Ontario,
M5J 2F8, Canada;
- Financial Technologies Ventures, 601 California Street, Suite 2200, San
Francisco, California 94108;
- Gemini Capital Fund, 11 Galgalei Haplada Street, P.O. Box 112548,
Industrial Zone, Herzliya 46733, Israel;
- J.L. Albright II Venture Fund, L.P. and Gary Rubinoff, Canada Trust
Tower, BCE Place, Suite 440, 161 Bay Street, Toronto, Ontario M5J 2S1,
Canada;
- Sigma Partners and Robert E. Davoli, 20 Custom House Street, Suite 830,
Boston, Massachusetts 02110;
- LRJ Technologies and Mark S. Skapinker, c/o Brightspark, 20 Eglinton
Avenue West, Suite 600, Toronto, Ontario M4R 1K8, Canada;
- Sofinov, Societe Financiere d'Innovation and Sophie Forest, 1981 Avenue,
McGill College, 13th Floor, Montreal, Quebec H3A 3C7, Canada;
- Christopher H. Greendale, c/o Internet Capital Group, Inc., 145 Milk
Street, Boston, Massachusetts 02109;
- All other listed stockholders, c/o Servicesoft Technologies, Inc., Two
Apple Hill Drive, Natick, Massachusetts 01760.
Sigma Partners is comprised of Sigma Partners IV, L.P., Sigma Associates
IV, L.P., Sigma Investors IV, L.P., Sigma Partners V, L.P., Sigma Associates V,
L.P. and Sigma Investors V, L.P. The Gemini Funds are comprised of Gemini Israel
II Parallel Fund, L.P., Gemini Partner Investors, L.P., Gemini Israel II, L.P.,
Advent PGGM Gemini, L.P. and Gemini Capital Fund Management, Inc. Financial
Technology Ventures is comprised of Financial Technology Ventures, L.P. and
Financial Technology Ventures (Q), L.P.
53
<PAGE> 58
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------
BENEFICIALLY BEFORE THE AFTER THE
OWNED OFFERING OFFERING
---------------- ----------- ----------
<S> <C> <C> <C>
Sofinov, Societe Financiere d'Innovation.............. 2,005,434 9.9% 8.5%
Sigma Partners........................................ 1,724,611 8.5 7.3
CIBC WMV Inc. ........................................ 1,570,343 7.8 6.6
Gemini Capital Fund................................... 1,371,664 6.8 5.8
LRJ Technologies...................................... 1,263,463 6.3 5.3
Financial Technologies Ventures....................... 1,256,341 6.2 5.3
Christopher M. Butler(a).............................. 888,873 4.4 3.8
Daniel J. Kossmann(b)................................. 196,611 1.0 *
Massood Zarrabian..................................... 22,148 * *
Paul R. Maguire....................................... 29,075 * *
David P. Tarrant...................................... 368,122 2.0 1.6
Jeffrey L. Whitney.................................... 37,918 * *
Stephen M. Harrison................................... 35,746 * *
Mark S. Skapinker(c).................................. 1,304,124 6.4 5.5
Sophie Forest(d)...................................... 2,005,434 9.9 8.5
Robert E. Davoli(e)................................... 1,749,611 8.6 7.4
Christopher H. Greendale(f)........................... 1,001,882 5.0 4.2
Gary Rubinoff(g)...................................... 977,352 4.8 4.1
All directors and executive officers as a group (13
persons)(h)......................................... 8,284,511 41.0% 34.8%
</TABLE>
- ------------
* Less than 1%
(a) Includes 833,502 shares issued to Mr. Butler pursuant to a stock
restriction agreement in November 1999. Of these shares, 208,375 shares
vest in August 2000, and the remainder vests quarterly thereafter for three
years so long as Mr. Butler remains employed by us.
(b) Includes 180,000 shares issued to Mr. Kossmann pursuant to a restricted
stock agreement, of which 45,000 shares vest in November 2000, and the
remainder vests monthly thereafter for three years so long as Mr. Kossmann
remains employed by us.
(c) Represents 27,685 shares and 12,976 vested options held by Mr. Skapinker
individually, and 1,263,463 shares beneficially owned by LRJ Technologies,
Inc.
(d) Includes the 2,005,434 shares that are beneficially owned by Sofinov,
Societe Financiere d'Innovation. Ms. Forest disclaims beneficial ownership
of such shares except to the extent of her pecuniary interest therein.
(e) Includes the 1,724,611 shares that are beneficially owned by Sigma
Partners. Mr. Davoli disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein. Also includes 25,000
shares issued to Mr. Davoli pursuant to a restricted stock agreement dated
November 6, 1999, which shares vest 34% in April 2000, then 8.25% quarterly
thereafter for two years so long as a service relationship exists between
us and Mr. Davoli.
(f) Includes 52,521 shares and 6,162 vested options held by Mr. Greendale
individually, and 931,199 shares beneficially owned by Internet Capital
Group, Inc. Mr. Greendale disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. Also includes
12,000 shares issued to Mr. Greendale pursuant to a restricted stock
agreement dated November 1, 1999, which shares vest 34% in April 2000, then
8.25% quarterly thereafter for two years so long as a service relationship
exists between us and Mr. Greendale.
(g) Includes 960,540 shares beneficially owned by J.L. Albright II Venture
Fund, L.P. Mr. Rubinoff disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest therein. Also includes
10,000 shares issued to Mr. Rubinoff pursuant to a restricted stock
agreement dated November 1, 1999, which shares vest 34% in April 2000 then
8.25% quarterly thereafter over two years so long as a service relationship
exists between us and Mr. Rubinoff, and 6,812 vested options.
(h) Includes 81,869 shares underlying options which are exercisable within 60
days of January 31, 2000.
54
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions governing our
capital stock. This summary is not complete and should be read together with our
certificate of incorporation, a copy of which has been filed as an exhibit to
the registration statement of which this prospectus forms a part.
Immediately following the offering, our authorized capital stock will
consist of 105,000,001 shares, par value $.01 per share, including 100,000,000
shares of common stock; one share of authorized, issued and outstanding Series X
preferred stock; and 5,000,000 shares of undesignated preferred stock issuable
in one or more series to be designated by our board of directors, of which no
shares will be issued and outstanding. Except as otherwise indicated, the
following information reflects the filing, as of the closing of this offering,
of our eleventh amended and restated certificate of incorporation and, as of the
effectiveness of this prospectus, the adoption of our amended and restated
by-laws.
COMMON STOCK
The holders of common stock have one vote per share. Holders of common
stock are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority, or, in the case of election of directors, by a plurality, subject to
any voting rights granted to holders of any then outstanding preferred stock.
Except as otherwise provided by law, amendments to our certificate of
incorporation, which will be effective upon consummation of the offering, must
be generally approved by a majority of the voting power of the common stock.
Holders of common stock share ratably in any dividends declared by the
Board of Directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock. In the event of our merger or consolidation
with or into another company as a result of which shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property, including cash, all holders of common stock will be entitled to
receive the same kind and amount, on a per share of common stock basis, of such
shares of stock and other securities and property, including cash. On our
liquidation, dissolution or winding up, all holders of common stock are entitled
to share ratably in any assets available for distribution to the holders of
shares of common stock. No shares of common stock are subject to redemption or
have preemptive rights to purchase additional shares of common stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock
may be issued from time to time in one or more series. Our Board of Directors is
authorized to establish the voting rights, if any, and the designations, powers,
preferences, qualifications, limitations and restrictions applicable to the
shares of each series. Our Board of Directors may, without stockholder approval,
issue preferred stock with voting and other rights that could adversely affect
the voting power and other rights of the holders of the common stock and could
have anti-takeover effects. The ability of our Board of Directors to issue
preferred stock without stockholder approval could have the effect of delaying,
deferring or preventing a change of control or the removal of our existing
management. We have no present plans to issue any shares of preferred stock.
We have one share of Series X preferred stock outstanding. As a result of
our merger with Balisoft in February 1999, as of January 31, 2000, we are
obligated to issue to the former Balisoft shareholders an aggregate of 1,041,183
shares of common stock in exchange for exchangeable shares of Servicesoft
Technologies Canada at any time, at the election of the holders thereof. The
share of Series X preferred stock was issued to a trustee for the former
Balisoft shareholders pursuant to a Voting and Exchange Trust Agreement. Under
this agreement, the exchangeable shareholders are entitled to exercise voting
rights equivalent to voting rights attaching to the same number of shares of our
common stock by and through the trustee of the share of Series X preferred
stock. The share of Series X preferred stock will be automatically redeemed at
such time that no exchangeable shares are held by the former Balisoft
shareholders. The exchangeable share structure is a common tax-advantageous
structure used in acquisitions of Canadian companies.
55
<PAGE> 60
WARRANTS
As of February 29, 2000, there were outstanding:
- warrants to purchase up to an aggregate of 2,797 shares of our common
stock at a weighted average per share purchase price of $.60 which are
exercisable until January 1, 2003.
- a warrant to purchase 63,025 shares of our Series H preferred stock for
a purchase price of $4.76 per share. This warrant will expire upon the
closing of this offering.
- a warrant to purchase 77,855 shares of our common stock for a purchase
price of $3.53 per share which is exercisable until May 29, 2000.
- warrants to purchase an aggregate of 17,985 shares of our common stock
at per share purchase prices of $4.10 which are exercisable until
December 17, 2004.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
As of February 29, 2000, the holders of 17,022,867 shares of common stock,
including shares issuable upon the exchange of the exchangeable shares held by
the former holders of Balisoft and upon the conversion of our preferred stock,
have rights to register those shares under the Securities Act. These
stockholders will be entitled to piggyback registration rights in connection
with any registration by us of securities for our own account or the account of
other stockholders. If we propose to register any shares of common stock under
the Securities Act (with the exception of those shares issued or issuable upon
conversion of the exchangeable preferred and exchangeable common stock
registered pursuant to the demand registration right discussed below), we are
required to give those stockholders notice of the registration and to include
their shares in the registration statement. In addition, at any time after 180
days following the effective date of this prospectus, holders of 15% of the
registrable shares may demand that we register these shares up to three times.
At any time after we become eligible to file a registration statement on Form
S-3, these stockholders may require us to file up to two registration statements
on Form S-3 in any given twelve-month period under the Securities Act with
respect to their shares. We also have agreed to register these registrable
securities on a shelf registration statement, one year after we become a public
reporting company. The registration rights of these stockholders, subject to
certain limitations, will terminate when the shares held by them may be sold
under Rule 144, in any three-month period without volume limitations, under the
Securities Act. All expenses incurred in connection with such registrations,
other than underwriters and brokers' discounts and commissions, will be borne by
Servicesoft.
As of the completion of this offering, the holders of 2,515,297 shares of
common stock issued or issuable upon exchange of shares of exchangeable common
stock and exchangeable preferred stock of Servicesoft Canada have the right to
register those shares under the Securities Act and to request that the Company
keep the registration statement effective for a period of up to 21 days. This
demand registration will not become effective prior to the expiration of the 180
day lock-up period following the date of this prospectus. This demand
registration right will expire on March 10, 2001.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Statutory Business Combination Provision. Following the offering, we will
be subject to Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from consummating a "business
combination" with an "interested stockholder" for a period of three years after
the date such person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
56
<PAGE> 61
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of two-thirds of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
Certificate of Incorporation nor our By-laws contain any such exclusion.
Charter and By-law Provisions. Our Eleventh Amended and Restated
Certificate of Incorporation, which will be effective on the completion of this
offering, provides that, subject to any rights of preferred shareholders to
remove their own elected directors, directors may only be removed from office
for cause and with the affirmative vote of the holders of two-thirds of our
capital stock. Furthermore, our certificate of incorporation also provides that
the Board of Directors will be divided into two classes, with each class serving
a staggered two-year term. The restrictions on removal and the classification
system of electing directors may tend to discourage a third party from making a
tender offer or otherwise attempting to obtain control of Servicesoft, and may
maintain the incumbency of the Board of Directors as these provisions generally
increase the difficulty of replacing a majority of the directors. Our
certificate of incorporation also provides that any action required or permitted
to be taken by our stockholders at an annual or special meeting of stockholders
may only be taken if it is properly brought before such meeting and may not be
taken by written action in lieu of a meeting. Our by-laws provide that a special
meeting of stockholders may be called only by the Board of Directors, subject to
any rights of preferred stockholders, unless otherwise required by law. Our
by-laws provide that only those matters included in the notice of the special
meeting may be considered or acted upon at that special meeting unless otherwise
provided by law. In addition, our by-laws include advance notice and
informational requirements and time limitations on any director nomination or
any new proposal that a stockholder wishes to make at an annual meeting of
stockholders. Further, provisions of our certificate of incorporation and our
by-laws provide that stockholders may amend certain provisions of our
certificate of incorporation and by-laws only with the affirmative vote of the
holders of two-thirds of our capital stock. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of Servicesoft.
Ability to Adopt Stockholder Rights Plan. The Board of Directors may in
the future resolve to issue shares of preferred stock or rights to acquire such
shares to implement a stockholder rights plan. A stockholder rights plan
typically creates voting or other impediments that would discourage persons
seeking to gain control of Servicesoft by means of a merger, tender offer, proxy
contest or otherwise if the Board of Directors determines that such change in
control is not in the best interests of our stockholders. The Board of Directors
has no present intention of adopting a stockholder rights plan and is not aware
of any attempt to obtain control of Servicesoft.
LISTING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have the common stock approved for quotation on the
Nasdaq National Market under the symbol "SRVS."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be EquiServe.
57
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
this offering because of certain contractual and legal restrictions on resale,
as described below, sales of substantial amounts of common stock in the public
market after the restrictions lapse could adversely affect the prevailing market
price.
After this offering, 23,783,400 shares of common stock will be outstanding,
assuming the issuance of an aggregate of 3,500,000 shares of common stock. The
number of shares outstanding after this offering is based on the number of
shares outstanding as of January 31, 2000, and assumes no exercise of
outstanding options. The 3,500,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act. The remaining 20,283,400
shares of common stock outstanding upon completion of the offering are
restricted securities in that they may be sold in the public market only if
registered or if they qualify for an exemption from registration under the
Securities Act or Rules 144 or 701 of the Securities Act. In addition, upon
completion of this offering, there will be 1,041,183 shares of exchangeable
common stock of Servicesoft Technologies Canada outstanding, which are
exchangeable on a one-for-one basis into our common stock. The holding period
for purposes of Rule 144 does not begin until these exchangeable shares are
exchanged into our common stock.
The remaining 20,283,400 shares of common stock held by existing
stockholders are restricted shares or are subject to the contractual
restrictions described below. Restricted shares may be sold in the public market
only if registered or if they qualify for an exception from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Of these restricted shares, 5,719,285 shares will be available
for resale in the public market in reliance on Rule 144(k) immediately following
this offering, 5,418,486 of which shares are subject to lock-up agreements
described below. An additional 5,251,690 shares will be available for resale in
the public market in reliance on Rule 144 beginning ninety days following this
offering, of which 5,226,082 shares are subject to lock-up agreements. The
remaining 9,312,425 shares become eligible for resale in the public market at
various dates thereafter, 8,558,253 of which shares are subject to lock-up
agreements.
Each of our executive officers and directors, and certain of our other
stockholders, who will own in the aggregate 18,225,676 shares of common stock
after the offering, have entered into lock-up agreements generally providing
that they will not to offer to sell, contract to sell or otherwise sell, dispose
of, loan, pledge, or grant any rights with respect to any shares of common
stock, any options or warrants to purchase, any of the shares of common stock or
any securities convertible into, or exercisable or exchangeable for, common
stock owned by them, or enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the common stock, for a period of 180 days after the date of this prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated.
Morgan Stanley & Co. Incorporated may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. When determining whether or not to release shares from the
lock-up agreements, Morgan Stanley & Co. Incorporated will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time. Following the expiration of the 180 day lock-up period, additional shares
of common stock will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, an affiliate of
Servicesoft or a person, or persons whose shares are aggregated, who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate of Servicesoft, would be
entitled to sell within any three month period a number of shares that does not
exceed the greater of 1% of our then outstanding shares of common stock or the
average weekly trading volume of our common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about Servicesoft. Any person, or
persons whose shares are aggregated, who is not deemed to have been an affiliate
of Servicesoft at
58
<PAGE> 63
any time during the 90 days preceding a sale, and who has beneficially owned
shares for at least two years including any period of ownership of preceding
non-affiliated holders, would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from Servicesoft by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Exchange Act. To be
eligible for resale under Rule 701, shares must have been issued in connection
with written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercise of such options,
including exercises after the date of this offering. Securities issued in
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than affiliates, subject only to the
manner of sale provisions of Rule 144, and by affiliates, under Rule 144 without
compliance with its one-year minimum holding period.
At February 29, 2000, we had reserved an aggregate of 2,200,000 shares of
common stock for issuance pursuant to the Amended and Restated 1994 Stock Option
Plan, and options to purchase approximately 2,057,095 shares were outstanding
under this Plan; we had reserved an aggregate of 1,876,498 shares of common
stock for issuance pursuant to the 1999 Stock Option and Grant Plan, and
1,675,875 options and shares of restricted stock were outstanding under this
Plan; and we had reserved an aggregate of 500,000 shares of common stock for
issuance pursuant to the 2000 Employee Stock Purchase Plan, and no shares were
outstanding under this Plan. As soon as practicable following the offering, we
intend to file registration statements under the Securities Act to register
shares of common stock reserved for issuance under the Amended and Restated 1994
Stock Option Plan, the 1999 Stock Option and Grant Plan, and the 2000 Employee
Stock Purchase Plan. Such registration statements will automatically become
effective immediately upon filing. Any shares issued upon the exercise of stock
options will be eligible for immediate public sale, subject to the lock-up
agreements noted above.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of this prospectus, except we
may issue, and grant options to purchase, shares of common stock under the
Amended and Restated 1994 Stock Option Plan, the 1999 Stock Option and Grant
Plan, and the 2000 Employee Stock Purchase Plan.
Following the offering, some of our stockholders will have rights to
require us to register their shares of common stock under the Securities Act,
and they will have rights to participate in any future registration of
securities by us. See "Description of Capital Stock--Registration Rights of
Certain Holders."
59
<PAGE> 64
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, FleetBoston Robertson Stephens Inc. and
SG Cowen Securities Corporation are acting as representatives, have severally
agreed to purchase, and we have agreed to sell to them, severally, the number of
shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
FleetBoston Robertson Stephens Inc. ........................
SG Cowen Securities Corporation.............................
Total.....................................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for the share covered
by the underwriters over-allotment option described below.
The per share price of any shares sold by the underwriters shall be the
public offering price listed on the cover page of this prospectus less an amount
not greater than the per share amount of the concession to dealers described
below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 525,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number listed next to the underwriter's name in the preceding table bears to
the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. Assuming an initial public offering price
of $14.00 per share, if the underwriters' option is exercised in full, the total
price to the public would be $56.4 million, the total underwriters' discounts
and commissions would be $3.9 million and total proceeds to us would be $52.4
million.
We have applied to have our common stock approved for quotation, subject to
official notice of issuance, on the National Market under the symbol "SRVS."
We, the directors, executive officers and certain other of our stockholders
have agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, we will not, during the period
ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
60
<PAGE> 65
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock.
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by us of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to shares offered in this prospectus for our
directors, employees and business associates. The number of shares of common
stock available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares that are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered in this prospectus. Concurrent with this
offering, we are also offering shares of our common stock at the initial
public offering price to our Canadian employees, directors and business
partners. Sales of those shares of common stock will be made directly by us to
our Canadian employees, directors and business partners and the underwriters
have not participated in and will not receive a commission in respect of those
sales.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
In January 2000, we sold an aggregate of 3,481,478 shares of our Series J
preferred stock to a group of 37 investors, led by Goldman Sachs, for an
aggregate of $31,437,989, or $9.03 per share. All of the investors were
accredited investors, including our executive officers. In this private
placement, Morgan Stanley Dean Witter Equity Funding, Inc. purchased 110,742
shares of Series J preferred stock, which are convertible on a one-to-one basis
into our common stock, for approximately $1,000,000. Morgan Stanley Dean Witter
Equity Funding, Inc. purchased these shares on the same terms as the other
investors in the private placement. Morgan Stanley Dean Witter Equity Funding,
Inc. is a wholly owned subsidiary of Morgan Stanley & Co. Incorporated, one of
the underwriters in this offering.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiations
between us and the representatives. Among the factors to be considered in
determining the initial public offering price will be our future prospects and
our industry in general, our sales, earnings and certain other financial
operating information in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to us. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
61
<PAGE> 66
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by McDermott, Will & Emery, Boston, Massachusetts. As of February
25, 2000, an investment partnership comprised of certain partners of McDermott,
Will & Emery beneficially owned 7,420 shares of our Series J preferred stock.
Various legal matters related to the sale of the common stock offered hereby
will be passed upon for the underwriters by Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, Waltham, Massachusetts.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by various independent accountants. The companies and periods covered by
these audits are indicated in the individual accountants' reports. Such
financial statements have been so included in reliance on the reports of the
various independent accountants given on the authority of such firms as experts
in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act and the rules and regulations thereunder, for the registration of
the common stock offered hereby. This prospectus, which forms a part of the
registration statement, does not contain all the information included in the
registration statement, parts of which have been omitted as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract or other document are not necessarily complete.
Where the contract or other document is an exhibit to the registration
statement, each statement is qualified by the provisions of that exhibit.
The registration statement can be inspected and copied at the public
reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the registration statement can be obtained from the Public Reference
Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at
http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC.
62
<PAGE> 67
SERVICESOFT TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERVICESOFT TECHNOLOGIES, INC.
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statement of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statement of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999.................... F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
BALISOFT TECHNOLOGIES INC.
Report of Independent Accountants........................... F-24
Consolidated Balance Sheet as of December 31, 1997 and
1998...................................................... F-25
Consolidated Statement of Loss and Deficit for the period
from June 5, 1997 (inception) to December 31, 1997 and the
year ended December 31, 1998.............................. F-26
Consolidated Statement of Changes in Financial Position for
the period from June 5, 1997 (inception) to December 31,
1997 and the year ended December 31, 1998................. F-27
Notes to Consolidated Financial Statements.................. F-28
INTERNET BUSINESS ADVANTAGES, INC.
Report of Independent Accountants........................... F-37
Balance Sheet as of December 31, 1997 and 1998 and September
30, 1999 (unaudited)...................................... F-38
Statement of Operations for the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1998
and 1999 (unaudited)...................................... F-39
Statement of Stockholders' Deficit for the years ended
December 31, 1997 and 1998 and the nine months ended
September 30, 1999 (unaudited)............................ F-40
Statement of Cash Flows for the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1998
and 1999 (unaudited)...................................... F-41
Notes to Financial Statements............................... F-42
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial
Statements................................................ F-49
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1999.............................. F-51
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-52
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Servicesoft Technologies, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of redeemable convertible preferred stock
and stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Servicesoft Technologies, Inc. and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
company'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 auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 11, 2000
F-2
<PAGE> 69
SERVICESOFT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ DECEMBER 31,
1998 1999 1999
------- ------- ------------
(NOTE 2)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,016 $ 6,630 $ 6,630
Restricted cash........................................ 200 187 187
Accounts receivable, net of allowance for doubtful
accounts of $50, $170 and $170 at December 31, 1998
and 1999 and pro forma December 31, 1999
(unaudited)......................................... 1,593 6,635 6,635
Prepaid expenses and other current assets.............. 155 717 717
------- ------- -------
Total current assets................................ 3,964 14,169 14,169
Property and equipment, net.............................. 364 3,368 3,368
Other assets............................................. -- 200 200
Goodwill and other intangible assets, net................ -- 16,032 16,032
------- ------- -------
Total assets................................... $ 4,328 $33,769 $33,769
======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under revolving line of credit.............. $ -- $ 1,000 $ 1,000
Accounts payable....................................... 246 971 971
Accrued compensation and benefits...................... 338 2,052 2,052
Accrued expenses....................................... 123 3,088 3,088
Current portion of capital lease obligations........... 40 334 334
Deferred revenue....................................... 819 6,436 6,436
------- ------- -------
Total current liabilities........................... 1,566 13,881 13,881
Capital lease obligations, net of current portion........ 80 522 522
Other liabilities........................................ -- 173 173
------- ------- -------
Total liabilities................................... 1,646 14,576 14,576
------- ------- -------
Commitments (Note 9)
Redeemable convertible preferred stock, $0.01 par value;
10,200,000, 12,450,000 and 0 shares authorized;
9,898,621, 11,587,344 and 0 shares issued and
outstanding, at December 31, 1998 and 1999 and pro
forma December 31, 1999 (unaudited) (liquidation
preference of $38,095 at December 31, 1999)............ 25,441 52,251 --
------- ------- -------
Stockholders' equity (deficit):
Common stock, $0.01 par value; 13,000,000, 17,450,000
and 100,000,000 shares authorized; 34,788, 5,152,352
and 16,739,696 shares issued and outstanding, at
December 31, 1998 and 1999 and pro forma December
31, 1999 (unaudited)................................ -- 51 167
Additional paid-in capital............................. -- 30,450 82,585
Accumulated deficit.................................... (22,479) (46,032) (46,032)
Notes receivable from stockholders..................... -- (1,117) (1,117)
Deferred stock compensation............................ -- (16,298) (16,298)
Accumulated other comprehensive loss................... (280) (112) (112)
------- ------- -------
Total stockholders' equity (deficit)................ (22,759) (33,058) 19,193
------- ------- -------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity
(deficit).................................... $ 4,328 $33,769 $33,769
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 70
SERVICESOFT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenue:
Software license.......................................... $ 2,139 $ 2,508 $ 4,210
Services.................................................. 387 1,782 2,934
-------- -------- --------
Total revenue..................................... 2,526 4,290 7,144
-------- -------- --------
Cost of revenue:
Cost of software license.................................. 252 148 406
Cost of services (excluding in 1999 stock compensation of
$25)................................................... 625 1,101 3,375
-------- -------- --------
Total cost of revenue............................. 877 1,249 3,781
-------- -------- --------
Gross profit................................................ 1,649 3,041 3,363
-------- -------- --------
Operating expenses:
Research and development (excluding in 1999 stock
compensation of $124).................................. 930 1,174 4,205
Sales and marketing (excluding in 1999 stock compensation
of $156)............................................... 977 3,598 13,310
General and administrative (excluding in 1999 stock
compensation of $1,595)................................ 756 1,612 5,044
Amortization of goodwill and other intangible assets...... -- -- 2,671
Stock compensation........................................ -- -- 1,900
-------- -------- --------
Total operating expenses.......................... 2,663 6,384 27,130
-------- -------- --------
Loss from operations........................................ (1,014) (3,343) (23,767)
Interest income............................................. 7 168 320
Interest expense............................................ (97) (538) (35)
Other income (expense), net................................. -- (250) (71)
-------- -------- --------
Net loss.................................................... (1,104) (3,963) (23,553)
Accretion on redeemable convertible preferred stock......... (340) (1,031) (2,725)
-------- -------- --------
Net loss attributable to common stockholders................ $ (1,444) $ (4,994) $(26,278)
======== ======== ========
Basic and diluted net loss per common share................. $(144.40) $(262.84) $ (11.02)
Shares used in computing basic and diluted net loss per
common
share..................................................... 10 19 2,385
Pro forma basic and diluted net loss per common share
(unaudited)............................................... $ (1.99)
Shares used in computing pro forma basic and diluted net
loss per common share (unaudited)......................... 11,862
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 71
[This page intentionally left blank]
F-5
<PAGE> 72
SERVICESOFT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES I SERIES H SERIES G
REDEEMABLE REDEEMABLE REDEEMABLE
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- ---------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........................ -- $ -- -- $ -- -- $ --
Exercise of stock options.........................
Accretion to redemption value of redeemable
convertible preferred stock.....................
Comprehensive loss:
Net loss........................................
Other comprehensive loss, net of tax:
Foreign currency translation adjustments......
Total comprehensive loss......................
--------- ------- --------- ------- ---------- -------
BALANCE, DECEMBER 31, 1997........................ -- -- -- -- -- --
Issuance of Series F redeemable convertible
preferred stock upon conversion of bridge loan
including accrued interest......................
Issuance of Series G redeemable convertible
preferred stock for cash........................ 4,667,969 5,975
Exercise of stock options.........................
Accretion to redemption value of redeemable
convertible preferred stock..................... 498
Comprehensive loss:
Net loss........................................
Other comprehensive income, net of tax:
Foreign currency translation adjustments......
Total comprehensive loss..................
--------- ------- --------- ------- ---------- -------
BALANCE, DECEMBER 31, 1998........................ -- -- -- -- 4,667,969 6,473
Issuance of Exchangeable Preferred Stock,
Exchangeable Common Stock and stock options in
connection with the acquisition of Balisoft
Technologies Inc................................ 2,281,653 7,758
Accretion to redemption value of Series F and
Series G redeemable convertible preferred
stock........................................... 81
Exchange of Series F and Series G redeemable
convertible preferred stock for Series H
redeemable convertible preferred stock.......... 5,323,420 25,602 (4,667,969) (6,554)
Issuance of Series I redeemable convertible
preferred stock for cash, including issue
costs........................................... 3,982,271 16,327
Accretion to redemption value of Series H and
Series I redeemable convertible preferred
stock........................................... 884 1,680
Sale of common stock..............................
Exercise of stock options and warrants............
Stock compensation expense for stock option
modifications...................................
Issuance of restricted common stock and related
deferred stock compensation.....................
Interest on notes receivable from stockholders....
Deferred stock compensation related to grants of
stock options...................................
Amortization of deferred stock compensation to
expense.........................................
Issuance of common stock and stock options in
connection with the acquisition of Internet
Business Advantages, Inc........................
Comprehensive loss:
Net loss........................................
Other comprehensive income, net of tax:
Foreign currency translation adjustments......
Total comprehensive loss..................
--------- ------- --------- ------- ---------- -------
BALANCE, DECEMBER 31, 1999........................ 3,982,271 $17,211 7,605,073 $35,040 -- $ --
========= ======= ========= ======= ========== =======
<CAPTION>
SERIES F
REDEEMABLE TOTAL
CONVERTIBLE REDEEMABLE
PREFERRED STOCK CONVERTIBLE
--------------------- PREFERRED
SHARES AMOUNT STOCK
---------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........................ 3,111,917 $ 15,976 $15,976
Exercise of stock options.........................
Accretion to redemption value of redeemable
convertible preferred stock..................... 340 340
Comprehensive loss:
Net loss........................................
Other comprehensive loss, net of tax:
Foreign currency translation adjustments......
Total comprehensive loss......................
---------- -------- -------
BALANCE, DECEMBER 31, 1997........................ 3,111,917 16,316 16,316
Issuance of Series F redeemable convertible
preferred stock upon conversion of bridge loan
including accrued interest...................... 2,118,735 2,119 2,119
Issuance of Series G redeemable convertible
preferred stock for cash........................ 5,975
Exercise of stock options.........................
Accretion to redemption value of redeemable
convertible preferred stock..................... 533 1,031
Comprehensive loss:
Net loss........................................
Other comprehensive income, net of tax:
Foreign currency translation adjustments......
Total comprehensive loss..................
---------- -------- -------
BALANCE, DECEMBER 31, 1998........................ 5,230,652 18,968 25,441
Issuance of Exchangeable Preferred Stock,
Exchangeable Common Stock and stock options in
connection with the acquisition of Balisoft
Technologies Inc................................ 7,758
Accretion to redemption value of Series F and
Series G redeemable convertible preferred
stock........................................... 80 161
Exchange of Series F and Series G redeemable
convertible preferred stock for Series H
redeemable convertible preferred stock.......... (5,230,652) (19,048) --
Issuance of Series I redeemable convertible
preferred stock for cash, including issue
costs........................................... 16,327
Accretion to redemption value of Series H and
Series I redeemable convertible preferred
stock........................................... 2,564
Sale of common stock..............................
Exercise of stock options and warrants............
Stock compensation expense for stock option
modifications...................................
Issuance of restricted common stock and related
deferred stock compensation.....................
Interest on notes receivable from stockholders....
Deferred stock compensation related to grants of
stock options...................................
Amortization of deferred stock compensation to
expense.........................................
Issuance of common stock and stock options in
connection with the acquisition of Internet
Business Advantages, Inc........................
Comprehensive loss:
Net loss........................................
Other comprehensive income, net of tax:
Foreign currency translation adjustments......
Total comprehensive loss..................
---------- -------- -------
BALANCE, DECEMBER 31, 1999........................ -- $ -- $52,251
========== ======== =======
</TABLE>
F-6
<PAGE> 73
SERVICESOFT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
--------------------- PAID-IN ACCUMULATED FROM STOCK
SHARES PAR VALUE CAPITAL DEFICIT STOCKHOLDERS COMPENSATION
--------- --------- ---------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ 8,386 $-- $ 487 $(16,567) $ -- $ --
Exercise of stock options......... 9,628 -- 35
Accretion to redemption value of
redeemable convertible preferred
stock............................ (340)
Comprehensive loss:
Net loss......................... (1,104)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments..................
Total comprehensive loss.......
--------- --- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1997........ 18,014 -- 182 (17,671) -- --
Issuance of Series F redeemable
convertible preferred stock upon
conversion of bridge loan
including accrued interest.......
Issuance of Series G redeemable
convertible preferred stock for
cash.............................
Exercise of stock options......... 16,774 -- 4
Accretion to redemption value of
redeemable convertible preferred
stock............................ (186) (845)
Comprehensive loss:
Net loss......................... (3,963)
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments..................
Total comprehensive loss...
--------- --- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1998........ 34,788 -- -- (22,479) -- --
Issuance of Exchangeable Preferred
Stock, Exchangeable Common Stock
and stock options in connection
with the acquisition of Balisoft
Technologies Inc................. 2,205,915 22 4,533
Accretion to redemption value of
Series F and Series G redeemable
convertible preferred stock...... (161)
Exchange of Series F and Series G
redeemable convertible preferred
stock for Series H redeemable
convertible preferred stock......
Issuance of Series I redeemable
convertible preferred stock for
cash, including issue costs...... (207)
Accretion to redemption value of
Series H and Series I redeemable
convertible preferred stock...... (2,564)
Sale of common stock.............. 10,000 -- 10
Exercise of stock options and
warrants......................... 717,137 7 184 (68)
Stock compensation expense for
stock option modifications....... 1,253
Issuance of restricted common
stock and related deferred stock
compensation..................... 1,060,502 11 5,760 (1,036) (4,710)
Interest on notes receivable from
stockholders..................... (13)
Deferred stock compensation
related to grants of stock
options.......................... 12,235 (12,235)
Amortization of deferred stock
compensation to expense.......... 647
Issuance of common stock and stock
options in connection with the
acquisition of Internet Business
Advantages, Inc.................. 1,124,010 11 9,407
Comprehensive loss:
Net loss......................... (23,553)
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments..................
Total comprehensive loss...
--------- --- ------- -------- ------- --------
BALANCE, DECEMBER 31, 1999........ 5,152,352 $51 $30,450 $(46,032) $(1,117) $(16,298)
========= === ======= ======== ======= ========
<CAPTION>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
COMPREHENSIVE COMPREHENSIVE EQUITY
LOSS LOSS (DEFICIT)
------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996........ $(283) $ (16,363)
Exercise of stock options......... 35
Accretion to redemption value of
redeemable convertible preferred
stock............................ (340)
Comprehensive loss:
Net loss......................... $ (1,104) (1,104)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments.................. (12) (12) (12)
--------
Total comprehensive loss....... (1,116)
----- ======== ---------
BALANCE, DECEMBER 31, 1997........ (295) (17,784)
Issuance of Series F redeemable
convertible preferred stock upon
conversion of bridge loan
including accrued interest....... --
Issuance of Series G redeemable
convertible preferred stock for
cash............................. --
Exercise of stock options......... 4
Accretion to redemption value of
redeemable convertible preferred
stock............................ (1,031)
Comprehensive loss:
Net loss......................... (3,963) (3,963)
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments.................. 15 15 15
--------
Total comprehensive loss... (3,948)
----- ======== ---------
BALANCE, DECEMBER 31, 1998........ (280) (22,759)
Issuance of Exchangeable Preferred
Stock, Exchangeable Common Stock
and stock options in connection
with the acquisition of Balisoft
Technologies Inc................. 4,555
Accretion to redemption value of
Series F and Series G redeemable
convertible preferred stock...... (161)
Exchange of Series F and Series G
redeemable convertible preferred
stock for Series H redeemable
convertible preferred stock......
Issuance of Series I redeemable
convertible preferred stock for
cash, including issue costs...... (207)
Accretion to redemption value of
Series H and Series I redeemable
convertible preferred stock...... (2,564)
Sale of common stock.............. 10
Exercise of stock options and
warrants......................... 123
Stock compensation expense for
stock option modifications....... 1,253
Issuance of restricted common
stock and related deferred stock
compensation..................... 25
Interest on notes receivable from
stockholders..................... (13)
Deferred stock compensation
related to grants of stock
options.......................... --
Amortization of deferred stock
compensation to expense.......... 647
Issuance of common stock and stock
options in connection with the
acquisition of Internet Business
Advantages, Inc.................. 9,418
Comprehensive loss:
Net loss......................... (23,553) (23,553)
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments.................. 168 168 168
--------
Total comprehensive loss... $(23,385)
----- ======== ---------
BALANCE, DECEMBER 31, 1999........ $(112) $ (33,058)
===== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 74
SERVICESOFT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,104) $(3,963) $(23,553)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 57 102 3,195
Provision for doubtful accounts........................ -- 50 120
Loss on disposal of property and equipment............. -- 18 20
Compensation expense for stock options and grants...... -- -- 1,900
Interest income on notes from stockholders............. -- -- (13)
Interest expense associated with conversion of bridge
loans to Series F redeemable convertible preferred
stock................................................ -- 530 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................. (604) (695) (4,156)
Prepaid expenses, other current assets and other
assets............................................ 4 (83) (586)
Accounts payable..................................... 101 (3) (211)
Accrued expenses, compensation and benefits.......... 252 (95) 4,028
Deferred revenue..................................... 117 496 5,434
------- ------- --------
Net cash used in operating activities............. (1,177) (3,643) (13,822)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (25) (337) (2,255)
Cash of businesses acquired, net of acquisition
expenses............................................... -- -- 3,411
(Increase) decrease in restricted cash.................... -- (200) 13
------- ------- --------
Net cash provided by (used in) investing
activities...................................... (25) (537) 1,169
------- ------- --------
Cash flows from financing activities:
Proceeds from bridge loans................................ 782 -- --
Proceeds from line of credit.............................. -- -- 1,000
Payments of capital lease obligations..................... -- -- (102)
Proceeds from issuance of redeemable convertible preferred
stock, net of issue costs.............................. -- 5,975 16,120
Proceeds from issuance of common stock.................... -- -- 35
Proceeds from exercise of stock options................... 35 4 123
------- ------- --------
Net cash provided by financing activities......... 817 5,979 17,176
------- ------- --------
Effects of exchange rate changes on cash and cash
equivalents............................................... (13) 11 91
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (398) 1,810 4,614
Cash and cash equivalents, beginning of year................ 604 206 2,016
------- ------- --------
Cash and cash equivalents, end of year...................... $ 206 $ 2,016 $ 6,630
======= ======= ========
See supplemental cash flow information in Note 13.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 75
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION:
Servicesoft Technologies, Inc. ("Servicesoft") was originally incorporated
as Rosh Intelligent Systems in 1987, was renamed ServiceSoft Corporation in 1993
and was subsequently renamed Servicesoft Technologies, Inc. in 1999. Servicesoft
develops, markets and delivers software products and professional services that
help businesses provide Internet-based services to their customers, employees
and business partners. To date, Servicesoft's revenue has been reported and
managed through one operating segment and has resulted from the sale of its
products and services to major corporations in the United States and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Servicesoft
and its wholly owned subsidiaries. Intercompany transactions and balances have
been eliminated.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of Servicesoft's foreign subsidiaries is the local
currency, except for a subsidiary in Israel, whose functional currency is the
U.S. dollar. Assets and liabilities of the Servicesoft's foreign operations
whose functional currencies are other than the U.S. dollar are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date; revenues
and expenses are translated using the average exchange rates in effect during
the period. The resultant cumulative translation adjustments are included in
accumulated other comprehensive income or loss, which is a separate component of
stockholders' equity (deficit). Foreign currency transaction gains and losses
are included in the determination of net income or loss for the period.
REVENUE RECOGNITION
Servicesoft recognizes revenue in accordance with Statement of Position
97-2, "Software Revenue Recognition ("SOP 97-2"), as amended by Statement of
Position 98-9. Revenue from software license sales and related implementation
services are recognized using the percentage-of-completion method over the
implementation period, assuming the contract price is fixed and determinable,
binding evidence of the arrangement has been received and collection is
probable. Percentage-of-completion is measured by the percentage of
implementation hours incurred to date compared to the estimated total required
implementation hours. The total amount of revenue to be earned under these
contracts is generally fixed by contractual terms. Servicesoft regularly reviews
its progress on these contracts and revises the estimated time for completing
its implementations. Anticipated losses, if any, on contracts in progress are
recognized when identified. When Servicesoft is not engaged to complete the
software implementation, Servicesoft recognizes revenue upon delivery of the
software to the end user, provided all other revenue recognition criteria are
met. Revenue from software support and maintenance agreements, which are priced
based on a fixed percentage of the related products' current list prices, is
deferred and recognized ratably over the term of the agreements generally twelve
months. Frequently, Servicesoft's sales include software licenses, related
implementation services and a maintenance and support arrangement. Under SOP
98-9, the total contract value is attributed first to the maintenance and
support arrangement based on its fair value which equals its stated price as a
fixed percentage of the related product's current list price; then to
implementation services based on its fair value as determined using a daily
rate; the remainder of the total contract value is then attributed to the
software license and related implementation services, with the effect that
discounts inherent in the total contract value are attributed to the software
license. The Company does not offer its customers any rights of return.
CASH AND CASH EQUIVALENTS
Servicesoft considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of overnight certificates of deposit. Restricted cash
F-9
<PAGE> 76
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
represents required collateral on certain capital leases. The restricted cash is
released to Servicesoft after one year.
FINANCIAL AND CREDIT RISK
Financial instruments which expose Servicesoft to concentrations of credit
risk consist primarily of cash equivalents and accounts receivable. Servicesoft
invests primarily in money market accounts with large commercial banks with
strong credit ratings. Servicesoft provides credit to customers in the normal
course of business. Collateral is not required for accounts receivable, but
evaluation of customers' credit and financial condition is performed
periodically. Servicesoft maintains reserves for potential credit losses and
such losses have been within management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash, cash equivalents, accounts
receivable, accounts payable and redeemable convertible preferred stock, are
carried in the consolidated financial statements at amounts that approximated
fair value as of December 31, 1997, 1998 and 1999. Fair values are based on
quoted market prices and assumptions concerning the amount and timing of
estimated future cash flows and assumed discount rates, reflecting varying
degrees of perceived risk.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method, over the estimated useful lives of the assets,
typically three to five years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets result from Servicesoft's mergers or acquisitions of
businesses (Note 3) accounted for under the purchase method and consist of
identifiable assets, including completed technology, non-compete agreements and
workforce, as well as goodwill. Intangible assets are recorded at cost, net of
accumulated amortization. Identifiable intangible assets and goodwill are
amortized on a straight-line basis over their estimated useful lives of three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of," Servicesoft periodically evaluates its long-lived assets,
including intangible assets, for potential impairment. Recoverability of these
assets is assessed based on undiscounted expected cash flows, considering a
number of factors including past operating results, budgets and economic
projections, market trends and product development cycles. An impairment in the
carrying value of each asset is assessed when the undiscounted expected cash
flows derived from the asset are less than its carrying value. Through December
31, 1999, Servicesoft has not recognized an impairment loss on its long-lived
assets.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development expenditures, except for certain software
development expenditures, are expensed as incurred. Software development costs
incurred after technological feasibility has been achieved and until the
products are available for sale are capitalized and amortized over the life of
the product. Costs of internally developed software which qualify for
capitalization have not been material to date.
F-10
<PAGE> 77
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK COMPENSATION
Stock options and restricted stock issued to employees and members of
Servicesoft's Board of Directors are accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations ("APB 25"); accordingly, compensation expense is
recorded for options and restricted stock awarded to employees and directors to
the extent that the exercise/purchase prices are less than the common stock's
fair market value, for financial reporting purposes, on the date of grant, where
the number of shares and exercise/purchase price are fixed. The difference
between the fair value of Servicesoft's common stock and the exercise/purchase
price of the stock option or restricted stock awards is recorded as deferred
stock compensation. Deferred stock compensation is amortized to compensation
expense over the vesting period of the underlying stock option or restricted
stock. Servicesoft follows the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") (Note 7). All stock-based awards to non-employees are accounted for at
their fair value in accordance with SFAS 123.
ADVERTISING COSTS
Advertising costs are included in sales and marketing expenses and are
expensed as incurred. Advertising costs were $2,000, $140,000 and $298,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation allowance against deferred tax assets is recorded if,
based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. Servicesoft does
not provide for U.S. income taxes on the undistributed earnings of its foreign
subsidiaries, which Servicesoft considers to be permanent investments.
NET LOSS PER COMMON SHARE--HISTORICAL
Servicesoft computes net loss per common share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS 128").
Under the provisions of SFAS 128, basic net loss per common share is computed by
dividing net loss attributable to common stockholders by the weighted average
number of common shares outstanding. There is no difference between basic and
diluted net loss per share since potential common shares from the conversion of
redeemable convertible preferred stock and the exercises of options and warrants
are anti-dilutive for all periods presented. The calculations of diluted net
loss per common share for the years ended December 31, 1997, 1998 and 1999 do
not include 3,437,000, 10,955,000 and 14,700,000 potential shares of common
stock equivalents, including common stock options, common and preferred stock
warrants, and redeemable convertible preferred stock, respectively.
NET LOSS PER COMMON SHARE--PRO FORMA
The unaudited pro forma net loss per common share for the year ended
December 31, 1999 is calculated assuming the automatic conversion of all
preferred stock outstanding had occurred as of the beginning of the year or as
of the date of issuance of the preferred stock, if later. Therefore, accretion
on the redeemable convertible preferred stock is excluded from the calculation
of pro forma net loss per common share. The redeemable convertible preferred
stock automatically converts into 11,587,344 shares of common stock upon the
completion of Servicesoft's initial public offering (Note 5). The calculation of
pro forma diluted net loss per common share for the year ended December 31, 1999
does not include 3,113,000 potential shares of common stock equivalents as their
inclusion would be anti-dilutive.
F-11
<PAGE> 78
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED PRO FORMA BALANCE SHEET
Under the terms of Servicesoft's redeemable convertible preferred stock
(Note 5), all shares of such preferred stock will automatically convert into
common stock upon completion of Servicesoft's initial public offering of common
stock. The unaudited pro forma balance sheet reflects the conversion of the
outstanding shares of redeemable convertible preferred stock into 11,587,344
shares of common stock, as if the conversions had occurred on December 31, 1999.
In addition, the unaudited pro forma balance sheet reflects the filing of an
amended certificate of incorporation upon the effectiveness of the registration
statement for Servicesoft's initial public offering, wherein the total
authorized shares of common stock will be increased to 100,000,000. The amended
certificate of incorporation also will authorize 5,000,001 shares of preferred
stock.
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
disclosures 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 97-2 to
require recognition of revenue using the "residual method" in circumstances
outlined in SOP 98-9. Under the residual method, revenue is recognized as
follows: (1) the total fair value of undelivered elements, as indicated by
vendor specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. SOP 98-9 is
effective for transactions entered into during fiscal years beginning after
March 15, 1999 (fiscal year 2000 for Servicesoft), however early adoption is
permitted. Servicesoft has adopted SOP 98-9.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," is effective for fiscal years beginning after June 15, 2000.
Because Servicesoft does not currently hold any derivative instruments and does
not currently engage in hedging activities, Servicesoft does not expect the
adoption of SFAS No. 133 will not have a material impact on its financial
position or operating results.
3. ACQUISITIONS
BALISOFT TECHNOLOGIES INC.
On February 12, 1999, Servicesoft completed its merger with Balisoft
Technologies Inc. ("Balisoft"), a company that develops e-mail management and
real-time internet collaboration applications. In connection with the
acquisition, Servicesoft issued 2,205,915 shares of exchangeable common stock
(Note 6) valued at $3,760,000, issued 2,281,653 shares of exchangeable preferred
stock (exchangeable into Series H redeemable convertible preferred stock) (Note
5) valued at $7,773,000, and issued options and warrants to purchase
F-12
<PAGE> 79
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
641,275 shares of Servicesoft common stock valued at $780,000. Servicesoft
valued the options and warrants included in the purchase consideration based on
a Black Scholes computation of their fair value at the date of grant;
assumptions used included a risk-free interest rate of 5.25%, no dividend yield,
volatility of 100%, weighted average expected life of 5 years, and fair value of
the underlying common stock of $1.70 per share. The total consideration of
$12,313,000 represented by the Servicesoft stock and options was determined
based on an independent appraisal. In connection with this merger, Servicesoft
incurred costs of $273,000, which are included in the total purchase price for
accounting purposes.
The merger was accounted for under the purchase method of accounting.
Accordingly, the fair market values of the acquired assets and assumed
liabilities have been included in the consolidated financial statements of
Servicesoft as of the merger date and the results of operations of Balisoft have
been included thereafter. The purchase price was allocated to the acquired
assets and assumed liabilities as follows (in thousands):
<TABLE>
<S> <C>
Working capital, net........................................ $ 3,834
Property and equipment...................................... 198
Completed technologies...................................... 1,512
Workforce................................................... 473
Non-competition covenant.................................... 180
Goodwill.................................................... 6,389
-------
$12,586
=======
</TABLE>
The amounts allocated to identifiable tangible and intangible assets were
based on the results of an independent appraisal. Goodwill represents the amount
by which the total purchase price exceeded the fair values of the acquired net
assets on the merger date.
INTERNET BUSINESS ADVANTAGES, INC.
On December 17, 1999, Servicesoft completed its acquisition of Internet
Business Advantages, Inc. ("IBA"), a company that provides consulting services
primarily focused on using Internet and Intranet technologies. In connection
with the acquisition, Servicesoft paid $1,156,000, issued 1,124,010 shares of
common stock valued at $8,992,000, and issued options and warrants to purchase
71,745 shares of Servicesoft common stock valued at $426,000. Servicesoft valued
the options included in the purchase consideration based on a Black Scholes
computation of their fair value at the date of grant; assumptions used included
a risk-free interest rate of 5.25%, no dividend yield, volatility of 100%,
weighted average expected life of 5 years, and fair value of the underlying
common stock of $8.00 per share. The total consideration of $10,574,000
represented by the Servicesoft stock and options was determined by an
independent appraisal. In connection with this acquisition, Servicesoft incurred
costs of $295,000, which are included in the total purchase price for accounting
purposes.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the fair market values of the acquired assets and assumed
liabilities have been included in the consolidated financial statements of
Servicesoft as of the acquisition date and the results of operations of IBA have
been included
F-13
<PAGE> 80
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
thereafter. The purchase price was allocated to the acquired assets and assumed
liabilities as follows (in thousands):
<TABLE>
<S> <C>
Working capital, net........................................ $ 233
Property and equipment...................................... 487
Workforce................................................... 1,071
Goodwill.................................................... 9,078
-------
$10,869
=======
</TABLE>
The amounts allocated to identifiable tangible and intangible assets were
based on the results of an independent appraisal. Goodwill represents the amount
by which the total purchase price exceeded the fair values of the net assets on
the date of purchase.
Accumulated amortization associated with identifiable intangible assets and
goodwill related to the Balisoft merger and IBA acquisition was $2,496,000 and
$175,000 at December 31, 1999, respectively.
PRO FORMA PRESENTATION
The following table presents unaudited pro forma information as if
Servicesoft, Balisoft and IBA had been combined as of January 1, 1998. The pro
forma data are presented for illustrative purposes only and are not necessarily
indicative of the combined financial position or results of operations of future
periods or the results that actually would have resulted had Servicesoft,
Balisoft and IBA been a combined company during the specified periods. The pro
forma data gives effect to actual operating results prior to the transactions
and adjustments to reflect amortization of goodwill and other intangible assets.
<TABLE>
<CAPTION>
PRO FORMA UNAUDITED
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net revenue................................................. $ 6,113 $ 10,479
Net loss attributable to common stockholders................ $(19,829) $(34,669)
Net loss per common share -- basic and diluted.............. $ (5.92) $ (9.27)
Weighted average common shares -- basic and diluted......... 3,349 3,738
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of December 31, 1998
and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
Computer and office equipment............................. $ 567 $ 3,589
Furniture and fixtures.................................... 137 744
Leasehold improvements.................................... -- 116
----- -------
704 4,449
Accumulated depreciation.................................. (340) (1,081)
----- -------
$ 364 $ 3,368
===== =======
</TABLE>
As of December 31, 1998 and 1999, fixed assets held under capital leases
included computer and office equipment with a cost of $120,000 and $1,959,000
and accumulated amortization of $0 and $497,000, respectively.
F-14
<PAGE> 81
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $57,000, $102,000 and $524,000, respectively.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock consisted of the following as of
December 31, 1998 and 1999 (in thousands, except share data):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Series I, $0.01 par value; 0 and 4,450,000 shares
authorized; 0 and 3,982,271 shares issued and outstanding,
as of December 31, 1998 and 1999, respectively............ $ -- $17,211
Series H, $0.01 par value; 0 and 8,000,000 shares
authorized; 0 and 7,605,073 shares issued and outstanding,
as of December 31, 1998 and 1999, respectively............ -- 35,040
Series G, $0.01 par value; 4,900,000 and 0 shares
authorized; 4,667,969 and 0 shares issued and outstanding,
as of December 31, 1998 and 1999, respectively............ 6,473 --
Series F, $0.01 par value; 5,300,000 and 0 shares
authorized; 5,230,652 and 0 shares issued and outstanding,
as of December 31, 1998 and 1999, respectively............ 18,968 --
------- -------
Total redeemable convertible preferred stock...... $25,441 $52,251
======= =======
</TABLE>
On February 12, 1999, all outstanding shares of Series F and Series G
preferred stock were converted into 5,323,420 shares of Series H preferred
stock. On the date of the conversion, Servicesoft reclassified the book value of
the Series F and Series G preferred stock of $25,602,000 to Series H preferred
stock. As part of the Balisoft merger, Servicesoft issued 2,281,653 shares of
exchangeable preferred stock. The exchangeable preferred stock has rights
identical to the outstanding Series H preferred stock and is exchangeable into
shares of Series H preferred stock at any time at the option of the holder;
accordingly, the exchangeable preferred stock has been included within the
balance of outstanding Series H preferred stock. During 1999, Servicesoft
recorded $1,680,000 of accretion to reflect cumulative amounts payable to the
Series H preferred stockholders upon redemption.
On June 18, 1999, Servicesoft issued 3,982,271 shares of Series I preferred
stock for proceeds to Servicesoft of $16,327,000, prior to any fees or offering
costs. During 1999, Servicesoft recorded $884,000 of accretion to reflect
cumulative amounts payable to the Series I preferred stockholders upon
redemption.
The Series H preferred stock and the Series I preferred stock
(collectively, the "preferred stock") have the following characteristics:
CONVERSION
Each share of preferred stock is convertible at any time, at the option of
the holder based on specified formula (one-for-one as of December 31, 1999),
subject to anti-dilution adjustments, as defined. All shares of preferred stock
will automatically convert into common stock upon the vote of the holders of
two-thirds of the outstanding shares of preferred stock or upon an initial
public offering of common stock with gross proceeds to Servicesoft of at least
$30,000,000 and an offering which places the value of Servicesoft at not less
than $150,000,000.
F-15
<PAGE> 82
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
VOTING AND DIVIDENDS
Holders of the preferred stock are entitled to votes equaling the number of
shares of common stock into which their shares may be converted. The holders of
preferred stock are entitled to annual, noncumulative dividends of 6% of the
original issue price, as defined, when and if declared by Servicesoft's Board of
Directors.
LIQUIDATION
In the event of liquidation, dissolution or winding up of Servicesoft, the
holders of Series I preferred stock are entitled to a liquidation preference of
$4.10 per share plus all declared and unpaid dividends thereon, prior to any
distribution to holders of Series H preferred stock or common stock. Upon the
satisfaction of the Series I preferred stock liquidation preference, the holders
of Series H preferred stock are entitled to an aggregate liquidation preference
of $19,203,186, prior to any distribution to holders of common stock. Any
remaining assets after the liquidation preference payments made to the preferred
stock will be shared ratably by the common stockholders until the holders
receive the per share liquidation amount that the Series H preferred
stockholders received. After that point, the remaining assets will be shared
ratably by the Series H stockholders, on an as-converted basis, and the common
stockholders until the Series H stockholders and the common stockholders receive
the per share liquidation amount that the Series I preferred stockholders
received. Any remaining assets will be shared ratably among the Series I and
Series H stockholders, on an as-converted basis, and the common stockholders.
REDEMPTION
On each of February 10, 2004, 2005 and 2006, Servicesoft, upon the written
election of at least a majority of the holders of preferred stock, at the option
of any holder, is obligated to redeem one-third of the shares of the preferred
stock outstanding on February 10, 2004. The redemption price for each share of
Series H and Series I preferred stock will be $2.53 and $4.10 per share,
respectively, plus 10% per year compounded on each anniversary date of the
issuance of each series of preferred stock, plus declared and unpaid dividends
on each series of preferred stock.
PREFERRED STOCK WARRANT
In January 1998, Servicesoft issued a warrant to purchase 117,188 shares of
Series G preferred stock. This warrant, which was issued in connection with a
software development and license agreement, was immediately exercisable at a
price of $2.56 per share and expires in 2003. In connection with the conversion
of the Series G preferred stock to Series H preferred stock, this warrant was
amended to provide for the purchase of 63,025 shares of Series H preferred stock
at an exercise price of $4.76 per share. This warrant was determined to have an
immaterial value on the date of issue.
As of December 31, 1999, Servicesoft had 11,650,369 shares of common stock
reserved for issuance upon the conversion and exchange of preferred stock and
the exercise of the outstanding preferred stock warrant.
6. STOCKHOLDERS' DEFICIT
STOCK SPLIT
On February 12, 1999, the Board of Directors approved a 1-for-0.53781
reverse stock split. All share data have been restated in these consolidated
financial statement to reflect this stock split.
EXCHANGEABLE COMMON STOCK
As part of the Balisoft acquisition, Servicesoft issued 2,205,915 shares of
exchangeable common stock. The exchangeable common stock has rights identical to
Servicesoft's outstanding common stock and is
F-16
<PAGE> 83
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exchangeable into shares of common stock at any time at the option of the
holder; accordingly, the exchangeable common stock has been included within the
balance of outstanding common stock.
SERIES X AND Y PREFERRED STOCK
As of December 31, 1999, Servicesoft had one share of Series X preferred
stock outstanding and one share of Series Y preferred stock outstanding which
were issued in connection with the Balisoft merger to a trustee of the former
Balisoft stockholders pursuant to a Voting and Exchange Trust Agreement. Under
this agreement, the holders of exchangeable common stock are entitled to
exercise voting rights equivalent to voting rights attaching to the same number
of Servicesoft's common stock by and through the trustee of the share of Series
X preferred stock. The holders of exchangeable preferred stock are entitled to
exercise voting rights equivalent to voting rights attaching to the same number
of shares of Series H preferred stock through the trustee of the share of Series
Y preferred stock. The share of Series X preferred stock will be automatically
redeemed at such time that no shares of exchangeable common stock are
outstanding and the share of Series Y preferred stock will be automatically
redeemed, at such time that no shares of exchangeable preferred stock are
outstanding.
RESTRICTED STOCK
During October and November 1999, Servicesoft granted 1,060,502 shares of
$.01 par value restricted common stock to certain employees and members of its
Board of Directors. These shares vest annually over a four-year term for those
shares issued to employees and annually over a three-year term for those shares
issued to Board of Directors members. Unvested restricted shares are subject to
forfeiture in the event that an employee ceases to be employed by Servicesoft or
a Board of Director member ceases to be on the Board of Directors. Servicesoft
recorded deferred stock compensation of $4,710,000, which represents the excess
of the fair value of the restricted shares at the date of the award, for
financial reporting purposes, over the purchase price. Compensation expense will
be recognized ratably over the vesting period of the restricted stock. For the
year ended December 31, 1999, Servicesoft recognized $323,000 of related stock
compensation expense.
In connection with the issuance of the restricted stock, Servicesoft
accepted notes payable from two officers in the total amount of $1,013,000.
These notes have an interest rate of 7% compounded annually; interest is payable
annually on the anniversary date of the notes. The principal and any accrued but
unpaid interest is payable on the earlier of the sale or other disposition of
the underlying stock or on the tenth anniversary of the notes. The principal and
interest may not be prepaid. Interest earned during the year ended December 31,
1999 was $11,000 and is included in interest income. These notes are secured by
the underlying shares of stock and have recourse to the officers' personal
assets of up to 30% of the principal amount and 100% of any outstanding
interest.
STOCK OPTION MODIFICATIONS
In August 1999, a former employee of Servicesoft exercised stock options to
purchase 368,122 shares of common stock, through the issuance of a recourse note
payable to Servicesoft in the amount of $68,000. This note has an interest rate
of 6% and is due on the earlier of (i) the third anniversary of issuance, (ii)
one year after completion of an initial public offering of common stock or (iii)
upon the sale or disposition of the underlying stock. Interest earned during the
year ended December 31, 1999 was $2,000 and is included in interest income. As a
result of modifying these options, Servicesoft recorded stock compensation
expense of $1,036,000 during the year ended December 31, 1999.
During 1999, Servicesoft also authorized other stock option modifications,
such as extended exercise periods, which resulted in the recording of $217,000
of additional stock compensation expense during the year ended December 31,
1999.
F-17
<PAGE> 84
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMMON STOCK PURCHASE WARRANTS
As of December 31, 1999, Servicesoft had warrants outstanding for the
purchase of 2,797 shares of common stock. These warrants, which were issued in
connection with services rendered, were immediately exercisable and expire in
the year 2003. The holder of these warrants may purchase 2,634 shares of common
stock at $0.18 per share and 163 shares of common stock at $7.36 per share.
These warrants were determined to have an immaterial value on the date of issue.
As part of the Balisoft acquisition, Servicesoft issued warrants for the
purchase of 77,855 shares of exchangeable common stock at a price of $3.53 per
share. These warrants were immediately exercisable and expire in June 2000.
As part of the IBA acquisition, Servicesoft issued warrants for the
purchase of 17,985 shares of common stock. These warrants were immediately
exercisable at a price of $4.10 per share and expire on December 17, 2004. The
value of these warrants has been included in the purchase price of IBA (Note 3).
As of December 31, 1999, Servicesoft had 2,304,552 shares of common stock
reserved for issuance upon the exchange of the exchangeable common stock and the
exercise of outstanding common stock warrants.
BRIDGE LOAN CONVERSION
During 1996 and 1997, Servicesoft received proceeds of approximately
$724,000 and $782,000, respectively, from the issuance of bridge loans. As of
December 31, 1997, accrued interest related to these loans was $83,000. The
terms of the bridge loans included an interest rate of 8% and an original
maturity date of November 14, 1997. On February 18, 1998, Servicesoft converted
all amounts outstanding under the bridge loan, including accrued interest, into
2,118,735 shares of Series F preferred stock at a value of $0.75 per share.
Associated with this conversion, Servicesoft recorded an additional $530,000 of
interest expense to reflect the issuance of Series F preferred stock at below
fair market value.
7. STOCK OPTION PLAN:
In accordance with Servicesoft's 1994 Stock Option Plan (the "94 Plan"), as
amended, incentive stock options ("ISOs") and nonqualified stock options to
purchase a maximum of 2,200,000 shares of common stock may be granted to
qualified individuals by Servicesoft's Board of Directors. On November 1, 1999,
Servicesoft adopted the 1999 Stock Option and Grant Plan (the "99 Plan"). The 99
Plan provides for the granting of ISOs and nonqualified stock options,
restricted stock awards and unrestricted stock awards to officers, employees,
directors, consultants, advisors and other key persons, for up to 1,876,498
shares of common stock. The 99 Plan provides that upon an initial public
offering of Servicesoft's common stock and on each January 1 beginning on
January 1, 2001, the number of reserved shares authorized under the 99 Plan will
automatically increase to equal the greater of 4% of the issued and outstanding
capital stock on a fully-diluted basis or that number of shares as would be
necessary to maintain the reserved number of shares at 20% of the issued and
outstanding capital stock on a fully-diluted basis. ISOs are granted to
employees of Servicesoft with exercise prices not less than the fair market
value of Servicesoft's common shares on the date of grant, as determined by
Servicesoft's Board of Directors, typically vest over a four-year period, and
are exercisable over a period not to exceed ten years from the date of grant.
Nonqualified options may be granted to employees, directors, consultants and
other advisors to Servicesoft on terms set forth by the Board of Directors on an
individual case basis.
F-18
<PAGE> 85
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity of the 94 Plan and the 99 Plan
since January 1, 1997:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996..................... 279,043 $1.34
Granted............................................ 66,675 0.19
Exercised.......................................... (9,628) 3.24
Canceled........................................... (13,789) 0.22
---------
Outstanding at December 31, 1997..................... 322,301 0.84
Granted............................................ 819,031 0.19
Exercised.......................................... (16,774) 0.19
Canceled........................................... (93,936) 0.32
---------
Outstanding at December 31, 1998..................... 1,030,622 0.37
Granted............................................ 2,899,651 0.79
Exercised.......................................... (717,137) 0.27
Canceled........................................... (261,456) 0.53
---------
Outstanding at December 31, 1999..................... 2,951,680 $0.82
=========
</TABLE>
As of December 31, 1997, 1998 and 1999, options to purchase 131,335,
192,071 and 281,942 shares of common stock were exercisable, respectively with
weighted-average exercise prices of $1.73, $1.19 and $0.41, respectively. The
weighted average fair value per share of options granted during 1997, 1998 and
1999 was $0.03, $0.12 and $5.18, respectively.
As of December 31, 1999, 100,215 and 797,603 shares were available for
future grants under the 94 Plan and the 99 Plan, respectively.
Summarized information about stock options outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
REMAINING
NUMBER OF CONTRACTUAL NUMBER OF
EXERCISE OPTIONS LIFE OPTIONS
PRICE OUTSTANDING (IN YEARS) EXERCISABLE
- -------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.18 1,035,327 8.29 263,483
0.50 120,000 9.67 --
1.00 1,676,169 9.91 3,768
3.08 53,760 9.27 3,804
3.53 4,673 8.83 4,154
5.14 60,728 8.88 5,710
7.36 1,023 4.35 1,023
--------- -------
2,951,680 9.17 281,942
========= =======
</TABLE>
Under APB 25, prior to 1999, no compensation expense had been recognized
for stock option grants made by Servicesoft. For the year ended December 31,
1999, compensation expense recognized for stock option and restricted stock
grants totaled $1,900,000. Had compensation cost for Servicesoft's stock option
plans been determined based on the fair value at the date of grant for awards
granted in 1999 and all prior periods (excluding those common stock options
converted and issued in connection with the Balisoft and IBA transactions),
consistent with the provisions of SFAS 123, Servicesoft's net loss attributable
to common
F-19
<PAGE> 86
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stockholders and net loss per common share for the years ended December 31,
1997, 1998 and 1999 would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------ ------------------------
NET LOSS NET NET LOSS NET NET LOSS NET
ATTRIBUTABLE LOSS PER ATTRIBUTABLE LOSS PER ATTRIBUTABLE LOSS PER
TO COMMON COMMON TO COMMON COMMON TO COMMON COMMON
STOCKHOLDERS SHARE STOCKHOLDERS SHARE STOCKHOLDERS SHARE
------------ -------- ------------ -------- ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
As reported.......... $(1,444) $(144.40) $(4,994) $(262.84) $(26,278) $(11.02)
Pro forma............ $(1,447) $(144.70) $(5,005) $(263.42) $(26,358) $(11.05)
</TABLE>
For this purpose, the fair value of options at the date of grant was
estimated using the minimum value method with the following weighted-average
assumptions for 1997, 1998 and 1999: risk-free interest rates of 6.5%, 5.0% and
5.25%, respectively; no dividend yields or volatility factors; and
weighted-average expected life of the options of five years However, because the
determination of the fair value of all options granted after Servicesoft becomes
a publicly-traded entity will include an expected volatility factor, because
most options vest over periods of up to four years and because additional option
grants are expected to be made subsequent to December 31, 1999, the pro forma
effects of applying the fair value method may be materially different in future
years.
8. LINES OF CREDIT:
REVOLVING LINE OF CREDIT
On June 3, 1999, Servicesoft entered into a revolving credit facility with
a bank which provides up to $2,000,000 in revolving credit. Under the terms of
this agreement, Servicesoft paid a non-refundable facility fee of $3,750 and
must pay on the first date of each calendar quarter thereafter a non-refundable
facility fee in the amount of $2,500. The interest rate assessed on outstanding
borrowings is equal to the bank's prime rate plus 0.5% per year (9.0% at
December 31, 1999). Additionally, Servicesoft is required to maintain certain
financial ratios and is bound by covenants over the life of the agreement. As of
December 31, 1999, Servicesoft had $1,000,000 outstanding under this facility
and $1,000,000 remained available.
EQUIPMENT LINE
On June 3, 1999, Servicesoft entered into equipment financing arrangements
with a bank for aggregate borrowings of $750,000 with an interest rate of the
bank's prime rate plus 0.75% per year (9.25% at December 31, 1999). Borrowings
are collateralized by certain assets of Servicesoft. Servicesoft had no
borrowings against this facility as of December 31, 1999.
9. COMMITMENTS:
OPERATING LEASES
Servicesoft has entered into operating leases for its office facilities and
certain equipment, which expire at various dates through 2005. Total rent
expense for the years ended December 31, 1997, 1998 and 1999 was $162,000,
$157,000 and $818,000, respectively.
CAPITAL LEASES
Servicesoft has entered into various lease agreements for computer and
office equipment and software that have been recorded as capital leases. Certain
of these leases required Servicesoft to deposit restricted cash on account of
$187,000 as of December 31, 1999; other capital leases required Servicesoft to
obtain $400,000
F-20
<PAGE> 87
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of standby letters of credit. Servicesoft would be required to reimburse the
bank for any amounts paid under these letters of credit.
Future minimum lease payments under all noncancelable operating and capital
leases as of December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED DECEMBER 31, LEASES LEASES
- ----------------------- --------- -------
<S> <C> <C>
2000...................................................... $1,505 $404
2001...................................................... 1,361 368
2002...................................................... 1,345 170
2003...................................................... 1,270 33
2004...................................................... 1,255 17
Thereafter................................................ 673 4
------ ----
$7,409 996
======
Less: amounts representing interest......................... 140
----
Present value of future minimum payments.................... 856
Less: amounts due within one year........................... 334
----
Long-term portion........................................... $522
====
</TABLE>
10. SEGMENT REPORTING
Servicesoft operates in a single segment and has no organizational
structure dictated by product lines, geography or customer type.
The following table presents revenue and long-lived assets, excluding
goodwill and other intangible assets, information by geographic area as of and
for the years ended December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
TOTAL REVENUE LONG-LIVED ASSETS
-------------------------- ----------------------
1997 1998 1999 1997 1998 1999
------ ------ ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
United States........................... $2,423 $3,858 $5,362 $19 $363 $3,056
United Kingdom.......................... -- -- 704 -- -- 56
Belgium................................. 103 432 944 -- 1 13
Canada.................................. -- -- 134 -- -- 443
------ ------ ------ --- ---- ------
$2,526 $4,290 $7,144 $19 $364 $3,568
====== ====== ====== === ==== ======
</TABLE>
International revenue is based on the country in which the sale originates.
During 1997 and 1998, three and two customers accounted for a total of 44% and
32% of Servicesoft's total revenue, respectively. During 1999, no customer
accounted for more than 10% of Servicesoft's total revenue.
11. INCOME TAXES:
As a result of taxable losses generated, Servicesoft has not recorded any
provisions for income taxes for the years ended December 31, 1997, 1998 and
1999. The following is a reconciliation between the amount of
F-21
<PAGE> 88
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Servicesoft's income taxes utilizing the U.S. federal statutory rate and
Servicesoft's actual provision for income taxes for the years ended December 31
1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
At U.S. federal statutory rate........................ $(379) $(1,393) $(8,008)
Non-deductible stock option compensation charges...... -- -- 646
Non-deductible amortization and other charges......... 26 11 909
State taxes, net of federal effect.................... (65) (178) (1,188)
Effect of change in valuation allowance............... 506 1,636 7,777
Research and development credits...................... (88) (76) (136)
----- ------- -------
Provision for income taxes............................ $ -- $ -- $ --
===== ======= =======
</TABLE>
Deferred taxes reflect the net effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. As of December 31 1998 and 1999, net
deferred tax assets consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards............................ $ 6,933 $ 16,310
R&D credits and investment tax credits...................... 446 384
Capitalized development costs............................... 212 399
Differences in accounting for intangible assets............. -- (944)
Other....................................................... 24 32
------- --------
Total deferred tax assets......................... 7,615 16,181
Valuation allowance......................................... (7,615) (16,181)
------- --------
Net deferred tax assets........................... $ -- $ --
======= ========
</TABLE>
As of December 31, 1999, Servicesoft had net operating loss carryforwards
of $37,500,000, $29,100,000 and $5,100,000 for federal, state and foreign income
tax purposes, respectively. These carryforwards expire in the years 2000 through
2019, and are subject to additional annual limitations as a result of changes in
Servicesoft's ownership.
Management of Servicesoft has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets. Through December 31,
1999, management was unable to conclude that it is more likely than not that
Servicesoft will realize the benefit of the deferred tax assets and,
accordingly, Servicesoft has recorded a valuation allowance for the full amount
of the net deferred tax assets.
12. SAVINGS PLAN:
Servicesoft sponsors a savings plan for its employees which is designed to
be qualified under section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deductions within statutory and plan limits. Servicesoft does not contribute to
the plan.
F-22
<PAGE> 89
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUPPLEMENTAL CASH FLOW INFORMATION:
The following table reflects supplemental cash flow investing and financing
activities (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash paid for interest..................................... $ 14 $ 8 $ 35
======== ======== ========
Noncash investing and financing activities:
Conversion of bridge loans and accrued interest into
Series F redeemable convertible preferred stock....... $ -- $ 1,589 $ --
Property and equipment acquired under capital lease
obligations........................................... $ -- $ 120 $ 559
Common stock issued in exchange for notes receivable from
stockholders.......................................... $ -- $ -- $ 1,104
Merger with Balisoft Technologies Inc., liabilities were
assumed as follows:
Fair value of assets acquired and goodwill............ $ -- $ -- $ 13,273
Common stock, preferred stock, common stock options
and warrants issued................................. -- -- (12,313)
-------- -------- --------
Liabilities assumed................................. $ -- $ -- $ 960
======== ======== ========
Acquisition of Internet Business Advantages, Inc.,
liabilities were assumed as follows:
Fair value of assets acquired and goodwill............ $ -- $ -- $ 11,765
Common stock, preferred stock, common stock options
and warrants issued................................. -- -- (9,418)
Cash paid............................................. -- -- (1,156)
-------- -------- --------
Liabilities assumed................................. $ -- $ -- $ 1,191
======== ======== ========
</TABLE>
14. SUBSEQUENT EVENTS:
SERIES J PREFERRED STOCK OFFERING
On January 13, 2000, Servicesoft completed an offering of 3,481,478 shares
of its Series J redeemable convertible preferred stock (the "Series J preferred
stock") for proceeds to the Company of $31,438,000, prior to any fees or
offering costs. The Series J preferred stock has substantially identical voting,
dividend, redemption and conversion rights as the Series H and Series I
preferred stock, except the redemption amount per share (Note 5). In the event
of any liquidation, dissolution or winding-up of Servicesoft, the holders of
Series J preferred stock have a liquidation preference above Series H and Series
I preferred stock and are entitled to receive $9.03 per share prior to any
distributions to holders of Series H and Series I preferred stock and common
stock.
F-23
<PAGE> 90
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors of
Balisoft Technologies Inc.
We have audited the consolidated balance sheets of Balisoft Technologies
Inc. as at December 31, 1998 and 1997 and the consolidated statements of loss
and deficit and changes in financial position for the year ended December 31,
1998 and for the period from the date of incorporation, June 5, 1997, to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997 and the results of its operations and the changes in its financial
position for the year ended December 31, 1998 and for the period from the date
of incorporation, June 5, 1997, to December 31, 1997 in accordance with
accounting principles generally accepted in Canada.
ERNST & YOUNG LLP
Chartered Accountants
Toronto, Canada,
March 12, 1999.
F-24
<PAGE> 91
BALISOFT TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
AS AT DECEMBER 31,
-----------------------
1998 1997
$ $
---------- ---------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents [note 2].......................... 8,435,790 1,375,534
Accounts receivable......................................... 170,304 48,873
Prepaid expenses............................................ 176,846 5,037
---------- ---------
TOTAL CURRENT ASSETS........................................ 8,782,940 1,429,444
---------- ---------
Capital assets, net [note 3]................................ 481,876 245,799
---------- ---------
9,264,816 1,675,243
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities.................... 1,267,274 410,396
Current portion of obligations under capital leases [note
8]........................................................ 102,228 --
Current portion of long-term debt [note 4].................. 5,272 6,689
---------- ---------
TOTAL CURRENT LIABILITIES................................... 1,374,774 417,085
---------- ---------
Long-term debt [note 4]..................................... 218,256 221,863
Obligations under capital leases [note 8]................... 225,516 --
---------- ---------
TOTAL LIABILITIES........................................... 1,818,546 638,948
---------- ---------
Commitments and contingencies [notes 8 and 11]
SHAREHOLDERS' EQUITY
Share capital [note 5]...................................... 5,927,404 2,032,163
Special warrants [note 5]................................... 8,631,439 --
Deficit..................................................... (7,112,573) (995,868)
---------- ---------
TOTAL SHAREHOLDERS' EQUITY.................................. 7,446,270 1,036,295
---------- ---------
9,264,816 1,675,243
========== =========
</TABLE>
See accompanying notes
F-25
<PAGE> 92
BALISOFT TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF
LOSS AND DEFICIT
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
DATE OF
INCORPORATION,
JUNE 5, 1997,
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1998 1997
$ $
------------ --------------
<S> <C> <C>
REVENUE
Interest income............................................. 299,715 --
---------- --------
EXPENSES
Research and development.................................... 1,742,473 436,739
General and administrative.................................. 1,669,432 453,491
Marketing................................................... 1,369,249 105,638
Sales....................................................... 1,184,693 --
Restructuring [note 9]...................................... 450,573 --
---------- --------
6,416,420 995,868
---------- --------
NET LOSS FOR THE PERIOD..................................... (6,116,705) (995,868)
Deficit, beginning of period................................ (995,868) --
---------- --------
DEFICIT, END OF PERIOD...................................... (7,112,573) (995,868)
========== ========
</TABLE>
See accompanying notes
F-26
<PAGE> 93
BALISOFT TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF
CHANGES IN FINANCIAL POSITION
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
DATE OF
INCORPORATION,
JUNE 5, 1997,
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1998 1997
$ $
------------ --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss for the period..................................... (6,116,705) (995,868)
Add item not affecting cash
Amortization.............................................. 162,436 11,708
---------- ---------
(5,954,269) (984,160)
Net change in non-cash working capital balances related
to operations [note 6].................................... 563,638 356,486
---------- ---------
CASH USED IN OPERATING ACTIVITIES........................... (5,390,631) (627,674)
---------- ---------
INVESTING ACTIVITIES
Purchase of capital assets.................................. (398,513) (257,507)
---------- ---------
CASH USED IN INVESTING ACTIVITIES........................... (398,513) (257,507)
---------- ---------
FINANCING ACTIVITIES
Issuance of common shares [note 5].......................... 1,093,117 2,032,163
Issuance of exchangeable preferred shares, net of costs
[note 5].................................................. 2,802,124 --
Issuance of special warrants, net of costs [note 5]......... 8,631,439 --
Increase (decrease) in long-term debt....................... (5,024) 228,552
Obligations under capital leases, net....................... 327,744 --
---------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES....................... 12,849,400 2,260,715
---------- ---------
NET INCREASE IN CASH DURING THE PERIOD...................... 7,060,256 1,375,534
Cash and cash equivalents, beginning of period.............. 1,375,534 --
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... 8,435,790 1,375,534
========== =========
REPRESENTED BY
Cash........................................................ 2,058,666 379,574
Cash equivalents [note 2]................................... 6,377,124 995,960
---------- ---------
8,435,790 1,375,534
========== =========
</TABLE>
See accompanying notes
F-27
<PAGE> 94
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN CANADIAN DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Balisoft Technologies Inc. [the
"Company"] have been prepared by management in accordance with generally
accepted accounting principles in Canada. The significant accounting policies
are as follows:
BASIS OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Balisoft Ltd., incorporated under the laws of
Israel. These consolidated financial statements are expressed in Canadian
dollars, the operating currency of the Company.
USE OF ESTIMATES
In preparing the Company's consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and reported amounts of
revenue and expenses during the period. Actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS
Cash includes cash equivalents, which are investments that are generally
held to maturity and have terms of three months or less at the time of
acquisition. Cash equivalents typically consist of discounted and short-term
notes. Cash equivalents are stated at fair value, which approximates cost.
CAPITAL ASSETS
Capital assets are recorded at cost less accumulated amortization.
Amortization is provided on a straight-line basis over the following periods:
<TABLE>
<S> <C>
Office equipment..................................... 5 years
Computer hardware and software....................... 3 years
Furniture and fixtures............................... 6 to 15 years
Motor vehicles....................................... 6.67 years
Leasehold improvements............................... 5 years
Equipment under capital leases....................... 3 years
</TABLE>
LEASES
A lease that transfers substantially all the benefits and risks incidental
to the ownership of the property is accounted for as if it were an acquisition
of an asset and the incurrence of an obligation at the inception of the lease.
All other leases are accounted for as operating leases with rental payments
being expensed as incurred.
REVENUE RECOGNITION
Revenue from software sales is recognized on delivery of the software.
FOREIGN EXCHANGE TRANSLATION
The Company's subsidiary is considered to be an integrated operation.
Accordingly, monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at the rates of exchange
F-28
<PAGE> 95
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
prevailing at period end while other consolidated balance sheet items are
translated at historic rates. Revenue and expenses are translated at the rates
of exchange in effect on the transaction dates. Realized and unrealized foreign
exchange gains and losses are included in income in the period in which they
occur, except where they arise from translation of non-current monetary items.
Such gains and losses are deferred and amortized to income on a straight-line
basis over the remaining life of the underlying non-current monetary items.
RESEARCH AND DEVELOPMENT
Research costs are expensed in the period incurred. Development costs are
expensed in the period incurred unless a development project meets generally
accepted accounting criteria for deferral and amortization. No development costs
have been deferred to date.
INCOME TAXES
The Company follows the deferral method of income tax allocation. Deferred
income taxes result from claiming deductions for income tax purposes in amounts
which differ from those charged in the accounts.
2. CASH EQUIVALENTS
As at December 31, 1998, cash equivalents consist of bankers' acceptances
of U.S. $2,604,090 and $2,372,496 [$995,960 at December 31, 1997], which mature
on January 15, 1999 and January 20, 1999, respectively [January 21, 1998 for
December 31, 1997], and bear interest at rates ranging from 4.3% to 4.4%.
3. CAPITAL ASSETS
Capital assets consist of the following:
<TABLE>
<CAPTION>
1998
----------------------------------
NET
ACCUMULATED BOOK
COST AMORTIZATION VALUE
$ $ $
------- ------------ -------
<S> <C> <C> <C>
Office equipment................................. 4,622 818 3,804
Computer hardware and software................... 122,714 33,465 89,249
Furniture and fixtures........................... 36,927 3,258 33,669
Motor vehicles................................... 50,023 7,084 42,939
Leasehold improvements........................... 18,650 3,730 14,920
Equipment under capital leases................... 272,269 45,374 226,895
Leasehold improvements under capital leases...... 88,000 17,600 70,400
------- ------- -------
593,205 111,329 481,876
======= ======= =======
</TABLE>
F-29
<PAGE> 96
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------
NET
ACCUMULATED BOOK
COST AMORTIZATION VALUE
$ $ $
------- ------------ -------
<S> <C> <C> <C>
Office equipment................................. 2,808 94 2,714
Computer hardware and software................... 160,914 9,317 151,597
Furniture and fixtures........................... 41,408 900 40,508
Motor vehicles................................... 46,494 1,354 45,140
Leasehold improvements........................... 5,883 43 5,840
------- ------- -------
257,507 11,708 245,799
======= ======= =======
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
------- -------
<S> <C> <C>
Canada Israel Industrial Research and
Development Foundation................................. 200,000 200,000
Bank Leumi............................................... 23,528 28,552
------- -------
223,528 228,552
Less current portion..................................... 5,272 6,689
------- -------
218,256 221,863
======= =======
</TABLE>
The Canada Israel Industrial Research and Development Foundation ["CIIRDF"]
has advanced $200,000 of a total $600,000 due under the terms of an agreement
with the Company and its subsidiary, dated November 24, 1997. The balance of the
monies was due in two equal annual tranches on November 24, 1998 and 1999,
however, owing to the discontinuance of operations of the subsidiary, no further
amounts will be advanced. The provisions of the agreement require repayment of
the loan at 2.5% of gross sales, calculated semi-annually commencing at the date
of the first commercial transaction. The loan will be forgiven in the event that
no commercial sales of the products funded by CIIRDF are made. No interest is
charged on this loan.
The U.S. dollar loan from Bank Leumi is collateralized against certain
assets of the subsidiary, bears interest at 8.5% per annum and is repayable in
monthly installments of U.S. $331.
5. SHARE CAPITAL
Share capital consists of the following:
AUTHORIZED
Unlimited common shares
Unlimited voting, non-cumulative, convertible Class A preferred shares
F-30
<PAGE> 97
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ISSUED
A summary of changes to issued share capital is as follows:
<TABLE>
<CAPTION>
1998
COMMON SHARES
---------------------
# $
------- ----------
<S> <C> <C>
Issued and outstanding, December 31, 1997............. 121,162 2,032,163
Issue of common shares for cash [a]................... 250.... 14,300
Issue of common shares for cash upon exercise of
warrants............................................ 8,271 500,395
Conversion of short-term debt to common shares
pursuant to convertible loan agreements............. 2,375 187,500
Issue of common shares for cash pursuant to employee
share purchase plan................................. 4,941 390,665
Employee stock options exercised for cash............. 167 257
------- ----------
ISSUED AND OUTSTANDING, DECEMBER 31, 1998............. 137,166 3,125,280
======= ==========
</TABLE>
<TABLE>
<CAPTION>
1998
SPECIAL WARRANTS
---------------------
# $
------- ----------
<S> <C> <C>
Issued and outstanding, December 31, 1997............. -- --
Issue of special warrants for cash [b]................ 112,013 8,631,439
------- ----------
ISSUED AND OUTSTANDING, DECEMBER 31, 1998............. 112,013 8,631,439
======= ==========
</TABLE>
<TABLE>
<CAPTION>
1998
EXCHANGEABLE
PREFERRED SHARES
---------------------
# $
------- ----------
<S> <C> <C>
Issued and outstanding, December 31, 1997............. -- --
Issue of exchangeable preferred shares for cash [c]... -- 2,802,124
------- ----------
ISSUED AND OUTSTANDING, DECEMBER 31, 1998............. -- 2,802,124
------- ----------
14,558,843
==========
</TABLE>
<TABLE>
<CAPTION>
1997
COMMON SHARES
---------------------
# $
------- ----------
<S> <C> <C>
Issued and outstanding, June 5, 1997.................. 90,000 343,753
Issue of common shares for cash....................... 31,162 1,688,410
------- ----------
Issued and outstanding, December 31, 1997............. 121,162 2,032,163
======= ==========
</TABLE>
<TABLE>
<CAPTION>
1997
SPECIAL WARRANTS
---------------------
# $
------- ----------
<S> <C> <C>
Issued and outstanding, June 5, 1997.................. -- --
------- ----------
Issued and outstanding, December 31, 1997............. -- --
------- ----------
</TABLE>
F-31
<PAGE> 98
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997
EXCHANGEABLE
PREFERRED SHARES
---------------------
# $
------- ----------
<S> <C> <C>
Issued and outstanding, June 5, 1997.................. -- --
Issued and outstanding, December 31, 1997............. -- --
------- ----------
2,032,163
==========
</TABLE>
The common shares and preferred shares participate equally with respect to
voting rights. Any preferred shares which may be issued shall rank prior to the
common shares with respect to dividends and with respect to the return of
property or assets upon the liquidation, dissolution or winding-up of the
Company. After the payment of preferred share dividends, the preferred shares
participate equally with the common shares in any further dividends.
The preferred shares may be converted pro rata, at any time, at the option
of the holder, into fully paid, non-accessible common shares of the Company on a
one-for-one basis. Each outstanding preferred share shall be automatically
converted into one common share at the earlier of June 1, 2002, any initial
public offering of common shares of the Company, or the closing date of a change
of control transaction.
[a] Warrants. On April 9, 1998, 250 common shares were issued for
aggregate proceeds of approximately $14,300 [U.S. $10,000]. In connection with
this issue of common shares, the Company granted 5,000 warrants that are
exercisable at any time up to June 3, 2000, at an exercise price of U.S. $54.92.
[b] Special warrants. Pursuant to an agreement dated June 3, 1998, the
Company completed the issuance, by way of a private placement, of 112,013
special warrants for gross proceeds of $8,851,000 [U.S. $5,700,000 and Cdn.
$650,000]. The net proceeds of the offering totalled approximately $8,631,439.
Each special warrant [other than 1,898 special warrants that are
convertible into common shares only] is exercisable without additional
consideration for one preferred share or, at the election of the holder, such a
number of common shares as would be issuable upon conversion of one preferred
share into common shares in accordance with the Articles of Incorporation.
In the event that a final prospectus is not issued and the Company fails to
complete an initial public offering on or before the 3rd anniversary date of the
agreement, any special warrants exercised after this date shall entitle the
holders to receive 1.15 shares, without payment of additional consideration. Any
outstanding warrants shall be deemed to have been exercised by the holder on the
expiry date, being the 4th anniversary of the closing date.
[c] Exchangeable preferred shares. On June 3, 1998, the Company issued
100 exchangeable preferred shares in its subsidiary for aggregate proceeds of
approximately $2,877,600 [U.S. $2,000,000], to be used specifically to fund
research and development. The associated costs of the exchangeable preferred
share issue were approximately $75,500.
These exchangeable preferred shares are exchangeable on the basis of
364.16605 preferred shares or 364.16605 common shares of the Company at the
holder's option for each exchangeable preferred share subject to adjustment as
set forth in the Articles of Incorporation and share exchange agreement. The
exchangeable preferred shares rank equally with the common shares of the Company
in respect of voting rights and entitlement to dividends. Upon liquidation,
proceeds will be allocated U.S. $54.92 plus 8% interest from June 1, 1998 to
each issued preferred share and then U.S. $54.92 to each common share. The
common and preferred shares then share equally in any remaining liquidation
surplus.
F-32
<PAGE> 99
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
An automatic exchange of the exchangeable preferred shares into either
common or preferred shares may occur if any of the following transactions takes
place:
[i] Upon insolvency of the Company or the subsidiary;
[ii] Upon the proposed sale of all or substantially all, or the proposed
amalgamation, merger or other business combination of the
subsidiary;
[iii] From June 3, 2003, after a resolution of the board of directors of
the subsidiary; or
[iv] Upon a mandatory conversion event defined in the Articles of
Amendment as either the closing date of any initial public offering
by the Company or the closing date of any transaction approved by
the board of directors of the Company in a resolution designating
such transaction as a "change in control transaction" for the
purposes of the Articles of Amendment and resulting in the
acquisition of control of the Company, the sale of all or
substantially all of the business or assets of the Company, or the
amalgamation, merger or other business combination of the Company.
Accordingly, the preferred shares of the subsidiary held by non-controlling
interests is regarded in substance as a residual equity interest of the Company
and has been presented as equity in these consolidated financial statements.
[d] Stock options. As at December 31, 1998, 10,000 founder's options are
outstanding to acquire 10,000 common shares at an exercise price per common
share of $0.01 which expire on April 6, 2007.
The Company has established two stock option plans [Option Plan A and
Option Plan B] to encourage ownership in the Company's common shares by
executives, directors and employees of the Company and its subsidiary. As at
December 31, 1998, under these plans there were options granted to purchase
32,525 common shares exercisable at various prices which range from Cdn. $0.10
to $55.00 and U.S. $1.00 to $40.00. These options expire on various dates to
April 29, 2001.
6. CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
The net change in non-cash working capital balances related to operations
consists of the following:
<TABLE>
<CAPTION>
1998 1997
$ $
-------- -------
<S> <C> <C>
Accounts receivable..................................... (121,431) (48,873)
Prepaid expenses........................................ (171,809) (5,037)
Accounts payable and accrued liabilities................ 856,878 410,396
-------- -------
563,638 356,486
======== =======
</TABLE>
7. INCOME TAXES LOSS CARRYFORWARDS
The Company has non-capital losses available for carryforward from December
31, 1998 of approximately $4,060,000 and $460,000 [1997--$460,000] that will
expire in 2005 and 2004, respectively. The Company's subsidiary has a taxable
loss allowance at December 31, 1998 of approximately $2,660,000
[1997--$480,000]. The potential income tax benefits of these losses have not
been recorded in the consolidated financial statements.
F-33
<PAGE> 100
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LEASE COMMITMENTS
[A] CAPITAL LEASES
Future minimum annual lease payments under capital leases for the next five
years are as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
1999..................................................... 124,650
2000..................................................... 123,385
2001..................................................... 90,690
2002..................................................... 21,346
2003..................................................... 12,453
-------
Total minimum capital lease payments..................... 372,524
Less imputed interest.................................... 44,780
-------
Present value of net minimum capital lease payments...... 327,744
Less current portion..................................... 102,228
-------
225,516
=======
</TABLE>
The Company has entered into an agreement with Dell Financial Services Ltd.
to provide a line of credit totaling $250,000 for leasing of capital assets. As
at December 31, 1998, the Company has utilized approximately $246,000 of this
facility. The nominal interest rate on the obligation is 8.1% per annum.
A letter of credit of $125,000 has been issued by the Company in favour of
Dell Financial Services Ltd. that expires on December 22, 1999.
The Company entered into an agreement with its real estate lessor whereby
the lessor paid for leasehold improvements totaling $88,000 to be repaid by the
Company over the term of the lease of five years ending July 1, 2003 with a
nominal interest rate of 8.2% per annum.
[B] OPERATING LEASES
Future minimum annual lease payments under operating leases for the next
five years are approximately as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
1999..................................................... 209,000
2000..................................................... 202,000
2001..................................................... 195,000
2002..................................................... 194,000
2003..................................................... 113,000
-------
913,000
=======
</TABLE>
9. RESTRUCTURING EXPENSES
Prior to the year end, management adopted a formal plan to close the
subsidiary's operations. This closure was substantially completed on January 4,
1999. Restructuring expenses consist of loss on capital assets of $111,904 and
closure related costs of $338,669.
F-34
<PAGE> 101
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in Canada ["Canadian GAAP"],
which, as applied in these consolidated financial statements, conform in all
material respects to those accounting principles generally accepted in the
United States ["U.S. GAAP"], except as follows:
Under Canadian GAAP, the accompanying consolidated statements of changes in
financial position report the changes in financial position of each major
balance sheet item, reconciling to the net change in cash. Under U.S. GAAP, the
consolidated statements of cash flow report the actual cash flow activities.
Accordingly, certain non-cash changes reported in the accompanying consolidated
statements of changes in financial position would not be reported in the
consolidated statements of cash flow under U.S. GAAP as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DATE OF
INCORPORATION,
JUNE 5, 1997,
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1998 1997
$ $
------------ --------------
<S> <C> <C>
OPERATING ACTIVITIES
Cash used in operating activities, Canadian
and U.S. GAAP............................... (5,390,631) (627,674)
---------- ---------
INVESTING ACTIVITIES
Cash used in investing activities, Canadian
GAAP........................................ (398,513) (257,507)
Assets acquired by capital lease.............. 327,744 --
---------- ---------
Cash used in investing activities, U.S.
GAAP........................................ (70,769) (257,507)
---------- ---------
FINANCING ACTIVITIES
Cash provided by financing activities,
Canadian GAAP............................... 12,849,400 2,260,715
Common shares issued for non-cash
consideration............................... (187,500) (343,750)
Obligations under capital lease............... (327,744) --
Debt issued................................... 187,500 343,750
---------- ---------
Cash provided by financing activities, U.S.
GAAP........................................ 12,521,656 2,260,715
---------- ---------
Net increase in cash and cash equivalents,
U.S. GAAP................................... 7,060,256 1,375,534
Cash and cash equivalents, beginning of
period...................................... 1,375,534 --
---------- ---------
Cash and cash equivalents, end of period...... 8,435,790 1,375,534
========== =========
</TABLE>
11. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the
F-35
<PAGE> 102
BALISOFT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Year 2000 Issue affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
12. SUBSEQUENT EVENT
Subsequent to December 31, 1998, in February 1999, the Company entered into
a combination transaction with a U.S. based company, ServiceSoft Corporation.
The shareholders of the Company received 45% of the common and preferred share
equity in the new combined entity. As part of the transaction, the Company
merged with Servicesoft Technologies (Canada) Inc., a wholly-owned subsidiary of
ServiceSoft Corporation. As part of the terms, 20% of the exchangeable shares of
Servicesoft Technologies (Canada) Inc. and 20% of ServiceSoft Corporation's
shares have been placed in escrow until the earlier of completion of an initial
public offering or 60 days after the completion of the fiscal 1999 audit.
F-36
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Internet Business Advantages, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Internet Business Advantages, Inc.
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company'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 auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
July 1, 1999
F-37
<PAGE> 104
INTERNET BUSINESS ADVANTAGES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 242,722 $ 855,681 $ 605,123
Accounts receivable, net of allowance for doubtful
accounts of $40,000, $2,500 and $2,500 at December 31,
1997 and 1998 and September 30, 1999 (unaudited),
respectively............................................ 200,400 252,550 308,744
Unbilled accounts receivable.............................. 11,500 90,817 241,054
Prepaid expenses and other current assets................. 17,100 14,953 61,316
---------- ---------- -----------
Total current assets.................................... 471,722 1,214,001 1,216,237
Fixed assets, net........................................... 100,340 295,988 376,017
Other assets................................................ -- 158,321 150,000
---------- ---------- -----------
Total assets....................................... $ 572,062 $1,668,310 $ 1,742,254
========== ========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Convertible demand note................................... $ -- $ -- $ 2,200,000
Current portion of capital lease obligations.............. -- 28,349 38,073
Current portion of long-term debt......................... -- 18,523 246,626
Accounts payable.......................................... 46,100 106,523 209,372
Accrued expenses.......................................... 121,500 318,338 467,285
Deferred revenue.......................................... 108,978 18,082 185,186
Accumulated losses in excess of investment in affiliate... 47,993 260,859 --
---------- ---------- -----------
Total current liabilities............................... 324,571 750,674 3,346,542
Capital lease obligations................................... -- 47,288 42,545
Long-term debt.............................................. -- 114,840 457,152
---------- ---------- -----------
Total liabilities....................................... 324,571 912,802 3,846,239
---------- ---------- -----------
Commitments (Note 9)
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.001
par value; 928,394 shares authorized, issued and
outstanding............................................. 1,021,233 1,021,233 1,021,233
Series B redeemable convertible preferred stock, $0.001
par value; 1,071,606 shares authorized, issued and
outstanding............................................. 978,767 978,767 978,767
Series C redeemable convertible preferred stock, $0.001
par value; no shares authorized, issued and outstanding
at December 31, 1997; 914,667 shares authorized, issued
and outstanding at December 31, 1998 and September 30,
1999 (unaudited)........................................ -- 2,999,998 2,999,998
---------- ---------- -----------
Total redeemable convertible preferred stock............ 2,000,000 4,999,998 4,999,998
---------- ---------- -----------
Stockholders' deficit:
Common stock, $0.001 par value; 5,000,000 shares
authorized; 1,062,667, 1,088,667 and 1,088,667 shares
issued at December 31, 1997 and 1998 and September 30,
1999 (unaudited), respectively; 1,062,667, 909,792 and
854,459 shares outstanding at December 31, 1997 and 1998
and September 30, 1999 (unaudited), respectively........ 1,063 1,089 1,089
Additional paid-in capital................................ 2,624 2,858 2,858
Treasury stock, at cost................................... -- (859) (1,267)
Accumulated deficit....................................... (1,756,196) (4,247,578) (7,106,663)
---------- ---------- -----------
Total stockholders' deficit............................. (1,752,509) (4,244,490) (7,103,983)
---------- ---------- -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' deficit.................. $ 572,062 $1,668,310 $ 1,742,254
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 105
INTERNET BUSINESS ADVANTAGES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue............................... $ 1,069,551 $ 1,822,833 $ 1,015,468 $ 2,221,904
=========== =========== =========== ===========
Operating expenses:
Professional services............... 935,404 1,834,923 1,140,314 2,673,165
Sales and marketing................. 607,450 1,086,671 738,353 1,229,364
General and administrative.......... 686,250 1,259,071 827,759 1,450,014
----------- ----------- ----------- -----------
Total operating expenses......... 2,229,104 4,180,665 2,706,426 5,352,543
----------- ----------- ----------- -----------
Loss from operations.................. (1,159,553) (2,357,832) (1,690,958) (3,130,639)
Loss from equity investment........... (47,993) (212,866) (145,729) (221,120)
Gain on disposal of subsidiary........ -- -- -- 544,135
Interest income....................... 37,600 90,481 69,522 20,139
Interest expense...................... -- (2,065) -- (99,481)
Other income, net..................... -- -- -- 27,881
----------- ----------- ----------- -----------
Net loss......................... $(1,169,946) $(2,482,282) $(1,767,165) $(2,859,085)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 106
INTERNET BUSINESS ADVANTAGES, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL TOTAL
NUMBER $0.001 PAID-IN TREASURY ACCUMULATED STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL STOCK DEFICIT DEFICIT
--------- --------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 888,167 $ 888 $1,054 $ -- $ (586,250) $ (584,308)
Issuance of restricted stock to
employees......................... 174,500 175 1,570 1,745
Net loss............................ (1,169,946) (1,169,946)
--------- ------ ------ ------- ----------- -----------
Balance at December 31, 1997........ 1,062,667 1,063 2,624 -- (1,756,196) (1,752,509)
Issuance costs related to Series C
redeemable convertible preferred
stock............................. (9,100) (9,100)
Issuance of restricted stock to
employees......................... 26,000 26 234 260
Purchase of common stock held in
treasury.......................... (859) (859)
Net loss............................ (2,482,282) (2,482,282)
--------- ------ ------ ------- ----------- -----------
Balance at December 31, 1998........ 1,088,667 1,089 2,858 (859) (4,247,578) (4,244,490)
Purchase of common stock held in
treasury (unaudited).............. (408) (408)
Net loss (unaudited)................ (2,859,085) (2,859,085)
--------- ------ ------ ------- ----------- -----------
Balance at September 30, 1999
(unaudited)....................... 1,088,667 $1,089 $2,858 $(1,267) $(7,106,663) $(7,103,983)
========= ====== ====== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 107
INTERNET BUSINESS ADVANTAGES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss......................................... $(1,169,946) $(2,482,282) $(1,767,165) $(2,859,085)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 33,900 79,901 47,458 108,089
Loss from equity investment.................... 47,993 212,866 145,729 221,120
Gain on disposal of subsidiary................. -- -- -- (544,135)
Changes in assets and liabilities, net of
effects from acquisition:
Accounts receivable.......................... (200,400) (52,150) (201,639) 10,804
Unbilled accounts receivable................. (11,500) (79,317) -- (150,237)
Loans to affiliate........................... -- -- -- (151,120)
Prepaid expenses and other current assets.... (9,801) 2,147 -- (46,363)
Other assets................................. 15,517 (158,321) 8,779 8,321
Accounts payable............................. 37,059 60,423 2,393 90,599
Accrued expenses............................. 38,589 196,838 13,162 117,014
Deferred revenue............................. 108,978 (90,896) 90,637 167,104
----------- ----------- ----------- -----------
Net cash used in operating activities..... (1,109,611) (2,310,791) (1,660,646) (3,027,889)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of fixed assets........................ (95,871) (176,248) (146,586) (148,905)
Investment in equity method company.............. -- -- -- (32,153)
Proceeds from disposal of subsidiary............. -- -- -- 600,000
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. (95,871) (176,248) (146,586) 418,942
----------- ----------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital lease
obligations.................................... -- (23,664) (17,254) (24,307)
Borrowings from line of credit................... -- 133,363 -- 85,122
Borrowings from term loan........................ -- -- -- 500,000
Repayments on term loan.......................... -- -- -- (14,707)
Repayment on debt assumed with acquisition of
subsidiary..................................... -- -- -- (387,311)
Proceeds from convertible demand note............ -- -- -- 2,200,000
Proceeds from issuance of Series C redeemable
convertible preferred stock, net of issuance
costs.......................................... -- 2,990,898 2,990,898 --
Proceeds from issuance of common stock........... 1,745 260 201 --
Purchase of common stock held in treasury........ -- (859) (859) (408)
----------- ----------- ----------- -----------
Net cash provided by financing
activities.............................. 1,745 3,099,998 2,972,986 2,358,389
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (1,203,737) 612,959 1,165,754 (250,558)
Cash and cash equivalents, beginning of period..... 1,446,459 242,722 242,722 855,681
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period........... $ 242,722 $ 855,681 $ 1,408,476 $ 605,123
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......... $ -- $ 5,041 $ -- $ 14,103
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
In November 1997, the Company contributed Know-how in exchange for 950,000
shares of common stock, or 95% ownership, in Internet Security Advantages, Inc.
(Note 3).
In the year ended December 31, 1998 and the nine months ended September 30,
1999, the Company incurred $99,301 and $29,288 (unaudited), respectively, in
capital lease obligations for fixed assets.
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 108
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Internet Business Advantages, Inc. ("IBA") is a professional service
consulting and systems firm. IBA's principal market is domestic businesses. IBA
manages its business as a single segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
IBA invests its excess cash primarily in money market funds of major
financial institutions. These investments are subject to minimal credit and
market risk. IBA considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalent
investments are classified as available-for-sale and carried at cost, which
approximates fair market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of IBA's financial instruments, which include cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
long-term debt, approximate their fair values at December 31, 1997 and 1998.
REVENUE RECOGNITION
IBA receives fees for application development and consulting which
constitute the majority of IBA's revenue. Revenue is recognized using the
percentage-of-completion method based on the ratio that the hours expended to
date bears to the estimated total hours at completion. Losses, if any, are
provided for at the time that management determines costs will exceed fees.
Maintenance contract revenue is deferred and recognized ratably over the
contract period, generally six months or less. Unbilled accounts receivable
represents revenue recognized in excess of amounts billed. Deferred revenue
represents the unrecognized portion of maintenance contract revenue and amounts
billed in excess of revenue recognized on application development and consulting
contracts.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially expose IBA to concentrations of
credit risk consist primarily of trade accounts receivable. Management believes
its credit policies are prudent and reflect normal industry terms and business
risk. IBA performs ongoing credit evaluations of customers' financial condition
but does not require collateral. IBA maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded management's
expectations.
At December 31, 1997, four customers accounted for 27%, 22%, 16% and 12% of
total accounts receivable. At December 31, 1998, four customers accounted for
27%, 24%, 19% and 14% of total accounts receivable.
Revenue from three customers accounted for 28%, 19% and 15% of total
revenue for the year ended December 31, 1997. Revenue from one customer
accounted for 32% of total revenue for the year ended December 31, 1998.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Repair and maintenance
costs are expensed as incurred.
F-42
<PAGE> 109
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
STOCK-BASED COMPENSATION
IBA accounts for stock-based awards to employees in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. IBA has adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," through footnote disclosure only.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $33,000
and $17,000 in the years ended December 31, 1997 and 1998.
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 amount of revenues and expenses during the reporting
period. Actual amounts could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. SoP 98-1 will be effective
for IBA beginning in 1999, and IBA does not expect adoption of this SoP 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 the opening of 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.
SoP 98-5 requires that the cost of start-up activities be expensed as incurred.
SoP 98-5 is effective for IBA beginning in 1999 and IBA does not expect adoption
of this SoP to have a material effect on its financial position or results of
operations.
3. INVESTMENT IN INTERNET SECURITY ADVANTAGES, INC. AND GAIN ON DISPOSAL OF
SUBSIDIARY
In November 1997, IBA and Axent Technologies, Inc. ("Axent") established
Internet Security Advantages, Inc. ("ISA"), a joint venture, to provide Internet
network security consulting services. Axent contributed $50,000 for the purchase
of 50,000 shares of common stock, or 5% ownership. IBA contributed its
capability to manage consulting services ("Know-how") in exchange for 950,000
shares of common stock, or 95% ownership. In addition, ISA entered into a term
loan agreement with Axent which enabled ISA to borrow up to $950,000 through
November 1998. At December 31, 1998, ISA had borrowed $350,000. Axent may
convert all or any portion of the principal at any time into shares of ISA
common stock in accordance with a formula in the term loan agreement. The joint
venture also authorized 600,000 shares of common stock for issuance under
restricted stock and stock option plans and 100,000 shares of preferred stock.
At December 31, 1998, no shares of restricted stock, stock options or preferred
stock had been issued. IBA accounts for such investment in accordance with the
equity method as Axent holds certain participating rights over operating and
capital decisions.
IBA's initial investment in ISA was recorded at zero. The difference
between the carrying amount of the investment and IBA's share of the underlying
equity in net assets of ISA represents a deferred gain, which is
F-43
<PAGE> 110
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
being amortized to equity income (loss) over seven years, the estimated life of
the Know-how contributed to ISA at the inception of the joint venture. The
amount of the deferred gain at the inception of ISA was $47,500, and at December
31, 1997 and 1998, the unamortized portion of the deferred gain is approximately
$46,400 and $39,600, respectively. At December 31, 1997 and 1998, IBA recognized
a liability for its proportionate share of ISA's losses, net of amortization of
the deferred gain, in excess of the carrying amount of the investment as ISA's
losses are primarily attributable to start-up costs and profitable operations
are expected.
The equity loss from investment in affiliate and the accumulated losses
from investment in affiliate would not have been materially different from the
reported amounts at December 31, 1997 and 1998 and for the years then ended, if
Axent had converted the term loan into ISA common stock.
Condensed financial information of ISA at December 31, 1997 and 1998 and
for the period from inception (November 10, 1997) through December 31, 1997 and
the year ended December 31, 1998 is summarized below:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Total assets.......................................... $200,000 $ 230,500
Total liabilities..................................... 201,700 463,450
Stockholders' deficit................................. (1,700) (232,950)
Revenue............................................... -- 373,900
Net loss.............................................. (51,700) (231,250)
</TABLE>
Unaudited--In May 1999, IBA acquired Axent's 5% interest in the assets and
liabilities of ISA for total cash consideration of $50,000. IBA accounted for
the acquisition of Axent's interest under the purchase method of accounting and
allocated the purchase price to the assets acquired and liabilities assumed
based on their fair values at the date of acquisition. Following the acquisition
of Axent's interest, IBA has accounted for ISA as a 100% owned and consolidated
subsidiary.
Unaudited--In August 1999, IBA disposed of ISA for $600,000 in cash. The
difference between the total cash consideration received and the net book value
of the assets disposed was recorded as gain on disposal of ISA in the nine
months ended September 30, 1999.
4. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE --------------------
IN YEARS 1997 1998
----------- -------- --------
<S> <C> <C> <C>
Computer equipment and software................... 3 $135,836 $232,529
Furniture and fixtures............................ 5 13,500 160,999
Leasehold improvements............................ lease term -- 31,357
-------- --------
149,336 424,885
Less--accumulated depreciation and amortization... 48,996 128,897
-------- --------
$100,340 $295,988
======== ========
</TABLE>
At December 31, 1998, furniture and fixtures held under capital leases
totaled $99,301. Accumulated depreciation of furniture and fixtures held under
capital leases was $7,800 at December 31, 1998.
F-44
<PAGE> 111
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LINES OF CREDIT
In October 1998, IBA entered into an agreement with a bank under which IBA
has the ability to borrow up to $750,000 for working capital purposes ("Working
Capital Facility") and $500,000 for purchases of equipment and software
("Equipment Facility"), subject to certain limitations. All borrowings under
this agreement are collateralized by substantially all of IBA's assets and bear
interest at the bank's prime rate plus 0.50% (8.25% at December 31, 1998).
Borrowings against the Working Capital Facility and accrued interest are due and
payable by November 1, 1999. As of December 31, 1998, no borrowings had been
made against the Working Capital Facility. Accrued interest on Equipment
Facility advances will be payable monthly through August 1, 1999. Equipment
Facility advances outstanding on August 1, 1999 will convert to a term loan to
be repaid in 36 equal monthly installments of principal, plus accrued interest.
Borrowings against the Equipment Facility totaled $133,363 at December 31, 1998.
In addition, IBA is required to comply with certain restrictive covenants,
including the maintenance of specific financial ratios. As of December 31, 1998,
IBA was in compliance with all financial and nonfinancial covenants.
In May 1999, IBA entered into a $500,000 term note agreement bearing
interest at the bank's prime rate plus 1.0%. The term note is due in May 2002
and is secured by substantially all of IBA's assets and requires IBA to comply
with certain financial and nonfinancial covenants.
CONVERTIBLE DEMAND NOTE
In March 1999, IBA obtained debt financing in the form of convertible
demand notes ("Demand Notes") totaling $2,200,000 from shareholders of IBA. The
Demand Notes bear interest at an annual interest rate of 6.5% and are
convertible into Series D redeemable convertible preferred stock ("Series D
Preferred Stock") at the issuance price. If the Series D Preferred Stock is not
issued within nine months of the Demand Notes, the principal and accrued
interest balances will be payable in full. In connection with the Demand Notes,
IBA issued warrants to investors for the purchase of $550,000 in shares of
Series D Preferred Stock at the issuance price. Should the Series D Preferred
Stock not be issued within nine months of the debt financing, the warrants will
become convertible into 167,683 shares of Series C redeemable convertible
preferred stock at $3.28 per share. The warrants are exercisable for a period of
four years.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock (collectively, the "Redeemable Convertible Preferred Stock")
have the following characteristics:
Conversion. Each share of the Redeemable Convertible Preferred Stock
is convertible at any time at the option of the holder into one share of
common stock, subject to certain anti-dilution adjustments, except that
holders of the Series B Preferred Stock may only opt for conversion upon
either (i) the closing of an initial public offering of IBA's common stock
or (ii) the sale of all or substantially all of the assets of IBA. All
shares of the Redeemable Convertible Preferred Stock automatically convert
into common stock upon the closing of a public offering of IBA's common
stock involving aggregate proceeds to IBA of at least $15 million and a
price of not less than $9.00 per share.
At December 31, 1998, IBA has reserved 4,999,998 shares of its common
stock for issuance upon conversion of the Redeemable Convertible Preferred
Stock.
Dividend Rights. Holders of the Redeemable Convertible Preferred
Stock are entitled to receive dividends when and if declared by the Board
of Directors. Any dividends declared must be distributed to the holders of
each series of the Redeemable Convertible Preferred Stock equally and no
dividends may be paid on the common stock until any and all dividends
declared on the Redeemable Convertible
F-45
<PAGE> 112
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock have been paid in full. Through December 31, 1998, no
dividends have been declared or paid by IBA.
Redemption. At the request of the holders of a majority of the Series
A Preferred Stock, on December 31, 2003 and each anniversary thereafter,
IBA shall redeem the then outstanding shares of Series A Preferred Stock
held by the requesting shareholders at a per share price of $1.10 plus all
declared but unpaid dividends, subject to certain anti-dilution
adjustments. The Series B Preferred Stock and Series C Preferred Stock are
redeemable under the same terms as the Series A Preferred Stock except that
they are redeemable at a per share price of $0.91 and $3.28, respectively,
plus all declared but unpaid dividends, subject to certain anti-dilution
adjustments.
Liquidation, Dissolution or Winding-Up. In the event of any
liquidation, dissolution or winding-up of the affairs of IBA, the holders
of the then outstanding Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock will be entitled to receive, in preference to
the holders of the common stock, a payment of $1.10, $0.91 and $3.28 per
share, respectively, plus any declared but unpaid dividends. Any assets
remaining following the distributions to the holders of the Redeemable
Convertible Preferred Stock will be distributed ratably among the common
stockholders.
Voting Rights. Each holder of the Series A Preferred Stock and Series
C Preferred Stock is entitled to the number of votes equal to the number of
shares of common stock into which such holder's shares are convertible at
the record date for such vote. Holders of the Series B Preferred Stock are
not entitled to vote on the affairs of IBA.
STOCK RESTRICTION AGREEMENTS
At December 31, 1997 and 1998, all of IBA's outstanding shares of common
stock are subject to stock restriction agreements. Under these agreements, IBA
has the option to repurchase any or all unvested shares of common stock held by
a given stockholder in the event of voluntary resignation or termination of
their employment by IBA. The number of shares that may be repurchased by IBA
upon termination is reduced over a four-year period. At December 31, 1998,
125,000, 7,000 and 120,000 shares of common stock are subject to repurchase at a
price of $0.001, $0.05 and $0.01 per share, respectively.
TREASURY STOCK
During 1998, IBA repurchased 178,875 shares of common stock at cost.
7. 1996 STOCK PLAN
During 1996, IBA adopted the 1996 Stock Incentive Plan (the "1996 Plan").
The 1996 Plan provides for the granting of incentive and non-qualified stock
options, performance shares, restricted stock and other stock-based awards to
management, other key employees, consultants and directors of IBA. The total
number of shares of common stock that may be issued pursuant to awards granted
under the 1996 Plan is 466,667. The exercise price under each stock option shall
be specified by the Board of Directors at the time of grant. However, incentive
stock options may not be granted at less than the fair market value of IBA's
common stock at the date of grant or for a term in excess of ten years. For
holders of more than 10% of IBA's total combined voting power of all classes of
stock, incentive stock options may not be granted at less than 110% of the fair
market value of IBA's common stock at the date of grant and for a term not to
exceed five years.
F-46
<PAGE> 113
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Transactions under the 1996 Plan during the year ended December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
1998
----------------------------
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at beginning of year.......................... -- $ --
Granted................................................... 172,250 0.33
Canceled.................................................. (25,250) 0.33
--------
Outstanding at end of year................................ 147,000 0.33
========
Weighted-average fair value of options granted during the
year.................................................... $ 0.07
========
</TABLE>
At December 31, 1998, no options were exercisable. The weighted average
remaining contractual life of options granted in 1998 is 9.63 years.
FAIR VALUE DISCLOSURES
No compensation cost has been recognized under APB Opinion No. 25 for
options granted to employees during the year ended December 31, 1998. Had
compensation costs for these awards been determined based on the fair value at
the date of grant consistent with the method prescribed by SFAS No. 123, IBA's
net loss for the year ended December 31, 1998 would not have differed
significantly from the amount reported. However, because options vest over
several years and because additional option grants are expected to be made
subsequent to December 31, 1998, the pro forma effects of applying the fair
value method may be material to reported net income or loss in future years.
The fair value of each option grant is estimated on the date of grant using
the minimum value option-pricing method with the following assumptions used for
option grants made in 1998: no dividend yield, risk-free interest rate of 5.0%,
no volatility and an expected option term of five years.
8. INCOME TAXES
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
-------- ----------
<S> <C> <C>
Net operating loss carryforwards............................ $664,000 $1,588,000
Research and development tax credit carryforwards........... 28,000 35,000
Other....................................................... 15,000 16,000
-------- ----------
Gross deferred tax assets................................... 707,000 1,639,000
Deferred tax asset valuation allowance...................... (707,000) (1,639,000)
-------- ----------
Net deferred tax assets..................................... $ -- $ --
======== ==========
</TABLE>
At December 31, 1997 and 1998, IBA has provided a valuation allowance for
the full amount of the deferred tax assets since realization of any future
benefit from deductible temporary differences and net operating loss and tax
credit carryforwards cannot be sufficiently assured.
At December 31, 1998, IBA has net operating loss carryforwards for federal
and state tax purposes of approximately $3,940,000 which are available to reduce
future taxable income and expire at various dates through 2018. IBA also has
federal and state investment tax credit carryforwards of $19,000 and $25,000,
respectively, available to reduce future tax liabilities. These tax credit
carryforwards expire at various dates between 2011 and 2013.
F-47
<PAGE> 114
INTERNET BUSINESS ADVANTAGES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under the provisions of the Internal Revenue Code, certain substantial
changes in IBA's ownership may limit the amount of net operating loss and tax
credit carryforwards which could be utilized annually to offset future taxable
income and taxes payable. The amount of this annual limitation is determined
based, in part, upon IBA's value prior to an ownership change.
9. COMMITMENTS
LEASES
IBA leases office space and certain fixed assets under noncancelable
operating and capital leases. Future minimum lease payments due under these
leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ---------- -------
<S> <C> <C>
1999...................................................... $ 298,000 $33,690
2000...................................................... 300,000 33,690
2001...................................................... 222,000 16,845
2002...................................................... 196,000 --
2003...................................................... 196,000 --
---------- -------
Total minimum lease payments................................ $1,212,000 84,225
==========
Less--amount representing interest.......................... 8,588
-------
Present value of obligations under capital leases........... $75,637
=======
</TABLE>
Total rent expense under these noncancelable operating leases was $95,000
and $244,000 for the years ended December 31, 1997 and 1998, respectively.
10. SUBSEQUENT EVENT (UNAUDITED)
On December 17, 1999, IBA entered into a Merger Agreement with Servicesoft
Technologies, Inc. ("Servicesoft"). In connection with the transaction, all IBA
stock was exchanged for Servicesoft common stock. Additionally, all convertible
note holders were issued Servicesoft common stock as consideration for the
cancellation of the notes. Outstanding options and warrants were also converted
into equivalent Servicesoft options and warrants.
F-48
<PAGE> 115
SERVICESOFT TECHNOLOGIES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
During the year ended December 31, 1999, Servicesoft Technologies, Inc.
("Servicesoft") completed two transactions which are comprehended by these
unaudited pro forma combined financial statements.
BALISOFT TECHNOLOGIES INC.
On February 12, 1999, Servicesoft completed its merger with Balisoft
Technologies Inc. ("Balisoft"), a company that develops e-mail management and
real-time internet collaboration applications. In connection with the
acquisition, Servicesoft issued 2,205,915 shares of exchangeable common stock
valued at $3,760,000, issued 2,281,653 shares of exchangeable preferred stock
(exchangeable into Series H redeemable convertible preferred stock) valued at
$7,773,000, and issued options and warrants to purchase 641,275 shares of
Servicesoft common stock valued at $780,000. Servicesoft valued the options and
warrants included in the purchase consideration based on a Black Scholes
computation of their fair value at the date of grant; assumptions used included
a risk-free interest rate of 5.25%, no dividend yield, volatility of 100%,
weighted average expected life of 5 years, and fair value of the underlying
common stock of $1.70 per share. The total consideration of $12,313,000
represented by the Servicesoft stock and options was determined based on an
independent appraisal. In connection with this merger, Servicesoft incurred
costs of $273,000, which are included in the total purchase price for accounting
purposes.
The merger was accounted for under the purchase method of accounting.
Accordingly, the fair market values of the acquired assets and assumed
liabilities have been included in the consolidated financial statements of
Servicesoft as of the merger date and the results of operations of Balisoft have
been included thereafter. The purchase price was allocated to the acquired
assets and assumed liabilities as follows (in thousands):
<TABLE>
<S> <C>
Working capital, net........................................ $ 3,834
Property and equipment...................................... 198
Completed technologies...................................... 1,512
Workforce................................................... 473
Non-competition covenant.................................... 180
Goodwill.................................................... 6,389
-------
$12,586
=======
</TABLE>
The amounts allocated to identifiable tangible and intangible assets were
based on the results of an independent appraisal.
INTERNET BUSINESS ADVANTAGES, INC.
On December 17, 1999, Servicesoft completed its acquisition of Internet
Business Advantages, Inc. ("IBA"), a company that provides consulting services
primarily focused on using Internet and Intranet technologies. In connection
with the acquisition, Servicesoft paid $1,156,000, issued 1,124,010 shares of
common stock valued at $8,992,000, and issued options and warrants to purchase
71,745 shares of Servicesoft common stock valued at $426,000. Servicesoft valued
the options included in the purchase consideration based on a Black Scholes
computation of their fair value at the date of grant; assumptions used included
a risk-free interest rate of 5.25%, no dividend yield, volatility of 100%,
weighted average expected life of 5 years, and fair value of the underlying
common stock of $8.00 per share. The total consideration of $10,574,000
represented by the Servicesoft stock and options was determined by an
independent appraisal. In connection with this acquisition, Servicesoft incurred
costs of $295,000, which are included in the total purchase price for accounting
purposes.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the fair market values of the acquired assets and assumed
liabilities have been included in the consolidated financial
F-49
<PAGE> 116
statements of Servicesoft as of the acquisition date and the results of
operations of IBA have been included thereafter. The purchase price was
allocated to the acquired assets and assumed liabilities as follows (in
thousands):
<TABLE>
<S> <C>
Working capital, net........................................ $ 233
Property and equipment...................................... 487
Workforce................................................... 1,071
Goodwill.................................................... 9,078
-------
$10,869
=======
</TABLE>
The amounts allocated to identifiable tangible and intangible assets were
based on the results of an independent appraisal.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The unaudited pro forma combined statement of operations for the year ended
December 31, 1999 presents the results of operations of Servicesoft, Balisoft
and IBA on a combined basis assuming the acquisitions had occurred on January 1,
1999. The transactions were accounted for under the purchase method;
accordingly, the results of operations of Balisoft and IBA were included in the
results of Servicesoft as reported from the applicable closing dates. The pro
forma columns for Balisoft and IBA represent their results of operations in 1999
prior to the transactions. All material adjustments to reflect the effects of
the transactions are set forth in the Adjustments column. An unaudited pro forma
combined balance sheet is not presented here since all effects of the
transactions are reflected in the consolidated balance sheet of Servicesoft as
of December 31, 1999, which is presented elsewhere herein.
The pro forma data is for informational purposes only and does not
necessarily reflect future results of operations or what the results of
operations would have been had Servicesoft, Balisoft, and IBA been operating as
a combined entity for the specified period. The unaudited pro forma combined
financial statements should be read in conjunction with the historical
consolidated financial statements of Servicesoft, including the notes thereto.
F-50
<PAGE> 117
SERVICESOFT TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SERVICESOFT INTERNET
TECHNOLOGIES, BALISOFT BUSINESS
INC. (AS TECHNOLOGIES ADVANTAGES, PRO FORMA
REPORTED) INC. INC. ADJUSTMENTS COMBINED
------------- ------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license......... $ 4,210 $ -- $ -- $ -- $ 4,210
Services................. 2,934 -- 3,335 -- 6,269
-------- ----- ------- -------- --------
Total revenue......... 7,144 -- 3,335 -- 10,479
-------- ----- ------- -------- --------
Cost of revenue:
Cost of software
license............... 406 -- -- -- 406
Cost of services......... 3,375 -- 3,775 -- 7,150
-------- ----- ------- -------- --------
Total cost of
revenue............. 3,781 -- 3,775 -- 7,556
-------- ----- ------- -------- --------
Gross profit............... 3,363 -- (440) -- 2,923
-------- ----- ------- -------- --------
Operating expenses:
Research and
development........... 4,205 197 18 -- 4,420
Sales and marketing...... 13,310 259 1,550 -- 15,119
General and
administrative........ 5,044 339 2,223 -- 7,606
Amortization of goodwill
and other intangible
assets................ 2,671 -- -- 3,684(a) 6,355
Stock compensation....... 1,900 -- -- -- 1,900
-------- ----- ------- -------- --------
Total operating
expenses............ 27,130 795 3,791 3,684 35,400
-------- ----- ------- -------- --------
Loss from operations....... (23,767) (795) (4,231) (3,684) (32,477)
Interest and other income
(expense), net........... 214 20 371 -- 605
-------- ----- ------- -------- --------
Net loss................... (23,553) (775) (3,860) (3,684) (31,872)
Accretion on redeemable
convertible preferred
stock.................... (2,725) -- -- (72)(b) (2,797)
-------- ----- ------- -------- --------
Net loss attributable to
common stockholders...... $(26,278) $(775) $(3,860) $ (3,756) $(34,669)
======== ===== ======= ======== ========
Basic and diluted net loss
per common share......... $ (11.02) $ (9.27)
Shares used in computing
basic and diluted net
loss per common share.... 2,385 1,353(c) 3,738
</TABLE>
F-51
<PAGE> 118
SERVICESOFT TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect the amortization of the goodwill and other intangible assets
acquired totaling $18,703,000 as if the acquisitions had occurred on January
1, 1999, over their expected useful lives. The adjustment was determined as
follows:
<TABLE>
<CAPTION>
USEFUL
RECORDED LIFE ANNUAL
INTANGIBLE ASSET FAIR VALUE (YEARS) AMORTIZATION
---------------- ---------- ------- ------------
<S> <C> <C> <C>
Completed technologies -- Balisoft.................... $1,512 3 $ 504
Workforce -- Balisoft................................. 473 3 158
Non-competition covenant -- Balisoft.................. 180 1 180
Goodwill -- Balisoft.................................. 6,389 3 2,130
Workforce -- IBA...................................... 1,071 3 357
Goodwill -- IBA....................................... 9,078 3 3,026
------
Total annual amortization........................... 6,355
Amortization recorded in 1999......................... 2,671
------
Pro forma adjustment................................ $3,684
======
</TABLE>
(b) To reflect accretion on the exchangeable Series H redeemable convertible
preferred stock as if such shares had been outstanding since January 1,
1999.
(c) The calculation of pro forma weighted-average number of shares outstanding
includes the weighted-average number of common shares outstanding of
Servicesoft for the year ended December 31, 1999, adjusted to give effect to
the issuance of 2,205,915 shares of Servicesoft's common stock in connection
with the Balisoft merger and the issuance of 1,124,010 shares of
Servicesoft's common stock in connection with the IBA acquisition, as if
such shares had been outstanding since January 1, 1999. The calculation does
not include the effect of common stock equivalents as their inclusion would
be anti-dilutive.
F-52
<PAGE> 119
The art work will consist of screen shots of our products. Descriptive captions
will be used for the screen shots. In addition, we plan to use the our
corporate logo which contains the word "Servicesoft."
<PAGE> 120
SERVICESOFT LOGO
<PAGE> 121
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- -------
<S> <C>
SEC Registration Fee........................................ $19,800
NASD Filing Fee............................................. 8,000
Nasdaq National Market Listing Fee.......................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Blue Sky Qualification Fees and Expenses.................... *
Transfer Agent's Fee........................................ *
Miscellaneous............................................... *
-------
Total............................................. *
</TABLE>
- ------------
* To be completed by amendment.
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VI of our Ninth Amended and Restated Certificate of Incorporation
provides that no director of Servicesoft be personally liable to Servicesoft or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (1) for any breach of the director's duty of
loyalty to Servicesoft or its stockholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) in respect of unlawful dividend payments or stock redemptions or
repurchases, or (4) for any transaction from which the director derived an
improper personal benefit. In addition, the Ninth Amended and Restated
Certificate of Incorporation provides that if the Delaware General Corporation
Law is amended to authorize the further elimination or limitation of the
liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Article VI of our By-laws, as amended, provides for indemnification by
Servicesoft of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of the registrant if such person acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of Servicesoft, and, with respect to criminal actions or proceedings,
if such person had no reasonable cause to believe his or her conduct was
unlawful.
Under Section of the underwriting agreement to be filed as Exhibit 1.1
hereto, the underwriters have agreed to indemnify, under certain conditions,
Servicesoft, its directors, certain officers and persons who control Servicesoft
within the meaning of the Securities Act against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by the Registrant during the past three years.
Further included is the consideration, if any, received by the Registrant for
such shares, and information relating to the section of the Securities Act or
rule of the
II-1
<PAGE> 122
Securities and Exchange Commission under which exemption from registration was
claimed. The numbers below reflect a one-to-five reverse stock split of the
Registrant's stock effected in March 1998 and a .53781-to-1 reverse stock split
of the Registrant's stock effected in February 1999.
(a) CERTAIN ISSUANCES AND SALES OF SECURITIES
1. From November 1996 to September 1997, the Registrant granted an
aggregate of 40,000 shares of Series F preferred stock to one holder
as compensation for services rendered. The shares were issued under
Section 4(2) of the Securities Act.
2. In February 1998, the Registrant issued an aggregate of 4,667,969
shares of Series G preferred stock to 10 accredited investors for
$1.28 per share or an aggregate purchase price of $5,975,000. These
shares were issued under Section 4(2) of and Regulation D under the
Securities Act in a transaction not involving a public offering.
3. In February 1998, the Registrant issued an aggregate of 2,097,908
shares of Series F preferred stock in exchange for cancellation of
convertible promissory notes held by 10 accredited investors with an
aggregate outstanding principal amount at that time of $1,573,430.78
plus interest due. These shares were issued under Section 4(2) of the
Securities Act.
4. In February 1999, in connection with the Registrant's merger with of
Balisoft Technologies Inc., the Registrant's wholly-owned subsidiary
Servicesoft Technologies (Canada) Inc. issued an aggregate of
1,714,603 shares of its exchangeable preferred stock and 2,205,915
shares of its exchangeable common stock to the former shareholders of
Balisoft Technologies Inc. and reserved 567,050 shares of exchangeable
preferred stock for issuance on the conversion of the Series A
preferred stock of Balisoft Technologies, Ltd. Exchangeable common
stock is exchangeable into shares of common stock of the Registrant,
and exchangeable preferred stock is exchangeable into shares of Series
H preferred stock of the Registrant. These shares were issued under
Section 4(2) of the Securities Act.
5. In February 1999, the Registrant issued an aggregate of 5,323,420
shares of Series H preferred stock to the holders of Series F and
Series G preferred stock in connection with a recapitalization of the
Registrant. These shares were issued under Section 4(2) of the
Securities Act.
6. In February 1999, in connection with its merger with Balisoft, the
Registrant issued one share of each of its Series X special preferred
voting stock and Series Y special preferred voting stock to a voting
trustee of the holders of exchangeable shares of Servicesoft
Technologies Canada. These shares were issued under Section 4(2) of
the Securities Act.
8. In June 1999, the Registrant issued an aggregate of 3,945,686 shares
of its Series I preferred stock to 18 accredited investors for $4.10
per share or an aggregate purchase price of $16,177,312. These shares
were issued under Section 4(2) of and Regulation D under the
Securities Act in a transaction not involving a public offering.
9. In August 1999, the Registrant issued an aggregate of 36,585 shares of
its Series I preferred stock to one accredited investor for an
aggregate purchase price of $149,999. These shares were issued under
Section 4(2) of and Regulation D under the Securities Act in a
transaction not involving a public offering.
10. In October 1999, the Registrant issued 833,502 shares of restricted
common stock to Chris M. Butler, its President and Chief Executive
Officer, for $1.00 per share, or an aggregate purchase price of
$833,502. These shares were issued under Section 4(2) of and
Regulation D under the Securities Act in a transaction not involving a
public offering.
11. In November 1999, the Registrant issued an aggregate of 227,000 shares
of restricted common stock to three outside directors and its Chief
Financial Officer for $1.00 per share, or an aggregate purchase price
of $227,000. These shares were issued under Section 4(2) of and
Regulation D under the Securities Act in a transaction not involving a
public offering.
II-2
<PAGE> 123
12. In December 1999, the Registrant issued an aggregate of 1,124,010
shares of its common stock valued at $8.00 per share for financial
reporting purposes to former stock and note holders of Internet
Business Advantages, Inc. as consideration for the acquisition of
Internet Business Advantages. These shares were issued under Section
4(2) of the Securities Act.
13. In January 2000, the Registrant issued and sold an aggregate of
3,481,478 shares of Series J Preferred Stock to 37 accredited
investors, including executive officers of the Registrant, for $9.03
per share, or an aggregate purchase price of $31,437,989. These shares
were issued under Section 4(2) of and Regulation D under the
Securities Act.
(b) STOCK OPTION GRANTS
1. In February 1999, the Registrant assumed options of former option
holders of Balisoft purchase an aggregate of 563,420 shares of its
common stock at a weighted average per share exercise price of $0.64.
2. In December 1999, the Registrant granted options to purchase an
aggregate of 398,587 shares of common stock at a per share exercise
price of $1.00 to former employees of Internet Business Advantages.
3. In December 1999, the Registrant assumed options of former
optionholders of Internet Business Advantages to purchase an aggregate
of 53,760 shares of common stock at a per share exercise price of
$3.08.
4. Through February 29, 2000, the Registrant granted options to purchase
an aggregate of 3,505,990 shares of its common stock, net of
cancellations of 737,860 options, exercises of 216,594 options, at a
per share weighted average exercise price of $2.11, to employees of
the Registrant.
GRANTS OF OTHER SECURITIES
1. In February 1998, the Registrant issued to Intel Corporation a warrant
to purchase 117,188 shares of Series G preferred stock at a per share
purchase price of $2.56 pursuant to Section 4(2) of the Securities
Act. Under the terms of the warrant, the warrant became exerciseable
for an aggregate of 63,025 shares of the Registrant's Series H
preferred stock, following the conversion of all Series G preferred
stock into Series H preferred stock in February 1999. This warrant
expires upon the completion of this offering.
2. In February 1999, in connection with the merger with Balisoft
Technologies Inc., Registrant issued a warrant to purchase 77,855
shares of its common stock at a per share exercise price of $3.53. The
warrant was issued pursuant to Section 4(2) of the Securities Act.
3. In December 1999, in connection with the acquisition of Internet
Business Advantages, the Registrant issued warrants to purchase an
aggregate of 17,985 shares of its common stock at per share purchase
prices of $4.10. The warrants were issued pursuant to Section 4(2) of
the Securities Act.
No underwriters were used in connection with these sales and issuances. The
sales and issuances of these securities were exempt from registration under the
Securities Act pursuant to Rule 701 promulgated thereunder on the basis that
these securities were offered and sold either pursuant to a written compensatory
benefit plan or pursuant to written contracts relating to compensation, as
provided by Rule 701, or pursuant to Section 4(2) of the Securities Act and the
rules and regulations thereunder on the basis that the transactions did not
involve a public offering. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
II-3
<PAGE> 124
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Combination Agreement by and among Balisoft Technologies
Inc., ServiceSoft Corporation and Servicesoft Canada Inc.,
dated as of February 1, 1999.
2.2** Merger Agreement by and among the Registrant, Servicesoft
Acquisition Corp. and Internet Business Advantages, Inc.,
dated as of December 17, 1999.
3.1 Form of Tenth Restated Certificate of Incorporation of the
Registrant (to be effective upon the effectiveness of this
Registration Statement).
3.2 Form of Eleventh Restated Certificate of Incorporation of
the Registrant (to be effective upon completion of this
offering).
3.3** By-laws of the Registrant, as amended.
3.4** Form of Amended and Restated By-laws of the Registrant (to
be effective upon the effectiveness of this Registration
Statement).
4.1* Specimen certificate for shares of common stock, $.01 par
value, of the Registrant.
5.1* Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
9.1** Voting and Exchange Trust Agreement, dated as of February
12, 1999, by and among the Registrant, Servicesoft Canada
Inc. and CIBC Mellon Trust Company.
10.1** Second Amended and Restated Shareholders' Agreement, dated
January 13, 2000, between the Registrant and the
Shareholders named therein.
10.2** Seventh Amended and Restated Registration Rights Agreement,
dated January 13, 2000, between the Registrant and the
Shareholders named therein.
10.3** Amended and Restated 1994 Stock Option Plan of the
Registrant.
10.4** 1999 Stock Option and Grant Plan of the Registrant, as
amended.
10.5 2000 Employee Stock Purchase Plan.
10.6** Letter Agreement, dated October 11, 1999, by and between the
Registrant and Mark S. Skapinker.
10.7** Letter Agreement, dated August 9, 1999, by and between the
Registrant and Christopher M. Butler.
10.8** Stock Restriction Agreement, Promissory Note and Pledge
Agreement, dated October 25, 1999, by and between the
Registrant and Christopher M. Butler.
10.9** Letter Agreement, dated November 23, 1999, by and between
the Registrant and Daniel J. Kossmann.
10.10** Restricted Stock Agreement, Promissory Note and Pledge
Agreement, dated November 23, 1999, by and between the
Registrant and Daniel J. Kossmann.
10.11** Letter Agreement, dated June 9, 1999, by and between the
Registrant and Massood Zarrabian.
10.12** Letter Agreement, dated August 30, 1998, by and between the
Registrant and Jeffrey L. Whitney.
10.13** Letter Agreement, dated January 20, 1999, by and between the
Registrant and Paul R. Maguire.
10.14** Letter Agreement, dated July 16, 1999, by and between the
Registrant and David P. Tarrant.
10.15** Letter Agreement, dated November 30, 1999, by and between
the Registrant and Stephen M. Harrison.
10.16** Form of Restricted Stock Agreement of the Registrant.
10.17** Form of Incentive Stock Option Agreement under the 1999
Stock Option and Grant Plan of the Registrant, as amended.
10.18** Form of Non-Qualified Stock Option Agreement under the 1999
Stock Option and Grant Plan of the Registrant, as amended.
</TABLE>
II-4
<PAGE> 125
<TABLE>
<C> <S>
10.19** Lease Agreement dated April 9, 1999, by and between the
Registrant and Metropolitan Life Insurance Company, as
amended by First Amendment, dated October 8, 1999.
10.20 Series J Convertible Preferred Stock Purchase Agreement, by
and between the Registrant and the Shareholders named
therein, dated as of January 13, 2000.
21.1* Schedule of Subsidiaries of the Registrant.
23.1* Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
24.1** Power of Attorney (included on page II-6).
27.1** Financial Data Schedule.
99.1 Consent of International Data Corporation.
</TABLE>
- ------------
* To be filed by amendment to this Registration Statement.
** Previously filed.
(b) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not required or because
the required information is given in the Consolidated Financial Statements or
Notes to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Natick, Commonwealth of Massachusetts, on March 23, 2000.
SERVICESOFT TECHNOLOGIES, INC.
By: *
------------------------------------
Christopher M. Butler
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive March 23, 2000
- --------------------------------------------------- Officer and Director
Christopher M. Butler
(Principal Executive Officer)
/s/ DANIEL J. KOSSMANN Chief Financial Officer March 23, 2000
- ---------------------------------------------------
Daniel J. Kossmann
(Principal Financial Officer and Principal
Accounting Officer)
* Chairman of the Board of March 23, 2000
- --------------------------------------------------- Directors
Mark S. Skapinker
* Director March 23, 2000
- ---------------------------------------------------
Robert E. Davoli
* Director March 23, 2000
- ---------------------------------------------------
Sophie Forest
* Director March 23, 2000
- ---------------------------------------------------
Christopher H. Greendale
* Director March 23, 2000
- ---------------------------------------------------
Gary Rubinoff
*By: /s/ DANIEL J. KOSSMANN
- ---------------------------------------------------
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 127
EXHIBIT INDEX
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Combination Agreement by and among Balisoft Technologies
Inc., ServiceSoft Corporation and Servicesoft Canada Inc.,
dated as of February 1, 1999.
2.2** Merger Agreement by and among the Registrant, Servicesoft
Acquisition Corp. and Internet Business Advantages, Inc.,
dated as of December 17, 1999.
3.1 Form of Tenth Restated Certificate of Incorporation of the
Registrant (to be effective upon the effectiveness of this
Registration Statement).
3.2 Form of Eleventh Restated Certificate of Incorporation of
the Registrant (to be effective upon completion of this
offering).
3.3** By-laws of the Registrant, as amended.
3.4** Form of Amended and Restated By-laws of the Registrant (to
be effective upon the effectiveness of this Registration
Statement).
4.1* Specimen certificate for shares of common stock, $.01 par
value, of the Registrant.
5.1* Opinion of McDermott, Will & Emery as to the validity of the
securities being offered.
9.1** Voting and Exchange Trust Agreement, dated as of February
12, 1999, by and among the Registrant, Servicesoft Canada
Inc. and CIBC Mellon Trust Company.
10.1** Second Amended and Restated Shareholders' Agreement, dated
January 13, 2000, between the Registrant and the
Shareholders named therein.
10.2** Seventh Amended and Restated Registration Rights Agreement,
dated January 13, 2000, between the Registrant and the
Shareholders named therein.
10.3** Amended and Restated 1994 Stock Option Plan of the
Registrant.
10.4** 1999 Stock Option and Grant Plan of the Registrant, as
amended.
10.5 2000 Employee Stock Purchase Plan.
10.6** Letter Agreement, dated October 11, 1999, by and between the
Registrant and Mark S. Skapinker.
10.7** Letter Agreement, dated August 9, 1999, by and between the
Registrant and Christopher M. Butler.
10.8** Stock Restriction Agreement, Promissory Note and Pledge
Agreement, dated October 25, 1999, by and between the
Registrant and Christopher M. Butler.
10.9** Letter Agreement, dated November 23, 1999, by and between
the Registrant and Daniel J. Kossmann.
10.10** Restricted Stock Agreement, Promissory Note and Pledge
Agreement, dated November 23, 1999, by and between the
Registrant and Daniel J. Kossmann.
10.11** Letter Agreement, dated June 9, 1999, by and between the
Registrant and Massood Zarrabian.
10.12** Letter Agreement, dated August 30, 1998, by and between the
Registrant and Jeffrey L. Whitney.
10.13** Letter Agreement, dated January 20, 1999, by and between the
Registrant and Paul R. Maguire.
10.14** Letter Agreement, dated July 16, 1999, by and between the
Registrant and David P. Tarrant.
10.15** Letter Agreement, dated November 30, 1999, by and between
the Registrant and Stephen M. Harrison.
10.16** Form of Restricted Stock Agreement of the Registrant.
10.17** Form of Incentive Stock Option Agreement under the 1999
Stock Option and Grant Plan of the Registrant, as amended.
10.18** Form of Non-Qualified Stock Option Agreement under the 1999
Stock Option and Grant Plan of the Registrant, as amended.
</TABLE>
<PAGE> 128
<TABLE>
<C> <S>
10.19** Lease Agreement dated April 9, 1999, by and between the
Registrant and Metropolitan Life Insurance Company, as
amended by First Amendment, dated October 8, 1999.
10.20 Series J Convertible Preferred Stock Purchase Agreement, by
and between the Registrant and the Shareholders named
therein, dated as of January 13, 2000.
21.1* Schedule of Subsidiaries of the Registrant.
23.1* Consent of McDermott, Will & Emery (included in Exhibit 5.1
hereto).
23.2 Consent of PricewaterhouseCoopers LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
24.1** Power of Attorney (included on page II-6).
27.1** Financial Data Schedule.
99.1 Consent of International Data Corporation.
</TABLE>
- ------------
* To be filed by amendment to this Registration Statement.
** Previously filed.
<PAGE> 1
EXHIBIT 3.1
TENTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SERVICESOFT, INC.
Servicesoft, Inc., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is Servicesoft, Inc. The original
Certificate of Incorporation (the "Original Certificate") was filed with the
Secretary of State of the State of Delaware on June 3, 1987 in the name of Rosh
Intelligent Systems, Inc. Restated Certificates of Incorporation were filed with
the Secretary of State on October 2, 1989, May 23, 1990, December 14, 1992
(which was amended on October 26, 1993 to change the corporation's name to
Servicesoft Corporation), February 2, 1994, June 23, 1995, February 9, 1998
(which was amended on February 13, 1998), February 10, 1999, June 18, 1999 and
January 13, 2000.
2. This Tenth Amended and Restated Certificate of Incorporation amends,
restates and integrates the provisions of the Original Certificate, as
heretofore amended, and was duly adopted by the Board of Directors in accordance
with the provisions of Section 245 of the Delaware General Corporation Law (the
"DGCL").
3. The text of the Original Certificate, as amended, is hereby amended
and restated in its entirety to provide as herein set forth in full.
ARTICLE I
NAME
The name of the corporation is Servicesoft, Inc.
ARTICLE II
REGISTERED OFFICE
The registered office of the Corporation in the State of Delaware is
1209 Orange Street, in the City of Wilmington, in the County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
<PAGE> 2
ARTICLE III
PURPOSES
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the DGCL.
ARTICLE IV
CAPITAL STOCK
The total number of shares of all classes of stock which the
Corporation has authority to issue is 121,450,002 (all with a par value of $0.01
per share), consisting of: 100,000,000 shares of common stock (the "Common
Stock") and 21,450,002 shares of preferred stock (collectively, the "Preferred
Stock"). There are five series of Preferred Stock. The first series consists of
8,000,000 shares and is designated Series H Convertible Preferred Stock (the
"Series H Preferred"). The second series consists of 4,450,000 shares and is
designated Series I Convertible Preferred Stock (the "Series I Preferred"). The
third series consists of 4,000,000 shares and is designated Series J Convertible
Preferred Stock (the "Series J Preferred). The fourth series consists of one
share of Series X Special Preferred Voting Stock. The fifth series consists of
one share of Series Y Special Preferred Voting Stock. The remainder shall be
undesignated preferred stock. The Series H Preferred, Series I Preferred and
Series J Preferred are collectively referred to as the "Convertible Preferred
Stock."
A. COMMON STOCK
1. Voting Rights. Except as otherwise provided by law or this
Certificate, the holders of shares of Common Stock shall be entitled to one vote
for each share so held with respect to all matters voted on by the stockholders
of the Corporation.
2. Liquidation Rights. Subject to the prior and superior
rights of the Convertible Preferred Stock which are described below at Section
B.2, upon the occurrence of any Liquidation Event (as defined below), the
holders of Common Stock shall be entitled to participate ratably on a per share
basis with the Convertible Preferred Stock (on an as-converted basis) in
receiving the remaining funds, if any after satisfaction of creditor claims,
available for distribution to stockholders.
3. Dividends. Subject to provisions of law and of this
Certificate, the holders of Common Stock shall be entitled to receive dividends
out of funds legally available therefore at such times and in such amounts as
the Board of Directors may determine in its sole discretion.
B. PREFERRED STOCK
1. Designation of Voting Rights. Each share of Convertible
Preferred Stock shall entitle the holder thereof to such number of votes per
share on each such action as
2
<PAGE> 3
shall equal the number of shares of Common Stock (including fractions of a share
rounded up to the nearest whole number) into which each such share of
Convertible Preferred Stock is then convertible.
2. Liquidation Preference.
(a) Upon the occurrence of any Liquidation Event (as defined
below), the holders of the Series H Preferred (including, by virtue of a Support
Agreement dated February 12, 1999 (the "Support Agreement") between the
Corporation and Servicesoft Technologies (Canada) Inc. ("Servicesoft Canada"),
all holders of shares of Servicesoft Canada convertible or exchangeable for
Series H Preferred (the "Exchangeable Preferred")), shall be entitled to receive
collectively an aggregate preference amount of $19,203,186 (the "Series H
Preference Amount"). The holders of Series I Preferred shall be entitled to
receive $4.10 per share of Series I Preferred (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like) held by them
plus any accrued and unpaid dividends on such shares of Series I Preferred (the
"Series I Preference Amount"). The holders of Series J Preferred shall be
entitled to receive $9.03 per share of Series J Preferred (as adjusted for any
stock dividends, combinations, splits, recapitalizations and the like) held by
them plus any accrued and unpaid dividends on such shares of Series J Preferred
(the "Series J Preference Amount"). The Series H Preference Amount, Series I
Preference Amount and Series J Preference Amount are referred to collectively as
the "Preference Amounts". The full amount of the Preference Amounts to be paid
under this Section B.2 shall be paid or set apart for payment before the payment
or setting apart for payment of any amount for, or the distribution of any
assets or surplus funds of the Corporation to, the holders of Common Stock or
any other capital stock of the Corporation ranking on liquidation junior to the
Series H, Series I and Series J Preferred in connection with such Liquidation
Event (collectively, the "Junior Stock"). If the assets or surplus funds to be
distributed to the holders of Series H Preferred (including the holders of
shares of Exchangeable Preferred), Series I Preferred and Series J Preferred are
insufficient to permit the payment to such holders of the entire Preference
Amounts, the assets and surplus funds legally available for distribution shall
be distributed ratably among such holders in the same proportion to the entire
Preference Amounts each such holder would otherwise be entitled to receive. The
procedure for allocating the Series H Preference Amount among the parties
entitled to it shall be set forth in a Second Amended and Restated Shareholders
Agreement of approximately the date of filing of this Certificate among the
Corporation, certain holders of Convertible Preferred Stock, and a certain
executive of the Corporation (the "Shareholders Agreement").
(b) After the payment or setting apart for payment to the
holders of the Series H Preferred (including shares of Exchangeable Preferred),
the Series I Preferred and the Series J Preferred of the entire Preference
Amounts so payable to them under Section 2(a), any additional assets and surplus
funds legally available for distribution shall be distributed as follows:
(i) initially, the Junior Stock shall be entitled to
receive an amount per share equal to the minimum per share amount paid to the
holders of Series H Preferred prior to any further distributions to the holders
of Convertible Preferred Stock;
(ii) thereafter, the holders of Junior Stock,
together with those holders of Series H Preferred who have received the same per
share distribution as the Junior Stock
3
<PAGE> 4
(following completion of the distributions under clause (i) above), shall be
entitled to receive an amount per share equal to the difference between the
amount already received by them and the amount received by the holders of Series
H Preferred who received the next highest per share amount;
(iii) thereafter, the holders of Junior Stock,
together with all those holders of Series H Preferred who have received the same
per share distribution as the Junior Stock (following completion of the
distributions under clause (ii) above), shall be entitled to an amount per share
equal to the difference between the per share amount already received by them
and the maximum per share amount already paid to the holders of Series H
Preferred;
(iv) thereafter, the holders of Junior Stock,
together with all holders of Series H Preferred, shall be entitled to an amount
per share equal to the difference between the per share amount already received
by them and the per share amount distributed to holders of the Series I
Preferred;
(v) thereafter, the holders of Junior Stock, together
with all holders of Series H Preferred and Series I Preferred, shall be entitled
to an amount per share equal to the difference between the per share amount
received by them and the per share amount distributed to holders of the Series J
Preferred; and
(vi) thereafter, the holders of Junior Stock, Series
H Preferred, Series I Preferred and Series J Preferred shall be entitled to
participate ratably on a per share as-if-converted or exercised basis in
receiving all remaining assets or surplus funds of the Corporation.
(c) For purposes of this Certificate, "Liquidation Event"
shall mean (i) any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the business of the Corporation, (ii) any sale of all or
substantially all of the assets, properties or business of the Corporation and
its subsidiaries taken as a whole, (iii) the acquisition of the Corporation by
another entity by way of merger or consolidation or any other corporate
reorganization, transaction or event in which the stockholders of the
Corporation immediately prior thereto own less than 50% of the Corporation's
voting power immediately after such event or transaction, or (iv) any
transaction or series of related transactions to which the Corporation is a
party in which in excess of 50% of the Corporation's voting power is transferred
(excluding in the case of clauses (iii) and (iv) any merger effected exclusively
for purposes of changing the domicile of the Corporation).
(d) For purposes of this Section B.2, in the event any of the
assets of the Corporation are to be distributed other than in cash and/or
publicly traded securities, the value of the consideration received by the
Corporation shall be determined by competent independent appraisers engaged by
the Corporation's Board of Directors. The Corporation shall, upon receipt of
such appraiser's valuation, give prompt written notice to each holder of capital
stock of the Corporation of the appraiser's valuation.
3. Dividends.
(a) Holders of Convertible Preferred Stock, in preference to
the holders
4
<PAGE> 5
of any Junior Stock, shall be entitled to receive, when, as and if declared by
the Board of Directors, but only out of funds that are legally available
therefor, cash dividends at the rate of 6% per annum on the Original Issue Price
(as hereinafter defined) on each outstanding share of Convertible Preferred
Stock held by such holder (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like). The Original Issue Price of the Series
H Preferred shall be $2.53 per share. The Original Issue Price of the Series I
Preferred shall be $4.10 per share. The Original Issue Price of the Series J
Preferred shall be $9.03 per share. Such dividends shall be payable only when,
as and if declared by the Board of Directors and shall be non-cumulative. If
less than full dividends are paid or declared and set aside for payment to the
holders of the Convertible Preferred Stock, then the amount to be paid or
declared and set apart for payment shall be divided as between the holders of
the Series H Preferred, the holders of the Series I Preferred, and the holders
of the Series J Preferred, ratably in the same proportion such holders would
have received had the full amount of dividends been declared and paid.
(b) So long as any shares of Convertible Preferred Stock are
outstanding, no dividend, whether in cash or in property, shall be paid or
declared, nor shall any other distribution be made, on any Junior Stock, nor
shall any shares of any Junior Stock of the Company be purchased, redeemed, or
otherwise acquired for value by the Corporation (except for acquisitions of
Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase shares upon termination of services to the Corporation
or in exercise of the Corporation's right of first refusal upon a proposed
transfer pursuant to Article V hereof) until all accrued and unpaid dividends
(as set forth in Section 3(a) above) on the Convertible Preferred Stock have
been paid in full, in cash, or declared and set apart, in full, in cash, and all
redemptions of Convertible Preferred Stock then due and payable (as set forth in
Section B.5 of Article IV) have been paid in full, in cash, or set apart for
payment in full, in cash. In the event dividends are paid on any share of Common
Stock, an additional dividend shall be paid, in cash, with respect to all
outstanding shares of the Convertible Preferred Stock in an amount equal per
share (on an as-if-converted basis) to the amount paid or set aside for each
share of Common Stock. The provisions of this Section 3(b) shall not, however,
apply to (i) a dividend payable in Common Stock with respect to which an
appropriate adjustment to the Conversion Rate applicable to the Convertible
Preferred Stock is made pursuant to Section 4(f) or (ii) the acquisition of
shares of any Junior Stock in exchange for shares of any other Junior Stock.
4. Conversion. The holders of any shares of Convertible
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) General. Subject to and in compliance with the provisions
of this Section 4, any shares of the Convertible Preferred Stock may, at the
option of the holder, be converted at any time or from time to time into
fully-paid and non-assessable shares (calculated as to each conversion to the
largest whole share) of Common Stock. The number of shares of Common Stock to
which a holder of Convertible Preferred Stock shall be entitled upon conversion
shall be the product obtained by multiplying the applicable Conversion Rate
(determined as provided in Section 4(d)) by the number of shares of Convertible
Preferred Stock being converted.
(b) Mechanics of Conversion. Before any holder of Convertible
Preferred Stock shall be entitled to convert the same into full shares of Common
Stock, such holder shall
5
<PAGE> 6
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Corporation or of any transfer agent for the Convertible Preferred Stock,
and shall give written notice to the Corporation at such office that such holder
elects to convert the same and shall state therein his name or the name or names
of his nominees in which such holder wishes the certificate or certificate for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Convertible Preferred Stock, or to such holder's nominee or nominees, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid, and a certificate or certificates
for such number of shares of Convertible Preferred Stock as were represented by
the certificates surrendered and not converted. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date of such
surrender of the shares of Convertible Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock from and after the close of business on such date.
(c) Automatic Conversion. All shares of Preferred Stock not
theretofore converted shall automatically be converted into Common Stock in
accordance with the provisions of this Section 4 upon the earlier of (i) the
affirmative vote of the holders of at least two-thirds of the shares of
Convertible Preferred Stock then outstanding including the holders of the
Exchangeable Preferred (voting together as a single class); provided, however,
that the Series I Preferred shall not be converted into Common Stock without the
affirmative vote of the holders of at least two-thirds of the shares of the
Series I Preferred then outstanding and the Series J Preferred shall not be
converted into Common Stock without the affirmative vote of the holders of at
least two-thirds of the shares of Series J Preferred then outstanding, and (ii)
concurrently with the effectiveness of a firm commitment, underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, of the Corporation's Common Stock to the public with
aggregate gross proceeds to the Corporation of not less than $30,000,000 and
which places a value on the Corporation of not less than $250,000,000 (a
"Qualified Public Offering").
(d) Conversion Rate. The "Series H Conversion Rate" in effect
for the Series H Preferred shall be the quotient obtained by dividing $2.53 by
the Series H Conversion Value, calculated as provided in Section 4(e). The
"Series I Conversion Rate" in effect for the Series I Preferred shall be the
quotient obtained by dividing $4.10 by the Series I Conversion Value, calculated
as provided in Section 4(e). The "Series J Conversion Rate" in effect for the
Series J Preferred shall be the quotient obtained by dividing $9.03 by the
Series J Conversion Value, calculated as provided in Section 4(e). The Series H
Conversion Rate, the Series I Conversion Rate and the Series J Conversion Rate
are herein generally referred to as the "Conversion Rate."
(e) Conversion Value. The "Series H Conversion Value" in
effect for the Series H Preferred shall initially be $2.53, as such amount may
be as adjusted from time to time in accordance with Section 4(f) hereof. The
"Series I Conversion Value" in effect for the Series I Preferred shall initially
be $4.10, as such amount may be adjusted from time to time in accordance with
Section 4(f) hereof. The "Series J Conversion Value" in effect for the Series J
Preferred shall initially be $9.03, as such amount may be adjusted from time to
time in accordance with Section 4(f) hereof. The Series H Conversion Value, the
Series I Conversion Value and the Series J Conversion Value are herein generally
referred to as the "Conversion Value."
6
<PAGE> 7
(f) Adjustments to the Applicable Conversion Value for
Diluting Issuance of Securities.
(i) Special Definitions. For purposes of this Section
4(f), the following definitions shall apply:
(1) "Option" shall mean all rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Convertible Securities" shall mean any
evidences of indebtedness, capital stock (other than Common Stock, Convertible
Preferred Stock and Exchangeable Preferred) or other securities directly or
indirectly convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall
mean all shares of Common Stock issued (or, pursuant to Section 4(f)(iii),
deemed to be issued) by the Corporation after the filing date of this
Certificate (the "Filing Date"), but shall not include:
(a) shares of Common Stock issued or
issuable upon conversion of shares of the Convertible Preferred Stock, the
Series C Exchangeable Common Shares of Servicesoft Canada (the "Exchangeable
Common Shares") or the Exchangeable Preferred;
(b) shares of Common Stock issued or
issuable to officers, employees or directors of, or consultants to, the
Corporation pursuant to the Corporation's stock option and grant plans approved
by the Board of Directors including the approval of a majority of the members of
the Board of Directors who are not employees of the Corporation;
(c) shares of Common Stock issued or
issuable upon exercise of warrants to purchase shares of Common Stock
outstanding as of the Filing Date; or
(d) as a dividend or distribution in
Convertible Preferred Stock as pursuant to any event for which adjustment is
made pursuant to subparagraphs (f)(vi) or (vii) hereof.
(ii) No Adjustment of Applicable Conversion Rate or
Applicable Conversion Value. No adjustment to the applicable Conversion Rate or
applicable Conversion Value shall be made in respect of the issuance of
Additional Shares of Common Stock or otherwise, unless the consideration per
share for an Additional Share of Common Stock issued or deemed to be issued by
the Corporation is less than the applicable Conversion Value in effect
immediately prior to the time that such Additional Shares of Common Stock are
issued or deemed to be issued.
(iii) Issue of Securities; Deemed Issue of Additional
Shares of Common Stock.
(1) Options and Convertible Securities. In the
event the Corporation at any time or from time to time after the Filing Date
issues any Options or Convertible
7
<PAGE> 8
Securities or fixes a record date for the determination of holders of any class
of securities entitled to receive any such Options or Convertible Securities,
then the maximum number of shares (as set forth in the instrument relating
thereto without regard to any provisions contained therein for a subsequent
adjustment of such number) of Common Stock issuable upon the exercise of any
such Options or, in the case of Convertible Securities and Options therefor, the
conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided, that Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section 4(f)(v) hereof) of such Additional Shares of Common Stock is
less than the applicable Conversion Value in effect on the date immediately
prior to such issue, or such record date, as the case may be, and provided
further, that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(a) no further adjustment in the applicable
Conversion Value shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
decrease or increase in the number of shares of Common Stock issuable, upon the
exercise, conversion or exchange thereof, the applicable Conversion Value
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon, shall,
upon any such increase or decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such options or the rights of
conversion or exchange under such Convertible Securities;
(c) upon the expiration of any such Options
or any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the applicable Conversion Value computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(i) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common Stock issued were the shares
of Common Stock, if any, actually issued upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(ii) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options, and the consideration received
by the Corporation for the Additional Shares of Common
8
<PAGE> 9
Stock deemed to have been then issued was the consideration actually received by
the Corporation (determined pursuant to Section 4(f)(v)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;
(d) no readjustment pursuant to clause (B)
or (C) above shall have the effect of increasing the applicable Conversion Value
to an amount which exceeds the lower of (i) the applicable Conversion Value on
the Filing Date, or (ii) the applicable Conversion Value that would have
resulted from any issuance of Additional Shares of Common Stock between the
Filing Date and such readjustment date;
(e) in the case of any Options which expire
by their terms not more than 30 days after the date of issue thereof, no
adjustment of the applicable Conversion Value shall be made until the expiration
or exercise of all such Options, whereupon such adjustment shall be made in the
same manner provided in clause (C) above; and
(f) if such record date shall have been
fixed and such Options or Convertible Securities are not issued on the date
fixed thereof, the adjustment previously made in the applicable Conversion Value
which become effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the applicable Conversion Value
shall be adjusted pursuant to this Section 4(f)(iii) as of the actual date of
their issuance.
(2) Stock Dividends, Stock Distribution and
Subdivisions. In the event the Corporation at any time or from time to time
after the Filing Date shall declare or pay, without consideration, any dividend
on the Common Stock payable in Common Stock or make any other distribution on
the Common stock payable in Common Stock, or effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock split, reclassification or otherwise than by payment of a
dividend in Common Stock) or in the event the outstanding shares of Common Stock
shall be combined or consolidated by reclassification or otherwise into a lesser
number of shares, or any right to acquire Common Stock for no consideration,
then and in any such event, Additional Shares of Common Stock shall be deemed to
have been issued:
(a) in the case of such dividend or
distribution, immediately after the close of business on the record date of the
determination of holders of any class of securities entitled to receive such
dividend or distribution, or
(b) in the case of any subdivisions, at the
close of business on the date immediately prior to the date upon which such
corporate action becomes effective.
If such record date shall have been fixed and such dividend shall not have been
fully paid on the date fixed therefor, the adjustment previously made in the
applicable Conversion Value which became effective on such record date shall be
canceled as of the close of business on such record date, and thereafter the
applicable Conversion Value shall be adjusted pursuant to this Section 4(f)(iii)
as of the time of actual payment of such dividend.
9
<PAGE> 10
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Stock. In the event that the Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 4(f)(iii)(1), but excluding Additional
Shares of Common Stock issued pursuant to Section 4(f)(iii)(2), which event is
dealt with in Section 4(f)(vi) hereof) without consideration or for
consideration per share less than the applicable Conversion Value in effect on
the date of and immediately prior to such issue, then and in such event, such
applicable Conversion Value shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by multiplying such applicable
Conversion Value by a fraction (X) the numerator of which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
(including shares of Common Stock issuable upon conversion of any outstanding
Convertible Preferred Stock (including Convertible Preferred Stock issuable in
respect of the Exchangeable Preferred) or Convertible Securities and upon
exchange of the Exchangeable Common), plus (2) the number of shares of Common
Stock which the aggregate consideration received by the Corporation for the
total number of Additional Shares of Common Stock so issued would purchase at
such applicable Conversion Value, and (Y) the denominator which shall be (1) the
number of shares of Common Stock outstanding immediately prior to such issue
(calculated in accordance with clause (X)(1) above) plus (2) the number of such
Additional Shares of Common Stock so issued, provided, that the applicable
Conversion Value shall not be so reduced at such time if the amount of such
reduction would be an amount less than $0.01, but any such amount shall be
carried forward and reduction with respect thereto made at the time of and
together with any subsequent reduction which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.01 or more. Upon
any adjustment of the applicable Conversion Value pursuant to this Section
4(f)(iv), the applicable Conversion Rate shall be correspondingly adjusted.
(v) Determination of Consideration. For purposes of
this Section 4(f), the consideration received by the Corporation for the
issuance of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall:
(a) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(b) insofar as it consists of property other
than cash, be computed at the fair market value thereof at the time of such
issue, as determined in good faith by the Board of Directors; and
(c) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The
10
<PAGE> 11
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 4(f)(iii)(1),
relating to Options and Convertible Securities, shall be determined by dividing:
(x) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(vi) Adjustment for Dividends, Distributions,
Subdivisions, Combinations or Consolidation of Common Stock.
(1) Stock Dividends, Distribution or
Subdivisions. In the event the Corporation shall issue Additional Shares of
Common Stock pursuant to Section 4(f)(iii)(2) in a stock dividend, stock
distribution or subdivision, the applicable Conversion Value in effect
immediately prior to such stock dividend, stock distribution or subdivision
shall, concurrently with the effectiveness of such stock dividend, stock
distribution or subdivision, be proportionately decreased and the applicable
Conversion Rate correspondingly adjusted.
(2) Combinations or Consolidation. In the event
the outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise pursuant to Section 4(f)(iii)(2) above, into a
lesser number of shares of Common Stock, the applicable Conversion Value in
effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased and the applicable Conversion Rate correspondingly
adjusted.
(vii) Adjustment for Merger or Reorganization, etc.
In the case of any capital reorganization (other than as a recapitalization,
subdivision, combination, classification, exchange or substitution of shares
provided elsewhere in this Section B.4), each share of Convertible Preferred
Stock shall thereafter be convertible into the number of shares of stock or
other securities or property to which a holder of the number of shares of Common
Stock of the Corporation deliverable upon conversion of such Convertible
Preferred Stock would have been entitled upon such capital reorganization; and,
in any case, appropriate adjustment (as determined by the Board of Directors)
shall be made in the application of the provisions herein set forth with respect
to the rights and interest thereafter of the holders of the Convertible
Preferred Stock, to the end that the provisions set forth herein (including
provisions with respect to changes in and other adjustments of the applicable
Conversion Rate and applicable Conversion Value) shall thereafter be
applicable, as
11
<PAGE> 12
nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Convertible Preferred
Stock.
(g) No Impairment. Without the consent of the holders of a
majority of the then outstanding Convertible Preferred Stock, the Corporation
shall not, by amendment of its Certificate of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying
out of all the provisions of this Section 4 and in the taking of all such action
as may be necessary or appropriate in order to protect the conversion rights of
the holders of the Convertible Preferred Stock against impairment.
(h) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the applicable Conversion Value and applicable
Conversion Rate pursuant to this Section 4, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and furnish to each holder of Convertible Preferred Stock upon
request a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based.
(i) Common Stock Reserved. The Corporation shall reserve and
keep available out of its authorized but unissued Common Stock such number of
shares of Common Stock as shall from time to time be sufficient to effect
conversion of the Convertible Preferred Stock.
5. Redemption.
(a) To the extent permitted by the General Corporation Law of
Delaware and presuming there previously has not been a Liquidation Event, the
Series H Preferred shall be redeemable as follows:
(i) On each of February 10, 2004, February 10, 2005,
and February 10, 2006 (each a "Series H Redemption Date"), the Corporation
shall, upon the affirmative vote of the holders of a majority of shares of the
Series H Preferred as specified in Section 5(a)(iii) below, at the option of a
holder of the Series H Preferred, such option to be effected by delivering a
Series H Redemption Notice (as defined below) to the Corporation at least 60
days prior to such Series H Redemption Date, redeem: (i) on February 10, 2004
(the "First Redemption Date"), an amount not to exceed 33.3% of all such Series
H Preferred outstanding immediately prior to such date, (ii) on February 10,
2005, an amount not to exceed 33.3% of all shares of Series H Preferred
outstanding as of the First Redemption Date plus any shares of Series H
Preferred which were eligible for redemption on the First Redemption Date, and
(iii) on February 10, 2006, the remainder of all outstanding Series H Preferred.
(ii) The Series H Preferred to be redeemed on any
Series H Redemption Date shall be redeemed by paying for each share in cash an
amount equal to the same amount per share as would be payable if there were to
be a Liquidation Event, plus a 10% per annum "redemption value," compounded on
each Series H Redemption Date, plus declared and unpaid dividends with respect
to such shares (the "Series H Redemption Price"). Such notice shall state the
12
<PAGE> 13
number of shares of Series H Preferred to be redeemed.
(iii) On or before 105 days prior to each Series H
Redemption Date, the Corporation shall conduct a vote of the holders of the
Series H Preferred with regard to whether to effectuate the redemption provision
as of the then forthcoming Series H Redemption Date. Should a majority of the
then outstanding shares of the Series H Preferred approve that redemption no
less than 75 days prior to each Redemption Date the Company shall send a notice
(a "Series H Redemption Notice") to all holders of Series H Preferred to be
redeemed, setting forth (i) the Series H Redemption Price for the shares to be
redeemed and (ii) the place at which such holders may obtain payment of the
Series H Redemption Price upon surrender of their share certificates. The
Corporation shall send a copy of such Series H Redemption Notice to each holder
of Series I Preferred and Series J Preferred concurrently with its delivery to
the holders of the Series H Preferred.
(iv) Shares subject to redemption pursuant to this
Section 5(a) shall be redeemed from each holder of the Series H Preferred on a
pro rata basis. If the Corporation does not have sufficient funds legally
available to redeem all shares to be redeemed at a Series H Redemption Date,
then it shall redeem such shares on a pro rata basis (based on the portion of
the aggregate Series H Redemption Price payable to them) to the extent possible
and shall redeem the remaining shares to be redeemed as soon as sufficient funds
are legally available.
(b) To the extent permitted by the General Corporation Law of
Delaware and presuming there previously has not been a Liquidation Event, the
Series I Preferred and Series J Preferred shall be redeemable as follows:
(i) On each of February 10, 2004, February 10, 2005,
and February 10, 2006, (each a "Series I/J Redemption Date"), the Corporation
shall at the option of a holder of the Series I Preferred or Series J Preferred,
such option to be effected by delivering a Series I/J Redemption Notice (as
defined below) to the Corporation at least 60 days prior to such Series I/J
Redemption Date, redeem: (i) on the First Redemption Date, an amount of shares
of Series I and Series J Preferred not to exceed 33.3% of all such Series I and
Series J Preferred outstanding immediately prior to such date, (ii) on February
10, 2005, an amount of shares of Series I and Series J Preferred not to exceed
33.3% of all such Series I and Series J Preferred outstanding as of the First
Redemption Date plus any shares of Series I and Series J Preferred which were
eligible for redemption on the First Redemption Date, and (iii) on February 10,
2006, the remainder of all outstanding Series I and Series J Preferred.
(ii) The Series I and Series J Preferred to be
redeemed on any Series I/J Redemption Date shall be redeemed by paying for each
share in cash an amount equal to the same amount per share as would be payable
if there were to be a Liquidation Event, plus a 10% per annum "redemption
value," compounded on each Series I/J Redemption Date, plus declared and unpaid
dividends with respect to such shares (the "Series I/J Redemption Price"). Such
notice shall state the number of shares of Series I/J Preferred to be redeemed.
(iii) No less than 75 days prior to each Series I/J
Redemption Date the Corporation shall send a notice (a "Series I/J Redemption
Notice") to all holders of Series I and
13
<PAGE> 14
Series J Preferred to be redeemed, setting forth (i) the Series I/J Redemption
Price for the shares to be redeemed and (ii) the place at which such holders may
obtain payment of the Series I/J Redemption Price upon surrender of their share
certificates.
(iv) Shares subject to redemption pursuant to this
Section 5(b) shall be redeemed from each holder of the Series I and Series J
Preferred on a pro rata basis, treating the Series I and J Preferred as a single
class. If the Corporation does not have sufficient funds legally available to
redeem all shares to be redeemed at a Series I/J Redemption Date, then it shall
redeem such shares on a pro rata basis (based on the portion of the aggregate
Series I/J Redemption Price payable to them) to the extent possible and shall
redeem the remaining shares to be redeemed as soon as sufficient funds are
legally available.
(c) Notwithstanding any provisions of this Section 5, the
Corporation shall not redeem any shares of Series H Preferred unless it shall
simultaneously redeem the maximum amount of Series I and Series J Preferred
which are subject to redemption or shall have reserved sufficient funds, in
full, in cash, to redeem the maximum amount of Series I and Series J Preferred
which could be subject to redemption.
(d) From and after a Redemption Date, unless there shall have
been a default in payment of the Redemption Price or the Corporation is unable
to pay the Redemption Price due to not having sufficient legally available funds
or financing, all rights of the holder of such shares as a holder of Convertible
Preferred Stock (except the right to receive the Redemption Price without
interest upon surrender of such holder's certificate(s)), shall cease and
terminate with respect to such shares; provided, that in the event that shares
of Convertible Preferred Stock are not redeemed due to a default in payment by
the Corporation or because the Corporation does not have sufficient legally
available funds or financing or otherwise pursuant to Section 5(f) below, such
shares of Convertible Preferred Stock shall remain outstanding and shall be
entitled to all of the rights and preferences provided herein.
(e) On or promptly after the date of redemption as specified
in the Series H Redemption Notice or Series I/J Redemption Notice, as the case
may be, the holder shall surrender such holder's certificate for the number of
shares to be redeemed as stated in the notice. If less than all of the shares
represented by such certificates are redeemed, a new certificate shall forthwith
be issued for the unredeemed shares. Until the date of redemption specified in
the notice, the holders of such Series H or Series I and Series J Preferred, as
the case may be, shall continue to have the right to convert the same pursuant
to the provisions of Section 4 hereof.
(f) Should Delaware law or some other valid legal reason
prevent the Corporation from redeeming shares on the date otherwise required by
operation of the foregoing procedures, the Corporation shall effectuate the
redemption as soon thereafter as it legally can do so.
(g) The provisions of this Section 5 shall terminate and have
no further effect upon the closing of a Qualified Public Offering.
14
<PAGE> 15
C. SPECIAL PREFERRED VOTING STOCK.
1. Series X Special Preferred Voting Stock. A series
of Preferred Stock, consisting of one share of such stock, is hereby designated
as "Series X Special Preferred Voting Stock." The record holder of the Series X
Special Preferred Voting Stock shall not be entitled to receive any dividends or
other distributions or to receive or participate in any distribution of assets
upon any Liquidation Event. Except as otherwise required by applicable law, at
each annual or special meeting of stockholders of the Corporation the record
holder of the Series X Special Preferred Voting Stock shall be entitled to vote
on all matters submitted to a vote of the holders of the Common Stock, voting
together with the holders of the Common Stock as a single class (except as
otherwise provided herein or by applicable law), and the record holder of the
Series X Special Preferred Voting Stock shall be entitled to cast on any such
matter a number of votes equal to the number of Exchangeable Common Shares of
Servicesoft Canada and its successors at law, whether by merger, amalgamation or
otherwise, outstanding as of the record date for such annual or special meeting
of stockholders, which are not owned by the Corporation or any subsidiary of the
Corporation. At such time as no Exchangeable Common Shares (other than
Exchangeable Common Shares owned by the Corporation or any subsidiary of the
Corporation) shall be outstanding and there are no shares of stock, debt,
options or other agreements which could give rise to the issuance of any
Exchangeable Common Shares to any person (other than the Corporation or any
subsidiary of the Corporation), the share of Series X Special Preferred Voting
Stock shall automatically be redeemed for $1.00, and upon any such redemption or
other purchase or acquisition of the Series X Special Preferred Voting Stock by
the Corporation the share of Series X Special Preferred Voting Stock shall be
deemed retired and canceled and may not be reissued.
2. Series Y Special Preferred Voting Stock. A series
of Preferred Stock, consisting of one share of such stock, is hereby designated
as "Series Y Special Preferred Voting Stock." The record holder of the Series Y
Special Preferred Voting Stock shall not be entitled to receive any dividends or
other distributions or to receive or participate in any Liquidation Event.
Except as otherwise required by applicable law, at each annual or special
meeting of stockholders of the Corporation the record holder of the Series Y
Special Preferred Voting Stock shall be entitled to vote on all matters
submitted to a vote of the holders of the Series H Preferred, voting together
with the holders of the Series H Convertible Preferred Stock as a single class
(except as otherwise provided herein or by applicable law), and the record
holder of the Series Y Special Preferred Voting Stock shall be entitled to cast
on any such matter a number of votes equal to the number of shares of
Exchangeable Preferred of Servicesoft Canada and its successors at law, whether
by merger, amalgamation or otherwise, outstanding as of the record date for such
annual or special meeting of stockholders, which are not owned by the
Corporation or any subsidiary of the Corporation. At such time as no
Exchangeable Preferred Shares (other than Exchangeable Preferred Shares owned by
the Corporation or any subsidiary of the Corporation) shall be outstanding and
there are no shares of stock, debt, options or other agreements which could give
rise to the issuance of any Exchangeable Preferred Shares to any person (other
than the Corporation or any subsidiary of the Corporation), the share of Series
Y Special Preferred Voting Stock shall automatically be redeemed for $1.00, and
upon any such redemption or other purchase or acquisition of the Series Y
Special Preferred Voting Stock by the Corporation the
15
<PAGE> 16
share or Series Y Special Preferred Voting Stock shall be deemed retired and
canceled and may not be reissued.
D. UNDESIGNATED PREFERRED STOCK. The Board of Directors or any
authorized committee thereof is expressly authorized to the fullest extent
permitted by law to provide for the issuance of the shares of Undesignated
Preferred Stock in one or more series of such stock, and by filing a certificate
pursuant to applicable law of the State of Delaware, to establish or change from
time to time the number of shares of each such series, and to fix the
designation, powers, including voting powers, full or limited, or no voting
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereof.
ARTICLE V
RIGHT OF FIRST REFUSAL
If at any time any holder of the Corporation's Common Stock or
Preferred Stock desires to sell or transfer all or any part of such holder's
shares (the "Shares") to another person (a "Proposed Transferee"), such holder
(the "Offeror") shall submit, prior to consummating any such sale or transfer, a
written offer (the "Offer") to the Corporation to sell such shares (the "Offered
Shares"); provided, however, that the provisions of this Article V shall not
apply to the holders of the Series I or Series J Preferred. The Offer shall
state in reasonable detail the proposed sale or transfer including, without
limitation, the number of Shares to be sold or transferred, the nature of such
sale or transfer, the consideration to be paid, and the name and address of each
prospective purchaser or transferee (the "Proposed Transferee").
Such Offer shall be at least as favorable to the Company as those on
which the Offeror proposes to sell the Offered Shares to the Proposed
Transferee. The Offer shall disclose the name and address of the Proposed
Transferee, the number of Offered Shares proposed to be sold, the total number
of shares owned by the Offeror, the terms and conditions, including price, of
the proposed sale and any other material facts relating to the proposed sale.
The Offer shall further state that the Company may acquire all (but not less
than all) of the Offered Shares for the price and upon the other terms and
conditions, including deferred payment (if applicable), set forth therein.
The Corporation shall communicate in writing its election to either
purchase all (but not less than all) or none of the Offered Shares to the
Offeror, which communication shall be delivered in person or mailed to the
Offeror at the address provided by the Offeror within seven days of the date the
Offer is made. Such communication shall, when taken in conjunction with the
Offer, be deemed to constitute a valid, legally binding and enforceable
agreement for the sale and purchase of such Offered Shares. Sales of the Offered
Shares to be sold to the Corporation pursuant to this Article V shall be made at
the offices of the Corporation on the 20th day following the date the Offer is
made (or if such 20th day is not a business day, then on the next succeeding
business day). Such sale shall be effected by the Offeror's delivery to the
Corporation of a certificate or certificates evidencing the Offered Shares to be
purchased by it,
16
<PAGE> 17
duly endorsed for transfer to the Corporation against payment to the Offeror of
the purchaser price therefor by the Corporation.
If the Corporation fails to exercise its right to purchase all of
the Offered Shares described in the Offer, such Offeror (if it is not a Major
Shareholder, as defined in the Shareholders Agreement) may, not later than 120
days following delivery to the Corporation of the original Offer, enter into an
agreement providing for the closing of the transfer of the Offered Shares
covered by the Offer on terms and conditions materially no more favorable to the
proposed Transferee than those described in the Offer. Any proposed transfer on
terms and conditions materially more favorable to the Proposed Transferee than
those described in the Offer, as well as any subsequent proposed transfer of any
of the Shares held by the Offeror, shall again be subject to the right of first
refusal of the Corporation and shall require compliance by a Offeror with the
procedures described in this Article V.
If the Offeror is a Major Shareholder and the Corporation has failed
to exercise its purchase rights set forth above, then such Offeror must follow
the procedures set forth in Section 4 of the Shareholders Agreement prior to
transferring the Offered Shares, except that such Offeror need not make the
Offer again to the Corporation.
The provisions of this Article V shall terminate and have no further
effect upon the closing of a Qualified Public Offering.
ARTICLE VI
STOCKHOLDER ACTION
Any action required or permitted to be taken by the stockholders of
the Corporation at any annual or special meeting of stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ARTICLE VII
DIRECTORS
A. GENERAL. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors except as
otherwise provided herein or required by law.
B. ELECTION OF DIRECTORS. Election of Directors need not be by
written ballot unless the By-laws of the Corporation shall so provide.
C. NUMBER OF DIRECTORS; TERM OF OFFICE. The number of Directors of
the Corporation shall be fixed exclusively by resolution duly adopted from time
to time by the Board of Directors. The Directors, other than those who may be
elected by the holders of any series of Undesignated Preferred Stock of the
Corporation, shall be classified, with respect to the term for
17
<PAGE> 18
which they severally hold office, into three classes, as nearly equal in number
as reasonably possible. The initial Class I Directors of the Corporation shall
be Christopher H. Greendale, Sophie Forest and Mark S. Skapinker; and the
initial Class II Directors of the Corporation shall be Christopher M. Butler,
Robert E. Davoli and Gary Rubinoff. The initial Class I Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 2001 and
the initial Class II Directors shall serve for a term expiring at the annual
meeting of stockholders to be held in 2002. At each annual meeting of
stockholders, the successor or successors of the class of Directors whose term
expires at that meeting shall be elected by a plurality of the votes cast at
such meeting and shall hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
Directors elected to each class shall hold office until their successors are
duly elected and qualified or until their earlier resignation or removal.
D. VACANCIES. Subject to the rights, if any, of the holders of any
series of Undesignated Preferred Stock to elect Directors and to fill vacancies
in the Board of Directors relating thereto, any and all vacancies in the Board
of Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely and
exclusively by the affirmative vote of a majority of the remaining Directors
then in office, even if less than a quorum of the Board of Directors, and not by
the stockholders. Any Director appointed in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
Directors in which the new directorship was created or the vacancy occurred and
until such Director's successor shall have been duly elected and qualified or
until his or her earlier resignation or removal. Subject to the rights, if any,
of the holders of any series of Undesignated Preferred Stock to elect Directors,
when the number of Directors is increased or decreased, the Board of Directors
shall, subject to Article VI.3, determine the class or classes to which the
increased or decreased number of Directors shall be apportioned; provided,
however, that no decrease in the number of Directors shall shorten the term of
any incumbent Director.
E. REMOVAL. Subject to the rights, if any, of any series of
Undesignated Preferred Stock to elect Directors and to remove any Director whom
the holders of any such stock have the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office (i) only with cause and (ii) only by the affirmative vote of
the holders of two-thirds of the shares then entitled to vote at an election of
directors. At least 45 days prior to any meeting of stockholders at which it is
proposed that any Director be removed from office, written notice of such
proposed removal and the alleged grounds therefor shall be sent to the Director
whose removal will be considered at the meeting.
ARTICLE VIII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
18
<PAGE> 19
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Tenth Amended and Restated Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
ARTICLE V
AMENDMENT OF BY-LAWS
A. AMENDMENT BY DIRECTORS. Except as otherwise provided by law, the
By-laws of the Corporation may be amended or repealed by the Board of Directors
by the affirmative vote of a majority of the Directors then in office.
B. AMENDMENT BY STOCKHOLDERS. The By-laws of the Corporation may be
amended or repealed at any annual meeting of stockholders, or special meeting of
stockholders called for such purpose as provided in the By-laws, by the
affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal by
holders of voting stock, voting together as a single class.
ARTICLE X
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Tenth
Amended and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute and this Tenth Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. Whenever any vote of the holders of voting stock is
required, and in addition to any other vote of holders of voting stock that is
required by this Tenth Amended and Restated Certificate of Incorporation or by
law, the affirmative vote of the majority of the outstanding shares entitled to
vote on such amendment or repeal, and the affirmative vote of the majority of
the outstanding shares of each class entitled to vote therein as a class, at a
duly constituted meeting of stockholders called expressly for such purpose shall
be required to amend or repeal any provisions of this Tenth Amended and Restated
Certificate of Incorporation; provided, however, that the affirmative vote of
not less than two-
19
<PAGE> 20
thirds of the outstanding shares entitled to vote on such amendment or repeal
and the affirmative vote of not less than two-thirds of the outstanding shares
of each class entitled to vote thereon as a class, shall be required to amend or
repeal any of the provisions of Article V, Article VI, Article VII or Article IX
of this Tenth Amended and Restated Certificate of Incorporation.
20
<PAGE> 1
EXHIBIT 3.2
ELEVENTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SERVICESOFT, INC.
Servicesoft, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is Servicesoft, Inc. The
original Certificate of Incorporation was filed with the Secretary of State on
June 3, 1987 in the name of Rosh Intelligent Systems, Inc. (the "Original
Certificate"). Restated Certificates of Incorporation were filed with the
Secretary of State on October 2, 1989, May 23, 1990, December 14, 1992 (which
was amended on October 26, 1993 to change the corporation's name to Servicesoft
Corporation), February 2, 1994, June 23, 1995, February 9, 1998 (which was
amended on February 13, 1998), February 10, 1999, June 18, 1999, January 13,
2000, and March ___, 2000.
2. This Eleventh Amended and Restated Certificate of
Incorporation amends, restates and integrates the provisions of the Original
Certificate, as heretofore amended and restated, and was duly adopted in
accordance with the provisions of Section 245 of the General Corporation Law of
the State of Delaware (the "DGCL").
3. The text of the Original Certificate, as amended, is hereby
amended and restated in its entirety to provide as herein set forth in full.
ARTICLE I
The name of the Corporation is Servicesoft, Inc.
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street in
the City of Wilmington, County of New Castle. The name of its registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the DGCL.
<PAGE> 2
ARTICLE IV
CAPITAL STOCK
The total number of shares of capital stock which the
Corporation shall have authority to issue is One Hundred Five Million and One
(105,000,001) shares, of which (i) One Hundred Million (100,000,000) shares
shall be a class of common stock, par value $.01 per share (the "Common Stock"),
and (ii) Five Million and One (5,000,001) shares shall be preferred stock, par
value $.01 per share, respectively (the "Preferred Stock"), of which Five
Million (5,000,000) shares shall be undesignated preferred stock (the
"Undesignated Preferred Stock") and one (1) share shall be designated Series X
Special Preferred Voting Stock (the "Series X Special Preferred Voting Stock").
The number of authorized shares of the class of Undesignated
Preferred Stock may from time to time be increased or decreased (but not below
the number of shares outstanding) by the affirmative vote of the holders of a
majority of the shares of Common Stock entitled to vote, without a vote of the
holders of the Undesignated Preferred Stock except as otherwise provided in any
certificate of designation for any series of Undesignated Preferred Stock.
Except as otherwise required by law, holders of Common Stock,
as such, shall not be entitled to vote on any amendment to this Amended and
Restated Certificate of Incorporation (including a certificate establishing a
series of Preferred Stock) that alters or changes the powers, preferences,
rights or other terms of one or more outstanding series of Preferred Stock if
the holders of such affected series are entitled to vote, either separately or
together with the holders of one or more other such series, on such amendment
pursuant to this Amended and Restated Certificate of Incorporation (including a
certificate establishing a series of Preferred Stock) or pursuant to the
Delaware General Corporation Law.
The powers, preferences and rights of, and the qualifications,
limitations and restrictions upon, each class or series of stock shall be
determined in accordance with, or as set forth below in, this Article IV.
A. COMMON STOCK
Subject to all the rights, powers and preferences of the
Undesignated Preferred Stock, and except as provided by law or in this Article
IV (or in any certificate of designation of any series of Preferred Stock);
1. the holders of the Common Stock shall have the
exclusive right to vote for the election of directors and on all other matters
requiring stockholder action, each share being entitled to one vote;
2. dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as declared by
the Board of Directors or any authorized committee thereof; and
-2-
<PAGE> 3
3. upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the net assets of the Corporation
shall be distributed pro rata to the holders of the Common Stock in accordance
with their respective rights and interests.
B. PREFERRED STOCK
1. Undesignated Preferred Stock. The Board of
Directors or any authorized committee thereof is expressly authorized to the
fullest extent permitted by law to provide for the issuance of the shares of
Undesignated Preferred Stock in one or more series of such stock, and by filing
a certificate pursuant to applicable law of the State of Delaware, to establish
or change from time to time the number of shares of each such series, and to fix
the designation, powers, including voting powers, full or limited, or no voting
powers, preferences and the relative, participating, optional or other special
rights of the shares of each series and any qualifications, limitations and
restrictions thereof.
2. Series X Special Preferred Voting Stock. A series
of Preferred Stock, consisting of one share of such stock, is hereby designated
as "Series X Special Preferred Voting Stock." The record holder of the Series X
Special Preferred Voting Stock shall not be entitled to receive any dividends or
other distributions or to receive or participate in any distribution of assets
upon any Liquidation Event. Except as otherwise required by applicable law, at
each annual or special meeting of stockholders of the Corporation the record
holder of the Series X Special Preferred Voting Stock shall be entitled to vote
on all matters submitted to a vote of the holders of the Common Stock, voting
together with the holders of the Common Stock as a single class (except as
otherwise provided herein or by applicable law), and the record holder of the
Series X Special Preferred Voting Stock shall be entitled to cast on any such
matter a number of votes equal to the number of Exchangeable Common Shares of
Servicesoft Canada and its successors at law, whether by merger, amalgamation or
otherwise, outstanding as of the record date for such annual or special meeting
of stockholders, which are not owned by the Corporation or any subsidiary of the
Corporation. At such time as no Exchangeable Common Shares (other than
Exchangeable Common Shares owned by the Corporation or any subsidiary of the
Corporation) shall be outstanding and there are no shares of stock, debt,
options or other agreements which could give rise to the issuance of any
Exchangeable Common Shares to any person (other than the Corporation or any
subsidiary of the Corporation), the share of Series X Special Preferred Voting
Stock shall automatically be redeemed for $1.00, and upon any such redemption or
other purchase or acquisition of the Series X Special Preferred Voting Stock by
the Corporation the share of Series X Special Preferred Voting Stock shall be
deemed retired and canceled and may not be reissued.
ARTICLE V
STOCKHOLDER ACTION
Any action required or permitted to be taken by the
stockholders of the Corporation at any annual or special meeting of stockholders
of the Corporation must be
-3-
<PAGE> 4
effected at a duly called annual or special meeting
of stockholders and may not be taken or effected by a written consent of
stockholders in lieu thereof.
ARTICLE VI
DIRECTORS
1. General. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided herein or required by law.
2. Election of Directors. Election of Directors need not be by
written ballot unless the By-laws of the Corporation shall so provide.
3. Number of Directors; Term of Office. The number of Directors of
the Corporation shall be fixed exclusively by resolution duly adopted from time
to time by the Board of Directors. The Directors, other than those who may be
elected by the holders of any series of Undesignated Preferred Stock of the
Corporation, shall be classified, with respect to the term for which they
severally hold office, into three classes, as nearly equal in number as
reasonably possible. The initial Class I Directors of the Corporation shall be
Christopher H. Greendale, Sophie Forest and Mark S. Skapinker; and the initial
Class II Directors of the Corporation shall be Christopher M. Butler, Robert E.
Davoli and Gary Rubinoff. The initial Class I Directors shall serve for a term
expiring at the annual meeting of stockholders to be held in 2001 and the
initial Class II Directors shall serve for a term expiring at the annual meeting
of stockholders to be held in 2002. At each annual meeting of stockholders, the
successor or successors of the class of Directors whose term expires at that
meeting shall be elected by a plurality of the votes cast at such meeting and
shall hold office for a term expiring at the annual meeting of stockholders held
in the third year following the year of their election. The Directors elected to
each class shall hold office until their successors are duly elected and
qualified or until their earlier resignation or removal.
4. Vacancies. Subject to the rights, if any, of the holders of any
series of Undesignated Preferred Stock to elect Directors and to fill vacancies
in the Board of Directors relating thereto, any and all vacancies in the Board
of Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely and
exclusively by the affirmative vote of a majority of the remaining Directors
then in office, even if less than a quorum of the Board of Directors, and not by
the stockholders. Any Director appointed in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
Directors in which the new directorship was created or the vacancy occurred and
until such Director's successor shall have been duly elected and qualified or
until his or her earlier resignation or removal. Subject to the rights, if any,
of the holders of any series of Undesignated Preferred Stock to elect Directors,
when the number of Directors is increased or decreased, the Board of Directors
shall, subject to Article VI.3, determine the class or classes to which the
increased or
-4-
<PAGE> 5
decreased number of Directors shall be apportioned; provided, however, that no
decrease in the number of Directors shall shorten the term of any incumbent
Director.
5. Removal. Subject to the rights, if any, of any series of
Undesignated Preferred Stock to elect Directors and to remove any Director whom
the holders of any such stock have the right to elect, any Director (including
persons elected by Directors to fill vacancies in the Board of Directors) may be
removed from office (i) only with cause and (ii) only by the affirmative vote of
the holders of two-thirds of the shares then entitled to vote at an election of
directors. At least 45 days prior to any meeting of stockholders at which it is
proposed that any Director be removed from office, written notice of such
proposed removal and the alleged grounds therefor shall be sent to the Director
whose removal will be considered at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (a) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL or (d) for any
transaction from which the Director derived an improper personal benefit. If the
DGCL is amended after the effective date of this Eleventh Amended and Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of Directors, then the liability of a
Director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Any repeal or modification of this Article VII by either of
(i) the stockholders of the Corporation or (ii) an amendment to the DGCL, shall
not adversely affect any right or protection existing at the time of such repeal
or modification with respect to any acts or omissions occurring before such
repeal or modification of a person serving as a Director at the time of such
repeal or modification.
ARTICLE VIII
AMENDMENT OF BY-LAWS
1. Amendment by Directors. Except as otherwise provided by law,
the By-laws of the Corporation may be amended or repealed by the Board of
Directors by the affirmative vote of a majority of the Directors then in office.
2. Amendment by Stockholders. The By-laws of the Corporation may
be amended or repealed at any annual meeting of stockholders, or special meeting
of stockholders called for such purpose as provided in the By-laws, by the
affirmative vote of at least two-thirds of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve
-5-
<PAGE> 6
such amendment or repeal at such meeting of stockholders, such amendment or
repeal shall only require the affirmative vote of the majority of the shares
present in person or represented by proxy at such meeting and entitled to vote
on such amendment or repeal by holders of voting stock, voting together as a
single class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Eleventh
Amended and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute and this Eleventh Amended and Restated Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. Whenever any vote of the holders of voting stock is
required, and in addition to any other vote of holders of voting stock that is
required by this Eleventh Amended and Restated Certificate of Incorporation or
By-law, the affirmative vote of the majority of the outstanding shares entitled
to vote on such amendment or repeal, and the affirmative vote of the majority of
the outstanding shares of each class entitled to vote therein as a class, at a
duly constituted meeting of stockholders called expressly for such purpose shall
be required to amend or repeal any provisions of this Eleventh Amended and
Restated Certificate of Incorporation; provided, however, that the affirmative
vote of not less than two-thirds of the outstanding shares entitled to vote on
such amendment or repeal and the affirmative vote of not less than two-thirds of
the outstanding shares of each class entitled to vote thereon as a class, shall
be required to amend or repeal any of the provisions of Article V, Article VI,
Article VII or Article IX of this Eleventh Amended and Restated Certificate of
Incorporation.
* * *
-6-
<PAGE> 1
EXHIBIT 10.5
SERVICESOFT, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Servicesoft, Inc. 2000 Employee Stock Purchase Plan ("the
Plan") is to provide eligible employees of ServiceSoft, Inc. (the "Company") and
certain of its subsidiaries with opportunities to purchase shares of the
Company's common stock, $.01 par value (the "Common Stock"). Five Hundred
Thousand (500,000) shares of Common Stock in the aggregate have been approved
for this purpose. The 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"), and shall be interpreted in accordance with that
intent.
1. ADMINISTRATION. the Plan will be administered by the Company's Board of
Directors (the "Board") or by a committee appointed by the Board for
such purpose (the "Committee"). The Board or the Committee has
authority to make rules and regulations for the administration of the
Plan, and its interpretations and decisions with regard thereto shall
be final and conclusive. No member of the Board or the Committee shall
be liable for any action or determination made in good faith with
respect to the Plan or any option granted hereunder.
2. OFFERINGS. The Company will make one or more offerings to eligible
employees to purchase Common Stock under the Plan ("Offerings"). The
initial Offering will begin April 1, 2000 and will end on September 30,
2000 (the "Initial Offering"). Thereafter, an Offering will begin on
the first business day occurring on or immediately after each October 1
and April 1 and will end on the last business day occurring on or
before the following March 31 and September 30, respectively.
3. ELIGIBILITY. All employees of the Company (including employees who are
also directors of the Company) and all employees of each Designated
Subsidiary (as defined in Section 11) are eligible to participate in
any one or more of the Offerings under the Plan, provided that as of
the first day of the applicable Offering (the "Offering Date") they are
customarily employed by the Company or a Designated Subsidiary for more
than twenty (20) hours a week.
4. PARTICIPATION. An employee eligible on any Offering Date may
participate in such Offering by submitting an enrollment form to his
appropriate payroll location at least ten (10) business days before the
Offering Date (or by such other deadline as shall be established for
the Offering). The form will (a) state the percentage to be deducted
from his Compensation (as defined in Section 11) per pay period, (b)
authorize the purchase of Common Stock for him in each Offering in
accordance with the terms of the Plan and (c) specify the exact name or
names in which shares of Common Stock purchased for him are to be
issued pursuant to Section 10. An employee who does not enroll in
accordance with these procedures will be deemed to have waived his
right to participate. Unless an employee files a new enrollment form or
withdraws from the Plan, his deductions and purchases will continue at
the
<PAGE> 2
same percentage of Compensation for future Offerings, provided he
remains eligible. Notwithstanding the foregoing, participation in the
Plan will neither be permitted nor be denied contrary to the
requirements of the Code.
5. EMPLOYEE CONTRIBUTIONS. Each eligible employee may authorize payroll
deductions at a minimum of one percent (1%) up to a maximum of ten
percent (10%) of his Compensation for each pay period. The Company will
maintain book accounts showing the amount of payroll deductions made by
each participating employee for each Offering. No interest will accrue
or be paid on payroll deductions.
6. DEDUCTION CHANGES. An employee may not increase or decrease his payroll
deduction during any Offering, but may increase or decrease his payroll
deduction with respect to the next Offering (subject to the limitations
of Section 5) by filing a new enrollment form at least ten (10)
business days before the next Offering Date (or by such other deadline
as shall be established by the Board or Committee for the Offering).
7. WITHDRAWAL. An employee may withdraw from participation in the Plan by
delivering a written notice of withdrawal to his appropriate payroll
location. The employee's withdrawal will be effective as of the next
business day. Following an employee's withdrawal, the Company will
promptly refund to him his entire account balance under the Plan (after
payment for any Common Stock purchased before the effective date of
withdrawal). Partial withdrawals are not permitted. The employee may
not begin participation again during the remainder of the Offering, but
may enroll in a subsequent Offering in accordance with Section 4.
8. GRANT OF OPTIONS. On each Offering Date, the Company will grant to each
eligible employee who is then a participant in the Plan an option
("Option") to purchase on the last day of such Offering (the "Exercise
Date"), at the Option Price hereinafter provided for, up to 500 whole
shares of Common Stock reserved for the purposes of the Plan. The
purchase price for each share purchased under such Option (the "Option
Price") will be 85% of the Fair Market Value of the Common Stock on the
Offering Date or the Exercise Date, whichever is less.
Notwithstanding the foregoing, no employee may be granted an Option
hereunder 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 any Parent or Subsidiary (as defined in Section 11). For
purposes of the preceding sentence, the attribution rules of Section
424(d) of the Code shall apply in determining the stock ownership of an
employee, and all stock which the employee has a contractual right to
purchase shall be treated as stock owned by the employee. In addition,
no employee may be granted an Option which permits his rights to
purchase stock under the Plan, and any other employee stock purchase
plan of the Company and its Parents and Subsidiaries, to accrue at a
rate which exceeds $25,000 of the fair market value of such stock
(determined on the option grant date or dates) for each
<PAGE> 3
calendar year in which the 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.
9. EXERCISE OF OPTION AND PURCHASE OF SHARES. Each employee who continues
to be a participant in the Plan on the Exercise Date shall be deemed to
have exercised his Option on such date and shall acquire from the
Company such number of whole shares of Common Stock reserved for the
purpose of the Plan as his accumulated payroll deductions on such date
will purchase at the Option Price, subject to any other limitations
contained in the Plan. Any balance remaining in an employee's account
at the end of an Offering will be refunded to the employee promptly;
provided that any balance remaining in an employee's account at the end
of an Offering solely by reason of the inability to purchase a
fractional share will be carried forward to the next Offering.
10. ISSUANCE OF CERTIFICATES. Certificates representing shares of Common
Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the employee and another person of legal age
as joint tenants with rights of survivorship, or in the name of a
broker authorized by the employee to be his, or their, nominee for such
purpose.
11. DEFINITIONS. The term "Compensation" means the amount of total cash
compensation, prior to salary reduction pursuant to either Section 125
or 401(k) of the Code, including base pay, commissions, overtime, and
incentive and bonus awards, but excluding allowances and reimbursements
for expenses such as relocation allowances or travel expenses, income
or gains on the exercise of Company stock options, and similar items.
The term "Designated Subsidiary" means any present or future Subsidiary
(as defined below) that is designated from time to time by the Board or
the Committee to participate in the Plan. Subsidiaries may be so
designated either before or after the Plan is approved by the
stockholders.
The term "Fair Market Value of Common Stock" on any given date shall
mean (i) if the Common Stock is admitted to on a national securities
exchange or the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") National Market System, the closing price
reported for Common Stock on NASDAQ on such date, or if no sales were
reported for such date, the last date preceding such date for which a
sale was reported, or (ii) if the Stock is not publicly traded on a
securities exchange or traded in the over-the-counter market or, if
traded or quoted, there are no transactions or quotations within the
last ten trading days or trading has been halted for extraordinary
reasons, the Fair Market Value on any given date shall be determined in
good faith by the Committee.
The term "Parent" means a "parent corporation" with respect to the
Company, as defined in Section 424(e) of the Code.
<PAGE> 4
The term "Subsidiary" means a "subsidiary corporation" with respect to
the Company, as defined in Section 424(f) of the Code.
12. RIGHTS ON RETIREMENT, DEATH, OR OTHER TERMINATION OF EMPLOYMENT. If a
participating employee's employment terminates for any reason before
the Exercise Date for any Offering, no payroll deduction will be taken
from any pay due and owing to the employee and the balance in his
account will be paid to him or, in the case of his death, to his
designated beneficiary as if he had withdrawn from the Plan under
Section 7. An employee will be deemed to have terminated employment,
for this purpose, if the corporation that employs him, having been a
Designated Subsidiary, ceases to be a Subsidiary, or if the employee is
transferred to any corporation other than the Company or a Designated
Subsidiary.
13. OPTIONEES NOT STOCKHOLDERS. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee
a stockholder of the shares of Common Stock covered by an Option under
the Plan until such shares have been purchased by and issued to him.
14. RIGHTS NOT TRANSFERABLE. Rights under the Plan are not transferable by
a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only
by the employee.
15. APPLICATION OF FUNDS. All funds received or held by the Company under
the Plan may be combined with other corporate funds and may be used for
any corporate purpose.
16. ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK. If, through or as
a result of any merger, consolidation, sale of all or substantially all
of the assets of the Company, reorganization, recaplitalization,
reclassification, stock dividend, stock split, reverse stock split or
other similar transaction in the capital structure of the Company
without consideration, the outstanding shares of Common Stock are
increased or decreased or are exchanged for a different number or kind
of shares or other securities of the Company or any successor company,
or additional shares or new or different shares or other securities of
the Company or other non-cash assets are distributed with respect to
such shares of Stock or other securities, the Board (or, if appointed,
the Committee) shall make an appropriate or proportionate adjustment in
(i) the maximum number of shares reserved for issuance under the Plan,
(ii) the share limitation in Section 8, and (iii) such other provision
as may be deemed equitable by the Board or, if applicable, the
Committee. Any adjustment or determination pursuant to this Section
shall be final, binding and conclusive.
17. AMENDMENT OF THE PLAN. The Board or the Committee may at any time, and
from time to time, amend the Plan in any respect, except that without
the approval, within twelve (12) months of such Board or Committee
action, by the holders of a majority of the shares of stock of the
Company present or represented and entitled to vote at a meeting of
stockholders, no amendment shall be made (a) increasing the number of
shares approved for the Plan, (b) changing the corporations or class
<PAGE> 5
of corporations whose employees will be allowed to participate in the
Plan, or (c) in any other manner that the Board or Committee may, in
its discretion, determine should become effective only if approved by
Stockholders even though Stockholder approval is not expressly required
by this Plan.
18. INSUFFICIENT SHARES. If the total number of shares of Common Stock that
would otherwise be purchased on any Exercise Date plus the number of
shares purchased under previous Offerings under the Plan exceeds the
maximum number of shares issuable under the Plan, the shares then
available 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 Common Stock on such Exercise
Date.
19. TERMINATION OF THE PLAN. The Plan may be terminated at any time by the
Board or the Committee. Upon termination of the Plan, all amounts in
the accounts of participating employees shall be promptly refunded.
20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver
Common Stock under the Plan is subject to listing on NASDAQ and
obtaining all governmental approvals required in connection with the
authorization, issuance, or sale of such stock.
The Plan shall be governed by Delaware law except to the extent that
such law is preempted by federal law.
21. ISSUANCE OF SHARES. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the
treasury of the Company, or from any other proper source.
22. TAX WITHHOLDING. Participation in the Plan is subject to any required
tax withholding on income of the participant in connection with the
Plan. Each employee agrees, by entering the Plan, that the Company and
its Subsidiaries shall have the right to deduct any such taxes from any
payment of any kind otherwise due to the employee, including shares
issuable under the Plan.
23. NOTIFICATION UPON SALE OF SHARES. Each employee agrees, by entering the
Plan, to give the Company prompt notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years
after the date of grant of the Option pursuant to which such shares are
purchased or one year after the Exercise Date.
24. EFFECTIVE DATE AND APPROVAL OF SHAREHOLDERS. The Plan shall take effect
on April 1, 2000, subject to approval by the holders of a majority of
the shares of stock of the Company present or represented and entitled
to vote at a meeting of stockholders, which approval must occur within
twelve (12) months of the adoption of the Plan by the Board.
<PAGE> 6
ADDENDUM: DESIGNATED SUBSIDIARIES
The following subsidiary is a "Designated Subsidiary" (as defined in
Section 11 of the Plan), eligible to participate in the Plan:
1. Servicesoft Canada, Inc.
<PAGE> 1
EXHIBIT 10.20
SERVICESOFT TECHNOLOGIES, INC.
SERIES J CONVERTIBLE
PREFERRED STOCK
PURCHASE AGREEMENT
as of January 13, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS AND PRINCIPLES OF INTERPRETATION.................................................. 1
Section 1.1 Definitions.......................................................................... 1
Section 1.2 Certain Rules of Interpretation...................................................... 4
Section 1.3 Entire Agreement..................................................................... 4
Section 1.4 Applicable Law....................................................................... 5
ARTICLE II PURCHASE AND SALE AND CLOSING................................................................. 5
Section 2.1 Purchase and Sale.................................................................... 5
ARTICLE III REPRESENTATIONS OF SERVICESOFT................................................................ 5
Section 3.1 Organization, Standing and Power..................................................... 5
Section 3.2 Capital Structure of Servicesoft and its Subsidiaries................................ 6
Section 3.3 Authority, Conflicts, Consents....................................................... 8
Section 3.4 Servicesoft Financial Statements..................................................... 9
Section 3.5 Absence of Undisclosed Liabilities................................................... 9
Section 3.6 Absence of Certain Changes........................................................... 10
Section 3.7 Tax Matters.......................................................................... 10
Section 3.8 Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment....... 12
Section 3.9 Intellectual Property................................................................ 12
Section 3.10 Material Contracts................................................................... 14
Section 3.11 Litigation........................................................................... 14
Section 3.12 Environmental and Safety Laws........................................................ 15
Section 3.13 Brokers' and Finders' Fees........................................................... 15
Section 3.14 Employee Benefit Plans and Compensation.............................................. 15
Section 3.15 Insurance............................................................................ 18
Section 3.16 Compliance with Laws................................................................. 18
Section 3.18 Other Relationships.................................................................. 18
Section 3.19 Investment Company Act............................................................... 19
Section 3.20 Private Sale......................................................................... 19
Section 3.21 Small Business....................................................................... 19
Section 3.22 Disclosure Schedule.................................................................. 19
ARTICLE IV REPRESENTATIONS OF THE INVESTORS.............................................................. 19
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
Section 4.1 Enforceability....................................................................... 19
Section 4.2 Securities Law Matters............................................................... 20
Section 4.3 Incorporation and Authorization...................................................... 20
ARTICLE V CLOSING CONDITIONS............................................................................ 21
Section 5.1 Conditions in Favor of the Investors................................................. 21
Section 5.2 Conditions in Favor of Servicesoft................................................... 22
ARTICLE VI COVENANTS..................................................................................... 22
Section 6.1 Use of Proceeds...................................................................... 22
Section 6.2 SBIC Regulatory Provisions........................................................... 22
Section 6.3 Regulatory Compliance Cooperation.................................................... 24
ARTICLE VII GENERAL....................................................................................... 24
Section 7.1 Non-Waiver........................................................................... 24
Section 7.2 Indemnification, Survival, etc....................................................... 25
Section 7.3 Assignment........................................................................... 25
Section 7.4 Successors and Assigns............................................................... 25
Section 7.5 Further Assurances................................................................... 25
Section 7.6 Preemptive Rights.................................................................... 25
Section 7.7 Notices.............................................................................. 26
Section 7.8 Public Notices....................................................................... 26
Section 7.9 Counterparts......................................................................... 27
</TABLE>
SCHEDULES AND EXHIBITS
Exhibit A - Schedule of Investors
Exhibit B - By-Laws
Exhibit C - Certificate
Exhibit D - Registration Rights Agreement
Exhibit E - Shareholders Agreement
Exhibit F - Disclosure Schedule
Exhibit G - Legal Opinion of McDermott, Will & Emery
-ii-
<PAGE> 4
SERIES J CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
This Series J Convertible Preferred Stock Purchase Agreement is entered
into as of the 13th day of January, 2000 between Servicesoft Technologies Inc.,
a Delaware corporation ("SERVICESOFT"), and each investor listed on Exhibit A
attached hereto (the "INVESTORS" and, each individually, the "INVESTOR"). Except
as otherwise indicated herein, capitalized terms used herein are defined in
Article I hereof.
WHEREAS, Servicesoft wishes to issue and sell to the Investors an
aggregate of up to 3,481,478 shares of its authorized but unissued Series J
Convertible Preferred Stock, $0.01 par value per share (the "Preferred J
Shares"); and
WHEREAS, the Investors wish to subscribe for and purchase the Preferred
J Shares on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, based upon the mutual covenants and agreements herein
contained, and for other good and sufficient consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS AND PRINCIPLES OF INTERPRETATION
Section 1.1 Definitions. Whenever used in this Agreement, unless there
is something inconsistent in the subject matter or context, the following words
and terms shall have the meanings set out below:
"AFFILIATE" means, with respect to any specified Person, (1) any other
Person who, directly or indirectly, owns or controls, is under common ownership
or control with, or is owned or controlled by, such specified Person, (2) any
other Person who is a director, officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, of the specified Person or a Person described in clause (1) above,
(3) any other Person of whom the specified Person is a director, officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities, (4) any other Person in whom the specified
Person has a substantial beneficial interest or as to whom the specified Person
serves as trustee or in a similar capacity, or (5) any relative or spouse of the
specified Person or any of the foregoing Persons described in clause (1), (2),
(3) or (4) above, any relative of such spouse, any spouse of any such relative
or any other Person who, directly or indirectly, is under common ownership or
control with, or is owned or controlled by such spouse or relative. As used in
this definition, the term "CONTROL" means the possession, directly or
indirectly, of the power to direct
<PAGE> 5
the management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"AGREEMENT" means this Series J Convertible Preferred Stock Purchase
Agreement, including all schedules and exhibits attached hereto, and all
instruments supplementing or amending or confirming this Agreement. With respect
to this Agreement, the terms "HEREOF," "HERETO" and "HEREUNDER" and similar
expressions mean and refer to this Agreement and not to any particular article
or section; and the words "ARTICLE" or "SECTION" means and refers to the
specified article or section of this Agreement.
"BEST KNOWLEDGE OF SERVICESOFT" means both (i) the actual knowledge of
Chris Butler and Dan Kossmann, the Chief Executive Officer and Chief Financial
Officer, respectively, of Servicesoft and (ii) that knowledge of such
individuals as any of them would be likely to have as a result of exercising
their respective management or fiduciary responsibilities in the ordinary course
of business.
"BUSINESS" means the business of Servicesoft and its Subsidiaries,
being the provision of Internet Customer Service Software and related services.
"BUSINESS DAY" means a day, other than a Saturday or Sunday, on which
the principal commercial banks located in New York and Toronto are open for
business during normal banking hours.
"BY-LAWS" means the By-Laws of Servicesoft as in effect as of the
Closing, in substantially the form attached hereto as Exhibit B.
"CERTIFICATE" means the Ninth Amended and Restated Certificate of
Incorporation of Servicesoft as in effect as of the Closing, in substantially
the form attached as Exhibit C hereto.
"CLAIM" means any claim, judgment, order, action, cause of action,
suit, litigation, administrative proceeding, arbitration or proceeding including
any appeal and application for review that may be pending or threatened.
"CLOSING" has the meaning set forth in Section 2.2.
"CLOSING DATE" has the meaning set forth in Section 2.2.
"CODE" means the Internal Revenue Code of 1986, as amended.
"GAAP" means United States generally accepted accounting principles.
"GOVERNMENTAL BODY" means any government, parliament, legislature,
regulatory authority, agency, commission, board or court or other law, rule, or
regulation-making entity having or purporting to have jurisdiction on behalf of
any nation or state or province or other subdivision thereof including any
municipality or district.
2
<PAGE> 6
"LIEN" means any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in any property (whether tangible or intangible, real
or personal).
"LOSS" means any Claim, loss, expense, liability or other damage,
including reasonable attorney's fees, to the extent of the amount of such Claim,
loss, expense, liability or other damage.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on the
business, assets, financial condition and, results of operations of Servicesoft
and each of its Subsidiaries, taken as a whole.
"ORGANIC DOCUMENTS" means relative to any Person (other than an
individual) the documents which establish its legal existence or which govern
its internal affairs, such as its certificate of incorporation, by-laws, and all
shareholder agreements, voting trusts and similar agreements or arrangements
authorized to its capital stock or other equity interests.
"PERSON" means any natural person, legal or personal representative,
partnership, company, corporation, incorporated syndicate, unincorporated or
incorporated association, trust or Governmental Body, howsoever designated or
constituted and whether acting in an individual, fiduciary or other capacity.
"PURCHASED SHARES" means, with respect to any Investor, the Preferred
J Shares to be issued by Servicesoft to, and purchased by such Investor at the
Closing pursuant to this Agreement, as more particularly described on Exhibit A
hereto.
"REGISTRATION RIGHTS AGREEMENT" means the Seventh Amended and Restated
Registration Rights Agreement to be entered into by Servicesoft, the Investors
and certain other major shareholders of Servicesoft on the Closing Date (as
defined herein) in substantially the form attached hereto as Exhibit D.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar federal statute, and the rules and regulations of the Securities and
Exchange Commission thereunder, all as the same shall be in effect at the time.
"SHAREHOLDERS AGREEMENT" means the Second Amended and Restated
Shareholders Agreement to be entered into among Servicesoft, the Investors and
certain other parties on the Closing Date, in substantially the form attached
hereto as Exhibit E.
"SUBSIDIARY," or collectively ,"SUBSIDIARIES," of any Person means any
corporation or other entity of which securities or other ownership interests
having ordinary voting power to elect a majority of the Board of Directors or
other Persons performing similar functions are directly or indirectly owned or
controlled by such Person or one or more Subsidiaries of such Person.
"TAX," or collectively, "TAXES," means (i) any and all federal, state,
local and foreign taxes, and similar assessments and other governmental charges,
duties, impositions, fees, royalties, withholdings, contributions and
liabilities, including taxes based upon or measured by
3
<PAGE> 7
gross receipts, gross income, gross profits, sales (including goods and
services), use and occupation, and value added, ad valorem, transfer, franchise,
stamp, documentary, severance, net income, capital, employer health, workers
compensation, pension, withholding, payroll, recapture, employment, excise and
property taxes, assessments, charges, duties, impositions, fees, royalties,
withholdings, contributions and liabilities, together with all interest,
penalties and additions imposed with respect to such amounts and any expenses
incurred in connection with the determination, settlement or litigation of any
tax liability; (ii) any liability for the payment of any amounts of the type
described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other Person or as
a result of any obligations under any agreements or arrangements with any other
Person with respect to such amounts and including any liability for Taxes of a
predecessor entity.
"TAX RETURN" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"TRANSACTION DOCUMENTS" means the Registration Rights Agreement and the
Shareholders Agreement.
Section 1.2 Certain Rules of Interpretation. In this Agreement:
(a) time is of the essence in the performance of the parties'
respective obligations;
(b) unless otherwise specified, all references to monetary
amounts are to United States dollars; and
(c) the use of words in the singular or plural, or with a
particular gender, shall not limit the scope or exclude the application of any
provision of this Agreement to such Person or Persons or circumstances as the
context otherwise permits.
Section 1.3 Entire Agreement. This Agreement together with the
Transaction Documents, the Certificate and other documents to be delivered
pursuant to this Agreement, constitute the entire agreement between the parties
or any of them pertaining to the subject matter of this Agreement and supersede
all prior agreements, understandings, negotiations and discussions, whether oral
or written, of the parties and there are no warranties, representations or other
agreements between the parties or any of them in connection with the subject
matter of this Agreement except as specifically set forth in this Agreement and
any document delivered pursuant to this Agreement. This Agreement may be amended
and any provision hereof waived with the prior written consent of the Company
and a majority-in-interest of the Investors; provided, however, that any
amendment which directly, materially and adversely affects any right
specifically granted to a particular Investor in a manner different from other
Investors shall not be effective unless such Investor has consented to that
amendment.. No waiver of any of the provisions of this Agreement shall be deemed
or shall constitute a waiver of any other provisions
4
<PAGE> 8
(whether or not similar) nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided.
Section 1.4 Applicable Law. This Agreement shall be construed in
accordance with the internal laws of the State of Delaware.
ARTICLE II
PURCHASE AND SALE AND CLOSING
Section 2.1 Purchase and Sale. Upon the terms and subject to the
conditions herein, and in reliance on the representations, warranties and
covenants set forth herein, at the Closing (as hereinafter defined) each
Investor named on Exhibit A hereto shall, individually and not jointly, purchase
from Servicesoft, and Servicesoft shall issue and sell to each such Investor,
the number of Preferred J Shares set forth opposite the name of such Investor in
Exhibit A hereto, for a purchase price of $9.03 per share, or an aggregate of
3,481,478 Preferred J Shares at an aggregate purchase price of $31,437,989 (the
"TOTAL PURCHASE PRICE").
Section 2.2 Closing. The closing (the "CLOSING") of the sale and
purchase of the Preferred J Shares to the Investors shall take place at the
offices of McDermott, Will & Emery at 10:00 a.m. on the date hereof, or such
time and place as shall be mutually agreed upon by Servicesoft and a majority
of-in-interest of the Investors (the "CLOSING DATE"). On the Closing Date,
Servicesoft shall deliver or cause to be delivered to each Investor identified
on Exhibit A stock certificates representing the number of Preferred J Shares
purchased by it free and clear of any and all Liens (except as otherwise
contemplated hereunder) issued in each of such Investor's name or in the name of
its nominee, against delivery by such Investor of such Investor's portion of the
Total Purchase Price therefor by certified check or wire transfer of immediately
available funds.
ARTICLE III
REPRESENTATIONS OF SERVICESOFT
Servicesoft represents and warrants to each of the Investors, severally
and not jointly, that except as set forth in Exhibit F hereto (the "DISCLOSURE
SCHEDULE"), as of the date hereof:
Section 3.1 Organization, Standing and Power. Except as set forth in
Section 3.1 of the Disclosure Schedule, Servicesoft and each of its Subsidiaries
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, except, with respect to Subsidiaries,
to the extent that the failure to be in good standing would not have a Material
Adverse Effect. Except for the Subsidiaries listed in Section 3.1 of the
Disclosure Schedule, Servicesoft has no direct or indirect interest in, and owns
no capital stock or other securities, or rights or obligations to acquire the
same, of any other Person. Servicesoft and each of its Subsidiaries has the
corporate power to own its properties and to carry on the Business as now being
conducted and as proposed to be conducted and is duly qualified to do business
and, except as set forth in Section 3.1 of the Disclosure Schedule, is in good
standing in each jurisdiction in which it is required to be so qualified except
to the extent that the failure to be so
5
<PAGE> 9
qualified would not have a Material Adverse Effect. The minute books containing
the records of the meetings of the stockholders, the Board of Directors and any
committees of the Board of Directors, the stock certificate books and the stock
record books of Servicesoft and each of its Subsidiaries are correct and
complete in all material respects. None of Servicesoft and its Subsidiaries is
in default under or in violation of any provisions of its Organic Documents,
except where such default or violation would not have a Material Adverse Effect.
Section 3.2 Capital Structure of Servicesoft and its Subsidiaries.
(a) Servicesoft. Immediately prior to the Closing, the
authorized capital stock of Servicesoft consists of 30,000,000 shares of Common
Stock, par value $0.01 per share (the "SERVICESOFT COMMON SHARES"), of which
4,178,590 are issued and outstanding, and 16,450,002 shares of Preferred Stock,
par value $0.01 per share (the "SERVICESOFT PREFERRED SHARES"), designated as
follows: (i) 8,000,000 shares of Series H Convertible Preferred Stock (the
"SERVICESOFT H PREFERRED SHARES"), of which 5,380,130 shares are issued and
outstanding, (ii) 4,450,000 shares of Series I Convertible Preferred Stock (THE
"SERVICESOFT I PREFERRED SHARES"), of which 3,982,271 SHARES are issued and
outstanding, (iii) 4,000,000 Preferred J Shares, none of which are issued and
outstanding, (iv) one share of Series X Special Preferred Stock (the
"SERVICESOFT X PREFERRED SHARE"), which is issued and outstanding, and (v) one
share of Series Y Special Preferred Stock (the "SERVICESOFT Y PREFERRED SHARE"),
which is issued and outstanding. Servicesoft has issued warrants (the
"SERVICESOFT WARRANTS") to purchase an aggregate of 63,025 shares of Servicesoft
H Preferred Shares and 20,782 shares of Servicesoft Common Shares. Except as set
forth in Section 3.2 of the Disclosure Schedule, all outstanding Servicesoft
Common Shares, Servicesoft H Preferred Shares, Servicesoft I Preferred Shares,
the Servicesoft X Preferred Shares and the Servicesoft Y Preferred Share are
duly authorized, validly issued, fully paid and non-assessable and are free of
any Liens other than any Liens created by or imposed upon the holders thereof
and, except as set forth in the Certificate and the Shareholders Agreement, are
not subject to pre-emptive rights or rights of first refusal created by statute,
or any agreement to which Servicesoft is a party or by which it is bound. As of
the Closing Date, the Series X Preferred Share may vote for 973,762 shares of
Servicesoft Canada Exchangeable Common Shares (as defined below) and the Series
Y Preferred Share may vote for 1,657,893 shares of Servicesoft Canada
Exchangeable Preferred Shares (as defined in Section 3.2(b) below). As of the
Closing Date, Servicesoft has reserved authorized but unissued shares of
Servicesoft Common Shares in an amount that would be sufficient to effect the
conversion of all outstanding shares of Servicesoft Preferred Shares (including
Servicesoft H Preferred Shares issued upon exercise and conversion of the
Servicesoft Warrants for Series H Preferred Shares and Servicesoft H Preferred
Shares issued upon exchange of Servicesoft Canada Exchangeable Preferred Shares
(as defined in Section 3.2(b) below)), to effect the exchange of all outstanding
Servicesoft Canada Exchangeable Common Shares, and to effect the exercise of
Servicesoft Warrants for Servicesoft Common Shares. Servicesoft has reserved
2,200,000 Servicesoft Common Shares for issuance to employees, directors and
consultants pursuant to its 1994 Stock Option Plan (the "SERVICESOFT 1994 STOCK
OPTION PLAN") of which 2,099,785 shares are subject to outstanding unexercised
options. Servicesoft has reserved 1,876,498 Servicesoft Common Shares for
issuance to employees, directors and consultants
6
<PAGE> 10
pursuant to its 1999 Stock Option and Grant Plan (the "SERVICESOFT 1999 STOCK
OPTION PLAN", and, together with the Servicesoft 1994 Stock Option Plan, the
"SERVICESOFT STOCK OPTION PLANS") of which 851,855 shares are subject to
outstanding unexercised options and 227,000 shares are subject to restricted
stock grants. Other than as set forth in this Section 3.2, the Disclosure
Schedule or the Certificate, there are no other options, warrants, calls,
rights, commitments or agreements of any character to which Servicesoft is a
party or by which it is bound obligating Servicesoft to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of capital stock of Servicesoft.
(b) Servicesoft Canada. The authorized capital of Servicesoft
Technologies (Canada) Inc. ("SERVICESOFT Canada") consists of an unlimited
number of common shares ("SERVICESOFT CANADA COMMON SHARES"), of which 100 are
issued and outstanding and owned by Servicesoft, an unlimited number of
Exchangeable Common Shares (the "SERVICESOFT CANADA EXCHANGEABLE COMMON
SHARES"), of which 973,762 are issued and outstanding, and an unlimited number
of Exchangeable Preferred Shares (the "SERVICESOFT CANADA EXCHANGEABLE PREFERRED
SHARES"), of which 1,657,893 are issued and outstanding. Servicesoft Canada has
issued Warrants (the "SERVICESOFT CANADA WARRANTS") to purchase an aggregate of
77,855 Servicesoft Canada Exchangeable Common Shares. Each of the Servicesoft
Canada Exchangeable Common Shares is exchangeable for one of the Servicesoft
Common Shares and each of the Servicesoft Canada Exchangeable Preferred Shares
is exchangeable for one of the Servicesoft H Preferred Shares. Except as set
forth on Schedule 3.2 of the Disclosure Schedule, all outstanding Servicesoft
Canada Common Shares, Servicesoft Canada Exchangeable Common Shares and
Servicesoft Canada Exchangeable Preferred Shares are duly authorized, validly
issued, fully paid and non-assessable and are free of any Liens other than any
Liens created by or imposed upon the holders thereof, and, except as set forth
in Servicesoft Canada's Charter and the Shareholders Agreement, are not subject
to pre-emptive rights or rights of first refusal created by statute, or any
agreement to which Servicesoft is a party or by which it is bound. Other than as
set forth in this Section 3.2 or Servicesoft Canada's Charter, there are no
other options, warrants, calls, rights, commitments or agreements of any
character to which Servicesoft Canada is a party or by which it is bound
obligating Servicesoft Canada to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of
capital stock of Servicesoft Canada.
(c) Balisoft Ltd. The authorized capital of Balisoft Ltd.
consists of 32,600 ordinary shares, of which 1,000 are issued and outstanding,
and 100 exchangeable preferred shares, all of which are issued and outstanding.
All of the ordinary shares are owned by or are currently held in trust for
Servicesoft Canada. The 100 exchangeable preferred shares are, in aggregate,
held by Gemini Israel II L.P., Gemini Israel II Parallel Fund Limited
Partnership and Advent PGGM Gemini L.P. and are exchangeable into an aggregate
of 567,050 Servicesoft Canada Exchangeable Preferred Shares each of which is
exchangeable for one share of the Servicesoft H Preferred Shares.
(d) E-Serv Solutions Inc. The authorized capital of E-Serv
Solutions Inc. consists of 100 shares of common stock with a par value of $0.01
per share, all of
7
<PAGE> 11
which are issued and outstanding, and 10,000 shares of preferred stock with a
par value of $0.01 per share, none of which are issued and outstanding. All of
the issued and outstanding common shares are owned by Servicesoft Canada.
(e) E-Serv Solutions (Canada) Inc. The authorized capital of
E-Serv Solutions (Canada) Inc. consists of 1,000,000 common shares, of which 100
shares are issued and outstanding. All of the issued and outstanding common
shares are owned by E-Serv Solutions Inc.
(f) Servicesoft Europe N.V. The authorized capital of
Servicesoft Europe N.V. consists of 10,000 shares, all of which are issued and
outstanding. All of the issued and outstanding shares are owned by Servicesoft.
(g) Servicesoft Technologies (UK) Inc. The authorized capital
of Servicesoft Technologies (UK) Inc. consists of 100,000 shares of common
stock, par value GBP1.0 per share, all of which shares are issued and
outstanding and all of the issued and outstanding common shares are owned by
Servicesoft.
(h) Servicesoft (Rosh) Ltd. The authorized capital of
Servicesoft (Rosh) Ltd. consists of 1,600,000 ordinary shares, of which 957,053
are issued and outstanding. 957,047 of the issued and outstanding ordinary
shares are owned by Servicesoft; five of the issued and outstanding ordinary
shares are held by individual investors and one issued and outstanding share is
held by Elron Electronic Industries Ltd.
(i) Servicesoft Deutschland GmbH. All of the authorized
capital of Servicesoft Deutschland GmbH is owned by Servicesoft, except for one
Common Share held by an individual.
(j) Internet Business Advantage, Inc. The authorized capital
of Internet Business Advantage, Inc. consists of 100 common shares, of which 100
are issued and outstanding. All of the issued and outstanding common shares are
owned by Servicesoft.
Section 3.3 Authority, Conflicts, Consents.
(a) Servicesoft has all requisite corporate power and
authority to enter into this Agreement and the Transaction Documents and to
consummate the transactions contemplated hereby and thereby, including the
issuance of the Purchased Shares (and any Common Shares issuable upon conversion
thereof). The execution, delivery and performance of this Agreement, the
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby, including the issuance of the Purchased Shares (and any
Common Shares issuable upon conversion thereof), have been duly authorized by
all necessary corporate and other action on the part of Servicesoft. This
Agreement and each of the Transaction Documents have been duly executed and
delivered by Servicesoft and each constitutes a valid and binding obligation,
enforceable in accordance with their respective terms.
8
<PAGE> 12
(b) To the Best Knowledge of Servicesoft, the execution and
delivery of this Agreement and the Transaction Documents by Servicesoft does
not, and the consummation of the transactions contemplated hereby and thereby,
including the issuance of the Purchased Shares (and any Common Shares issuable
upon conversion thereof), will not, (i) materially conflict with any provision
of the Organic Documents of Servicesoft, or the relevant Organic Documents of
any of its Subsidiaries, (ii) conflict with, result in the breach of or
constitute a default under any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Servicesoft or any of its Subsidiaries or any of their properties or assets
which conflict results in a Material Adverse Effect or (iii) result in the
creation or imposition of any material Lien or Claim on any asset of Servicesoft
or any of its Subsidiaries.
(c) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Body is required by
or with respect to Servicesoft or any of its Subsidiaries in connection with the
execution and delivery of this Agreement, the Transaction Documents or the
consummation of the transactions contemplated hereby or thereby, including the
issuance of the Purchased Shares (and any Common Shares issuable upon conversion
thereof), except for such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws. Servicesoft has obtained all necessary consents, waivers and
approvals of third parties applicable to the operations of Servicesoft or its
Subsidiaries that are required to be obtained by Servicesoft or its Subsidiaries
in connection with the execution and delivery of this Agreement and the
Transaction Documents by Servicesoft or the consummation by Servicesoft of the
transactions contemplated hereby or thereby, including the issuance of the
Purchased Shares (and any Common Shares issuable upon conversion thereof) except
where the failure to obtain any such consent would not result in a Material
Adverse Effect.
Section 3.4 Servicesoft Financial Statements. Servicesoft has furnished
to the Investors (i) its unaudited balance sheet as of September 30 1999, (the
"Base Balance Sheet") and the related statement of operations and statements of
stockholders equity and cash flows for the 9 months ended September 30, 1999,
(ii) the separate audited financial statements dated December 31, 1998 of each
of Servicesoft (which was then named Servicesoft Corporation) and Balisoft
Technologies Inc. (which was acquired by Servicesoft on February 12, 1999) and
(iii) its consolidated unaudited statements of stockholders equity dated
September 30, 1998 (collectively, the SERVICESOFT FINANCIAL STATEMENTS"). The
Servicesoft Financial Statements have been prepared in accordance with GAAP
applied on a basis consistent throughout the periods indicated and consistent
with each other. The Servicesoft Financial Statements are in accordance with the
books and records of Servicesoft and fairly present the consolidated financial
condition and operating results of Servicesoft at the dates and during the
periods indicated therein (subject, in the case of unaudited statements, to
normal, recurring year-end adjustments and the omission of certain footnote
disclosures).
Section 3.5 Absence of Undisclosed Liabilities. Neither Servicesoft nor
any of its Subsidiaries have any obligations or liabilities of any nature
(matured or unmatured, fixed or contingent) other than (i) those set forth or
adequately provided for in the Servicesoft Financial
9
<PAGE> 13
Statements, (ii) those incurred in the ordinary course of business and not
required to be set forth in the footnotes to audited financial statements
prepared in accordance with GAAP, (iii) those incurred in the ordinary course of
business since the date of the Base Balance Sheet and consistent with past
practice, which do not in any event exceed $100,000 in the aggregate, and (iv)
those set forth in Section 3.5 of the Disclosure Schedule.
Section 3.6 Absence of Certain Changes. Since the date of the Base
Balance Sheet, Servicesoft and each of its Subsidiaries has conducted the
Business in the ordinary course consistent with past practice and neither
Servicesoft nor any of its Subsidiaries have: (a) made any change, event or
condition that has resulted in a Material Adverse Effect; (b) acquired, sold or
transferred any material tangible or intangible asset of Servicesoft or any of
its Subsidiaries other than in the ordinary course of business and consistent
with past practice; (c) made any change in accounting methods or practices by
Servicesoft or any of its Subsidiaries or made any revaluation of any of their
respective assets; (d) issued or agreed to issue or any commitment to issue any
equity security, bond, note or other security of Servicesoft or any of its
Subsidiaries (except for the issuance of stock and options to employees,
directors and consultants in the ordinary course of business and as otherwise
contemplated by this Agreement); (e) declared, set aside, or paid a dividend or
other distribution with respect to the shares of Servicesoft or any of its
Subsidiaries, or directly or indirectly redeemed, purchased or otherwise
acquired of any of their respective shares of capital stock; (f) except in the
ordinary course of business mortgaged, pledged or subjected to any Lien any of
its material assets, tangible or intangible, other than Liens of current real
property taxes not yet due and payable; (g) sold, assigned, transferred or
granted any exclusive license with respect to any Servicesoft Intellectual
Property (as defined in Section 3.9, below); (h) suffered any substantial loss
of property or business, including losses arising from the acceleration,
modification, cancellation or termination of any agreement, contract, lease or
license (or series of related agreements, contracts, leases or licenses) to
which Servicesoft or any of its Subsidiaries is a party, or waived any right of
substantial value other than in the ordinary course of business; (i) made any
change in officer compensation except in the ordinary course of business and
consistent with past practice; (j) made any material change in the manner of
business or operations of Servicesoft or any of its Subsidiaries; or (k)
negotiated or agreed to do any of the things described in the preceding clauses
(a) through (j).
Section 3.7 Tax Matters.
(a) Except as set forth in Section 3.7 of the Disclosure
Schedule and where the failure to do so would not have a Material Adverse
Effect, Servicesoft and each of its Subsidiaries has (i) timely and properly
filed all Tax Returns they were required to file (and all such Tax Returns were
correct and complete in all material respects), (ii) paid all Taxes owed by
Servicesoft and each of its Subsidiaries (whether or not shown on any Tax
Return), and (iii) properly made all required Tax estimates, deposits,
prepayments and similar reports or payments for current periods. Neither
Servicesoft or any of its Subsidiaries is the beneficiary of any extension of
time within which to file any Tax Return. To the Best Knowledge of Servicesoft,
except as disclosed in Section 3.7 of the Disclosure Schedule, neither
Servicesoft nor any of its Subsidiaries is delinquent in the filing of any Tax
Return. To the Best Knowledge of Servicesoft, no claim is currently pending by
an authority in a jurisdiction where Servicesoft or any of its Subsidiaries does
not file Tax Returns that Servicesoft or any of its Subsidiaries is or may be
subject to taxation by that jurisdiction. There are no Liens on any of the
assets of
10
<PAGE> 14
Servicesoft or any of its Subsidiaries that arose in connection with any failure
(or alleged failure) to pay any Tax.
(b) Servicesoft and each of its Subsidiaries has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party.
(c) Neither Servicesoft nor any of its Subsidiaries has
received any notice of any adjustment of or deficiency for any Tax or claim for
additional Taxes that has been asserted or assessed against Servicesoft or any
of its Subsidiaries. Neither Servicesoft nor any of its Subsidiaries has any
dispute with any taxing authority as to Taxes. There are no audit examinations
being conducted or, to the Best Knowledge of Servicesoft, and there is no
deficiency or refund litigation or controversy in progress or, to the Best
Knowledge of Servicesoft threatened, with respect to any Taxes previously paid
by Servicesoft or any of its Subsidiaries or with respect to any Tax Returns
previously filed by or on behalf of Servicesoft or any of its Subsidiaries.
(d) Neither Servicesoft nor any of its Subsidiaries has been a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code.
(e) Except as set forth in Section 3.7 of the Disclosure
Schedule neither Servicesoft nor any of its Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency. Neither Servicesoft nor any of its
Subsidiaries has ever been a member of an affiliate group of corporations filing
a combined federal income Tax Return nor does Servicesoft or any of its
Subsidiaries have any liability for Taxes of any other person under Treasury
Regulations Section1.1502-6 (or any similar provision of foreign, state or local
law) or otherwise. Neither Servicesoft nor any of its Subsidiaries is a party to
any tax sharing or allocation arrangement.
(f) Except as set forth in Section 3.7 of the Disclosure
Schedule, neither Servicesoft nor any of its Subsidiaries has made any payment,
is obligated to make any payment, or is a party to any agreement that could
obligate it to make any payment that will be an "excess parachute payment" under
Section 280G of the Code.
(g) Neither Servicesoft nor any of its Subsidiaries has filed
a consent under Code Section 341(f) concerning collapsible corporations. Neither
Servicesoft nor any of its Subsidiaries has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be deductible
under Code Section 280G. Servicesoft and each of its Subsidiaries have disclosed
on its federal income Tax Returns all positions taken therein that could give
rise to a substantial understatement of federal income Tax within the meaning of
Code Section 6662.
(h) The unpaid accrued Taxes of Servicesoft and each of its
Subsidiaries (a) did not, as of the date of the Base Balance Sheet, exceed the
reserve for Tax liability set forth on the Financial Statements, and (b) do not
exceed such reserve as adjusted for the passage of time
11
<PAGE> 15
through the Closing Date in accordance with Servicesoft's past custom and
practice in filing their Tax Returns.
Section 3.8 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment.
(a) Section 3.8(a) of the Disclosure Schedule sets forth a
list of all real property currently owned, leased or subleased by Servicesoft or
any of its Subsidiaries and, in the case of leased property, the name of the
lessor, the date of the lease and each amendment thereto and the aggregate
annual rental and/or other fees payable under any such lease. All such leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default) of Servicesoft which would result in a
Material Adverse Effect.
(b) Servicesoft and each of its Subsidiaries have good and
valid title to, or, in the case of leased properties and assets, valid leasehold
interests in, all of their tangible properties and assets free and clear of any
material Liens, except as reflected in the Servicesoft Financial Statements and
except for Liens for Taxes not yet due and payable.
(c) The equipment owned or leased by Servicesoft and/or its
Subsidiaries, taken as a whole, is (i) adequate for the conduct of the Business
as currently conducted, (ii) generally in good operating condition, subject to
normal wear and tear, and (iii) reasonably maintained.
Section 3.9 Intellectual Property.
(a) Except as set forth in Section 3.9(a) of the Disclosure
Schedule, Servicesoft and each of its Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents, industrial
designs, trademarks, trade names, service marks, copyrights, Internet domain
names, and any applications therefor, net lists, schematics, technology,
know-how, computer software programs or applications (in both source code and
object code form as to software programs and applications owned by Servicesoft
and each of its Subsidiaries and in object code form as to software programs and
applications licensed by Servicesoft and each of its Subsidiaries), and tangible
or intangible proprietary information or material (collectively, "SERVICESOFT
INTELLECTUAL PROPERTY") that are used in the Business as currently conducted or
as proposed to be conducted by Servicesoft and its Subsidiaries.
(b) Section 3.9(b) of the Disclosure Schedule sets forth a
complete list of all patents, industrial designs, registered and material
unregistered trademarks, registered copyrights, trade names and service marks,
Internet domain names, and any applications therefor in respect of any of the
foregoing, included in the Servicesoft Intellectual Property, and specifies,
where applicable, the jurisdictions in which the rights to such Servicesoft
Intellectual Property have been issued or registered or in which an
12
<PAGE> 16
application for such issuance and registration has been filed, including the
respective registration or application numbers and the names of all registered
owners.
(c) Section 3.9(c) of the Disclosure Schedule sets forth a
complete list of all licenses, sublicenses and other agreements (including all
amendments and supplements thereto) to which Servicesoft or any of its
Subsidiaries are a party and pursuant to which Servicesoft and/or any of its
Subsidiaries are entitled to use intellectual property of a third party (other
than licenses to use off-the-shelf software which is generally commercially
available) or any other Person is authorized to use Servicesoft Intellectual
Property that is material to Servicesoft and/or its Subsidiaries, taken as a
whole, and includes the identity of all parties thereto. To the Best Knowledge
of Servicesoft, neither Servicesoft nor any of its Subsidiaries are in violation
in any material respect of any license, sublicense or agreement described on
such list. The execution and delivery of this Agreement by Servicesoft, and the
consummation of the transactions contemplated hereby, will not (i) cause
Servicesoft or any of its Subsidiaries to be in violation or default in any
material respect under any such license, sublicense or agreement, (ii) entitle
any other party to any such license, sublicense or agreement to terminate or
modify such license, sublicense or agreement or (iii) require Servicesoft or any
of its Subsidiaries to repay any funds already received by it from a third party
or make to a third party any incremental payment. Except for rights granted in
agreements, licenses or sublicenses described in Sections 3.9(b) and (c) of the
Disclosure Schedule, to the Best Knowledge of Servicesoft, Servicesoft or one of
its Subsidiaries is the sole and exclusive owner or licensee of, with all right,
title and interest in and to (free and clear of any Liens), the Servicesoft
Intellectual Property, and has sole and exclusive rights (and is not
contractually obligated to pay any compensation to any third party in respect
thereof) to the use thereof or the material covered thereby in connection with
the services or products in respect of which the Servicesoft Intellectual
Property is being used.
(d) Except as set forth on Schedule 3.9(d), no Claims
contesting Servicesoft's ownership of or right to use Servicesoft Intellectual
Property, or asserting any right of a third party to use any Servicesoft
Intellectual Property, have been asserted or, to the Best Knowledge of
Servicesoft, threatened against Servicesoft or any of its Subsidiaries or their
agents, nor to the Best Knowledge of Servicesoft are there any valid grounds for
any bona fide Claims (i) against the use by Servicesoft or any of its
Subsidiaries of any Servicesoft Intellectual Property used in the Business as
currently conducted by Servicesoft or any of its Subsidiaries, or (ii)
challenging the validity, effectiveness, or ownership by Servicesoft of any of
the Servicesoft Intellectual Property.
(e) To the Best Knowledge of Servicesoft (i) there is no
material unauthorized use, infringement or misappropriation of any of the
Servicesoft Intellectual Property by any third party, including any employee or
former employee of Servicesoft or its Subsidiaries, and (ii) no Servicesoft
Intellectual Property or product of Servicesoft or any of its Subsidiaries is
subject to any outstanding Claim restricting in any manner the licensing thereof
by Servicesoft or any of its Subsidiaries.
(f) Servicesoft and each of its Subsidiaries has a policy
requiring each employee and contractor materially involved in proprietary
aspects of the Business to
13
<PAGE> 17
execute ownership and nondisclosure of proprietary information and
confidentiality agreements, and all current and former employees, consultants
and contractors of Servicesoft and each of its Subsidiaries involved in
proprietary aspects of the Business have executed such an agreement.
(g) Servicesoft and each of its Subsidiaries have been and are
in compliance with the Export Administration Act of 1979, as amended, and all
regulations promulgated thereunder.
(h) Servicesoft and each of its Subsidiaries has reviewed the
areas within their respective business and operations which would reasonably be
likely to be adversely affected by the "Year 2000 issue" (that is, the risk that
computer applications used or produced by Servicesoft and its Subsidiaries may
be unable to recognize and perform properly date sensitive functions involving
certain dates prior to and any date on or after January 1, 2000). Based upon
such review and plan, Servicesoft believes that the "Year 2000 issue" will not
have a Material Adverse Effect on it or any of its Subsidiaries. Servicesoft
represents that the Servicesoft Intellectual Property, except for Servicesoft
Intellectual Property currently in development or other prerelease form not
provided to customers, so long as all hardware and software used in combination
with the Servicesoft Intellectual Property provide correct calendar date data,
will process and present calendar dates falling on of after January 1, 2000 in
the same manner as the Servicesoft Intellectual Property processes and presents
calendar dates falling on or before December 31, 1999.
Section 3.10 Material Contracts.
(a) Section 3.10 of the Disclosure Schedule lists all written
contracts or commitments: (i) involving any annual payment in excess of
$100,000, (ii) in respect of any sales made in the ordinary course of business,
involving annual receipts in excess of $200,000, and (iii) in respect of any
other matters, involving annual receipts in excess of $100,000 (collectively,
"MATERIAL CONTRACTS") to which Servicesoft or any of its Subsidiaries is a
party. Servicesoft has made available to the Investors true and complete copies
of all written Material Contracts in effect on the date hereof.
(b) To the Best Knowledge of Servicesoft, each of the Material
Contracts is in full force and effect and unamended (except for such amendments
as are disclosed on Section 3.10 of the Disclosure Schedule) and is valid,
binding and enforceable in accordance with its terms. To the Best Knowledge of
Servicesoft, no party to any Material Contract or successor or assignee thereof
is in default of any material provision thereof and there exists no event or
condition which does or would, by itself or with giving of notice or the passage
of time or both, constitute a material breach of or default under any Material
Contract or results in the acceleration of any obligation thereunder.
Section 3.11 Litigation. There is no Claim pending before any
Governmental Body or, to the Best Knowledge of Servicesoft, threatened against
Servicesoft or any of its Subsidiaries or any of their properties or any of
their officers or directors (in their capacities as such) that would,
14
<PAGE> 18
if adversely determined, have Material Adverse Effect. There is no judgment,
decree or order against Servicesoft or any of its Subsidiaries, or any of their
respective directors or officers (in their capacities as such), seeking to
enjoin or delay any of the transactions contemplated by this Agreement and/or
the Transaction Documents or that would, if adversely determined, have a
Material Adverse Effect.
Section 3.12 Environmental and Safety Laws. To the Best Knowledge of
Servicesoft, neither Servicesoft nor any of its Subsidiaries is in violation of
any applicable statute, law or regulation relating to the environment or
occupational health and safety, except to the extent such violation would not
have a Material Adverse Effect. No material expenditures are or will be required
in order to comply with any such existing statute, law or regulation.
Section 3.13 Brokers' and Finders' Fees. Neither of Servicesoft nor any
of its Subsidiaries has incurred, nor will they incur, directly or indirectly,
any liability for brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
Section 3.14 Employee Benefit Plans and Compensation.
(a) Section 3.14(a) of the Disclosure Schedule contains a true
and complete list of each "employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), "employee welfare benefit plan" (as defined in Section 3(1) of
ERISA), and any plan, agreement or program providing for pensions, retirement
income, deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation that (i) is entered into,
maintained or contributed to, as the case may be, by Servicesoft or any of its
Subsidiaries and (ii) covers any employee or former employee of Servicesoft or
any of its Subsidiaries (collectively "BENEFIT ARRANGEMENTS"). Each Benefit
Arrangement (and each related trust insurance contract or fund) has been
maintained and administered in material compliance with its terms and with the
requirements prescribed by ERISA, the Code and all other statutes, laws,
ordinances and regulations which are applicable thereto. The requirements of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"),
have been met with respect to each Benefit Arrangement which is a group health
plan under Section 5000(b)(1) of the Code. All required reports and descriptions
(including Form 5500 Annual Reports, summary annual reports, PBGC-l's and
summary plan descriptions) have been timely filed and distributed appropriately
with respect to each such Benefit Arrangement. No Benefit Arrangement has
unfunded liabilities that, as of the Closing, will not be offset by insurance or
fully accrued or reserved against in the Servicesoft Financial Statements.
Except to the extent required under COBRA, neither Servicesoft nor any of its
Subsidiaries maintains, contributes to, or has any liability or obligation to
contribute to any funded or unfunded medical, health or life insurance plan or
similar arrangement for present or future retirees, their spouses or dependents
or present or future terminated employees, their spouses or dependents. No
Benefit Arrangement has applied for or received a waiver of the minimum funding
standards imposed by Section 412 of the Code, and no Benefit Arrangement has an
"accumulated funding deficiency" within the meaning of Section 412(a) of the
Code as of the most recent plan year. Each Benefit
15
<PAGE> 19
Arrangement subject to Title IV of ERISA has paid all premiums when due to the
Pension Benefit Guaranty Corporation ("PBGC"). Neither Servicesoft nor any of
its Subsidiaries have incurred, and none of the directors and officers (and
employees with responsibility for employee benefits matters) of Servicesoft or
any of its Subsidiaries have any reason to expect that they will incur, any
liability to the PBGC (other than PBGC premium payments) or otherwise under
Title IV of ERISA (including any withdrawal liability as defined in Section 4201
of ERISA) or under the Code with respect to any such Benefit Arrangement which
is an employee pension benefit plan under Section 3(2) of ERISA. Except as
required by law or by the provisions of such Benefit Arrangement, no condition
exists that would prevent Servicesoft or any of its Subsidiaries from amending
or terminating any Benefit Arrangement.
(b) Except as disclosed in Section 3.14(b) of the Disclosure
Schedule, there are no investigations by any Governmental Body, termination
proceedings or other Claims (except Claims for benefits payable in the normal
operation of the Benefit Arrangements), suits or proceedings against or
involving any Benefit Arrangement that would result in material liability
against Servicesoft and its Subsidiaries or any Benefit Arrangement. Except as
disclosed in Section 3.14(b) of the Disclosure Schedule, the Benefit
Arrangements that are pension benefit plans have received determination letters
from the Internal Revenue Service to the effect that such Benefit Arrangements
are qualified and exempt from federal income taxes under Sections 401(a) and
501(a), respectively, of the Code, and no such determination letter has been
revoked nor, to the Best Knowledge of Servicesoft, has revocation been
threatened, nor to the BEst Knowledge of Servicesoft are there any facts that
could result in any such revocation, nor has any such Benefit Arrangement been
amended since the date of its most recent determination letter or application
therefor in any respect that would adversely affect its qualification. No
"prohibited transaction" (as defined in Section 4975 of the Code or Section 406
of ERISA) has occurred which involves the assets of any Benefit Arrangement and
which could subject any employees of Servicesoft or any of its Subsidiaries, a
trustee, administrator or other fiduciary of any trusts created under any
Benefit Arrangement to the tax or penalty on prohibited transactions imposed by
Section 4975 of the Code or the sanctions imposed under Title I of ERISA. To the
Best Knowledge of Servicesoft, no fiduciary has any liability for breach of
fiduciary duty or any other failure to at or comply in connection with the
administration or investment of the assets of any Benefit Arrangement. Except as
disclosed in Section 3.14(b) of the Disclosure Schedule, none of the Benefit
Arrangements have been terminated nor have there been any "reportable events"
(as defined in Section 4043 of ERISA and the regulations thereunder) with
respect thereto. The execution of this Agreement and the Transaction Documents
and the consummation of the transactions contemplated hereby and thereby will
not result in the acceleration or early vesting of any payments or benefits
under any Benefit Arrangement or in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code.
(c) Except as set forth in Section 3.14(c) of the Disclosure
Schedule, neither Servicesoft nor any of its Subsidiaries is a member of a
controlled group of corporations, within the meaning of Section 414(b) of the
Code, is a member of a group of trades or businesses under common control,
within the meaning of Section 414(c) of
16
<PAGE> 20
the Code, or is a member of an affiliated service group, within the meaning of
Section 414(m) and (o) of the Code. Neither Servicesoft nor any of its
Subsidiaries contributes to, has ever contributed to, or has ever been required
to contribute to any multiemployer plan (as defined in Section 3(37) of ERISA)
and none of them has any liability (including withdrawal liability as defined in
Section 4201 of ERISA) under any multiemployer plan.
(d) Except as set forth in Section 3.14(d) of the Disclosure
Schedule, no Benefit Arrangement provides, or has any liability to provide, life
insurance, medical or other employee benefits to any employee upon his or her
retirement or termination of employment for any reason, except as may be
required by law, and neither Servicesoft nor any of its Subsidiaries have ever
represented, promised or contracted (whether in oral or written form) to any
employee (either individually or to employees as a group) that such employee(s)
would be provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by law.
(e) Set forth in Disclosure Schedule 3.14(e) is a complete
list of all current employees of Servicesoft and each of its Subsidiaries whose
base salary exceeds $100,000 and their positions, gross remuneration and length
of employment. To the Best Knowledge of Servicesoft, Servicesoft and each of its
Subsidiaries: (i) are in compliance in all material respects with all applicable
federal, state, local and foreign laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours, in each case, with respect to employees; (ii) have withheld all
amounts required by law or by agreement to be withheld from the wages, salaries
and other payments to employees; (iii) are not liable for any arrears of wages
or any Taxes or any penalty for failure to comply with any of the foregoing; and
(iv) except as required by applicable law, are not liable for any payment to any
trust or other fund or to any Governmental Body, with respect to unemployment
compensation benefits, social security or other benefits for employees (other
than routine payments to be made in the normal course of business and consistent
with past practice). To the Best Knowledge of Servicesoft (and its employees
with responsibility for employment matters) no executive, key employee or group
of employees has plans to terminate employment with any of Servicesoft or its
Subsidiaries.
(f) Except as set forth in Section 3.14(f) of the Disclosure
Schedule, neither Servicesoft nor any of its Subsidiaries are involved in or
threatened with any labor dispute, grievance, litigation or Claim relating to
labor or occupational health and safety matters involving any employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would, individually
or in the aggregate, result in liability having a Material Adverse Effect on
Servicesoft and its Subsidiaries, taken as a whole. Neither Servicesoft nor any
of its Subsidiaries have engaged in any unfair labor practices which would,
individually or in the aggregate, directly or indirectly result in liability to
Servicesoft or any of its Subsidiaries. Except as set forth in Section 3.14(f)
of the Disclosure Schedule, neither Servicesoft nor any of its Subsidiaries are
presently, nor have they been in the past, a party to, or bound by, any
collective bargaining agreement or union contract with respect to employees and
no collective bargaining agreement is being negotiated by Servicesoft
17
<PAGE> 21
or any of its Subsidiaries or, to the Best Knowledge of Servicesoft, is being
organized or is threatened.
Section 3.15 Insurance. Section 3.15 of the Disclosure Schedule lists
all insurance policies and fidelity bonds covering the assets, the Business,
equipment, properties, operations, employees, officers and directors of
Servicesoft and each of its Subsidiaries. There is no Claim by Servicesoft or
any of its Subsidiaries pending under any of such policies or bonds as to which
Servicesoft or any of its Subsidiaries have received notice that coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and Servicesoft and each of its Subsidiaries are otherwise in material
compliance with the terms of such policies and bonds (or other policies and
bonds providing substantially similar insurance coverage). There is no
threatened termination of, or material premium increase with respect to, any of
such policies.
Section 3.16 Compliance with Laws. To the Best Knowledge of
Servicesoft, Servicesoft and each of its Subsidiaries have complied with, are
not in violation of, and have not received any notices of violation with respect
to, any federal, state, local or foreign statute, law or regulation with respect
to the conduct of the Business, or the ownership or operation of the Business,
assets or properties except to the extent such violation would not reasonably be
expected to have a Material Adverse Effect.
Section 3.17 Conflicts of Interests. Except as set forth on the
Disclosure Schedule, to the Best Knowledge of Servicesoft neither Servicesoft
nor any of its Subsidiaries nor any of their officers or employees, directly or
indirectly, given or agreed to give any money, gift or similar benefit (other
than legal price concessions to customers in the ordinary course of business) to
any customer, supplier, employee or agent of a customer or supplier, or official
or employee of any Governmental Body or other Person who was, is, or may be in
of a position to help or hinder the business of Servicesoft or any of its
Subsidiaries (or assist in connection with any actual or proposed transaction)
which (i) might subject Servicesoft or any of its Subsidiaries to any damage or
penalty in any civil, criminal or governmental litigation or proceeding, (ii) if
not given in the past, might have had a Material Adverse Effect on the assets,
businesses or operations of Servicesoft or any of its Subsidiaries as reflected
in the Servicesoft Financial Statements, or (iii) if not continued in the
future, might have a Material Adverse Effect on the assets, businesses,
operations or prospects of Servicesoft or any of its Subsidiaries.
Section 3.18 Other Relationships. Except as set forth on the Disclosure
Schedule, to the Best Knowledge of Servicesoft (a) no officer of Servicesoft nor
any of its Subsidiaries, nor any of their respective Affiliates, has any
interest (other than as non-controlling holders of securities of a
publicly-traded company), either directly or indirectly, in any Person other
than Servicesoft and its Subsidiaries (whether as an employee, officer,
director, shareholder, agent, independent contractor, security holder, creditor,
consultant or otherwise) that presently (i) provides any services or designs,
produces or sells any products or product lines, or engages in any activity
which is the same, similar to or competitive with any activity or business in
which Servicesoft or any of its Subsidiaries is now engaged, (ii) is a supplier
of, customer of, creditor of, or has an existing contractual relationship with,
Servicesoft or any of its Subsidiaries, or (iii) has any direct or indirect
interest in any asset or property used by Servicesoft or any property, real or
personal, tangible or intangible, that is necessary for the conduct of the
Business; and (b)
18
<PAGE> 22
no current Affiliate or senior employee of Servicesoft or any of its
Subsidiaries is at present, or since the inception of Servicesoft has been,
directly or indirectly through his affiliation with any other Person, a party to
any transaction (other than as an employee, independent contractor or
consultant) with Servicesoft or any of its Subsidiaries providing for the
furnishing of services by, or rental of real or personal property from, or
otherwise requiring cash payments to any such Person.
Section 3.19 Investment Company Act. Neither Servicesoft nor any of its
Subsidiaries are, and immediately after the Closing Date will not be, an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act.
Section 3.20 Private Sale. Neither Servicesoft nor any of its
Subsidiaries has, either directly or through any agent, offered any Preferred J
Shares or any other securities to, or solicited any offers to acquire any
Preferred J Shares or any other securities from, or otherwise approached,
negotiated or communicated in respect of any Preferred J Shares or any other
securities with, any Person in such a manner as to require that the offer or
sale of the Preferred J Shares or any such other securities be registered
pursuant to the Securities Act or any "blue sky" laws.
Section 3.21 Small Business. Servicesoft is a "Small Business" as
defined in Section 107.50 of Title 13 of the Code of Federal Regulations.
Servicesoft has heretofore furnished to each Investor that is a Small Business
Investment Company (an "SBIC") the following completed forms: Size Status
Declaration on SBA Form 480, Assurance of Compliance on SBA Form 652 and
Portfolio Financing Report on SBA Form 1031, and represents and warrants the
completeness and correctness of each of said forms. Servicesoft's tangible net
worth (including its Subsidiaries) is not in excess of $18,000,000 and
Servicesoft's average net income after federal income taxes (excluding any
carry-over losses) for the preceding two completed fiscal years is not in excess
of $6,000,000.
Section 3.22 Disclosure Schedule. The Disclosure Schedule has been
prepared and executed by Servicesoft and dated and delivered on the date of this
Agreement. Servicesoft shall endeavor to disclose in the Disclosure Schedule
each item of information in each separate section in which such item may
reasonably be required to be disclosed.
ARTICLE IV
REPRESENTATIONS OF THE INVESTORS
Each of the Investors, severally and not jointly, hereby represents,
warrants and acknowledges to Servicesoft the matters set out below.
Section 4.1 Enforceability. Each of this Agreement and the Transaction
Documents constitutes a legal, valid and binding obligation of each of the
Investors enforceable against it in accordance with their respective terms
subject, however, to limitations with respect to enforcement imposed by law in
connection with bankruptcy or similar proceedings and to the extent that
equitable remedies such as specific performance and injunction are in the
discretion of the court from which they are sought.
19
<PAGE> 23
Section 4.2 Securities Law Matters.
(a) Each such Investor has been afforded the opportunity to
ask questions of and receive answers from duly authorized officers or other
representatives of Servicesoft concerning the terms and conditions of the
transactions contemplated by this Agreement and has received any additional
information regarding Servicesoft which such Investor has requested.
(b) The agreements of each such Investor contained in this
Agreement were not obtained by means of any form of general solicitation or
general advertising, and in connection therewith such Investor did not: (A)
receive or review any advertisement, article, notice or other communication
published in a newspaper or magazine or similar media or broadcast over
television or radio whether closed circuit, or generally available; or (B)
attend any seminar meeting or industry investor conference whose attendees were
invited by any general solicitation or general advertising.
(c) Each such Investor is an "accredited investor" within the
meaning of Rule 501 under the Securities Act, and such Investor was not formed
for the purpose of receiving the Purchased Shares. Each such Investor, either by
reason of such Investor's business or financial experience or the business or
financial experience of such Investor's purchaser representative (within the
meaning of Rule 501 under the Securities Act ), which purchaser representative,
if any, is unaffiliated with and is not compensated by Servicesoft or any
Affiliate of Servicesoft, directly or indirectly, has the capacity to protect
such Investor's interests in connection with this Agreement.
(d) The Purchased Shares are being acquired for each such
Investor's own account and not with a view to their resale or distribution in a
manner that would violate any applicable federal or state securities or other
law. Each such Investor recognizes that the acquisition of the Purchased Shares
involves a high degree of risk in that (i) an investment in Servicesoft is
highly speculative and (ii) such Investor could sustain the loss of such
Investor's entire investment.
(e) Each such Investor hereby acknowledges that the issuance
of the Purchased Shares to such Investor has not been registered under the
Securities Act and is intended to be exempt from the registration requirements
of Section 5 of the Securities Act pursuant to Sections 4(2) of the Securities
Act and Regulation D promulgated thereunder. Each such Investor agrees that such
Investor will not sell or otherwise transfer the Purchased Shares unless (i)
such sale or transfer is registered under the Securities Act or (ii) in the
opinion of counsel reasonably acceptable to Servicesoft delivered in writing to
Servicesoft in advance, such sale or transfer is otherwise exempt from
registration under the Securities Act.
Section 4.3 Incorporation and Authorization. Each such Investor (other
than an individual) is duly formed and validly existing under the laws of the
jurisdiction governing its formation and each such Investor has all the
necessary corporate or other power, authority and capacity to enter into this
Agreement and each of the Transaction Documents and the execution and delivery
of this Agreement and each of the Transaction Documents has been duly authorized
20
<PAGE> 24
by all necessary corporate or other action on the part of each such Investor and
validly executed and delivered. The execution, delivery and performance of this
Agreement and the Transaction Documents by each such Investor will not be in
contravention of any law, order or agreement or any Organic Documents of such
Investor.
ARTICLE V
CLOSING CONDITIONS
Section 5.1 Conditions in Favor of the Investors. The obligations of
the Investors under this Agreement shall be conditional upon the following:
(a) Servicesoft and each of the Investors shall have duly
authorized and executed copies of this Agreement and each of the Transaction
Documents and each other agreement, document or instrument related hereto or
thereto required in connection with the consummation of the transactions
contemplated hereby, and each such agreement, document or instrument shall be in
full force and effect on the Closing Date.
(b) Servicesoft shall have obtained a good standing
certificate from the State of Delaware and from each other state where it is
qualified to do business and shall have provided copies of each such certificate
to the Investors on or prior to the Closing Date.
(c) Servicesoft will have adopted and filed with the Secretary
of State of the State of Delaware, on or before the Closing, the Certificate and
a copy of the filed Certificate shall have been provided to the Investors.
(d) The representations and warranties of Servicesoft set
forth in Article 3 shall be true and correct at the Closing.
(e) There will not be on the Closing Date any judgment or
order of a Governmental Body which would prohibit or have the effect of
preventing the consummation of the sale of the Preferred J Shares.
(f) The Board of Directors of Servicesoft shall have adopted
resolutions approving the issuance and sale of the Preferred J Shares to the
Investors and the stockholders of Servicesoft shall have approved the adoption
and filing of the Certificate.
(g) There shall be delivered legal opinion addressed to the
Investors, of McDermott, Will & Emery, counsel to Servicesoft, in substantially
the form attached hereto as Exhibit G.
(h) Servicesoft shall have obtained all necessary "blue sky"
law permits and qualifications, or have the availability of exemptions
therefrom, required by any state or province for the offer and sale of the
Series J Preferred.
(i) Servicesoft shall have delivered a certificate executed by
the Chief
21
<PAGE> 25
Executive Officer, dated as of the Closing Date and certifying compliance with
certain conditions, in the form agreed to by the parties.
(j) Servicesoft shall have delivered such other documentation
as the Investors and each of its legal counsel may reasonably require.
Section 5.2 Conditions in Favor of Servicesoft. Subject to Section 6.1,
the obligations of Servicesoft under this Agreement shall be conditioned on the
following:
(a) The representations and warranties of each of the
Investors set forth in Article 4 shall be true and correct as of Closing.
(b) Each of the Investors shall have delivered, by certified
check or wire transfer of immediately available funds, payment for the portion
of the Purchased Shares being purchased by it, in accordance with Section 2.2.
(c) Each Investor shall have delivered to Servicesoft a
counterpart signature page to this Agreement and each of the Transaction
Documents duly executed by it.
ARTICLE VI
COVENANTS
Section 6.1 Use of Proceeds. Servicesoft will use the proceeds from the
sale of the Series J Preferred for (i) general corporate purposes including
working capital to implement Servicesoft's current operating plan which includes
expanding sales and marketing activities, product development and infrastructure
and (ii) pay expenses related to the transactions contemplated by this
Agreement.
Section 6.2 SBIC Regulatory Provisions.
(a) At any time Servicesoft has 50 or more record holders of
Servicesoft's voting stock, Servicesoft shall notify each Major Shareholder (as
defined in the Shareholders Agreement) which is an SBIC (an "SBIC HOLDER") as
soon as practicable (and, in any event, not later than 15 days) prior to taking
any action after which any SBIC Holder (collectively with its Affiliates) would
be the record holder of 20% or more of Servicesoft's voting stock, and
Servicesoft shall notify each SBIC Holder of any other action or occurrence
after which any SBIC Holder (collectively with its Affiliates) would own of
record 20% or more of Servicesoft's voting stock, as soon as practicable after
Servicesoft becomes aware that such other action or occurrence has occurred or
is proposed to occur.
(b) Within 75 days after the Closing Date, Servicesoft shall
deliver to each SBIC Holder a written statement certified by Servicesoft's
president or chief financial officer describing in reasonable detail the use of
the proceeds of the sale of Series J Preferred by Servicesoft. In addition to
any other rights granted hereunder, Servicesoft shall grant each SBIC Holder and
the United States Small Business
22
<PAGE> 26
Administration (the "SBA") access to Servicesoft's records for the purpose of
verifying the use of such proceeds.
(c) Upon the occurrence of a Regulatory Violation (as defined
below) or in the event that any SBIC Holder determines in its reasonable good
faith judgment that a Regulatory Violation has occurred, in addition to any
other rights and remedies to which it may be entitled as a holder of Series J
Preferred (or any Common Stock issued upon conversion thereof) (whether under
this Agreement, the Transaction Documents, the Certificate or otherwise), each
SBIC Holder shall have the right to demand the immediate repurchase of all of
the outstanding shares of Preferred J Shares (or any Common Shares issued upon
conversion thereof) owned by such SBIC Holder at a price per share equal to the
purchase price paid for such stock, plus all accrued but unpaid dividends
thereon, by delivering written notice of such demand to Servicesoft; provided,
however, that such SBIC Holder shall have taken commercially reasonable actions
to obtain approval from the SBA for such SBIC Holder to retain its investment in
Servicesoft in order to avoid the repurchase provisions contained in this
Section 6.2(c); provided further, however, that Servicesoft shall not be
obligated to repurchase such shares in the event a Regulatory Violation is
triggered by more than 49% of the employees of Servicesoft being located outside
of the United States. Servicesoft shall pay the purchase price for such stock by
a cashier's or certified check or by wire transfer of immediately available
funds to each SBIC Holder demanding repurchase within 30 days after
Servicesoft's receipt of the demand notice, and upon such payment, each such
SBIC Holder shall deliver the certificates evidencing the Series J Preferred (or
any Common Stock certificates issued upon conversion thereof) to be repurchased
duly endorsed for transfer or accompanied by duly executed forms of assignment.
(d) Promptly after the end of each fiscal year (but in any
event prior to February 28 of each year), Servicesoft shall deliver to each SBIC
Holder a written assessment of the economic impact of each SBIC Holder's
investment in Servicesoft, specifying the full-time equivalent jobs created or
retained in connection with the investment, the economic impact of the
investment specifying the full-time equivalent jobs created or retained, and the
impact of the investment on the revenues and profits of the business and on
taxes paid by the business and its employees.
(e) For purposes of this Agreement, "REGULATORY VIOLATION"
means, with respect to any SBIC Holder providing Financing (as defined below)
under this Agreement, (i) a diversion of the proceeds of such Financing to a
non-permitted use thereof or a change in the principal business activity of
Servicesoft and its Subsidiaries to an ineligible business activity set forth in
13 CFR 107.720, if such diversion was effected without obtaining the prior
written consent of the SBIC Holders and if such diversion or change occurs
within one year after the sale and issuance of the Series J Preferred, or (ii)
any event occurs pursuant to which any SBIC Holder assumes impermissible control
as defined in 13 CFR 107.865. "SBIC REGULATIONS" means the Small Business
Investment Act of 1958 and the regulations issued thereunder as set forth in 13
CFR 107 and 121, as amended. "FINANCING" shall have the meaning set forth in the
SBIC Regulations.
Section 6.3 Regulatory Compliance Cooperation.
23
<PAGE> 27
(a) In the event that any SBIC Holder determines that it has a
Regulatory Problem (as defined below), such SBIC Holder shall have the right to
transfer its Preferred J Shares (or any Common Shares issued upon conversion
thereof) to any other Person, in accordance with the transfer provisions set
forth in the Shareholders Agreement and Servicesoft shall take all such actions
as are reasonably requested by such SBIC Holder to the extent necessary to
rectify the Regulatory Problem in order to (i) (a) effectuate and facilitate any
transfer or sale by such SBIC Holder of any securities of Servicesoft then held
by such SBIC Holder and/or (b) permit such SBIC Holder (or any of its
Affiliates) to exchange all or any portion of Servicesoft's voting securities
then held by it on a share-for-share basis for shares of a class of non-voting
securities of Servicesoft, which non-voting securities shall be identical in all
respects to such voting securities, except that such non-voting securities shall
be non-voting and shall be convertible into a class of Common Stock which is
nonvoting on such terms as are requested by such SBIC Holder in light of
regulatory considerations then prevailing; provided, however, that if such an
exchange is due to a Regulatory Violation triggered by more than 49% of the
employees of Servicesoft being located outside of the United States the expenses
incurred by Servicesoft in connection with such exchange shall be borne by such
SBIC Holder, (ii) if permitted by the SBIC Regulations continue and preserve the
respective allocation of the voting interests with respect to Servicesoft
arising out of the SBIC Holder's ownership of voting securities and/or provided
for in the Transaction Documents before the transfers and amendments referred to
above (including entering into such additional agreements as are requested by
such SBIC Holder to permit any Person(s) designated by such SBIC Holder to
exercise any voting power which is relinquished by such SBIC Holder), and (iii)
amend this Agreement, the Transaction Documents, the Certificate and any other
related documents, agreements or instruments to effectuate and reflect the
foregoing. The parties to this Agreement agree to vote their securities in favor
of such amendments and actions.
(b) For purposes of this Agreement, a "REGULATORY PROBLEM"
means any set of facts or circumstances wherein it has been asserted by any
governmental regulatory agency (or any SBIC Holder believes that there is a
substantial risk of such assertion) that such SBIC Holder and its Affiliates are
not entitled to hold, or exercise any significant right with respect to, the
Series J Preferred (or any Common Stock issued upon conversion thereof) and
includes a Regulatory Violation.
ARTICLE VII
GENERAL
Section 7.1 Non-Waiver. No investigations made by or on behalf of any
of the Investors at any time shall have the effect of waiving, diminishing the
scope or otherwise affecting any representation or warranty made by Servicesoft
in or pursuant to this Agreement. No waiver of any condition or other
provisions, in whole or in part, shall constitute as a waiver of any other
condition or provision (whether or not similar) nor shall such waiver constitute
a continuing waiver unless otherwise expressly provided.
Section 7.2 Indemnification, Survival, etc.
24
<PAGE> 28
(a) Servicesoft hereby indemnifies and holds harmless each
Investor from and against any damage, loss or expense incurred as a result of
the breach of any representation, warranty, covenant or other provisions
contained in this Agreement or any of the Transaction Documents by Servicesoft
or any of its Subsidiaries.
(b) Each of the Investors, severally and not jointly, hereby
indemnifies and holds harmless Servicesoft from and against any damage, loss or
expense incurred as a result of the breach of any representation, warranty,
covenant or other provisions contained in this Agreement or any of the
Transaction Documents by each of the Investors.
(c) All representations, warranties and covenants contained in
this Agreement and/or the Transaction Documents on the part of each of the
parties hereto shall survive the Closing, the execution and delivery under this
Agreement of any share or security transfer instruments or other documents of
title to any of the Preferred J Shares, and the payment of the consideration for
such Preferred J Shares; provided, however, that all representations and
warranties made in this Agreement shall expire on the earlier of (i) 15 months
from the Closing Date or (ii) the closing of Servicesoft's first underwritten
public offering of Servicesoft Common Shares. If no claim shall have been made
under this Agreement against a party for any incorrectness in or breach of any
representation or warranty made in this Agreement prior to the expiration of
these survival periods, such party shall have no further liability under this
Agreement with respect to such representations or warranties.
Section 7.3 Assignment. This Agreement shall not be assigned by any of
the parties without the prior written consent of the other parties, provided,
that each of the Investors may assign to any of its Permitted Transferees (as
defined in the Shareholders Agreement), provided further, that the assignee
delivers to Servicesoft an instrument in writing executed by the assignee
confirming that it is bound by and shall perform all of the obligations of the
relevant Investor assignor under this Agreement as if it were an original
signatory thereto. No such assignment shall relieve the original Investor of its
obligations under this Agreement.
Section 7.4 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties to this Agreement and their
respective heirs, executors, administrators, successors and assigns.
Section 7.5 Further Assurances. Each of the parties covenants and
agrees to take all such action and to execute all such documents as may be
necessary or advisable to implement the provisions of this Agreement fully and
effectively and to make them binding on the parties hereto.
Section 7.6 Preemptive Rights. Each of the Investors which is a Major
Shareholder, as defined in that certain Amended and Restated Shareholders
Agreement dated as of June 18, 1999 by and among Servicesoft and the other
parties thereto (the "Prior Shareholders Agreement"), hereby (a) confirms that
such Investor has waived any and all preemptive and other participation rights
under the Prior Shareholders Agreement, together with any notice period
applicable thereto, in connection with the sale and issuance of Series J
Preferred
25
<PAGE> 29
hereunder, and (b) acknowledges and agrees that the Purchased Shares issued and
sold to such Investor hereunder are in full satisfaction of any such preemptive
or other participation rights.
Section 7.7 Expenses. At the Closing, Servicesoft shall reimburse all
reasonable and customary fees and expenses of special counsel to Goldman Sachs,
Brown Raysman Millstein Felder & Steiner, LLP, and shall reimburse all
reasonable out-of-pocket fees and due diligence costs incurred by the Investors
incurred in connection with the purchase and sale of the Preferred I Shares
hereunder and the preparation, execution and delivery of this Agreement and all
documents and instruments executed pursuant to this Agreement, provided, that
Servicesoft shall not be responsible for any fees, expenses or costs in excess
of $15,000.
Section 7.8 Notices. Any notice or other writing required or permitted
to be given under this Agreement or for the purposes of this Agreement (referred
to in this Section as a "notice") to any party shall be sufficiently given if
delivered personally, or if sent by prepaid registered mail or if transmitted by
fax or other form of recorded communication tested prior to transmission to such
party:
(a) in the case of a notice to the Investors at the address
listed below each Investor's name on Exhibit A,
(b) in the case of a notice to Servicesoft at:
Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Attention: Chris Butler
Fax: (508)-655-0473
with a copy to:
McDermott, Will & Emery
28 State Street
Boston, MA 02109-1775
Attention: John J. Egan, III, P.C.
Fax: (617) 535-3800
or at such other address as the party to whom such writing is to be given shall
have last notified to the party giving the same in the manner provided in this
Section. Any notice personally delivered to the party to whom it is addressed as
provided in this Section shall be deemed to have been given and received on the
day it is so delivered at such address, provided, that if such day is not a
Business Day then the notice shall be deemed to have been given and received on
the Business Day next following such day. Any notice mailed to the address and
in the manner provided for in this Section shall be deemed to have been given
and received on the fifth Business Day next following the date of its mailing.
Any notice transmitted by fax or other form of recorded communication shall be
deemed given and received on the first Business Day after its transmission.
26
<PAGE> 30
Section 7.9 Public Notices. All public notices to third parties and all
other publicity concerning the transactions contemplated by this Agreement shall
be jointly planned and coordinated by Servicesoft and the Investors and no party
shall act unilaterally in this regard without the prior approval of the other
party, such approval not to be unreasonably withheld, except:
(a) in the case of Servicesoft for communications made in
confidence to Servicesoft's employees affected by such transactions; or
(b) where required to do so by law or by the applicable
regulations or policies of any United States or other regulatory agency of
competent jurisdiction or any stock exchange in circumstances where prior
consultation with the other parties is not practicable.
Section 7.10 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall be deemed to constitute one and the same instrument. Facsimile
counterpart signatures to this Agreement shall be acceptable and binding.
[SIGNATURE PAGE FOLLOWS]
27
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have executed this Series J
Convertible Preferred Stock Purchase Agreement, or a counterpart hereof, all as
of the date first above written.
"SERVICESOFT" SERVICESOFT TECHNOLOGIES, INC.
By: /s/ Chris Butler
----------------------------------------
Chris Butler
President and Chief Executive Officer
"INVESTORS"
/s/ Illegible (Designated Signatory Pursuant to PoA)
----------------------------------------------------
FREDERICK R. ADLER
/s/ Richard M. Bogoroch
--------------------------------------------
RICHARD M. BOGOROCH
CIBC WMV, INC.
By: /s/ T. Rosenberg
----------------------------------------
Name:
Its:
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 32
FINANCIAL TECHNOLOGIES VENTURES L.P.
By: /s/ Scott Wu
-----------------------------------
Name:
Its:
FINANCIAL TECHNOLOGIES VENTURES (Q) L.P.
By: /s/ Scott Wu
-----------------------------------
Name:
Its:
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 33
GEMINI ISRAEL II L.P.
By: /s/ Illegible
-----------------------------------
Name:
Its:
GEMINI ISRAEL II PARALLEL FUND L.P.
By: /s/ Illegible
-----------------------------------
Name:
Its:
ADVENT PGGM GEMINI L.P.
By: /s/ Illegible
-----------------------------------
Name:
Its:
GEMINI PARTNER INVESTORS L.P.
By: /s/ Illegible
-----------------------------------
Name:
Its:
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 34
/s/ Tony Graci
----------------------------------------
TONY GRACI, IN TRUST
GREY ADVERTISING LTD.
By:
----------------------------------------
Name:
Its:
INTERNET CAPITAL GROUP, INC.
By: /s/ C. Greendale
-------------------------------------
Name:
Its:
J.L. ALBRIGHT II VENTURE FUND
By: /s/ Gary Rubinoff
-------------------------------------
Name:
Its:
----------------------------------------
GERALD SEGAL
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 35
SIGMA PARTNERS V, L.P.
By: Sigma Management, V, L.L.C.
Its: General Partner
By: /s/ Clifford Haas
-------------------------------------
Name:
Its:
SIGMA ASSOCIATES V, L.P.
By: Sigma Management V, L.L.C.
Its: General Partner
By: /s/ Clifford Haas
-------------------------------------
Name:
Its:
SIGMA INVESTORS IV, L.L.C.
By: Sigma Management IV, L.L.C.
Its: General Partner
By: /s/ Clifford Haas
-------------------------------------
Name:
Its:
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 36
SIGMA PARTNERS IV, L.P.
By: Sigma Management, IV, L.L.C.
Its: General Partner
By: /s/ Robert E. Davoli
-------------------------------------
Name:
Its:
SIGMA ASSOCIATES IV, L.P.
By: Sigma Management IV, L.L.C.
Its: General Partner
By: /s/ Robert E. Davoli
-------------------------------------
Name:
Its:
SIGMA INVESTORS IV, L.L.C.
By: Sigma Management IV, L.L.C.
Its: General Partner
By: /s/ Robert E. Davoli
-------------------------------------
Name:
Its:
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 37
SOFINOV, SOCIETE FINANCIERE
D'INNOVATION INC., FILIALE DE LA
CAISSE DE DEPOT ET PLACEMENTS DU QUEBEC
By:
-------------------------------------
Name:
Its:
<PAGE> 38
/s/ F. Mark D'Annolfo
------------------------------------------
MARK D'ANNOLFO
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 39
THE GOLDMAN SACHS GROUP, INC.
By: /s/ Illegible
-----------------------------------------
Name:
Its:
STONE STREET FUND 2000, LLC
By: /s/ Katherine Nissenbaum
-----------------------------------------
Name:
Its:
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 40
LKJ TECHNOLOGIES
----------------------------------------
(Print name of Investor)
By: /s/ Illegible
-------------------------------------
Name:
Its:
<PAGE> 41
The Reez Trust
----------------------------------------
The Reez Trust
By: /s/ Gary Rewald
------------------------------------
<PAGE> 42
/s/ Chris Butler
----------------------------------------
Chris Butler
<PAGE> 43
/s/ Dan Kossmann
----------------------------------------
<PAGE> 44
/s/ Paul Maguire
----------------------------------------
Paul Maguire
<PAGE> 45
/s/ James Keller
----------------------------------------
Jim Keller
<PAGE> 46
/s/ Massood Zarrabian
----------------------------------------
Massood Zarrabian
<PAGE> 47
/s/ J. Whitney
----------------------------------------
Jeff Whitney
<PAGE> 48
/s/ Dale Kennedy
----------------------------------------
Dale Kennedy
<PAGE> 49
/s/ Alf Saggese
----------------------------------------
Alf Saggese
<PAGE> 50
/s/ E. Boyajian
----------------------------------------
Ed Boyajian
<PAGE> 51
/s/ C. Barnard, Jr.
----------------------------------------
Chet Barnard
<PAGE> 52
/s/ George R. Kalan
----------------------------------------
<PAGE> 53
ITOCHU TechnoScience Corporation
By: /s/ H. Satake
------------------------------------
Name: H. Satake
Its: President
<PAGE> 54
ITOCHU Technolgoy, Inc.
By: /s/ T. Susaki
------------------------------------
Name: Takahiro Susaki
Its: President
<PAGE> 55
ITOCHU Corporation
By: /s/ E. Kobayashi
------------------------------------
Name: Elzo Kobayashi, Chief Operating
Officer
Its: Information Technology &
Telecommunications Division
<PAGE> 56
/s/ Robert J. Gailus
---------------------------------------
<PAGE> 57
/s/ R. Bogoroch
---------------------------------------
Richard M. Bogoroch
<PAGE> 58
Morgan Stanley Dean Witter Equity
Funding, Inc.
By: /s/ David Powers
------------------------------------
Name: David Powers
Its: Vice President
<PAGE> 59
ITOCHU Techno-Science Corporation
By: /s/H. Satake
------------------------------------
Name: H. Satake
Its: President
[SIGNATURE PAGE TO SERIES J STOCK PURCHASE AGREEMENT]
<PAGE> 60
EXHIBIT A
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
PURCHASED AGGREGATE
INVESTORS SHARES PURCHASE PRICE
- -------------------------------------------------------------------------------
<S> <C> <C>
Frederick R. Adler 103,211 $ 931,995.33
c/o Jay Nickse
Venad Administrative Services, Inc.
342 Madison Avenue, #807
New York, NY 10173
Fax: 212-599-2526
- -------------------------------------------------------------------------------
Richard M. Bogoroch 4,651 $ 41,998.53
15 Caravan Drive
Don Mills, Ontario, M3B 1M9
Fax: 416-868-3134
- -------------------------------------------------------------------------------
CIBC WMV Inc. 350,831 $ 3,168,003.90
161 Bay Street, 8th Floor
BCE Place
Toronto, Ontario, M5J 2F8
Attn: Teddy Rosenberg
Fax: 416-594-8037
- -------------------------------------------------------------------------------
Financial Technologies Ventures, L.P. 280,731 $ 2,535,000.90
Financial Technologies Ventures (Q), L.P.
601 California Street, Suite 2200
San Francisco, CA 94108
Attn: Scott Wu
Fax: 415-229-3005
- -------------------------------------------------------------------------------
Gemini Israel II L.P. 306,423 $ 2,766,999.60
Advent PGGM Gemini L.P.
Gemini Israel II Parallel Fund L.P.
Gemini Partner Investors L.P.
c/o Gemini Capital Fund Management Ltd.
11 Galgalei Haplada Street
P.O. Box 12548
Industrial Zone
Herzlyia 46733 Israel
Attn: Tali Aben
Fax: 011-972-9-958-8442
- -------------------------------------------------------------------------------
The Goldman Sachs Group, Inc. 664,462 $ 6,000,001.60
Stone Street Fund 2000, LLC 110,742 $ 1,000,000.20
Goldman Sachs
85 Broad Street
New York, NY 10004
FAX: 212-357-5505
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 61
<TABLE>
<S> <C> <C>
Tony Graci, in trust 0 0
c/o Graci Associates
350 Bay Street, 9th Floor
Toronto, Ontario M5H 2SE
Fax: 416-367-4098
- -------------------------------------------------------------------------------
Grey Advertising Ltd. 0 0
1881 Yonge Street, 5th Floor
Toronto, Ontario M4S 3C4
Attn: Tony Russell
Fax: 416-488-7071
- -------------------------------------------------------------------------------
Internet Capital Group, Inc. 208,084 $ 1,878,998.50
45 Milk Street
Boston, MA 02109
Attn: Chris Greendale
Fax: 617-338-7117
- -------------------------------------------------------------------------------
J.L. Albright II Venture Fund, L.P. 147,287 $ 1,330,001.60
Canada Trust Tower
BCE Place, Suite 440
161 Bay Street
Toronto, Ontario,
CANADA M5J 2S1
Attn: Gary Rubinoff
Fax: 416-943-6160
- -------------------------------------------------------------------------------
George Kalan 9,967 $ 90,002.01
c/o Orien Ventures
One Post Road
Fairfield, CT 06430
Fax: 203-259-5288
- -------------------------------------------------------------------------------
Samjank Inc. 33,666 $ 304,003.98
c/o Schindlers
21 Cork Street
London, England W1X 1HB
- -------------------------------------------------------------------------------
Gerald Segal 0 0
c/o Robertson Stephens Evergreen Ltd.
96 Rothschild Blvd.
65224 Tel-Aviv, Israel
Fax: 011-972-3-710-8220
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 62
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------
Sigma Partners V, L.P. 385,271 $ 3,478,997.10
Sigma Partners IV, L.P.
Sigma Associates IV, L.P.
Sigma Investors IV, L.P.
2884 Sand Hill Road, Suite 121
Menlo Park, CA 94025
Attn: Marilyn Stallings
Fax: 650-854-1323
with a copy to:
20 Custom House Street, Suite 830
Boston, MA 02110
Attn: Bob Davoli
Fax: 617-330-7975
- -------------------------------------------------------------------------------
Sofinov, Societe Financiere D'Innovation
Inc., Filiale de la Caisse de Depot et
Placements du Quebec
1981Avenue, McGill College
Montreal, Quebec H3A 3C7 442,967 $ 3,999,992.00
Attn: Sophie Forest
Fax: 514-847-2628
- -------------------------------------------------------------------------------
Mark Skapinker 27,685 $ 249,995.55
c/o Brightspark
20 Eglinton Avenue West
Suite 600
Toronto, Ontario M4R 1K8
CANADA
Fax: 416-488-1988
- -------------------------------------------------------------------------------
Morgan Stanley 110,742 $ 1,000,000.20
2 International Place
Boston, MA 02109
Attn: Charles Sansbury
Fax: 617-856-8017
- -------------------------------------------------------------------------------
Mark D'Annolfo 11,047 $ 99,998.22
95 Suffolk Road
Chestnut Hill, MA 02467
- -------------------------------------------------------------------------------
Bob Gailus 16,611 $ 149,997.33
50 Riverside Drive #2B
New York, NY 10024
- -------------------------------------------------------------------------------
Washington Mall Partners 7,420 $ 67,002.60
c/o John Egan
120 Fulton St., 3D
Boston, MA 02109
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 63
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------
ITOCHU Techno-Science Corporation 110,742 $ 1,000,000.20
ITOCHU Corporation
ITOCHU Technology, Inc.
3100 Patrick Henry Drive
Santa Clara, CA 95054
Attn: Takayuki Fukuhara
Fax: 408-727-4619
- -------------------------------------------------------------------------------
Chris Butler 55,371 $ 500,000.13
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Ed Boyajian 5,537 $ 49,999.11
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Daniel Kossmann 16,611 $ 149,997.33
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Massood Zarrabian 22,148 $ 199,996.44
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Chet Barnard 2,769 $ 35,004.07
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Alf Saggese 9,967 $ 90,002.01
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Paul Maguire 5,537 $ 49,999.11
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Jeff Whitney 5,537 $ 49,999.11
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 64
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------
Jim Keller 9,967 $ 90,002.01
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
Dale Kennedy 5,537 $ 49,999.11
c/o Servicesoft Technologies, Inc.
Two Apple Hill Drive
Natick, MA 01760
Fax: (508) 655-0473
- -------------------------------------------------------------------------------
The Reez Trust 9,967 $ 90,002.01
c/o Kaplan Talkins
2900 John Street
Suite 1A
Markham, Ontario L3R 5G3
CANADA
- -------------------------------------------------------------------------------
TOTAL: 3,464,645 $31,285,987.80
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 11, 2000, relating to the consolidated financial
statements of Servicesoft Technologies, Inc., which appears in such
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 23, 2000
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption of "Experts" and the
use of our report dated March 12, 1999 with respect to the financial statements
of Balisoft Technologies Inc. included in the Registration Statement of
Servicesoft Technologies, Inc. (Form S-1 No. 333-30476) dated March 23, 2000.
/s/ Ernst & Young LLP
Toronto, Canada
March 23, 2000
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated July 1, 1999, relating to the financial statements of Internet
Business Advantages, Inc., which appears in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 23, 2000
<PAGE> 1
[International Data Corporation Letterhead]
Exhibit 99.1
Attention: 3/23/00
Servicesoft Technologies
IDC consents to using the following data in SEC IPO Prospectus:
"International Data Corporation projects that the number of Internet users
worldwide will grow from 196 million in 1999 to 502 million in 2003."
"International Data Corporation forecasts that the demand for e-service software
and services will grow from $11 billion in 1998 to $43 billion by 2003."
Sincerely,
/s/ Alexa McCloughan
---------------------------
Alexa McCloughan
Senior Vice President
