<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 26, 2000.
REGISTRATION NO. 333-41968
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
SELECTICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0432030
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
3 WEST PLUMERIA DRIVE, SAN JOSE, CA 95134
(408) 570-9700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RAJEN JASWA
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD
SELECTICA, INC.
3 WEST PLUMERIA DRIVE, SAN JOSE, CA 95134
(408) 570-9700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT V. GUNDERSON, JR., ESQ. MARK A. BERTELSEN, ESQ.
BENNETT L. YEE, ESQ. JOSE F. MACIAS, ESQ.
THEODORE G. WANG, ESQ. BETSEY SUE, ESQ.
DAVID W. WIENER, ESQ. JON C. AVINA, ESQ.
GUNDERSON DETTMER STOUGH SAMUEL WU, ESQ.
VILLENEUVE FRANKLIN & HACHIGIAN, LLP WILSON SONSINI GOODRICH & ROSATI
155 CONSTITUTION DRIVE PROFESSIONAL CORPORATION
MENLO PARK, CALIFORNIA 94025 650 PAGE MILL ROAD
(650) 321-2400 PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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, 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, please 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. [ ]
-------------------------
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 that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 26, 2000
4,000,000 Shares
[Selectica Logo]
Common Stock
------------------
We are selling 2,000,000 shares of common stock and the selling
stockholders are selling 2,000,000 shares of common stock. We will not receive
any of the proceeds from the shares of common stock sold by the selling
stockholders.
Our common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "SLTC." On July 25, 2000, the last reported sale price of our
common stock was $56.50 per share.
The selling stockholders have granted the underwriters an option to
purchase a maximum of 600,000 additional shares to cover over-allotments of
shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS SELECTICA STOCKHOLDERS
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total............................. $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
U.S. BANCORP PIPER JAFFRAY
WIT SOUNDVIEW
BANC OF AMERICA SECURITIES LLC
The date of this prospectus is , 2000.
<PAGE> 3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUMMARY.................. 3
RISK FACTORS........................ 6
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS................ 20
USE OF PROCEEDS..................... 21
DIVIDEND POLICY..................... 21
PRICE RANGE OF COMMON STOCK......... 21
CAPITALIZATION...................... 22
DILUTION............................ 23
SELECTED CONSOLIDATED FINANCIAL
DATA.............................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................... 25
BUSINESS............................ 40
</TABLE>
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Page
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MANAGEMENT.......................... 51
RELATED PARTY TRANSACTIONS.......... 61
PRINCIPAL AND SELLING
STOCKHOLDERS...................... 63
DESCRIPTION OF CAPITAL STOCK........ 67
SHARES ELIGIBLE FOR FUTURE SALE..... 70
UNDERWRITING........................ 72
NOTICE TO CANADIAN RESIDENTS........ 75
LEGAL MATTERS....................... 77
EXPERTS............................. 77
WHERE YOU CAN FIND MORE
INFORMATION....................... 77
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS........................ F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Selectica and the common stock being sold in this offering
in our financial statements and notes appearing elsewhere in this prospectus and
our risk factors beginning on page 6.
SELECTICA, INC.
Selectica is a leading provider of Internet selling system software and
services that enable companies to efficiently sell complex products and services
over intranets, which are networks of computers that are internal to companies
and use Internet technologies, extranets, which are intranets that outsiders,
such as suppliers and customers, are allowed to access, and the public Internet.
Our ACE suite of software products is a comprehensive Internet selling system
solution that guides a new customer through an analysis of its needs and product
or service selection and also guides an experienced customer, partner or
employee through product or service configuration, pricing and order creation
over the Internet, thereby helping convert potential buyers into customers. Our
Internet selling system solution allows companies to use the Internet platform
to deploy a selling application to many points of contact, including personal
computers, in-store kiosks and mobile devices, while offering customers,
partners and employees an interface customized to their specific needs.
The Internet is transforming the business environment by increasing
competition and enabling the development of new business models. In order to
remain competitive, companies must find innovative ways to sell, increase
efficiencies in the sales cycle and deliver greater customer satisfaction. A
growing number of companies are seeking to leverage the Internet to market and
sell their products and services. To date, many electronic commerce transactions
have been simple purchases of products such as books, compact discs, stocks and
toys. We believe, however, that growth in electronic commerce will be driven by
the ability of companies to complete complex transactions such as
business-to-business electronic commerce, which is the sale of products and
services over the Internet from businesses to other businesses, and the sale of
consumer products and services involving multiple features and options.
The completion of a complex sales transaction depends on a seller's ability
to identify and satisfy a buyer's needs. In traditional sales, companies rely on
trained salespeople to interact with customers to address customer needs,
explain product features and ultimately consummate the sale. To date, many
electronic commerce web sites have been static collections of non-interactive
content, and have limited ability to assist and guide a customer through a
purchase decision. Using the Internet to complete complex sales transactions,
however, requires businesses to implement a sophisticated system that performs
the traditional role of the salesperson throughout the sales lifecycle of the
products and services.
In parallel with the growth of electronic commerce, the Internet is
becoming a technology platform for business application deployment. With the
emergence of the Internet platform, which includes intranets, extranets and the
public Internet, companies are able to more broadly and cost-effectively deploy
business applications to customers, partners and employees and make the most
current applications and information immediately available on Internet-enabled
devices.
Our ACE suite of products enables businesses to easily develop and rapidly
deploy an Internet sales channel, or a means for selling products and services
over the Internet, that interactively assists their customers, partners and
employees through the selection, configuration, pricing, quoting and fulfillment
processes. ACE is a comprehensive Internet selling system that meets the needs
of companies looking to efficiently sell complex products and services. Our
product architecture has been designed specifically for the Internet, providing
our solution with scalability, which is the ability to accommodate substantial
increases in the number of users concurrently using the product, reliability and
flexibility. Additionally, our Internet selling system solution has been
developed with an open architecture that leverages data in existing enterprise
applications, such as enterprise resource planning systems, providing an
easy-to-install application that is designed to reduce deployment time.
Our current customers include 3Com, Allied Signal, Aspect Communications,
BMW, Centigram, Cisco, Cooper Cameron, Dell, Fireman's Fund, Fujitsu,
Hewlett-Packard, Highmark Blue Cross Blue Shield, Louis Vuitton Moet & Hennessy,
Network Appliance, Redback Networks, RTS Software, Samsung and Smart Pipes. We
have developed strong working relationships with system integrators, such as
Andersen Consulting, Arthur Andersen, EDS, A.T. Kearny, KPMG and
PricewaterhouseCoopers, with independent software vendors, such as BroadVision,
InterWorld, Netscape/AOL and Tibco, and with application service providers such
as Asera and Corio. Our strategic investors are the Intel 64 Fund and ITOCHU
Corporation.
Selectica was incorporated in June 1996. Our principal offices are located
at 3 West Plumeria Drive, San Jose, California 95134 and our telephone number is
(408) 570-9700.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common stock offered by us................................. 2,000,000 shares
Common stock offered by the selling stockholders........... 2,000,000 shares
Common stock to be outstanding after this offering......... 37,935,812 shares
Use of proceeds from this offering......................... Working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol.............................. SLTC
</TABLE>
The table above is based on shares outstanding as of June 30, 2000. This
table excludes:
- 3,603,688 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans at a weighted average exercise
price of $14.56 per share at June 30, 2000 and 2,161,569 shares of common
stock available for issuance under our stock option plans as of June 30,
2000;
- 800,000 shares of common stock issuable upon exercise of a warrant with
an exercise price of $13.00 per share;
- 1,000,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan; and
- An aggregate of 52,750 shares of common stock issuable pursuant to
options granted between July 1, 2000 and July 25, 2000 at a weighted
average exercise price of $70.07 per share.
------------------
Except as otherwise indicated, information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
------------------
Selectica, ACE and Selectica's logo are our trademarks and we have filed
applications to register Selectica and ACE. Trade names, service marks or
trademarks of other companies appearing in this prospectus are the property of
their respective holders.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD FROM INCEPTION YEARS ENDED MARCH 31, JUNE 30,
(JUNE 6, 1996) TO ---------------------------- ---------------------
MARCH 31, 1997 1998 1999 2000 1999 2000
--------------------- ------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Total revenues........................ $ 55 $ 170 $ 3,444 $ 16,088 $ 1,201 $ 7,581
Loss from operations.................. $ (256) $(3,188) $(7,636) $(32,045) $(3,917) $(16,935)
Net loss applicable to common
stockholders........................ $ (251) $(3,101) $(7,537) $(31,779) $(3,990) $(13,593)
Net loss per share applicable to
common stockholders:
Basic and diluted................... $(0.15) $ (0.91) $ (1.58) $ (4.54) $ (0.21) $ (0.41)
Weighted average shares -- basic and
diluted........................... 1,634 3,425 4,782 6,999 19,380 33,340
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $182,310 $288,095
Working capital............................................. $167,299 $273,084
Total assets................................................ $232,720 $338,505
Total stockholders' equity.................................. $201,515 $307,300
</TABLE>
See Note 1 of notes to consolidated financial statements for the year ended
March 31, 2000 and Note 5 of notes to condensed consolidated financial
statements for the period ended June 30, 2000, for a description of the method
that we used to compute our basic and diluted net loss per share applicable to
common stockholders.
The as adjusted column in the consolidated balance sheet data table above
reflects our sale of 2,000,000 shares of common stock by us in this offering, at
an assumed public offering price of $56.50 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
RECENT DEVELOPMENT
In July 2000, we entered into an agreement to acquire Wakely Software,
Inc., a provider of rating software and actuarial services for the insurance
industry for total consideration of stock and cash valued at approximately $18
million on July 17, 2000, excluding transaction costs. Combined with Wakely
Software, we intend to offer a multi-channel Internet sales solution developed
for the insurance industry. The closing of the acquisition is subject to a
number of closing conditions, including our right to terminate the acquisition
if it is determined that Wakely Software would be deemed a significant
subsidiary of us.
5
<PAGE> 7
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock.
RISKS RELATED TO OUR BUSINESS
THE UNPREDICTABILITY OF OUR QUARTERLY REVENUES AND RESULTS OF OPERATIONS MAKES
IT DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE AND MAY CAUSE VOLATILITY OR A
DECLINE IN THE PRICE OF OUR COMMON STOCK IF WE ARE UNABLE TO SATISFY THE
EXPECTATIONS OF INVESTORS OR THE MARKET.
In the past, our quarterly operating results have varied significantly, and
we expect these fluctuations to continue. Future operating results may vary
depending on a number of factors, many of which are outside of our control.
Our quarterly revenues may fluctuate as a result of our ability to
recognize revenue in a given quarter. We enter into arrangements for the sale of
(1) licenses of our software products and related maintenance contract; (2)
bundled license, maintenance, and services; and (3) services on a time and
material basis. For each arrangement, we determine whether evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collection is probable. If any of these criteria are not met, revenue
recognition is deferred until such time as all of the criteria are met.
Additionally, because we rely on a limited number of customers for our revenue,
the loss or delay of one prospective customer may significantly harm our
operating results.
For those contracts that consist solely of license and maintenance we
recognize license revenues based upon the residual method after all elements
other than maintenance have been delivered as we have vendor specific objective
evidence of fair value of maintenance we recognize maintenance revenues over the
term of the maintenance contract. For those contracts that bundle the license
with maintenance training, and/or consulting services, we assess whether the
service element of the arrangement is essential to the functionality of the
other elements of the arrangement. In those instances where we determine that
the service elements are essential to the other elements of the arrangement, we
account for the entire arrangement using contract accounting.
For those arrangements accounted for using contract accounting that do not
include contractual milestones or other acceptance criteria we utilize the
percentage of completion method based upon input measures of hours. For those
contracts that include contract milestones or acceptance criteria we recognize
revenue as such milestones are achieved or as such acceptance occurs.
In some instances the acceptance criteria in the contract requires
acceptance after all services are complete and all other elements have been
delivered. In these instances we recognize revenue based upon the completed
contract method after such acceptance has occurred.
For those arrangements for which we have concluded that the service element
is not essential to the other elements of the arrangement we determine whether
the services are available from other vendors, do not involve a significant
degree of risk or unique acceptance criteria, and whether we have sufficient
experience in providing the service to be able to separately account for the
service. When the service qualifies for separate accounting we have vendor
specific objective evidence of fair value for the service.
In addition, because we rely on a limited number of customers, the timing
of milestone achievement or customer acceptance by, the amount of services we
provide to, or the recognition of significant license revenues upon shipment to
a single customer can significantly affect our operating results. For example,
our services revenues declined significantly in the quarter ended June 30, 1999
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<PAGE> 8
due to completion of a services contract with BMW of North America, one of our
significant customers. Our license and service revenues increased significantly
in the quarters ended September 30, 1999, December 31, 1999 and March 31, 2000
generally due to the addition of two new customers. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Quarterly
Results of Operations." We intend to significantly increase our operating
expenses for the foreseeable future. Because these expenses are relatively fixed
in the near term, any shortfall from anticipated revenues could cause our
quarterly operating results to fall below anticipated levels.
We may also experience seasonality in revenues. For example, our quarterly
results may fluctuate based upon our customers' calendar year budgeting cycles.
These seasonal variations may lead to fluctuations in our quarterly revenues and
operating results.
Based upon the foregoing, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance. In
some future quarter, our operating results may be below the expectations of
public market analysts and investors, which could cause volatility or a decline
in the price of our common stock.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We have experienced operating losses in each quarterly and annual period
since inception. We incurred net losses applicable to common stockholders of
$7.5 million for the fiscal year ended March 31, 1999, $31.8 million for the
fiscal year ended March 31, 2000 and $13.6 million for the three months ended
June 30, 2000. As of June 30, 2000, we had an accumulated deficit of $56.7
million. We expect to significantly increase our research and development, sales
and marketing, and general and administrative expenses, and consequently our
losses may increase in the future. In order to accommodate our increase in
employees, we have recently leased a larger facility, and we will incur
increased capital equipment costs. We will need to generate significant
increases in our revenues to achieve and maintain profitability. If our revenue
fails to grow or grows more slowly than we anticipate or our operating expenses
exceed our expectations, our losses will significantly increase which would
significantly harm our business and operating results.
OUR RESULTS OF OPERATIONS WILL BE HARMED BY CHARGES ASSOCIATED WITH OUR PAYMENT
OF STOCK-BASED COMPENSATION AND CHARGES ASSOCIATED WITH OTHER SECURITIES
ISSUANCE BY US.
We have in the past and expect in the future to incur a significant amount
of amortization of charges related to securities issuances in future periods,
which will negatively affect our operating results. Since inception we have
recorded $13.2 million in deferred compensation charges. During the year ended
March 31, 2000 and the quarter ended June 30, 2000 we amortized $1.3 million and
$849,000 of such charges, respectively. We expect to amortize approximately $3.3
million of stock-based compensation for the fiscal year ending March 31, 2001
and we may incur additional charges in the future in connection with grants of
stock-based compensation at less than fair value. In January 2000, in connection
with a license and maintenance agreement, we issued a warrant to purchase
800,000 shares of common stock for $800,000. The fair value of the warrant was
$16.4 million. In the quarter ended March 31, 2000, we recorded a charge of $9.7
million related to the loss on the license and software maintenance contract, of
which $4.1 million was charged to cost of license revenues and $5.6 million was
charged to costs of services revenues, in relation to the issuance of these
warrants. During the three months ended June 30, 2000, revenues were reduced by
amortization of $2.7 million in connection with this license and services
agreement. We expect to amortize the remaining $3.2 million associated with the
fair value of this warrant through the end of fiscal 2001. The amount we
amortize in each quarter of fiscal 2001 will fluctuate based on the revenue from
the agreement. In
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<PAGE> 9
addition, if we consummate the acquisition of Wakely Software, we expect to
incur charges in the areas of in-process research and development. We expect to
incur amortization expense of goodwill over a period of three to five years. See
Note 10 of the Notes to consolidated financial statements for the year ended
March 31, 2000 and Note 7 of Notes to condensed financial statements for the
three months ended June 30, 2000.
OUR LIMITED OPERATING HISTORY AND THE FACT THAT WE OPERATE IN A NEW INDUSTRY
MAKES EVALUATING OUR BUSINESS PROSPECTS AND RESULTS OF OPERATIONS DIFFICULT.
We were founded in June 1996 and have a limited operating history. We began
marketing our ACE suite of products in early 1997 and released ACE 4.0 in
November 1999. Our business model is still emerging, and the revenue and income
potential of our business and market are unproven. As a result of our limited
operating history, we have limited financial data that you can use to evaluate
our business. You must consider our prospects in light of the risks and
difficulties we may encounter as an early stage company in the new and rapidly
evolving market for Internet selling systems.
IF THE MARKET FOR INTERNET SELLING SYSTEM SOFTWARE DOES NOT DEVELOP AS WE
ANTICIPATE, OUR OPERATING RESULTS WILL BE SIGNIFICANTLY HARMED, WHICH COULD
CAUSE A DECLINE IN THE PRICE OF OUR COMMON STOCK.
The market for Internet selling system software, which has only recently
begun to develop, is evolving rapidly and likely will have an increased number
of competitors. Because this market is new, it is difficult to assess its
competitive environment, growth rate and potential size. The growth of the
market is dependent upon the willingness of businesses and consumers to purchase
complex goods and services over the Internet and the acceptance of the Internet
as a platform for business applications. In addition, companies that have
already invested substantial resources in other methods of Internet selling may
be reluctant or slow to adopt a new approach or application that may replace,
limit or compete with their existing systems.
The acceptance and growth of the Internet as a business platform may not
continue to develop at historical rates and a sufficiently broad base of
companies may not adopt Internet platform-based business applications, either of
which could significantly harm our business and operating results. The failure
of the market for Internet selling system software to develop, or a delay in the
development of this market, would significantly harm our business and operating
results.
WE FACE INTENSE COMPETITION, WHICH COULD REDUCE OUR SALES, PREVENT US FROM
ACHIEVING OR MAINTAINING PROFITABILITY AND INHIBIT OUR FUTURE GROWTH.
The market for software and services that enable electronic commerce is
new, intensely competitive and rapidly changing. We expect competition to
persist and intensify, which could result in price reductions, reduced gross
margins and loss of market share. Our principal competitors include Calico
Commerce, FirePond and Trilogy Software. BAAN, Oracle Corporation, SAP and
Siebel Systems offer integrated solutions for electronic commerce incorporating
some of the functionality of an Internet selling system and may intensify their
efforts in our market. In addition, other enterprise software companies may
offer competitive products in the future.
Competitors vary in size and in the scope and breadth of the products and
services offered. Many of our competitors and potential competitors have a
number of significant advantages over us, including:
- a longer operating history;
- preferred vendor status with our customers;
8
<PAGE> 10
- more extensive name recognition and marketing power; and
- significantly greater financial, technical, marketing and other
resources, giving them the ability to respond more quickly to new or
changing opportunities, technologies and customer requirements.
Our competitors may also bundle their products in a manner that may
discourage users from purchasing our products. Current and potential competitors
may establish cooperative relationships with each other or with third parties,
or adopt aggressive pricing policies to gain market share. Competitive pressures
may require us to reduce the prices of our products and services. We may not be
able to maintain or expand our sales if competition increases and we are unable
to respond effectively.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT FOR US TO FORECAST REVENUE AND
AGGRAVATES THE VARIABILITY OF QUARTERLY FLUCTUATIONS, WHICH COULD CAUSE OUR
STOCK PRICE TO DECLINE.
The sales cycle of our products has historically averaged between four and
six months, and may sometimes be significantly longer. We are generally required
to provide a significant level of education regarding the use and benefits of
our products, and potential customers tend to engage in extensive internal
reviews before making purchase decisions. In addition, the purchase of our
products typically involves a significant commitment by our customers of capital
and other resources, and is therefore subject to delays that are beyond our
control, such as customers' internal budgetary procedures and the testing and
acceptance of new technologies that affect key operations. In addition, because
we intend to target large companies, our sales cycle can be lengthier due to the
decision process in large organizations. As a result of our products' long sales
cycles, we face difficulty predicting the quarter in which sales to expected
customers may occur. If anticipated sales from a specific customer for a
particular quarter are not realized in that quarter, our operating results for
that quarter could fall below the expectations of financial analysts and
investors, which could cause our stock price to decline.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, INCLUDING MAINTAINING
INTEROPERABILITY OF OUR PRODUCT WITH THE SOFTWARE AND HARDWARE PLATFORMS
PREDOMINANTLY USED BY OUR CUSTOMERS, OUR PRODUCT MAY BE RENDERED OBSOLETE AND
OUR BUSINESS MAY FAIL.
Our industry is characterized by rapid technological change, changes in
customer requirements, frequent new product and service introductions and
enhancements and emerging industry standards. In order to achieve broad customer
acceptance, our products must be compatible with major software and hardware
platforms used by our customers. Our products currently operate on the Microsoft
Windows NT, Sun Solaris, IBM AIX, Linux and HP/UX operating systems. In
addition, our products are required to interoperate with electronic commerce
applications and databases. We must continually modify and enhance our products
to keep pace with changes in these operating systems, applications and
databases. Internet selling system technology is complex and new products and
product enhancements can require long development and testing periods. If our
products were to be incompatible with a popular new operating system, electronic
commerce application or database, our business would be significantly harmed. In
addition, the development of entirely new technologies to replace existing
software could lead to new competitive products that have better performance or
lower prices than our products and could render our products obsolete and
unmarketable.
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DEMAND FOR OUR PRODUCTS AND SERVICES WILL DECLINE SIGNIFICANTLY IF OUR SOFTWARE
CANNOT SUPPORT AND MANAGE A SUBSTANTIAL NUMBER OF USERS.
Our strategy requires that our products be highly scalable. To date, only a
limited number of our customers have deployed our ACE products on a large scale.
If our customers cannot successfully implement large-scale deployments, or if
they determine that we cannot accommodate large-scale deployments, our business
and operating results would be significantly harmed.
IF WE FAIL TO IMPROVE OUR ACCOUNTING AND FINANCIAL CONTROL SYSTEMS OR ACCURATELY
MANAGE THE PROGRESS OF OUR CUSTOMER CONTRACTS, OUR OPERATING RESULTS WILL BE
SIGNIFICANTLY HARMED.
In the past, we have had difficulty managing our accounting and financial
reporting systems and the volume and complexity of our customer contracts. We
need to improve our financial and accounting controls, improve our reporting and
approval procedures, expand and train key personnel within our finance and
management organizations, implement more robust information systems, and
accurately record and track our customer contracts. If we fail to improve our
financial systems, procedures and controls or if we fail to effectively manage
our customer contracts, our business and operating results would be
significantly harmed.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON A LIMITED NUMBER OF CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES, AND THE LOSS OF ANY OF THESE
CUSTOMERS COULD SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS.
Our business and financial condition is dependent on a limited number of
customers. Our five largest customers accounted for approximately 75% of our
revenues for the three months ended June 30, 2000 and our ten largest customers
accounted for 91% of our revenues for the three months ended June 30, 2000. Our
five largest customers accounted for approximately 53% of our revenues for the
fiscal year ended March 31, 2000, and our ten largest customers accounted for
76% of our revenues for the fiscal year ended March 31, 2000. Revenues from
customers who accounted for more than 10% of total revenues as a percentage of
total revenues are as follows:
THREE MONTHS ENDED JUNE 30, 2000
<TABLE>
<S> <C>
Samsung, SDS................................................ 31%
Southwestern Bell........................................... 19%
Dell........................................................ 14%
</TABLE>
FISCAL YEAR ENDED MARCH 31, 2000
<TABLE>
<S> <C>
LVMH........................................................ 12%
Samsung, SDS................................................ 12%
3Com Corporation............................................ 10%
Fireman's Fund Insurance.................................... 10%
</TABLE>
We expect that we will continue to depend upon a relatively small number of
customers for a substantial portion of our revenues for the foreseeable future.
Contracts with our customers can generally be terminated on short notice by the
customer. As a result, if we fail to successfully sell our products and services
to one or more customers in any particular period, or a large customer purchases
less of our products or services, defers or cancels orders, or terminates its
relationship with us, our business and operating results would be harmed.
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<PAGE> 12
OUR FAILURE TO MEET CUSTOMER EXPECTATIONS ON DEPLOYMENT OF OUR PRODUCTS COULD
RESULT IN NEGATIVE PUBLICITY AND REDUCED SALES, BOTH OF WHICH WOULD
SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS.
In the past, our customers have experienced difficulties or delays in
completing implementation of our products. We may experience similar
difficulties or delays in the future. Our Internet selling system solution
relies on defining a knowledge base that must contain all of the information
about the products and services being configured. We have found that extracting
the information necessary to construct a knowledge base can be more time
consuming than we or our customers anticipate. If our customers do not devote
the resources necessary to create the knowledge base, the deployment of our
products can be delayed. Deploying our ACE products can also involve
time-consuming integration with our customers' legacy systems, such as existing
databases and enterprise resource planning software. Failing to meet customer
expectations on deployment of our products could result in a loss of customers
and negative publicity regarding us and our products, which could adversely
affect our ability to attract new customers. In addition, time-consuming
deployments may also increase the amount of professional services we must
allocate to each customer, thereby increasing our costs and adversely affecting
our business and operating results.
IF WE ARE UNABLE TO MAINTAIN AND EXPAND OUR DIRECT SALES FORCE, SALES OF OUR
PRODUCTS AND SERVICES MAY NOT MEET OUR EXPECTATIONS AND OUR BUSINESS AND
OPERATING RESULTS WILL BE SIGNIFICANTLY HARMED.
We depend on our direct sales force for all of our current sales and our
future growth depends on the ability of our direct sales force to develop
customer relationships and increase sales to a level that will allow us to reach
and maintain profitability.
There is a shortage of the sales personnel we need, such as sales
engineers, and competition for qualified personnel is intense. In addition, it
will take time for new sales personnel to achieve full productivity. If we are
unable to hire or retain qualified sales personnel, or if newly hired personnel
fail to develop the necessary skills or to reach productivity when anticipated,
we may not be able to expand our sales organization and increase sales of our
products and services.
IF WE ARE UNABLE TO GROW AND MANAGE OUR PROFESSIONAL SERVICES ORGANIZATION, WE
WILL BE UNABLE TO PROVIDE OUR CUSTOMERS WITH TECHNICAL SUPPORT FOR OUR PRODUCTS,
WHICH COULD SIGNIFICANTLY HARM OUR BUSINESS AND OPERATING RESULTS.
As we increase licensing of our software products, we must grow our
professional services organization to assist our customers with implementation
and maintenance of our products. Because these professional services have been
expensive to provide, we must improve the management of our professional
services organizations to improve our results of operations. Improving the
efficiency of our consulting services is dependent upon attracting and retaining
experienced project managers. Competition for these project managers is intense,
particularly in the Silicon Valley and in India where the majority of our
professional services organization is based, and we may not be able to hire
qualified individuals to fill these positions.
Although services revenues, which are primarily comprised of revenues from
consulting fees, maintenance contracts and training, are important to our
business, representing 52% and 43% of total revenues for the three months ended
June 30, 2000 and for the year ended March 31, 2000, respectively, services
revenues have lower gross margins than license revenues. Gross margins for
services revenues were negative 34% and negative 113% for the three months ended
June 30, 2000 and for the year ended March 31, 2000, respectively, compared to
gross margins for license revenues of 94% and 51% for the respective periods. As
a result, a continued increase in the percentage of total
11
<PAGE> 13
net revenues represented by services revenues or an unexpected decrease in
license revenues could have a detrimental impact on our overall gross margins
and our operating results.
We anticipate that customers will increasingly utilize third-party
consultants to install and deploy our products. Additionally, for all new
contracts we charge for our professional services on a time and materials rather
than a fixed-fee basis. To the extent that customers are unwilling to utilize
third-party consultants or require us to provide professional services on a
fixed fee basis, our cost of services revenues could increase and could cause us
to recognize a loss on a specific contract, either of which would adversely
affect our operating results. In addition, if we are unable to provide these
resources, we may lose sales or incur customer dissatisfaction and our business
and operating results could be significantly harmed.
FAILURE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH SYSTEMS INTEGRATORS AND
CONSULTING FIRMS, WHICH ASSIST US WITH THE SALE AND INSTALLATION OF OUR
PRODUCTS, WOULD IMPEDE ACCEPTANCE OF OUR PRODUCTS AND THE GROWTH OF OUR
REVENUES.
We rely in part upon systems integrators and consulting firms to recommend
our products to their customers and to install and deploy our products. To
increase our revenues and implementation capabilities, we must develop and
expand our relationships with these systems integrators and consulting firms. If
systems integrators and consulting firms develop, market or recommend
competitive Internet selling systems, our revenues may decline. In addition, if
these systems integrators and consulting firms are unwilling to install and
deploy our products, we may not have the resources to provide adequate
implementation services to our customers and our business and operating results
could be significantly harmed.
OUR OPERATING RESULTS ARE SIGNIFICANTLY DEPENDENT UPON THE SALE OF OUR ACE SUITE
OF PRODUCTS, INCLUDING THE NEW VERSION OF OUR PRODUCT RELEASED IN NOVEMBER 1999.
We expect that we will continue to depend on revenue from new and enhanced
versions of ACE for the foreseeable future, and if companies do not adopt or
expand their use of ACE, our business and operating results would be
significantly harmed. ACE 4.0 was introduced in November 1999. Customers may
discover errors or other problems with the product, which may adversely affect
its acceptance.
IF NEW VERSIONS AND RELEASES OF OUR PRODUCTS CONTAIN ERRORS OR DEFECTS, WE COULD
SUFFER LOSSES AND NEGATIVE PUBLICITY, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS
AND OPERATING RESULTS.
Complex software products such as ours often contain errors or defects,
including errors relating to security, particularly when first introduced or
when new versions or enhancements are released. In the past, we have discovered
defects in our products and provided product updates to our customers to address
such defects. ACE and other future products may contain defects or errors, which
could result in lost revenues, a delay in market acceptance or negative
publicity, which would significantly harm our business and operating results.
MANY OF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE RELATIVELY NEW AND MUST BE
INTEGRATED INTO OUR ORGANIZATION.
Many of our executive officers and key personnel have recently joined
Selectica, including our Vice President of Marketing and our Chief Financial
Officer, each of whom have joined Selectica since June 1999. Our future
performance will depend, in part, on our ability to successfully integrate
12
<PAGE> 14
our newly hired executive officers and key personnel into our management team,
and our ability to develop an effective working relationship among management.
OUR RAPID GROWTH PLACES A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES, AND IF WE FAIL TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE HARMED.
We have recently experienced a period of rapid growth and expansion, which
places significant demands on our managerial, administrative, operational,
financial and other resources. From December 31, 1998 to June 30, 2000, we
expanded from 68 to 549 employees. We have also significantly expanded our
operations in the U.S. and internationally and we plan to continue to expand the
geographic scope of our operations.
We will be required to manage an increasing number of relationships with
customers, suppliers and employees, and an increasing number of complex
contracts. If we are unable to initiate procedures and controls to support our
future operations in an efficient and timely manner, or if we are unable to
otherwise manage growth effectively, our business would be harmed.
THE LOSS OF ANY OF OUR KEY PERSONNEL WOULD HARM OUR COMPETITIVENESS BECAUSE OF
THE TIME AND EFFORT THAT WE WOULD HAVE TO EXPEND TO REPLACE SUCH PERSONNEL.
We believe that our success will depend on the continued employment of our
senior management team and key technical personnel, none of whom, except Rajen
Jaswa, our President and Chief Executive Officer, and Dr. Sanjay Mittal, our
Chief Technical Officer and Vice President of Engineering, has an employment
agreement with us. If one or more members of our senior management team or key
technical personnel were unable or unwilling to continue in their present
positions, these individuals would be difficult to replace. Consequently, our
ability to manage day-to-day operations, including our operations in Pune,
India, develop and deliver new technologies, attract and retain customers,
attract and retain other employees and generate revenues would be significantly
harmed.
A SUBSTANTIAL PORTION OF OUR OPERATIONS ARE CONDUCTED BY INDIA-BASED PERSONNEL,
AND ANY CHANGE IN THE POLITICAL AND ECONOMIC CONDITIONS OF INDIA OR IN
IMMIGRATION POLICIES, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR
OPERATIONS IN INDIA, COULD SIGNIFICANTLY HARM OUR BUSINESS.
We conduct quality assurance and professional services operations in India.
As of June 30, 2000, there were 184 persons employed in India. We are dependent
on our India-based operations for these aspects of our business and we intend to
grow our operations in India. As a result, we are directly influenced by the
political and economic conditions affecting India. Operating expenses incurred
by our operations in India are denominated in Indian currency and accordingly,
we are exposed to adverse movements in currency exchange rates. This, as well as
any other political or economic problems or changes in India, could have a
negative impact on our India-based operations, resulting in significant harm to
our business and operating results. Furthermore, the intellectual property laws
of India may not adequately protect our proprietary rights. We believe that it
is particularly difficult to find quality management personnel in India, and we
may not be able to timely replace our current India-based management team if any
of them were to leave our company.
Our training program for some of our India-based employees includes an
internship at our San Jose, California headquarters. Additionally, we provide
services to some of our customers internationally with India-based employees. We
presently rely on a number of visa programs to enable these India-based
employees to travel and work internationally. Any change in the immigration
policies of India or the countries to which these employees travel and work
could cause disruption or force the termination of these programs, which would
harm our business.
13
<PAGE> 15
BECAUSE COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE IN OUR INDUSTRY AND IN
OUR GEOGRAPHIC REGION, WE MAY NOT BE ABLE TO RECRUIT OR RETAIN PERSONNEL, WHICH
COULD IMPACT THE DEVELOPMENT OR SALES OF OUR PRODUCTS.
Our success depends on our ability to attract and retain qualified
management, engineering, sales and marketing and professional services
personnel. Competition for these types of personnel is intense, especially in
the Silicon Valley. We do not have employment agreements with most of our key
personnel. If we are unable to retain our existing key personnel, or attract and
train additional qualified personnel, our growth may be limited due to our lack
of capacity to develop and market our products.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY LITIGATION, IT COULD BE COSTLY AND
TIME CONSUMING TO DEFEND AND COULD DISTRACT US FROM FOCUSING ON OUR BUSINESS AND
OPERATIONS.
Since our products are company-wide, mission-critical computer applications
with a potentially strong impact on our customers' sales, errors, defects or
other performance problems could result in financial or other damages to our
customers. Although our license agreements generally contain provisions designed
to limit our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate such limitation of liability
provisions. Product liability litigation, even if it were unsuccessful, would be
time consuming and costly to defend.
OUR FUTURE SUCCESS DEPENDS ON OUR PROPRIETARY INTELLECTUAL PROPERTY, AND IF WE
ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM POTENTIAL COMPETITORS OUR
BUSINESS MAY BE SIGNIFICANTLY HARMED.
We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
currently hold one patent. We also currently have two pending U.S. patent
applications. In addition, we have three trademarks and have applied to register
two of the trademarks in the United States. Our trademark and patent
applications might not result in the issuance of any trademarks or patents. If
any patent or trademark is issued, it might be invalidated or circumvented or
otherwise fail to provide us any meaningful protection. We seek to protect
source code for our software, documentation and other written materials under
trade secret and copyright laws. We license our software pursuant to signed
license agreements, which impose certain restrictions on the licensee's ability
to utilize the software. We also seek to avoid disclosure of our intellectual
property by requiring employees and consultants with access to our proprietary
information to execute confidentiality agreements. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
In addition, the laws of many countries do not protect our proprietary rights to
as great an extent 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 and to determine the validity and scope of the proprietary
rights of others. Our failure to adequately protect our intellectual property
could significantly harm our business and operating results.
ANY ACQUISITIONS THAT WE MAY MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR
OPERATING RESULTS.
We may acquire or make investments in complementary companies, products or
technologies. In the event of any such investments, acquisitions or joint
ventures, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt;
14
<PAGE> 16
- assume liabilities;
- incur amortization expenses related to goodwill and other intangible
assets; or
- incur large and immediate write-offs.
These investments, acquisitions or joint ventures also involve numerous
risks, including:
- problems combining the purchased operations, technologies or products
with ours;
- unanticipated costs;
- diversion of managements' attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- potential loss of key employees, particularly those of the acquired
organizations; and
- reliance to our disadvantage on the judgment and decisions of third
parties and lack of control over the operations of a joint venture
partner.
Any acquisition or joint venture may cause our financial results to suffer
as a result of these risks. In July 2000, we entered into an agreement to
acquire Wakely Software, Inc. for total consideration of stock and cash valued
at approximately $18 million on July 17, 2000, excluding transaction costs. If
consummated, the acquisition of Wakely Software could subject us to these risks.
In addition, the acquisition of Wakely Software is subject to a number of
closing conditions, including our right to terminate the acquisition if it is
determined that Wakely Software would be a significant subsidiary of us.
IF WE ARE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION, WE MAY INCUR SUBSTANTIAL
COSTS, WHICH WOULD HARM OUR OPERATING RESULTS.
Our success and ability to compete are dependent on our ability to operate
without infringing upon the proprietary rights of others. Any intellectual
property litigation could result in substantial costs and diversion of resources
and could significantly harm our business and operating results. In the past, we
received correspondence from two patent holders recommending that we license
their respective patents. After review of these patents, we informed these
patent holders that in our opinion, it would not be necessary to license these
patents. However, we may be required to license either or both patents or incur
legal fees to defend our position that such licenses are not necessary. We
cannot assure you that if required to do so, we would be able to obtain a
license to use either patent on commercially reasonable terms, or at all.
Any threat of intellectual property litigation could force us to do one or
more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant intellectual property, which license
may not be available on reasonable terms;
- redesign those products or services that incorporate such intellectual
property; or
- pay money damages to the holder of the infringed intellectual property
right.
In the event of a successful claim of infringement against us and our
failure or inability to license the infringed intellectual property on
reasonable terms or license a substitute intellectual property or redesign our
product to avoid infringement, our business and operating results would be
15
<PAGE> 17
significantly harmed. If we are forced to abandon use of our trademark, we may
be forced to change our name and incur substantial expenses to build a new
brand, which would significantly harm our business and operating results.
RESTRICTIONS ON EXPORT OF ENCRYPTED TECHNOLOGY COULD CAUSE US TO INCUR DELAYS IN
INTERNATIONAL PRODUCT SALES, WHICH WOULD ADVERSELY IMPACT THE EXPANSION AND
GROWTH OF OUR BUSINESS.
Our software utilizes encryption technology, the export of which is
regulated by the United States government. If our export authority is revoked or
modified, if our software is unlawfully exported or if the United States adopts
new legislation restricting export of software and encryption technology, we may
experience delay or reduction in shipment of our products internationally.
Current or future export regulations could limit our ability to distribute our
products outside of the United States. While we take precautions against
unlawful exportation of our software, we cannot effectively control the
unauthorized distribution of software across the Internet.
IF WE ARE UNABLE TO EXPAND OUR OPERATIONS INTERNATIONALLY OR ARE UNABLE TO
MANAGE THE GREATER COLLECTIONS, MANAGEMENT, HIRING, LEGAL, REGULATORY AND
CURRENCY RISKS FROM THESE INTERNATIONAL OPERATIONS, OUR BUSINESS AND OPERATING
RESULTS WILL BE HARMED.
We intend to expand our operations internationally. This expansion may be
more difficult or take longer than we anticipate, and we may not be able to
successfully market, sell or deliver our products internationally. If successful
in our international expansion, we will be subject to a number of risks
associated with international operations, including:
- longer accounts receivable collection cycles;
- expenses associated with localizing products for foreign markets;
- difficulties in managing operations across disparate geographic areas;
- difficulties in hiring qualified local personnel;
- difficulties associated with enforcing agreements and collecting
receivables through foreign legal systems;
- unexpected changes in regulatory requirements that impose multiple
conflicting tax laws and regulations; and
- fluctuations in foreign exchange rates and the possible lack of financial
stability in foreign countries that prevent overseas sales growth.
RISKS RELATED TO THE INDUSTRY
IF USE OF THE INTERNET DOES NOT CONTINUE TO DEVELOP AND RELIABLY SUPPORT THE
DEMANDS PLACED ON IT BY ELECTRONIC COMMERCE, THE MARKET FOR OUR PRODUCTS AND
SERVICES MAY BE ADVERSELY AFFECTED, AND WE MAY NOT ACHIEVE ANTICIPATED SALES
GROWTH.
Growth in sales of our products and services depends upon the continued and
increased use of the Internet as a medium for commerce and communication. Growth
in the use of the Internet is a recent phenomenon and may not continue. In
addition, the Internet infrastructure may not be able to support the demands
placed on it by increased usage and bandwidth requirements. There have also been
recent well-publicized security breaches involving "denial of service" attacks
on major web sites.
16
<PAGE> 18
Concerns over these and other security breaches may slow the adoption of
electronic commerce by businesses, while privacy concerns over inadequate
security of information distributed over the Internet may also slow the adoption
of electronic commerce by individual consumers. Other risks associated with
commercial use of the Internet could slow its growth, including:
- inadequate reliability of the network infrastructure;
- slow development of enabling technologies and complementary products; and
- limited accessibility and ability to deliver quality service.
In addition, the recent growth in the use of the Internet has caused
frequent periods of poor or slow performance, requiring components of the
Internet infrastructure to be upgraded. Delays in the development or adoption of
new equipment and standards or protocols required to handle increased levels of
Internet activity, or increased government regulation, could cause the Internet
to lose its viability as a commercial medium. If the Internet infrastructure
does not develop sufficiently to address these concerns, it may not develop as a
commercial marketplace, which is necessary for us to increase sales.
INCREASING GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR OUR
PRODUCTS AND SERVICES, OR IMPOSE GREATER TAX BURDENS ON US OR LIABILITY FOR
TRANSMISSION OF PROTECTED DATA.
As electronic commerce and the Internet continue to evolve, federal, state
and foreign governments may 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 electronic commerce, and therefore
the market for our products and services. Although many of these regulations may
not apply directly to our business, we expect that laws regulating the
solicitation, collection or processing of personal or consumer information could
indirectly affect our business.
Laws or regulations concerning telecommunications might also negatively
impact us. Several telecommunications companies have petitioned the Federal
Communications Commission to regulate Internet service providers and online
service providers in a manner similar to long distance telephone carriers and to
impose access fees on these companies. This type of legislation could increase
the cost of conducting business over the Internet, which could limit the growth
of electronic commerce generally and have a negative impact on our business and
operating results.
RISKS RELATED TO THIS OFFERING
BECAUSE WE ARE IN THE INTERNET INDUSTRY, OUR STOCK PRICE MAY BE PARTICULARLY
VOLATILE, WHICH COULD LEAD TO CLASS ACTION LITIGATION.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of
Internet-related companies in general and our stock price in particular, have
been extremely volatile, and have experienced fluctuations that have often been
unrelated to or disproportionate to the operating performance of these
companies. For example from March 10, 2000, the date of the initial public
offering of our common stock, through July 25, 2000 our stock price has
fluctuated from $30.00 per share to $154.43 and has on many days fluctuated more
than 10%. The trading prices of many technology companies' stocks are at or near
historical highs and reflect valuations substantially above historical levels.
These trading prices and valuations may fall significantly. These broad market
fluctuations could adversely affect the market price of our common stock. In
addition, these fluctuations could lead to costly class action litigation that
could significantly harm our business and operating results.
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<PAGE> 19
In the past, securities class action litigation has often been brought
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. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could harm our business and operating results.
OUR EXECUTIVE OFFICER AND DIRECTORS WILL RETAIN SUBSTANTIAL VOTING CONTROL OVER
US AFTER THE OFFERING THAT WILL ALLOW THEM TO INFLUENCE THE OUTCOME OF MATTERS
SUBMITTED TO STOCKHOLDERS FOR APPROVAL.
Our executive officers and directors and their affiliates, based on
ownership as of June 30, 2000, beneficially own, in the aggregate, approximately
53% of our outstanding common stock. These stockholders will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could have the effect of delaying or preventing a third party from
acquiring control over us. For more information regarding the ownership of our
outstanding stock by our executive officers and directors and their affiliates,
see "Principal and Selling Stockholders."
WE HAVE VARIOUS MECHANISMS IN PLACE TO DISCOURAGE TAKEOVER ATTEMPTS THAT COULD
SUPPRESS OUR STOCK PRICE AND MAKE IT MORE DIFFICULT TO ACQUIRE US.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. These provisions
include:
- authorizing the issuance of shares of blank check preferred stock;
- providing for a classified board of directors with staggered, three year
terms; and
- prohibiting specified stockholder action by written consent.
For information regarding these and other provisions, please see
"Description of Capital Stock." We are also currently considering other
anti-takeover measures, including a stockholders' rights plan.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD DEPRESS OUR STOCK PRICE.
After this offering, we will have outstanding approximately 38 million
shares of common stock, of which approximately 9.2 million shares, including the
shares sold in this offering, plus any shares issued upon exercise of the
underwriters' over-allotment option, will be freely tradeable. The remaining
approximately 28.8 million shares of common stock outstanding after this
offering will become available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE OF AVAILABILITY FOR SALE
--------- -----------------------------
<C> <S>
1,714,815 September 6, 2000
24,180,015 Ninety days following the date of this prospectus
3,677,383 At various times thereafter, upon the expiration of
respective one-year holding periods.
</TABLE>
If our stockholders sell substantial amounts of common stock in the public
market, including shares issuable upon the exercise of outstanding options, the
market price of our common stock could fall. See "Shares Eligible for Future
Sale" and "Underwriting."
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<PAGE> 20
AS A NEW INVESTOR, YOU WILL INCUR SUBSTANTIAL DILUTION AS A RESULT OF THIS
OFFERING AND FUTURE EQUITY ISSUANCES.
The public offering price will be substantially higher than the book value
per share of our outstanding common stock. As a result, investors purchasing
common stock in this offering will incur immediate substantial dilution of
$48.62 a share. The exercise of outstanding options and warrants would result in
further dilution.
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING FOR PURPOSES
WITH WHICH YOU MAY NOT AGREE, AND WE MAY NOT BE SUCCESSFUL IN INVESTING THESE
PROCEEDS.
We plan to use the proceeds from this offering for general corporate
purposes. Therefore, we will have broad discretion as to how we will spend the
proceeds, and our stockholders may not agree with the ways in which we use the
proceeds. We may not be successful in investing the proceeds from this offering
in our operations or external investments to yield a favorable return.
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<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology; for instance, may, will,
should, intend, expect, plan, anticipate, believe, estimate, predict, potential
or continue, the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined in the Risk Factors section. These factors
may cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither any other person nor we
assumes responsibility for the accuracy and completeness of the forward-looking
statements.
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<PAGE> 22
USE OF PROCEEDS
Our net proceeds from the sale of the 2,000,000 shares of common stock by
us in this offering are estimated to be 105,785,000, assuming a public offering
price of $56.50 and after deducting estimated underwriting discounts and
commissions and estimated offering expenses. We will not receive any proceeds
from the sale of shares by selling stockholders.
We intend to use the net proceeds of this offering for additional working
capital and other general corporate purposes. These operating expenses will be
offset by the degree to which we recognize revenues from the sales of our
products and services. The amounts that we actually expend for working capital
and other general corporate purposes will vary significantly depending on a
number of factors, including future revenue growth, if any, and the amount of
cash that we generate from operations. As a result, we will retain broad
discretion over the allocation of the net proceeds from this offering. A portion
of the net proceeds may also be used for the acquisition of businesses, products
and technologies that are complementary to ours. Other than the proposed
acquisition of Wakely Software, Inc., we have no current agreements or
commitments for acquisitions of complementary businesses, products or
technologies. Pending these uses, we will invest the net proceeds of this
offering in short-term, investment grade and interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since inception and do not currently
intend to pay any cash dividends.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on The Nasdaq National Market under the
symbol SLTC since our initial public offering on March 10, 2000. The following
table shows the high and low close prices per share prices of our common stock
for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 2000
Fourth Fiscal Quarter (beginning March 10, 2000).......... $141.23 $ 75.27
FISCAL 2001
First Fiscal Quarter...................................... $ 86.50 $ 31.25
Second Fiscal Quarter (through July 25, 2000)............. $ 76.25 $ 56.50
</TABLE>
On July 25, 2000, the last reported sale price of our common stock on the
NASDAQ National Market was $56.50 per share. On June 30, 2000 there were
approximately 327 holders of record of our common stock.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the following information:
- our actual capitalization as of June 30, 2000; and
- our as adjusted capitalization gives effect to the sale of 2,000,000
shares of common stock offered by us at an assumed public offering price
of $56.50 per share less the estimated underwriting discounts and
commission, and estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.0001 par value, authorized: 10,000,000
shares, issued and outstanding: none, actual and as
adjusted............................................... $ -- $ --
Common stock, $0.0001 par value, authorized: 150,000,000
shares, issued and outstanding: 35,935,812 shares,
actual, 37,935,812, as adjusted........................ 3 4
Additional paid-in capital.................................. 282,258 388,042
Deferred compensation....................................... (11,081) (11,081)
Stockholder notes receivable................................ (12,716) (12,716)
Accumulated deficit......................................... (56,715) (56,715)
Accumulated other comprehensive loss........................ (234) (234)
-------- --------
Total stockholders' equity............................. $201,515 $307,300
-------- --------
Total capitalization................................... $201,515 $307,300
======== ========
</TABLE>
This table excludes the following shares:
- 3,603,688 shares of common stock issuable upon exercise of stock options
outstanding under our stock option plans at a weighted average exercise
price of $14.56 per share as of June 30, 2000 and 2,161,569 shares of
common stock available for issuance under our stock option plans as of
June 30, 2000;
- 800,000 shares of common stock issuable upon the exercise of a warrant
outstanding as of June 30, 2000 at an exercise price of $13.00 per share;
- 1,000,000 shares of common stock available for issuance under our 1999
Employee Stock Purchase Plan; and
- An aggregate of 52,750 shares of common stock issuable pursuant to
options granted between July 1, 2000 and July 25, 2000 at a weighted
average exercise price of $70.07 per share.
See "Management -- Employee Benefit Plans," and Note 10 of "Notes to
Consolidated Financial Statements" for a description of our equity plans.
22
<PAGE> 24
DILUTION
Our net tangible book value as of June 30, 2000 was $193.1 million, or
approximately $5.37 per share. Net tangible book value per share represents the
amount of stockholders' equity, less intangible assets divided by 35,935,812
shares of common stock outstanding.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to our sale
of 2,000,000 shares of common stock in this offering at an assumed public
offering price of $56.50 per share and after deducting the estimated
underwriting discounts and commissions, and estimated offering expenses, our net
tangible book value as of June 30, 2000 would have been $298.9 million or $7.88
per share. This represents an immediate increase in net tangible book value of
$2.51 per share to existing stockholders and an immediate dilution in net
tangible book value of $48.62 per share to purchasers of common stock in the
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $56.50
Net tangible book value per share as of June 30, 2000..... $5.37
Increase per share attributable to new investors.......... 2.51
-----
Net tangible book value per share after the offering........ 7.88
------
Dilution per share to new investors......................... $48.62
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 2000,
the differences between the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by the new investors purchasing shares in this offering. We
have used an assumed public offering price of $56.50 per share, and we have not
deducted estimated underwriting discounts and commissions and estimated offering
expenses in our calculations.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 35,935,812 95% $247,141,082 69% $ 6.88
New investors.................. 2,000,000 5 113,000,000 31 $56.50
---------- --- ------------ ---
Total........................ 37,935,812 100% $360,141,082 100%
========== === ============ ===
</TABLE>
This discussion of dilution, and the table quantifying it, assume no
exercise of any outstanding stock options. The exercise of stock options
outstanding under our stock option plans having an exercise price less than the
offering price would increase the dilutive effect to new investors.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statement
of operations data for the fiscal years ended March 31, 2000, 1999, and 1998 and
the consolidated balance sheet data at March 31, 2000 and 1999 are derived from
our audited consolidated financial statements included elsewhere in this
prospectus. The consolidated statement of operations data for the period from
June 6, 1996 through March 31, 1997 and the consolidated balance sheet data as
of March 31, 1998 and 1997 are derived from our audited financial statements not
included in this prospectus. The statement of operations data for the three
months ended June 30, 2000 and 1999 and the consolidated balance sheet at June
30, 2000 are derived from unaudited condensed consolidated financial statements
included elsewhere in this prospectus and, in the opinion of our management,
includes all adjustments, consisting only of normal recurring adjustments, that
are necessary for a fair presentation of the results of operations for this
period. The historical results are not necessarily indicative of the operating
results to be expected in the future. Catalogics Software Corporation our
predecessor corporation, had assets of $8,177, $6,154 and $5,952 at March 31,
1995 and 1996 and May 31, 1996, respectively. The net loss was none, $(2,828)
and $(337) for the years ended March 31, 1995 and 1996 and the two months ended
May 31, 1996, respectively.
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM THREE MONTHS ENDED
MARCH 31, JUNE 6, 1996 JUNE 30,
---------------------------- THROUGH -------------------------
2000 1999 1998 MARCH 31, 1997 2000 1999
-------- ------- ------- --------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
License................................ $ 9,181 $ 1,656 $ 170 $ 50 $ 3,674 $ 708
Services............................... 6,907 1,788 -- 5 3,907 493
-------- ------- ------- ------ -------- -------
Total revenues.................. 16,088 3,444 170 55 7,581 1,201
Cost of revenues:
License................................ 4,520 184 9 3 231 52
Services............................... 14,551 881 -- -- 5,227 1,069
Services -- related party.............. 135 303 51 -- -- 135
-------- ------- ------- ------ -------- -------
Total cost of revenues.......... 19,206 1,368 60 3 5,458 1,256
-------- ------- ------- ------ -------- -------
Gross profit (loss)...................... (3,118) 2,076 110 52 2,123 (55)
Operating expenses:
Research and development............... 7,347 3,893 1,950 169 4,382 1,479
Sales and marketing.................... 17,026 4,430 1,055 62 12,723 1,885
General and administrative............. 4,554 1,389 293 77 1,953 498
-------- ------- ------- ------ -------- -------
Total operating expenses........ 28,927 9,712 3,298 308 19,058 3,862
-------- ------- ------- ------ -------- -------
Loss from operations..................... (32,045) (7,636) (3,188) (256) (16,935) (3,917)
Interest and other income (expense),
net.................................... 1,241 99 87 5 3,342 (47)
-------- ------- ------- ------ -------- -------
Net loss before taxes.................... (30,804) (7,537) (3,101) (251) (13,593) (3,964)
Provision for income taxes............... 50 -- -- -- -- 26
-------- ------- ------- ------ -------- -------
Net loss................................. (30,854) (7,537) (3,101) (251) (13,593) (3,990)
Deemed dividend on Series E convertible
preferred stock........................ 925 -- -- -- -- --
-------- ------- ------- ------ -------- -------
Net loss applicable to common
stockholders........................... $(31,779) $(7,537) $(3,101) $ (251) $(13,593) $(3,990)
======== ======= ======= ====== ======== =======
Basic and diluted net loss per share
applicable to common stockholders...... $ (4.54) $ (1.58) $ (0.91) $(0.15) $ (0.41) $ (0.21)
Shares used in computing basic and
diluted net loss per share applicable
to common stockholders................. 6,999 4,782 3,425 1,634 33,340 19,380
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------- JUNE 30,
2000 1999 1998 1997 2000
-------- ------ ------ ---- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $215,818 $ -- $ 504 $788 $182,310
Working capital (deficit)................................... 202,611 (639) 422 770 167,299
Total assets................................................ 242,452 3,193 1,357 983 232,720
Total stockholders' equity.................................. 214,078 736 856 957 201,515
</TABLE>
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the notes to those statements that appear
elsewhere in this prospectus.
OVERVIEW
Selectica is a leading provider of Internet selling system software and
services that enable companies to efficiently sell complex products and services
over intranets, extranets and the Internet. Our ACE suite of software products
is a comprehensive Internet selling system solution that gives sellers the
ability to manage the sales process in order to facilitate the conversion of
prospective buyers into customers. Our Internet selling system solution allows
companies to use the Internet platform to deploy a selling application to many
points of contact, including personal computers, in-store kiosks and mobile
devices, while offering customers, partners and employees an interface
customized to their specific needs.
History
Selectica was incorporated in June 1996 and acquired the technology and
assets of Catalogics Software Corporation, a development stage Internet software
company founded by Dr. Sanjay Mittal, a co-founder of Selectica, in July 1996.
Selectica was a development-stage company until October 1997. In October 1997,
we released our first version of ACE, which consisted of the ACE Enterprise
Server and ACE Studio. During the following year, we primarily licensed our
products to businesses for pilot programs that involved limited deployments.
Beginning in calendar 1999, we licensed our products for larger scale
deployments and continued to develop and market our ACE suite of products,
expanding our product offering with ACE Enterprise Manager, ACE Quoter and ACE
Mobile. In November 1999, we released the current version of ACE, ACE 4.0, and
expanded our product offering with ACE Repository and ACE Connector.
In addition to our engineering and professional services employees based in
San Jose, California, we provide professional services and perform quality
assurance testing with the assistance of Selectica Configurators India Private
Limited, or Selectica India, a corporation located in Pune, India. Selectica
India was formed in June 1997. From June 1997 through July 1999, we purchased
services from Selectica India on an arms-length contract basis. In July 1999, we
completed an agreement to acquire a 99.9% ownership of Selectica India, making
it a subsidiary of Selectica, Inc. As of June 30, 2000, there were 184 employees
of Selectica India. Because we believe that Selectica India provides us with a
strategic advantage in advancing our product development and consulting
activities, we plan to continue expanding this operation. See "Related Party
Transactions -- Selectica Configurators India Pvt. Ltd."
Revenues
We enter into arrangements for the sale of (1) licenses of our software
products and related maintenance contract; (2) bundled license, maintenance, and
services; and (3) services on a time and material basis. In instances where
maintenance is bundled with a license of our software products, such maintenance
term is typically one year.
For each arrangement, we determine whether evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection
is probable. If any of these criteria are not met, revenue recognition is
deferred until such time as all of the criteria are met.
25
<PAGE> 27
For those contracts that consist solely of license and maintenance we
recognize license revenues based upon the residual method after all elements
other than maintenance have been delivered and recognize maintenance revenues
over the term of the maintenance contract as vendor specific objective evidence
of fair value for maintenance does exist.
Services can consist of maintenance, training and/or consulting services.
Consulting services include a range of services including installation of our
off-the-shelf software, customization of our software for the customer's
specific application, data conversion and building of interfaces to allow our
software to operate in customized environments.
In all cases, we assess whether the service element of the arrangement is
essential to the functionality of the other elements of the arrangement. In this
determination we focus on whether the software is off-the-shelf software,
whether the services include significant alterations to the features and
functionality of the software, whether the services involve the building of
complex interfaces, the timing of payments and the existence of milestones.
Often the installation of our software requires the building of interfaces to
the customer's existing applications or customization of the software for
specific applications. As a result, judgement is required in the determination
of whether such services constitute "complex" interfaces. In making this
determination we consider the following: (1) the relative fair value of the
services compared to the software, (2) the amount of time and effort subsequent
to delivery of the software until the interfaces or other modifications are
completed, (3) the degree of technical difficulty in building of the interface
and uniqueness of the application, (4) the degree of involvement of customer
personnel, and (5) any contractual cancellation, acceptance, or termination
provisions for failure to complete the interfaces. We also consider refunds,
forfeitures and concessions when determining the significance of such services.
In those instances where we determine that the service elements are
essential to the other elements of the arrangement, we account for the entire
arrangement using contract accounting.
For those arrangements accounted for using contract accounting that do not
include contractual milestones or other acceptance criteria we utilize the
percentage of completion method based upon input measures of hours. For those
contracts that include contract milestones or acceptance criteria we recognize
revenue as such milestones are achieved or as such acceptance occurs.
In some instances the acceptance criteria in the contract requires
acceptance after all services are complete and all other elements have been
delivered. In these instances we recognize revenue based upon the completed
contract method after such acceptance has occurred.
For those arrangements for which we have concluded that the service element
is not essential to the other elements of the arrangement we determine whether
the services are available from other vendors, do not involve a significant
degree of risk or unique acceptance criteria, and whether we have sufficient
experience in providing the service to be able to separately account for the
service. When the service qualifies for separate accounting we use vendor
specific objective evidence for the fair value of the services and the
maintenance to account for the arrangement using the residual method, regardless
of any separate prices stated within the contract for each element.
Vendor-specific objective evidence of fair value of services is based upon
hourly rates. As noted above, we enter into contracts for services alone and
such contracts are based upon time and material basis. Such hourly rates are
used to assess the vendor specific objective evidence in multiple element
arrangements.
In accordance with paragraph 10 of Statement of Position 97-2, Software
Revenue Recognition, vendor specific objective evidence of fair value of
maintenance is determined by reference to the price the customer will be
required to pay when it is sold separately (that is, the renewal rate), which is
26
<PAGE> 28
based on the price established by management having the relevant authority. Each
license agreement offers additional maintenance renewal periods at a stated
price. Maintenance contracts are typically one year in duration. To date we have
had four maintenance contracts come up for renewal for which the customer
elected to renew such maintenance contracts. We believe that given the nature of
our products as selling solutions for the Internet, our customers view
maintenance of those products as important to their business and will continue
to need upgrades and support of licensed products. As a result, we believe
renewals will occur in the future as more contracts come up for renewal.
To date we have not entered into arrangements solely for license of our
products and, therefore, we have not demonstrated vendor specific objective
evidence for the fair value of the license element.
In all cases we classify revenues for these arrangements as license
revenues and services revenues based on the estimates of fair value for each
element.
For the three months ended June 30, 2000 we recognized 49% of license and
services revenues under the percentage-of-completion method and 46% using the
residual method. For the three months ended June 30, 1999 we recognized 60% of
license and services revenues under the residual method and 39% using completed
contract method. For the year ended March 31, 2000, we recognized 45% of license
revenues under the residual method, 28% under the percentage-of-completion
method, and 23% using the completed contract method. For the fiscal year ended
March 31, 1999 we recognized 63% of license and services revenues under the
percentage-of-completion method and 36% using the completed contract method.
Because we rely on a limited number of customers, the timing of customer
acceptance or milestone achievement, or the amount of services we provide to a
single customer can significantly affect our operating results. For example, our
services revenues declined significantly in the quarter ended June 30, 1999 due
to the completion of services under a contract with BMW of North America, one of
our significant customers. Our license and services revenues increased
significantly in the quarters ended September 30, 1999 and December 31, 1999
generally due to the addition of two new customers in each respective quarter.
Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue recognized are
recorded as deferred revenue. Amounts recognized as revenue in advance of
billing (typically under percentage-of-completion accounting) are recorded as
unbilled receivables.
Factors Affecting Operating Results
A relatively small number of customers account for a significant portion of
our total revenues. For the three months ended June 30, 2000, revenue from
Samsung SDS, Southwestern Bell, and Dell accounted for 31%, 19% and 14% of our
revenues, respectively. For the three months ended June 30, 1999, revenue from
RTS Software, Watlow Electric, BMW of North America and Centigram Communications
accounted for 39%, 19%, 18% and 15% of our revenues, respectively. For the year
ended March 31, 2000, revenue from Samsung SDS, LVMH Group, 3Com Corporation,
and Fireman's Fund accounted for 12%, 12%, 10%, and 10% of our revenues,
respectively. For the fiscal year ended March 31, 1999, revenue from BMW of
North America and Olicom accounted for 60% and 10% of our revenues,
respectively. For the fiscal year ended March 31, 1998, revenue from
Hewlett-Packard of Germany, Ascend Communications, InterVoice and Insight
accounted for 45%, 27%, 16% and 12% of our total revenues, respectively. We
expect that revenues from a limited number of customers will continue to account
for a large percentage of total revenues in future quarters.
27
<PAGE> 29
To date, our revenues have been predominantly attributable to sales in the
United States. We plan to expand our international operations significantly,
because we believe international markets represent a significant growth
opportunity. Consequently, we expect that international revenues will increase
as a percentage of total revenues in the future. The expansion of our
international operations will be subject to a variety of risks that could
significantly harm our business and operating results. As our international
sales and operations expand, we anticipate that our exposure to foreign currency
fluctuations will increase because we have not adopted a hedging program to
protect us from risks associated with foreign currency fluctuations.
We have a limited operating history upon which we may be evaluated. We have
incurred significant losses since inception and, as of June 30, 2000, we had an
accumulated deficit of approximately $56.7 million. We believe our success
depends on the continued growth of our customer base and the development of the
emerging Internet selling system market. Accordingly, we intend to continue to
invest heavily in sales and marketing and research and development. Furthermore,
we expect to continue to incur substantial operating losses for the foreseeable
future.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Our limited operating history makes it
difficult to forecast future operating results. Additionally, despite our recent
revenue growth, we do not believe that historical growth rates are necessarily
sustainable or indicative of future growth and we cannot be certain that
revenues will increase. Even if we were to achieve profitability in any period,
we may not be able to sustain or increase profitability on a quarterly or annual
basis.
Equity Transactions
During October 1999, we issued, 1,505,702 shares of Series E Preferred
Stock to various investors, including parties related to us, for gross proceeds
of $6,597,986. Of this amount, $23,000 related to the exercise of warrants to
purchase 5,250 shares of Series E Preferred Stock issued in connection with the
convertible debt financing in May 1999. We issued 1,500,452 of these shares at
$4.382 per share while the deemed fair value of such preferred stock at that
date was approximately $7.70. As a result, in the third quarter of fiscal 2000
we recorded $5.0 million of charges related to the difference between the actual
issuance price of the preferred stock and its deemed fair value. Of this amount,
$266,000 was accounted for as compensation expense, $925,000 was accounted for
as a dividend to stockholders in the third quarter of fiscal 2000 and the
remaining amount will be amortized over an approximate two-year period in
connection with a development agreement entered into in September 1999 with
Intel, one of the investors. As of June 30, 2000 approximately $1.5 million had
been amortized.
Under the terms of the development agreement with Intel, we will work with
Intel to port the current suite of ACE products to additional platforms. In
connection with the development agreement, we issued warrants to purchase 57,000
shares of Series E convertible Preferred Stock. The warrants were issued in
December 1999 and were valued using the Black-Scholes valuation model. The value
of the warrants is approximately $381,000 and this amount will be expensed over
the remaining life of the development agreement, which will be approximately two
years. As of June 30, 2000, approximately $121,000 had been amortized.
On January 7, 2000, in connection with a license agreement entered into in
November 1999 and one year maintenance agreement of $3.0 million, we issued a
warrant to purchase 800,000 shares of common stock to one of our customers, for
$800,000. The warrant is fully vested, has a life of two years, and an exercise
price per share of $13. The value of the warrant is approximately $16.4 million
28
<PAGE> 30
and was determined based upon a Black-Scholes valuation model. The value of the
warrant, less the warrant purchase price of $800,000, is greater than the
revenues associated with the license and maintenance agreement, and accordingly,
we recorded a loss of approximately $9.7 million in the fourth quarter of fiscal
2000.
Between January 1, 2000 and June 30, 2000, an aggregate of 2,548,265
options to purchase common stock were granted at a weighted average price of
$21.59. We have recorded deferred compensation related to these options of
approximately $7.0 million representing the difference between the exercise
price of the options granted and the deemed fair value of our common stock at
the date of grant.
RESULTS OF OPERATIONS
Selectica reports financial results on a fiscal year basis ending March 31.
Therefore, the following references to years relate to our fiscal years. Fiscal
1997 includes only ten months of financial results during which we had no
significant revenue while expenditures were of a start-up nature related to
research and development of our products. All revenue and expense categories for
fiscal 1998 have increased compared to fiscal 1997 due to a full year of revenue
and expenses and increased activities as we introduced and expanded our initial
product offerings. Therefore, fiscal 1997 and 1998 are not comparable periods.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues
Total revenues were $7.6 million in the quarter ended June 30, 2000, an
increase of approximately $6.4 million or 531% over the quarter ended June 30,
1999 and a 9% increase from the quarter ended March 31, 2000. We believe that
the future percentage increase in revenues will be significantly less than what
has been achieved in prior periods.
License. License revenues totaled $3.7 million in the quarter ended June
30, 2000, an increase of approximately $3.0 million or 419% over the quarter
ended June 30, 1999 and an 8% decrease from the quarter ended March 31, 2000.
The net decrease in license revenues from the three months ended March 31, 2000
to three months ended June 30, 2000 was due to $733,000 of amortization of the
fair value of the warrant issued to a significant customer in connection with a
license and service agreement offset by the addition of new customers as a
result of expanded marketing activities, growth in our sales force, and greater
demand for and the acceptance of our ACE suite of products. Additionally, we
expect to amortize the remaining $1.4 million associated with the fair value of
this warrant through the end of fiscal 2001. The amount we amortize in each
quarter of fiscal 2001 will fluctuate based on our revenues from this agreement.
We intend to generate additional license revenues from our existing customers
and anticipate that revenues will increase in absolute dollars in future
periods, although it will fluctuate as a percentage of total revenues as our
customers and size of transactions change.
Services. Services revenues totaled $3.9 million in the quarter ended June
30, 2000, an increase of approximately $3.4 million or 692% over the quarter
ended June 30, 1999 and a 33% increase from the quarter ended March 31, 2000.
Our services revenues are comprised of fees from consulting, maintenance and
training services. The increase in services revenues was due primarily to the
increase in maintenance and maintenance renewals, consulting, and training
services associated with our increased installed base. During the three months
ended June 30, 2000, revenues were also reduced by amortization of $2.0 million,
the fair value of the warrant issued to a significant customer in connection
with a license and service agreement as noted above. Additionally, we expect to
amortize
29
<PAGE> 31
the remaining $1.8 million associated with the fair value of this warrant
through the end of fiscal 2001. The amount we amortize in each quarter of fiscal
2001 will fluctuate based on our revenues from this agreement. We expect
services revenues to continue to increase in terms of absolute dollars in future
periods as the number of consulting projects and maintenance contracts increases
with the addition of new customers.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists of the costs of
the product media, duplication, packaging and delivery of our software products
to our customers, which may include documentation, shipping and other data
transmission costs. Cost of license revenues represented 6% of license revenues
in the three months ended June 30, 2000, as compared to 7% for the three months
ended June 30, 1999. We expect cost of license revenues to maintain a relatively
consistent level as a percentage of license revenues.
Cost of Services Revenues, including Related Party. Cost of services
revenue is comprised mainly of salaries and related expenses of our services
organization. For the three months ended June 30, 1999, cost of services
revenues excludes expenses of our professional services organization in Pune,
India, which are included in costs of services revenues -- related party. Cost
of services revenues, including cost of services from a related party for the
three months ended June 30, 2000, totaled $5.2 million, an increase of $4.0
million or 334% over the three months ended June 30, 1999. Cost of services
revenue, including related party, was 134% compared to 244% of services revenues
for the quarters ended June 30, 2000 and 1999, respectively. The increase in
costs of services is primarily due to an increase in the number of consulting
and technical support personnel necessary to support both the expansion of our
installed base of customers and new implementations. We anticipate that cost of
services revenues will increase in absolute dollars in future periods as our
number of customers increases. We expect cost of services revenues to fluctuate
as a percentage of service revenue.
Gross Profit
For the three months ended June 30, 2000, we experienced overall gross
margins of 28% compared to overall negative gross margins of 5% for the quarter
ended June 30, 1999. The increase in gross margin percentage was due to an
increase in license revenues in the three months ended June 30, 2000 compared to
the three months ended June 30, 1999. We expect that our overall gross margins
will continue to fluctuate due to the timing of services and license revenue
recognition and will continue to be adversely affected by lower margins
associated with services revenues. The amount of impact on our gross profit will
depend on the mix of services we provide, whether the services are performed by
our in-house staff or third party consultants, and the overall utilization rates
of our professional services organization.
Gross Margin -- Licenses. Gross margin for license revenues was
approximately 94% for the quarter ended June 30, 2000 and 93% for the quarter
ended June 30, 1999. During the three months ended June 30, 2000, revenues were
reduced by $733,000 representing amortization of the fair value of the warrant
issued to a significant customer in connection with a license and service
agreement. Additionally, we expect to amortize the remaining $1.4 million
associated with the fair value of this warrant through the end of fiscal 2001.
The amount we amortize in each quarter of fiscal 2001 will fluctuate based on
our revenues from this agreement.
Gross Margin -- Services. Gross margin for services was approximately
negative 34% in the quarter ended June 30, 2000 and negative 144% in the quarter
ended June 30, 1999. The negative gross margin for the three months ended June
30, 2000 is primarily due to the revenues reduced by
30
<PAGE> 32
amortization of $2.0 million, the fair value of the warrant issued to a
significant customer in connection with a license and service agreement.
Additionally, we expect to amortize the remaining $1.8 million associated with
the fair value of this warrant through the end of fiscal 2001. The amount we
amortize in each quarter of fiscal 2001 will fluctuate based on our revenues
from this agreement. We expect that our overall gross margins will continue to
fluctuate due to the timing of services revenue recognition and will continue to
be adversely affected by the lower margins on our service contracts. The amount
of impact on our gross profit will depend on the mix of services we provide,
whether the services are performed by our in-house staff or third party
consultants, whether the services are being performed on a fixed fee basis and
the overall utilization rates of our professional services organization. We
anticipate that cost of services revenues will increase in absolute dollars in
future periods as our number of customers increases and that cost of services
revenues will fluctuate as a percentage of service revenue.
Operating Expenses
Research and Development. Our research and development costs primarily
consist of salaries and related costs of our engineering, quality assurance, and
technical publications efforts. Research and development costs were $4.4 million
in the quarter ended June 30, 2000, an increase of $2.9 million or 196% over the
comparable period in 1999. The increase was primarily due to an increase in the
number of research and development personnel to support the development of ACE
4.0, quality assurance, and technical publications operations. We amortized
approximately $86,000 for deferred compensation and approximately $530,000 for
the development agreement entered into with Intel for the three months ended
June 30, 2000. We expect that research and development expenses will increase in
absolute dollars in future periods.
Sales and Marketing. Our sales and marketing expenses primarily consist of
salaries and related costs for our sales and marketing organization and
marketing programs, including trade shows, sales materials, and advertising.
Sales and marketing expenses totaled $12.7 million in the quarter ended June 30,
2000, an increase of $10.8 million or 575% over the comparable period ended in
1999. The increase was primarily due to the hiring of additional sales and
marketing personnel and expenses incurred in connection with trade show and
additional marketing programs. We amortized approximately $465,000 for deferred
compensation and $431,000 for acceleration of stock option vesting for the three
months ended June 30, 2000. We expect that sales and marketing expenses will
increase in absolute dollars over the next year as we increase spending on
advertising and marketing programs and establish sales offices in additional
domestic and international locations.
General and Administrative. Our general and administrative expenses consist
primarily of personnel and related costs for general corporate functions,
including finance, accounting, legal, human resources and facilities as well as
information system expenses not allocated to other departments. General and
administrative expenses totaled $2.0 million in the quarter ended June 30, 2000,
an increase of $1.5 million or 292% over the comparable period ended in 1999.
The increase was primarily due to a higher number of personnel and additional
legal and accounting costs incurred in connection with business activities. We
amortized approximately $116,000 for deferred compensation and $44,000 for
acceleration of stock option vesting during the three months ended June 30,
2000. We expect that general and administrative expenses will increase in
absolute dollars over the next fiscal year as we hire additional general and
administrative personnel to support our expanding business activities.
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<PAGE> 33
Interest and Other Income, Net
Interest and other income, net primarily consists of interest earned on
cash balances and stockholders notes receivable, offset by interest expense
related to convertible debt issued in the three months ended June 30, 1999 and
converted in the same quarter. Interest and other income, net totaled $3.3
million compared with interest expense of $47,000 for the comparable period in
1999. The increase of $3.4 million in the three months ended June 30, 2000
resulted primarily from interest income on our initial public offering and
private placement net proceeds of $194.2 million, which was completed on March
10, 2000.
Provision for Income Taxes
There was no provision for income taxes for the three months ended June 30,
2000. We have recorded a tax provision of $26,000 for the three month period
ended June 30, 1999. The provision for income taxes consists primarily of state
income taxes and foreign taxes.
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes our historical operating performance and the
reported cumulative net losses in all prior years, we have provided a full
valuation allowance against net deferred tax assets. We intend to evaluate the
realizability of the deferred tax assets on a quarterly basis.
FISCAL YEARS ENDED MARCH 31, 2000, 1999, AND 1998
Revenues
Our revenues increased to $16.1 million in fiscal 2000 from $3.4 million in
fiscal 1999 from $170,000 in fiscal 1998, representing increases of 367% and
1932%, respectively. We believe that the future percentage increase in revenues
will be significantly less than what has been achieved in prior years.
License. License revenues increased to $9.2 million in fiscal 2000 from
$1.7 million in fiscal 1999 from $170,000 in fiscal 1998, representing increases
of 454% and 877%, respectively. The increase in license revenues was primarily
due to the addition of new customers as a result of expanded marketing
activities, growth in our sales force, and greater demand for and the acceptance
of our ACE suite of products. We intend to generate additional license revenues
from our existing customers and anticipate that this number will increase in
absolute dollars in future periods, although it will fluctuate as a percentage
of total revenues as our customers and size of transactions change.
Services. Services revenues increased to $6.9 million in fiscal 2000 from
$1.8 million in fiscal 1999 from none in fiscal 1998, representing an increase
of 286% from 1999 to 2000. Our services revenues are comprised of fees from
consulting, maintenance and training services. The increases in both fiscal 1999
and fiscal 2000 were due primarily to the increase in maintenance and
maintenance renewals, consulting, and training services associated with
increased sales of our products. We expect services revenues to continue to
increase in terms of absolute dollars in future periods as the number of
consulting projects and maintenance contracts increases with the addition of new
customers.
Cost of Revenues
Cost of License Revenues. Cost of license revenues increased to $4.5
million in fiscal 2000, from $184,000 in fiscal 1999 from $9,000 in fiscal 1998,
representing 49%, 11%, and 5% of license revenues, respectively. The increase in
fiscal 2000 was primarily due to a non-recurring $4.1 million
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<PAGE> 34
warrant charge associated with a license agreement entered into in November
1999. We expect cost of license revenues to maintain levels as a percentage of
license revenues consistent with fiscal 1999.
Cost of Services Revenues, including Related Party. For the fiscal years
1999 and 1998 and through the three months ended June 30, 1999, cost of services
revenues excludes expenses of our professional services organization in Pune,
India, which are included in costs of services revenues -- related party. Cost
of services revenues including cost of services from a related party, increased
to $14.7 million in fiscal 2000 from $1.2 million in fiscal 1999 from $51,000 in
fiscal 1998, representing 213% and 66% of services revenues for fiscal 2000 and
fiscal 1999, respectively. Of the $13.5 million increase in cost of services
revenues for fiscal 2000, $5.6 million was attributable to a non-recurring
warrant charge associated with a license agreement entered into in November
1999. $2.6 million was due to increased personnel and related expenses in our
services organization to support the increase in the amount of professional
services provided to our customers. The increase in cost of services revenues in
fiscal 2000 was also attributable to $2.1 million to support our subsidiary in
India and $1.8 million to increased travel and accommodations expenses to client
locations as well as consulting fees to system integrators. We anticipate that
cost of services revenues will increase in absolute dollars in future periods as
our number of customers increases. In addition, with respect to the warrants
associated with the revenue contracts, we expect to amortize $5.9 million as an
offset to revenue for fiscal 2001. We expect cost of services revenues to
fluctuate as a percentage of service revenue.
GROSS PROFIT
The increase in services revenues has resulted in reduced overall gross
margins, since services revenues typically have lower gross margins than license
revenues. For fiscal 2000, we experienced negative gross margins for services
revenues due to a $5.6 million warrant charge associated with a license
agreement entered into in November 1999 and due to the timing of services
revenues recognition. We expect that our overall gross margins will continue to
fluctuate due to the timing of services and license revenue recognition and will
continue to be adversely affected by the lower margins on our service contracts.
The amount of impact on our gross profit will depend on the mix of services we
provide, whether the services are performed by our in-house staff or third party
consultants, and the overall utilization rates of our professional services
organization.
OPERATING EXPENSES
Research and Development. Research and development costs increased to $7.3
million in fiscal 2000 from $3.9 million in fiscal 1999 from $2.0 million in
fiscal 1998, representing increases of 89% and 100%, respectively. In fiscal
2000, the increase of $3.5 million was attributable to $2.8 million in increased
personnel and related expenses, including $116,000 in amortization of deferred
compensation, from the hiring of additional technical personnel to support the
development of ACE 4.0. The remaining $600,000 consists of $1.0 million of
amortization from the development agreement entered into with Intel offset by a
reduction in the allocation of overhead costs. The $1.9 million increase in
research and development costs in fiscal 1999 was primarily due to our increased
personnel and related expenses of $1.3 million. We believe our investment in
research and development will increase in absolute dollars in future periods.
Sales and Marketing. Sales and marketing expenses increased to $17.0
million in fiscal 2000 from $4.4 million in fiscal 1999 from $1.1 million fiscal
1998, representing increases of 284% and 320%, respectively. The $12.6 million
increase in fiscal 2000 is primarily due to $7.5 million from the hiring of
additional sales and marketing personnel, including increased sales commissions
resulting from higher revenues, and $737,000 of amortization of deferred
compensation. Also in fiscal 2000, we
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<PAGE> 35
incurred $2.9 million in increased expenses in the areas of marketing programs
and sales related travel. The $3.4 million increase in sales and marketing
expenses in fiscal 1999 is primarily attributable to increases in payroll
expenses of $1.9 million from the hiring of additional sales and marketing
personnel and $742,000 relating to increased marketing activities. We expect
that sales and marketing expenses will increase in absolute dollars over the
next year as we hire additional sales and marketing personnel, increase spending
on advertising and marketing programs and establish sales offices in additional
and international locations.
General and Administrative. General and administrative expenses increased
to $4.6 million in fiscal 2000 from $1.4 million in fiscal 1999 from $293,000 in
fiscal 1998, representing increases of 228% and 375%, respectively. In fiscal
2000, we experienced an increase of $3.2 million primarily due to an increase of
$1.7 million in payroll and payroll related expenses, including $247,000 in
amortization of deferred compensation. We also incurred $930,000 for other legal
and professional fees associated with enhancing our infrastructure to support
expansion of our operations and to a lesser extent, an increase in the provision
for the allowance for doubtful accounts. The $1.1 million increase in general
and administrative expenses in fiscal 1999 primarily resulted from a $495,000
increase in payroll expenses due to hiring additional administrative and support
personnel and $370,000 in increased legal and accounting fees to support our
overall growth. We expect that general and administrative expenses will increase
in absolute dollars over the next year as we assume the responsibilities of a
public company and as we hire additional general and administrative personnel.
INTEREST AND OTHER INCOME, NET
Interest and other income, net primarily consists of interest earned on
cash balances and stockholders notes receivable, offset by interest expense
related to convertible debt issued in the first quarter of fiscal 2000 and
converted in the same quarter. Interest and other income, net increased to $1.2
million in fiscal 2000 from $99,000 in fiscal 1999 and from $87,000 in fiscal
1998. The significant increase of $1.1 million in fiscal 2000 resulted primarily
from interest income on our initial public offering net proceeds of $194.2
million, which was completed on March 10, 2000.
PROVISION FOR INCOME TAXES
We have recorded a tax provision of $50,000 for the year ended March 31,
2000. The provision for income taxes consists primarily of state income taxes
and foreign taxes.
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes our historical operating performance and the
reported cumulative net losses in all prior years, we have provided a full
valuation allowance against our net deferred tax assets. We intend to evaluate
the realizability of the deferred tax assets on a quarterly basis.
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<PAGE> 36
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations. The data has been derived from
our unaudited consolidated financial statements, and, in the opinion of our
management, include all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. This unaudited information should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses for the foreseeable future.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
License.................. $ 164 $ 243 $ 563 $ 686 $ 708 $ 2,125 $ 2,348 $ 4,000 $ 3,674
Services................. 219 108 683 778 493 1,309 2,157 2,948 3,907
------- ------- ------- ------- ------- ------- ------- -------- --------
Total revenues..... 383 351 1,246 1,464 1,201 3,434 4,505 6,948 7,581
Cost of revenues:
License.................. 28 39 51 66 52 90 117 4,261 231
Services................. 93 118 272 398 1,069 2,082 1,954 9,446 5,227
Services -- related
party.................. 50 50 53 150 135 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- --------
Total cost of
revenues......... 171 207 376 614 1,256 2,172 2,071 13,707 5,458
------- ------- ------- ------- ------- ------- ------- -------- --------
Gross profit
(loss)........... 212 144 870 850 (55) 1,262 2,434 (6,759) 2,123
Operating expenses:
Research and
development............ 594 827 1,077 1,395 1,479 761 1,892 3,215 4,382
Sales and marketing...... 781 776 1,126 1,747 1,885 2,978 4,408 7,755 12,723
General and
administrative......... 212 293 356 528 498 1,229 1,197 1,630 1,953
------- ------- ------- ------- ------- ------- ------- -------- --------
Total operating
expenses......... 1,587 1,896 2,559 3,670 3,862 4,968 7,497 12,600 19,058
------- ------- ------- ------- ------- ------- ------- -------- --------
Loss from operations....... (1,375) (1,752) (1,689) (2,820) (3,917) (3,706) (5,063) (19,359) (16,935)
Interest and other income
(expense), net........... 3 60 31 5 (47) 145 221 922 3,342
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss before taxes...... (1,372) (1,692) (1,658) (2,815) (3,964) (3,561) (4,842) (18,437) (13,593)
Provision for income
taxes.................... -- -- -- -- 26 24 -- -- --
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss................... (1,372) (1,692) (1,658) (2,815) (3,990) (3,585) (4,842) (18,437) (13,593)
Deemed dividend related to
Series E convertible
preferred stock.......... -- -- -- -- -- -- 925 -- --
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss applicable to
common stockholders...... $(1,372) $(1,692) $(1,658) $(2,815) $(3,990) $(3,585) $(5,767) $(18,437) $(13,593)
======= ======= ======= ======= ======= ======= ======= ======== ========
Revenues:
License.................. 43% 69% 45% 47% 59% 62% 52% 58% 48%
Services................. 57 31 55 53 41 38 48 42 52
------- ------- ------- ------- ------- ------- ------- -------- --------
Total revenues..... 100 100 100 100 100 100 100 100 100
Cost of revenues:
License.................. 7 11 4 5 4 3 3 61 3
Services................. 24 34 22 27 90 60 43 136 69
Services -- related
party.................. 13 14 4 10 11 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------- --------
Total cost of
revenues......... 44 59 30 42 105 63 46 197 72
------- ------- ------- ------- ------- ------- ------- -------- --------
Gross profit
(loss)........... 56 41 70 58 (5) 37 54 (97) 28
Operating expenses:
Research and
development............ 155 236 86 95 123 22 42 46 58
Sales and marketing...... 204 221 90 120 157 87 98 112 168
General and
administrative......... 55 83 29 36 41 36 26 23 25
------- ------- ------- ------- ------- ------- ------- -------- --------
Total operating
expenses......... 414 540 205 251 321 145 166 181 251
------- ------- ------- ------- ------- ------- ------- -------- --------
Loss from operations....... (358) (499) (135) (193) (326) (108) (112) (278) (223)
Interest and other income
(expense), net........... 1 17 2 -- (4) 4 5 13 44
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss before taxes...... (357) (482) (133) (193) (330) (104) (107) (265) (179)
Provision for income
taxes.................... -- -- -- -- 2 1 -- -- --
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss................... (357) (482) (133) (193) (332) (105) (107) (265) (179)
Deemed dividend related to
Series E convertible
preferred stock.......... -- -- -- -- -- -- 21 -- --
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss applicable to
common stockholders...... (357)% (482)% (133)% (193)% (332)% (105)% (128)% (265)% (179)%
======= ======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
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Total revenues declined significantly in the quarter ended June 30, 1999
due to the completion of a services contract with a single customer, and
increased significantly in the quarter ended September 30, 1999 primarily as a
result of the addition of two new customers. Revenues for the quarter ended
December 31, 1999 increased by $1.1 million primarily due to the increase in the
number of customers during the quarter, including two customers which, in the
aggregate, comprised approximately 41% of total revenues for the quarter.
Revenues for the quarter ended June 30, 2000 were reduced by $3.2 million of
non-cash charges primarily due to amortization of the fair value of the warrant
issued in connection with license and services agreements entered into in
November 1999 and March 2000. License revenues and services revenues, with
respect to these agreements, were reduced by $733,000 and $2.0 million,
respectively. In the quarter ended March 31, 2000, we recognized $2.0 million of
the $4.0 million license revenue based upon the delivery of the license. We
experience significant variability in license and services revenues from quarter
to quarter due to our dependence on a limited number of customers, the large
transaction size of contracts with these customers, the timing of customer
acceptance and the timing of milestone achievement under contracts with
recognition of revenues on a percentage-of-completion basis. Gross profit has
also fluctuated as a result of increased investment in the development of our
customer support and consulting organizations to support the increase in
professional services provided to our customers. Cost of services revenues are
affected by our allocation of overhead costs by department based upon headcount.
As headcount in our professional services organization has increased as a
percentage of overall headcount from fiscal 1999 through the fourth quarter of
fiscal 2000, an increasing percentage of overhead costs were allocated to cost
of services revenues, resulting in a corresponding reduction in the allocation
of overhead costs to research and development, sales and marketing and general
and administrative expenses in those quarters. We expect gross margin to
continue to fluctuate as a result of continued variation in the mix of our
revenues between high margin license revenues and lower margin services
revenues.
Cost of revenues increased by $11.6 million during the quarter ended March
31, 2000 primarily due to the non-recurring charge associated with a license
agreement entered into in November 1999. Charges associated with this agreement
in the quarter ended March 31, 2000 increased cost of license revenues by $4.1
million and increased cost of services revenues by $5.6 million, cost of
services revenues also increased by $650,000 due to increased headcount during
the quarter.
Our operating expenses have increased significantly from inception through
fiscal 2000 as we have transitioned from development stage to the
commercialization of our services. Research and development expenses fluctuated
from the end of fiscal 1999 through fiscal 2000, with an increase in the quarter
ended June 30, 1999 as a result of the payment of a $544,000 bonus to our Chief
Technology Officer, offset by a reduction in the allocation of overhead costs.
Sales and marketing expenses increased significantly through fiscal 2000 as a
result of the additional hiring of sales and marketing personnel, including our
Vice President of Sales, Americas and Vice President of Marketing, increased
sales commissions resulting from higher revenues and increased advertising and
promotion expenses, offset by a reduction in the allocation of overhead costs.
Sales and marketing expenses increased by $5.0 million for the quarter ended
June 30, 2000 compared to the quarter ended March 31, 2000. Of this increase,
$3.5 million was due to the impact of the headcount added in March 2000,
increased commissions as a direct result of increased revenues and increased
sales travel. We also incurred $1.9 million in advertising and marketing costs
during the quarter ended June 30, 2000 compared to $931,000 during the quarter
ended March 31, 2000. General and administrative expenses increased
significantly through the first quarter of fiscal 2000 as a result of an
increase in payroll expenses due to hiring additional administrative and support
personnel and an increase in legal and accounting services, offset by a
reduction in the allocation of overhead costs.
We plan to increase our operating expenses as we continue to increase sales
and marketing operations, expand our professional services organization and
continue to fund research and
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<PAGE> 38
development. Consequently, our losses will increase in the future. Although we
have experienced revenue growth in recent periods, we cannot be certain that
such growth will continue at its current rate or at all. If our revenue growth
is slower than we anticipate or our operating expenses exceed our expectations,
our losses will be significantly greater.
During October and November 1999, we issued a total of 1,505,702 shares of
Series E Preferred Stock to various investors, including 261,981 shares to
related parties and a member of our board of directors, of which 5,250 shares
were a result of exercise of warrants to purchase stock, 79,871 shares to our
officers, 22,820 shares to unrelated parties and 1,141,030 shares to an investor
who will work with us to port the current suite of ACE products to additional
platforms. Gross proceeds from these issuances were $6,597,986. Excluding those
related to warrant exercises, the shares were issued at $4.382 per share while
the deemed fair value of our preferred stock at that date was approximately
$7.70, 110% of the deemed fair value of our common stock on the date of the
closing of Series E convertible Preferred Stock. We recorded approximately $5.0
million of charges related to cheap stock valuation in the third quarter of
fiscal 2000. Of this amount, approximately $925,000 was accounted for as a
dividend to stockholders, approximately $190,000 as sales and marketing
compensation expense, and approximately $76,000 as general and administrative
compensation expense. The remaining $3.8 million will be amortized over a
two-year period in connection with a development agreement with one of our
investors. Amortization of the development agreement in the amount of $1.0
million was recorded in the year ended March 31, 2000, consistent with the level
of our efforts in the area of research and development.
In the past, our quarterly operating results have varied significantly, and
we expect these fluctuations to continue. Future operating results may vary
depending on a number of factors, many of which are outside of our control.
In the short term, we expect our quarterly revenues to be significantly
dependent on the sale of a small number of relatively large orders for our
products and services. In addition, our products and services generally have a
long sales cycle. As a result, our quarterly revenues may fluctuate
significantly if we are unable to complete one or more substantial sales in any
given quarter. In many cases, we recognize revenues from licenses and services
on a percentage-of-completion basis. Deployment of our products requires a
substantial commitment of resources by our customers or their consultants over
an extended period of time. The time required to complete a deployment may vary
from customer to customer and may be protracted due to unforeseen circumstances.
Our ability to recognize these revenues thus may be delayed if we are unable to
meet milestones on a timely basis. We intend to significantly increase our
operating expenses for the foreseeable future. Because these expenses are
relatively fixed in the near term, any shortfall in anticipated revenues could
cause our quarterly operating results to fall below anticipated levels.
We may also experience seasonality in revenues. For example, our quarterly
results may fluctuate based upon our customers' calendar year budgeting cycles.
These seasonal variations may lead to fluctuations in our quarterly revenues and
operating results.
Based upon the foregoing, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance. In
some future quarter, our operating results may be below the expectations of
public market analysts and investors, which could cause volatility or a decline
in the price of our common stock.
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and short-term investments were approximately $182.3
million at June 30, 2000 compared to $215.8 million at March 31, 2000. The
decrease primarily relates to cash
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<PAGE> 39
used in operations during the three months ended June 30, 2000 of $9.6 million,
capital expenditures of $2.3 million and investment in long-term commercial
paper of $21.3 million at June 30, 2000. Accounts receivable was approximately
$9.3 million at June 30, 2000 compared to $5.7 million at March 31, 2000. The
increase of $3.6 million is a direct result of increased deferred revenues
related to advanced billings and increased license and services revenues from
seven new customers during the quarter. Prepaid expenses were approximately $6.9
million at June 30, 2000 compared to $9.4 million at March 31, 2000. The
decrease of $2.6 million is primarily due to the amortization of the fair value
of a warrant issued to a customer in connection with a license agreement.
Property and equipment, net was $7.9 million at June 30, 2000 and $6.1 million
at March 31, 2000. The $1.8 million increase primarily relates to capital
additions of $2.3 million related to leasehold improvements to our new facility
in San Jose as well as computers and networking equipment related to our
headcount growth offset by depreciation of $486,000.
Accounts payable was approximately $3.2 million at June 30, 2000 compared
to $4.3 million at March 31, 2000. The decrease of $1.1 million was primarily
due to March 31, 2000 accruals related to our responsibilities of a public
company. Accrued payroll and related liabilities was approximately $3.4 million
at June 30, 2000 compared to $1.9 million at March 31, 2000. The $1.5 million
increase primarily relates to employee contributions withheld related to our
Employee Stock Purchase Plan which began on March 8, 2000 and for which the
first purchase cycle ends on October 31, 2000. Other accrued liabilities were
approximately $1.3 million at June 30, 2000 compared to $3.8 million at March
31, 2000. The $2.5 million decrease primarily relates to accruals at March 31,
2000 associated with our initial public offering. Deferred revenues were $23.3
million at June 30, 2000 compared to $18.5 million at March. The $4.8 million
increase was primarily due to cash advances and amounts billed in advance for
performing services or delivering product.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, cash, cash equivalents and short-term investments
totaled $182.3 million, compared to $215.8 million at March 31, 2000. We
currently have no significant capital commitments other than obligations under
operating leases.
We have funded our operations with proceeds from the private sale of common
and preferred stock, and public offering. Cash used by operating activities for
the three months ended June 30, 2000 was $9.6 million and was primarily a result
of our net loss adjusted for noncash items, increase in accounts receivable,
partially offset by a $4.3 million increase in deferred revenues.
Cash used for investing activities for the three months ended June 30, 2000
was $81.0 million and consisted primarily of long-term and short-term
investments as well as capital expenditures.
Cash provided by financing activities was not significant for the three
months ended June 30, 2000.
We expect to experience growth in our operating expenses in absolute
dollars for the foreseeable future in order to execute our business plan. As a
result, we anticipate that operating expenses and planned capital expenditures
will constitute a material use of our cash resources. Our capital requirements
depend on numerous factors, including developing, marketing, selling and
supporting our products, the timing and extent of establishing international
operations, and other factors. We expect to devote substantial resources to hire
additional research and development personnel to support the development of new
products and new versions of existing products. Sales and marketing expenses are
expected to increase in absolute dollars as we hire additional sales and
marketing personnel, increase spending on advertising and marketing programs,
and establish sales offices in additional domestic and international locations.
General and administrative expenses are expected to increase in absolute dollars
to support the expansion of our business as we hire additional general and
administrative personnel.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because we do
not currently hold any derivative instruments and do not engage in hedging
activities, we expect that the adoption of SFAS No. 133 will not have a material
impact on our financial position, results of operations or cash flows. We will
be required to implement SFAS No. 133 for the year ending March 31, 2002.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 is effective for years beginning after
December 15, 1999 and is required to be reported beginning in the quarter ended
March 31, 2001. SAB 101 is not expected to have a significant effect on the
Company's consolidated results of operations, financial position, or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We develop products in the United States and India and sell them worldwide.
As a result, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. Since our sales are currently priced in U.S. dollars and are translated
to local currency amounts, a strengthening of the dollar could make our products
less competitive in foreign markets. Interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since our investments are
in short-term instruments calculated at variable rates.
We established policies and business practices regarding our investment
portfolio to preserve principal while obtaining reasonable rates of return
without significantly increasing risk. This is accomplished by investing in
widely diversified short-term investments, consisting primarily of investment
grade securities, substantially all of which mature within the next twelve
months or have characteristics of short-term investments. A hypothetical 50
basis point increase in interest rates would result in an approximate $299,000
(less than 0.16%) in the fair value of our available-for-sale securities. This
potential change is based upon a sensitivity analysis performed on our financial
positions at June 30, 2000.
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BUSINESS
OVERVIEW
Selectica is a leading provider of Internet selling system software and
services that enable companies to efficiently sell complex products and services
over intranets, extranets and the Internet. Using our Internet selling system
software, businesses can guide their customers, partners and employees through
the selection, configuration, pricing, quotation and fulfillment processes. Our
Internet selling system solution allows companies to use the Internet platform
to deploy a selling application to many points of contact, including personal
computers, in-store kiosks and mobile devices, while offering customers,
partners and employees an interface customized to their specific needs. Our
product architecture has been designed specifically for the Internet, providing
our solution with scalability, reliability and flexibility. Additionally, our
Internet selling system solution has been developed with an open architecture
that leverages data in existing applications, such as enterprise resource
planning, or ERP, systems, providing an easy-to-install application designed to
reduce deployment time. Our current customers include 3Com, Allied Signal,
Aspect Communications, BMW, Centigram, Cisco, Cooper Cameron, Dell, Fireman's
Fund, Fujitsu, Hewlett-Packard, Highmark Blue Cross Blue Shield, Louis Vuitton
Moet & Hennessy, Network Appliance, Redback Networks, RTS Software, Samsung and
Smart Pipes.
INDUSTRY BACKGROUND
Evolution of Electronic Commerce
The Internet is transforming the business environment by increasing
competition and enabling the development of new business models. People,
businesses and other organizations are using the Internet as a platform to
communicate, collaborate, access information and conduct business with greater
speed and efficiency. As a result, business-to-business, business-to-consumer
and business-to-employee interactions are being fundamentally altered. In order
to remain competitive, companies must find innovative ways to sell, increase
efficiencies in the sales cycle and deliver greater customer satisfaction.
Forrester Research estimates that the combined value of business-to-consumer and
business-to-business transactions conducted via the Internet will grow to over
$1.4 trillion by 2003. A growing number of companies are seeking to leverage the
Internet to market and sell their products and services. To date, many
electronic commerce transactions have been simple purchases of products such as
books, compact discs, stocks and toys. We believe, however, that the growth in
electronic commerce will be driven by the ability of companies to complete
complex transactions such as business-to-business electronic commerce and the
sale of consumer products and services involving multiple features, options or
involving custom pricing or service options.
Complexity in Electronic Commerce
Complexity in the selling process manifests itself in many ways. One type
is product complexity, where the product has many possible features, with
factors interacting with one another and with other factors to influence the
performance or manufacturability of that item. Examples of complex products
include networking and telecommunications equipment, automobiles and computers.
A second type of complexity is needs complexity, in which the product or service
itself may be relatively simple, such as an insurance policy or a printer, but
the factors that go into evaluating a specific customer's needs and pairing
those needs with the optimal product or service may be complex. A third type of
complexity comes from flexible or customized pricing and discounting schemes,
including those based on the features of the product.
The completion of a complex sales transaction depends on a seller's ability
to identify and satisfy a buyer's needs. In traditional sales, companies rely on
trained salespeople to interact with customers
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to address customer needs, explain product features and ultimately consummate
the sale. To date, many electronic commerce web sites have been static
collections of non-interactive content, and have limited ability to assist and
guide a customer through a purchase decision. Using the Internet to complete
complex sales transactions, however, requires businesses to implement a
sophisticated system that performs the traditional role of the salesperson
throughout the sales lifecycle of the products and services. We believe that
such a system must also be able to take advantage of the emergence of the
Internet as an application platform.
The Internet as an Emerging Platform for Business Applications
In parallel with the growth of electronic commerce, the Internet is
becoming a technology platform for business application deployment.
Traditionally, companies seeking to improve their operations have implemented
applications such as ERP, customer relationship management, or CRM, or sales
force automation, or SFA, software based on client-server architectures that
require a significant part of the application to be loaded on every user's
computer. With the emergence of the Internet platform, companies are able to
more broadly and cost effectively deploy business applications to customers,
partners and employees and make the most current application and information
immediately available on Internet-enabled devices. We believe that a selling
application based on the Internet platform offers significant advantages over
one based on traditional client-server architectures, such as the ability to be
deployed on a broad range of browser-enabled devices and easy integration with
other Internet-based applications and legacy systems, including those running on
relational database management systems, or RDBMS.
Limitations of Existing Solutions
Until recently, businesses have generally attempted to address the
challenges of complexity in the selling process by building in-house solutions.
These solutions often require significant up-front development costs and lengthy
deployment periods. Furthermore, due to the rapid pace of change in products and
business processes, companies often find it difficult and expensive to maintain
these systems and integrate new functionality and technologies. As a result,
businesses are seeking to implement third-party packaged applications.
Current commercially available software designed to help companies address
the challenges of complexity in the selling process may have one or more of the
following limitations:
- have not been engineered for the Internet platform and as such are not
easily deployed across a broad range of Internet-enabled devices;
- require significant custom programming;
- provide a limited interactive experience; or
- employ application architectures that limit their scalability and
reliability.
We believe that there is a significant opportunity for an Internet selling
system that leverages the Internet platform to enable companies to efficiently
sell complex products and services using a broad range of Internet-enabled
devices.
THE SELECTICA SOLUTION
Our ACE suite of products is a comprehensive Internet selling system
solution that enables businesses to easily develop and rapidly deploy an
Internet sales channel that interactively assists their customers, partners and
employees through the selection, configuration, pricing, quoting and fulfillment
processes. Our Internet selling system solution allows companies to use the
Internet platform to deploy a selling application to many points of contact
including personal computers,
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in-store kiosks and mobile devices while offering customers, partners and
employees an interface customized to meet their specific needs. ACE is built
using Java technology and utilizes a multi-threaded architecture, which is an
application server design that manages a server to reduce the amount of memory
used to support new users as they make connections to the server, to rapidly
deploy, without custom programming, a cost-effective, robust and highly
scalable, Internet-enhanced sales channel.
Some of the major benefits of Selectica's Internet selling system solution
are described below:
Provides Comprehensive Solution. ACE provides all of the functionality for
Internet selling in a single comprehensive solution. Our Internet selling system
solution has been developed with an open architecture that leverages data in
existing enterprise applications, such as ERP systems, providing an
easy-to-install application that is designed to reduce deployment time.
Opportunity for Increased Sales. We enable sellers of complex products and
services to reach and sell to additional customers by enabling them to use the
Internet as an effective sales channel. Our Internet selling system solution is
designed for the Internet platform, providing increased scalability and allowing
companies to sell over a broad range of Internet-enabled devices, including
devices with limited processing power, such as mobile devices.
Shorten Sales Cycle. Generally, in a traditional sales environment for
complex products and services, prospective buyers repeatedly interact with a
seller's sales force to determine an appropriate configuration and pricing.
Selectica's ACE software is designed to enable companies to reduce the time
required to convert interested prospects into customers in several ways,
including:
- providing comprehensive product information to the customer or sales
person at the point of sale without requiring interaction with product
experts; and
- automating the pricing and configuration of complex products and
services, thereby providing customers with accurate real-time
information.
Improves Efficiency of the Indirect Sales Channel. Using our Internet
selling system solution, companies can enable their channel partners, such as
distributors and resellers to access their selling tools and product
information. This allows distributors and resellers to effectively sell complex
products and services with less support from the company. It also improves order
accuracy, which ultimately leads to greater efficiency and increased customer
satisfaction.
Opportunity for Greater Revenue per Customer. Sellers can use our Internet
selling system solution to perform real-time analysis and optimization to
identify cross-selling and up-selling opportunities, thereby increasing average
order size. For example, a prospective buyer of a computer may be prompted by
ACE to consider additional features such as increased memory or complementary
products such as a printer, based on specific selections made. In addition, by
enabling companies to build an easy-to-use selling channel that is always
available to their customers, ACE allows companies to capture a greater
percentage of their customers' business.
Allows Selling Process to Support Key Business Goals. ACE enables companies
to ensure that all orders conform to specific criteria. For example, if a
company had a minimum gross margin requirement for a given product, ACE could
ensure that the features and options chosen will result in a product that meets
the company's margin objectives. ACE also improves inventory management. For
example, ACE can automatically promote the sale of a product for which there is
excess inventory.
Enhances Customer Relations. ACE enables a seller of complex products and
services to present each customer with different options based upon the
customer's specified needs. This customization of the selling process actively
engages the customer in the decision making process. ACE also ensures that
customers arrive at a product configuration that meets the business and
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manufacturing guidelines of the company. We believe that ACE's functionality
enhances customer loyalty and satisfaction, ultimately resulting in increased
sales.
Rapid Deployment and Reduced Costs of Ownership. An effective Internet
selling system requires the user to build a knowledge base that captures its
product configurations and selling rules. ACE allows users to build, tailor and
maintain their knowledge base without custom programming. This enables users to
rapidly deploy our Internet selling system solution. It also reduces the need
for expensive technical specialists and programmers to maintain and enhance
their businesses' Internet selling systems.
STRATEGY
Our objective is to become the leading platform for Internet selling
systems. Key components of our strategy include:
Maintain Technology Leadership. We have developed ACE to be a comprehensive
Internet selling system that meets the needs of companies looking to efficiently
sell complex products and services. Our product architecture has been
specifically designed for the Internet, providing our solution with scalability,
reliability and flexibility. We intend to continue to invest heavily in research
and development to introduce new functionality and develop innovative products
that enable our customers to increase their selling efficiency.
Pursue Vertical Market Strategy. To date, we have targeted the computer,
networking systems, automotive and communication services industries. By
offering a high-performance and feature-rich Internet selling system solution to
meet complex and evolving needs, we have established reference accounts with
high-profile, market leaders including 3Com, BMW AG, BMW of North America,
Fujitsu PC, Fujitsu Networking Communications and Hewlett-Packard. We intend to
expand our position in these markets and leverage this position to target other
markets with complex products and services such as financial services and
manufacturing. In addition, we intend to leverage our experience in specific
industries to develop solutions that incorporate the business processes and
product knowledge used in those industries.
Continue to Build Relationships with Technology Providers. We believe that
establishing relationships with key technology providers is essential in
providing a comprehensive business solution for our customers. We intend to
focus on enhancing our Internet selling system functionality while partnering
with other leading technology providers to offer enhanced infrastructure and
complementary applications such as one-to-one marketing, supply chain
management, SFA or CRM.
Leverage and Expand Strategic Relationships. Our strategy is to complement
our direct sales force and professional service organization with strategic
partnerships with leading systems integrators and application service providers,
or ASPs. We believe that these partnerships will enable us to expand our market
reach, extend into new vertical markets and increase access to senior decision-
makers. These firms influence a customer's technology selection and their
recommendation represents a significant endorsement of our products. In
addition, our relationships with systems integrators and ASPs provide additional
implementation and integration resources.
Expand Internationally. As Internet adoption accelerates overseas, we
believe that international market demand for Internet selling system software
and services will increase. We plan to devote significant resources to grow our
sales and marketing efforts in order to penetrate international markets. We
intend to continue to target businesses characterized by high sales volumes and
countries characterized by high growth in demand for Internet selling system
products and services.
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SELECTICA PRODUCTS
The following table provides a list of our products and a brief description
of the features and benefits to our customers.
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------------
PRODUCT FEATURES BENEFITS
------------------------------------------------------------------------------------------------------
ACE Enterprise Server Electronic commerce configuration Enables customized, one-to-one
engine selling on the Internet
Highly scalable Internet-architecture Can scale to support millions of
simultaneous users by simply
installing more servers
Java-based Platform independence
Supports open standard integration Integrates with other Internet based
interfaces applications and legacy systems
Dynamic information update Can update product information
without stopping selling process
Easy-to-use, dynamically generated, Maximizes sales for productivity by
customized interface reducing sales training time
Supports devices with limited Can be deployed on a broad range of
processing power devices
HTML-based client Designed to run on any device with a
standard Internet browser
------------------------------------------------------------------------------------------------------
ACE Mobile Includes the features of ACE
Enterprise with the following
additional features:
Complete stand-alone selling system Enables mobile users to access our
that runs on laptop computers, point customers' Internet selling systems
of sale kiosks and wireless devices. with the same user interface as a
connected system
Automatically synchronizes knowledge Enables updated product and pricing
bases and quotes information and orders
------------------------------------------------------------------------------------------------------
ACE Enterprise Manager Administers multiple ACE Enterprise Add and remove ACE Enterprise Servers
Servers and ACE Mobile without stopping the selling process
Dynamically scales the load Optimizes available CPU, or central
distribution as more servers are processing unit, resources
added
------------------------------------------------------------------------------------------------------
ACE Quoter Central server and storage facility Enables users to generate, save and
for customer orders, configurations revise quotes online
and pricing information
Provides easy access from remote Enables accurate quotes and orders
devices to quote archives
------------------------------------------------------------------------------------------------------
ACE Studio Model, test and debug using a single Simplifies development process
tool
Graphical knowledge base and user Enables application deployment and
interface development tools maintenance by non-technical
personnel
------------------------------------------------------------------------------------------------------
ACE Repository Database that stores knowledge base Provides an audit trail for the
in readable, queryable format maintenance of large knowledge bases
------------------------------------------------------------------------------------------------------
ACE Connector Provides access to other enterprise Enables easy integration and reduces
applications costs and deployment time
------------------------------------------------------------------------------------------------------
</TABLE>
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LOGO
[Descriptions of Graphics]
Surrounding the entire graphics is a large box. To the left of the box is a
rectangle. Above the rectangle is the text: "Users." The rectangle is divided
into two parts. In the top of the rectangle is a lap-top computer. Below the
lap-top is the text "Remote Sales Force."
In the lower portion of the rectangle are a computer, a kiosk, a mobile phone
and a personal digital assistant. Beneath these items is the text: "Customers,"
"Partners" and "Internal users."
To the right of the rectangle is a cloud. A two-headed arrow runs from the
cloud to the picture of the multiple devices inside the first rectangle. Inside
the cloud is the following text: "Intranet," "Extranet" and "Internet."
To the right of the cloud is a rectangle. A two-headed arrow runs from the
cloud to this rectangle. Inside the rectangle is the following text: "Web
Server."
To the right of the second rectangle is a large box. Inside the box are a set
of rectangles. Inside the first rectangle is the following text: "ACE Enterprise
Manager." A two-headed arrow runs from this rectangle to the prior rectangle.
The next rectangle to the right is divided into two parts. The top portion
contains the following text "ACE Mobile." A two-headed arrow runs from this
portion of the rectangle to the lap-top computer on the first rectangle.
The lower portion of this rectangle contains the following text: "ACE
Enterprise Server."
The next rectangle to the right is divided into two sections. The top section
contains the following text: "ACE Repository." The bottom section contains the
following text: "ACE Quoter."
The final rectangle in the large box is a rectangle that contains the
following text: "ACE Connectors." A two headed arrow runs from this rectangle to
a vertical line. The vertical line connects to four rectangles by four short
lines.
Above the four rectangles is the following text: "Legacy Systems." The first
rectangle contains the following text: "Order Entry." The next rectangle
contains the following text "RDBMS." The next rectangle contains the following
text: "ERP." The bottom rectangle contains the following text: "CRM/SFA."]
SELECTICA SERVICES
Professional Services
We maintain a highly qualified and experienced professional services
organization to deliver quality Internet selling system solutions. Our
professional services organization offers a broad range of services through its
consulting, customer education and technical support groups. These services
include product education, presales prototype development, training seminars,
product installation, application development, customizations, integration and a
full range of education and technical support. This organization is also
responsible for training our partners to provide professional services and
technical support to our customers. The professional services organization
consisted of 209 people as of June 30, 2000, 65 of which are based in the United
States 144 of which are based in Pune, India. Because significant portions of
Internet selling system implementations can be performed away from the
customer's site, we have the flexibility of being able to provide services from
either our U.S. or India-based operations.
Customer Support
In addition to professional services, we offer various levels of product
maintenance to our customers. Maintenance services are typically subject to an
annual, renewable contract and are typically priced as a percentage of product
license fees. Customers under maintenance contracts receive technical product
support and product upgrades as they are released throughout the life of the
maintenance contracts. We also provide Select Onsite, which consists of
specialized services provided at our customers' locations.
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CUSTOMERS
Our customer base consists of a diverse group of companies operating in a
wide range of industries that are adopting electronic business strategies to
sell their complex products and services. Our current customers include:
<TABLE>
<S> <C> <C> <C>
3Com BMW Fireman's Fund RTS Software
Allied Signal Centigram Fujitsu Samsung
Aspect Communications Cisco Hewlett-Packard Watlow
BC Emergis Dell Redback Networks
</TABLE>
TECHNOLOGY
We have developed a unique architecture for developing a personalized,
intuitive, interactive and scalable Internet selling system solution that
includes selection, configuration, pricing, quoting and fulfillment processes.
The four key technological advantages of our Internet selling system solution
include:
- a declarative constraint engine;
- an integrated modeling environment;
- a multi-threaded server; and
- a scalable, thin-client architecture.
Declarative constraint engine
Most existing configurators are custom programs that were written
specifically for the product or family of products being configured. This means
both the configuration logic and the data describing product attributes are
combined in a single computer program that necessitates significant
reprogramming to reflect simple product changes. In contrast, our Internet
selling system solution utilizes a constraint-based engine that is completely
separate from the data describing the product attributes. This means that a
business can easily create and modify the knowledge base to reflect product
changes utilizing our integrated modeling environment thereby eliminating the
need for expensive programming teams.
Our engine, written in Java, is easily deployed on various operating
platforms. The use of Java allows us to support a range of deployment
environments including Java applications in a notebook computer and ACE
Enterprise server generated browser-readable pages, with the same engine and the
same knowledge base.
Integrated modeling environment
We have developed an integrated modeling environment that allows our
customers to easily create a sophisticated Internet selling system solution
without any programming. Our Internet selling system solution utilizes drag and
drop tools that enable sales and marketing personnel, rather than expensive
programmers, to maintain and enhance their businesses' Internet selling systems.
Using these drag and drop tools, businesses can:
- easily create and update knowledge bases containing product attributes;
- create HTML-based graphical user interface, or GUI, applications;
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- test the application interactively as the application is being built and
conduct batch order checks;
- verify the semantics of the knowledge base and identify some semantic
errors; and
- create flex models from individual models.
Multi-threaded server
We have a unique highly scalable server architecture for deploying our
customers' applications. The n-tier architecture, an architecture that enables
multiple servers to run at the same time, allows us to support a range of
configurations from a single ACE Enterprise Server, to several ACE Enterprise
Servers managed via a single ACE Enterprise Manager running on an HTTP server or
another server. An ACE Enterprise Manager can manage a single server running ACE
Enterprise Server or multiple, possibly overlapping servers all running ACE
Enterprise Servers. Our multi-threaded technologies enhance the performance for
each buyer session because each session state is preserved as the buyer makes
subsequent selections. Furthermore, our ACE Enterprise Server supports a large
number of concurrent user sessions because the engine uses a very small amount
of memory for each incremental user session.
Scalable thin-client architecture
Our software, employing a thin-client architecture, supports an Internet
computing model, enabling users to access an ISS with only an industry-standard
browser on a broad range of Internet-enabled devices. Our ACE Enterprise Servers
use our engine to process the user request from an HTML session, using the
knowledge base and legacy data as needed, to enforce rules, eliminate incorrect
choices and make calculations and then suggest choices by generating the next
HTML screen dynamically. Our servers can also be accessed by custom applications
using our thin-client application programming interfaces. Our ACE Enterprise
Server can communicate with our ACE Quoter or one or more database servers from
other vendors, and other enterprise resources, including legacy resources using
ACE Connectors.
SALES AND MARKETING
Our sales and marketing objective is to achieve broad market penetration
through targeted sales and increased brand name recognition. As of June 30,
2000, our sales and marketing team consisted of 153 persons, with offices in
California, Colorado, Delaware, Georgia, Illinois, Maryland, Massachusetts,
Michigan, Minnesota, New Hampshire, New Jersey, Oklahoma, Pennsylvania, Texas,
Virginia, Washington, Wisconsin, Canada, England, Germany, Australia, Mexico,
and Sweden and 33 marketing personnel located in San Jose.
We sell our ACE products primarily through a direct sales force supported
by telesales, system engineering and integration support. We believe that the
integration of these support networks assists in both the establishment and
enhancement of customer relationships. We have developed programs to attract and
retain high quality, motivated sales representatives that have the necessary
technical skills and consultative sales experience.
Our marketing department is engaged in a wide variety of activities, such
as awareness and lead generation programs and product management. These
activities include public relations, speaking programs, seminars, direct mail,
trade shows and advertising.
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STRATEGIC RELATIONSHIPS
Our business development group focuses on developing strategic
relationships with vendors who will help us rapidly penetrate key markets with
our comprehensive Internet selling system solution. We have developed strong
working relationships with system integrators, such as Andersen Consulting,
Arthur Andersen, EDS, KPMG and PricewaterhouseCoopers, with independent software
vendors such as BroadVision, InterWorld, Netscape/AOL and Tibco, and with
application service providers such as Asera and Corio.
STRATEGIC INVESTORS
One of our investors is the Intel 64 Fund. The Intel 64 Fund is a quarter
billion dollar equity fund that invests in emerging technologies for
next-generation servers and workstations utilizing Intel's IA-64 architecture.
The Fund is coordinated by Intel and Compaq, Dell, HP, Intel, NEC, and SGI as
co-investors. The Fund's other investors, managed by Morgan Stanley Dean Witter,
include Bank of America, The Boeing Company, Circuit City, Enron, Ford Motor
Company, General Electric, McKessonHBOC, Morgan Stanley Dean Witter, Reuters,
Sabre, SmithKline Beecham, Sumitomo Corp., SunAmerica and Telmex. In October
1999, the Intel 64 Fund purchased shares of our preferred stock as part of a
private sale of our securities.
In October 1999 we entered into a license and one-year maintenance
agreement with a customer. In connection with this agreement, we issued a
warrant to purchase 800,000 shares of our common stock. The fair value of the
warrant is approximately $16.4 million. The value of the warrant less the
purchase price of $800,000, is greater than the revenues under the related
license and service agreement, and accordingly, we recorded a loss on this
contract of $9.7 million in the fourth quarter of fiscal 2000 and amortization
of $2.7 million in the first quarter of fiscal 2001. We expect to amortize the
remaining $3.2 million through the remainder of fiscal 2001.
In September 1999 we entered into a development agreement with an investor.
At the same time we issued shares of convertible preferred stock to this
investor for less than the deemed fair value. The excess of fair value over
purchase prices of these shares of $3.8 million will be expensed over the life
of the development agreement, approximately 2 years. As well, in connection with
this agreement we issued warrants to purchase 57,000 shares of our common stock.
The fair value of these warrants of $381,000 will also be expensed over the life
of the agreement.
RESEARCH AND DEVELOPMENT
To date we have invested substantial resources in research and development.
At June 30, 2000, we had approximately 123 full-time engineers and technical
writing specialists that primarily work on product development, documentation,
quality assurance and testing.
We expect that most of our new products and enhancements to existing
products will be developed internally. However, we will evaluate on an ongoing
basis externally developed technologies for integration into our suite of
products. Enhancements to our existing products are released periodically to add
new features, improve functionality and incorporate feedback and suggestions
from our current customer base. These updates are usually provided as part of
separate maintenance agreement sold with the product license.
COMPETITION
Although we are a leading provider of Internet selling system software and
services, the market for software products that enable electronic commerce is
intensely competitive, and we expect
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competition in the Internet selling system software and services market to
increase substantially. We encounter competition from a number of different
sources, including in-house and customized Internet-development companies,
companies focused on Internet selling systems and other enterprise software
companies. We expect competition to persist and intensify, which could result in
price reductions, reduced gross margins and loss of market share. Our principal
competitors include Calico Commerce, FirePond and Trilogy Software. BAAN, Oracle
Corporation, SAP and Siebel Systems offer integrated solutions for electronic
commerce incorporating some of the functionality of an Internet selling system
and may intensify their efforts in our market. In addition, other enterprise
software companies may offer competitive products in the future.
Competitors vary in size and in the scope and breadth of the products and
services offered. Although we believe we have advantages over our competitors
including the comprehensiveness of our solution, our use of Java technology and
our multi-threaded architecture, many of our competitors and potential
competitors have a number of advantages over us, including:
- a longer operating history;
- a preferred vendor status with our customers;
- more extensive name recognition and marketing power; and
- significantly greater financial, technical, marketing and other
resources, giving them the ability to respond more quickly to new or
changing opportunities, technologies and customer requirements.
Our competitors may also bundle their products in a manner that may
discourage users from purchasing our products. Current and potential competitors
may establish cooperative relationships with each other or with third parties,
or adopt aggressive pricing policies to gain market share. Competitive pressures
may require us to reduce the prices of our products and services. We may not be
able to maintain or expand our sales if competition increases and we are unable
to respond effectively.
PROPRIETARY RIGHTS
We rely on a combination of trademark, trade secret and copyright law and
contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
currently hold one patent. We also currently have two pending U.S. patent
applications. In addition, we have three trademarks and have applied to register
two of them in the United States. Our trademark and patent applications might
not result in the issuance of any trademarks or patents. If any patent or
trademark is issued, it might be invalidated or circumvented or otherwise fail
to provide us any meaningful protection. We seek to protect the source code for
our software, documentation and other written materials under trade secret and
copyright laws. We license our software pursuant to signed license agreements,
which impose certain restrictions on the licensee's ability to utilize the
software. We also seek to avoid disclosure of our intellectual property by
requiring employees and consultants with access to our proprietary information
to execute confidentiality agreements. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of many countries do not protect our proprietary rights to as
great an extent 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 and to determine the validity and scope of the proprietary rights of
others. Our failure to adequately protect our intellectual property could have a
material adverse effect on our business and operating results.
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Our success and ability to compete are dependent on our ability to operate
without infringing upon the proprietary rights of others. Any intellectual
property litigation could result in substantial costs and diversion of resources
and could significantly harm our business and operating results. In the past, we
received correspondence from two patent holders recommending that we license
their respective patents. After review of these patents, we informed these
patent holders that in our opinion, it would not be necessary to license these
patents. However, we may be required to license either or both patents or incur
legal fees to defend our position that such licenses are not necessary. We may
not be able to obtain a license to use either patent on commercially reasonable
terms, or at all.
Any threat of intellectual property litigation could force us to do one or
more of the following:
- cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
- obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant intellectual property, which license
may not be available on reasonable terms;
- redesign those products or services that incorporate such intellectual
property; or
- pay money damages to the holder of the infringed intellectual property
right.
In the event of a successful claim of infringement against us and our
failure or inability to license the infringed intellectual property on
reasonable terms or license a substitute intellectual property or redesign our
product to avoid infringement, our business and operating results would be
significantly harmed. If we are forced to abandon use of our trademark, we may
be forced to change our name and incur substantial expenses to build a new
brand, which would significantly harm our business and operating results.
EMPLOYEES
At June 30, 2000, we had a total of 549 employees, 184 of whom were based
in India. Of the total, 332 were in engineering, consulting and research and
development, 153 were engaged in sales, marketing and business development and
64 were in administration and finance. None of our employees is represented by a
labor union and we consider our relations with our employees to be good.
FACILITIES
Our principal administrative, sales, marketing and research and development
facility occupies approximately 80,000 square feet of office space at 3 West
Plumeria Drive, San Jose, California 95134. The lease extends through November
2009. We believe the office space in the new facility will be adequate to meet
our needs for the next 12 months. We also have regional offices in California,
Colorado, Delaware, Georgia, Illinois, Maryland, Massachusetts, Michigan,
Minnesota, New Hampshire, New Jersey, Oklahoma, Pennsylvania, Texas, Virginia,
Washington, Wisconsin, Canada, England, Germany, Australia, Mexico, and Sweden.
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MANAGEMENT
Our executive officers and directors and their ages and positions as of
June 30, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rajen Jaswa............................. 47 Chairman of the Board, Chief Executive Officer
and President
Dr. Sanjay Mittal....................... 47 Vice Chairman of the Board, Chief Technical
Officer and Vice President of Engineering
Dr. S.S. Sundarajan..................... 51 Vice President of Indian Operations
Daniel A. Carmel........................ 39 Vice President of Marketing
Stephen Bennion......................... 53 Chief Financial Officer, Vice President of
Finance and Secretary
Ashish Mathur........................... 43 Vice President of Worldwide Professional
Services
Charles Pendell......................... 45 Vice President of Worldwide Sales
Alfredo Perez, Jr. ..................... 42 Vice President of Business Development and
Strategic Initiatives
Betsy Atkins(1)......................... 47 Director
John Fisher(1)(2)....................... 41 Director
Michael Lyons(2)........................ 58 Director
Robin Richards Donohoe.................. 34 Director
Thomas Neustaetter(2)................... 48 Director
</TABLE>
-------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Rajen Jaswa, a co-founder of Selectica, has served as our Chairman,
President and Chief Executive Officer since our inception. Prior to Selectica,
Mr. Jaswa co-founded and served as President of OPTi, a supplier of PC
compatible chipsets from January 1995 to January 1996 and as Vice President of
Sales and Marketing from August 1989 to December 1994. Mr. Jaswa received his
B.Tech in Electrical Engineering from the Indian Institute of Technology, his
M.S.E.E. in Electrical Engineering from the University of Toronto and his M.B.A.
from Stetson University.
Dr. Sanjay Mittal, a co-founder of Selectica, has served as our Chief
Technical Officer, Vice President of Engineering and a Director since our
inception. In January 2000 Dr. Mittal was elected Vice Chairman of the Board of
Directors. Prior to co-founding Selectica, from April 1992 to July 1996, Dr.
Mittal was the founder and President of Catalogics Software, a configuration
software company acquired by Selectica in July 1996. From 1990 to April 1992,
Dr. Mittal managed a development team at Metaphor, a business software company.
Prior to that, Dr. Mittal was a senior research scientist at Xerox's Palo Alto
Research Center (PARC) from 1982 to 1990. Dr. Mittal received his B.Tech in
Electrical Engineering from the Indian Institute of Technology and his M.S. and
Ph.D. in Computer Science from Ohio State University.
Dr. S.S. Sundarajan has served as our Vice President of Indian Operations
since June 1998. Prior to joining Selectica, Dr. Sundarajan served as Chief
Executive of Datapro Electronics, a software company focusing on real time
systems, in Pune, India, from April 1986 to June 1998. Dr. Sundarajan received
his B.S. in Engineering from Pune University and his M.S. in Electrical
Engineering and Ph.D. from Ohio State University.
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<PAGE> 53
Daniel A. Carmel has served as our Vice President of Marketing and Business
Development since July 1999. Prior to joining Selectica, Mr. Carmel served as
Executive Vice President for Sonnet Financial, an Internet financial services
company, from August 1994 to July 1999. Mr. Carmel received his B.S. and M.S. in
Engineering at the University of Pennsylvania and his M.B.A. from Stanford
University.
Stephen Bennion has served as our Chief Financial Officer and Vice
President of Finance since September 1999. In January 2000 Mr. Bennion was
elected our Secretary. From April 1998 to September 1999, Mr. Bennion served in
various capacities for Cohesive Technology Solutions, a technology consulting
company, including Vice President and Chief Financial Officer and Western Region
Managing Partner. From April 1995 to April 1998, Mr. Bennion served as Executive
Vice President and Chief Financial Officer for Worldtalk Communications, an
Internet e-mail software company. Mr. Bennion received his B.S. in accounting
from Weber State University and is a Certified Public Accountant.
Ashish Mathur has served as our Vice President of Worldwide Professional
Services since April 1997. Prior to joining Selectica, Mr. Mathur served as Vice
President of Worldwide Professional Services for Pure Atria from June 1992 to
April 1997. Mr. Mathur received his B.Tech in Electrical Engineering from the
Indian Institute of Technology and his M.S. in Computer Science from the
University of Southern California.
Charles Pendell joined as our Vice President of Sales, Americas in October
1998. Prior to joining Selectica, Mr. Pendell served as Vice President of
Worldwide Sales and Field Operations for Action Technologies, an Internet-based
workflow software company, from December 1994 to September 1998. Mr. Pendell
received his B.S. in Business Administration from Washington State University.
Alfredo Perez, Jr. has served as our Vice President of Business Development
and Strategic Initiatives since June 2000. Prior to joining Selectica as Vice
President of Strategic Sales in March, 2000, Mr. Perez served as Vice President
of Sales for the Network Management Division of Sterling Software from 1995 to
March 2000. Mr. Perez received his B.A. in Political Science from Catholic
University.
Betsy Atkins has served as a director since February 1997. Since 1995, Ms.
Atkins has served as Chief Executive Officer of Baja Corporation, a consulting
firm. Prior to joining Baja, Ms. Atkins was the Chief Executive Officer of NCI,
a manufacturing company. Ms. Atkins is both a founder and serves on the board of
directors of Ascend, a Lucent Network Solutions company. She also serves on the
board of directors of Paradyne, a digital subscriber line networking company,
and Polycom, a video-teleconferencing company. Ms. Atkins received her B.A. in
History from the University of Massachusetts and her B.A. from Trinity College
at Oxford.
John Fisher has served as a director since July 1997. Since 1991, Mr.
Fisher has served as a Managing Director of Draper Fisher Jurvetson, a venture
capital firm. Mr. Fisher serves on the boards of directors of Brodia Group,
Entegrity Solutions, Praxon, RealNames, New Markets International and WIT
Capital Group. Mr. Fisher received his B.A., Magna Cum Laude, in History of
Science and his M.B.A. from Harvard University.
Michael Lyons has served as a director since July 1998. Since 1997, Mr.
Lyons has served as the General Partner of Zilkha Venture Partners, a venture
capital firm. Since June 1992, Mr. Lyons has served as the General Partner of
Potrero Management, a venture capital firm. Since 1989, Mr. Lyons has been a
Consulting Associate Professor at the Stanford University Department of
Management Science and Engineering. Mr. Lyons is a member of the board of
directors of Informed Diagnostics, a sensor technology company and Advanced
Interactive Systems, a firearms training simulation company. Mr. Lyons received
his B.S.E.P. in Engineering Physics from Cornell University, M.S. in
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<PAGE> 54
Electrical Engineering from Stanford and M.B.A. with distinction from the
Pepperdine Presidential/ Key Executive Program.
Robin Richards Donohoe has served as a director since January 1997. Since
1995, Ms. Donohoe has served as General Partner of Draper International India,
L.P., a venture capital firm. Ms. Donohoe is also a General Partner of Draper
Richards L.P., a venture capital firm. Ms. Donohoe received her B.A. Phi Beta
Kappa in International Studies from the University of North Carolina and her
M.B.A. from Stanford University.
Thomas Neustaetter has served as a director since July 1999. Since March
1999, Mr. Neustaetter has been an Executive Member of JK&B Capital, a venture
capital firm. Prior to joining JK&B Capital, Mr. Neustaetter was a Partner of
the Chatterjee Group, an affiliate of Soros Fund Management, from January 1996
to February 1999. Prior to working at the Chatterjee Group, Mr. Neustaetter was
the President and founder of Bancroft Capital, a general consulting firm, from
December 1994 to December 1995. Mr. Neustaetter serves on the boards of
directors of MPower Communications, Paragon Networks International, emWare, Inc.
and Vertex Holdings. Mr. Neustaetter earned his B.A. Phi Beta Kappa in
Philosophy from the University of California, Berkeley, and his M.B.A. and M.S.
in Information Science from University of California, Los Angeles.
BOARD OF DIRECTORS
We currently have authorized seven directors. The terms of the office of
the board of directors are divided into three classes: Class A, whose term will
expire at the annual meeting of the stockholders to be held in 2000; Class B,
whose term will expire at the annual meeting of stockholders to be held in 2001;
and Class C, whose term will expire at the annual meeting of stockholders to be
held in 2002. The Class A directors are Robin Richards Donohoe and Betsy Atkins;
the Class B directors are John Fisher, Michael Lyons and Rajen Jaswa; and the
Class C directors are Thomas Neustaetter and Sanjay Mittal. At each annual
meeting of stockholders after the initial classification, each elected director
will serve from the time of his election and qualification until the third
annual meeting following his or her election. This classification of the board
of directors may have the effect of delaying or preventing changes in control or
management. All of our officers serve at the discretion of the board of
directors. There are no family relationships among our directors and officers.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors and our subsidiary
including stock compensation and loans. In addition, the compensation committee
reviews and makes recommendations on bonus and stock compensation arrangements
for all of our employees. As part of these responsibilities, the compensation
committee also administers our 1999 Equity Incentive Plan and 1999 Employee
Stock Purchase Plan. The current members of the compensation committee are Ms.
Atkins and Mr. Fisher.
Audit Committee. The audit committee of the board of directors reviews and
monitors our corporate financial reporting and our internal and external audits,
including our internal audit and control functions, the results and scope of the
annual audit and other services provided by our independent auditors and our
compliance with legal matters that have a significant impact on our financial
reports. The audit committee also consults with management and our independent
auditors
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<PAGE> 55
before the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee is responsible for considering and recommending
the appointment of, and reviewing fee arrangements with, our independent
auditors. The current members of the audit committee are Messrs. Neustaetter,
Lyons and Fisher.
Director Compensation
Ms. Atkins received an option for 30,000 shares of common stock on February
4, 1997 at an exercise price of $0.025 per share and an option for 20,000 shares
of our common stock on November 18, 1999 at an exercise price of $4.38 per
share. Under our 1999 Equity Incentive Plan, each non-employee director who
first becomes a board member following this offering will receive an automatic
option grant of 30,000 shares of our common stock on the date when he or she
initially becomes a board member. Each non-employee director who will continue
to be a board member following an annual meeting of stockholders will receive an
annual automatic option grant of 7,500 shares at each annual meeting under our
1999 Equity Incentive Plan, beginning at the 2001 annual meeting. Please see
"Employee Benefit Plans -- 1999 Equity Incentive Plan" for more details.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors currently consists of
Ms. Atkins and Mr. Fisher. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member of
the board of directors or compensation committee of any other company, and no
interlocking relationship has existed in the past. For disclosure of any related
party transactions between the members of the compensation committee and
Selectica, please see the section below entitled "Related Party Transactions."
INDEMNIFICATION
Our Second Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of our directors and officers
for monetary damages for breach of fiduciary duty as a director or officer,
except for liability:
- for any breach of the director's or officer's duty of loyalty to us or
our stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director or officer derived an
improper personal benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
- we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
- we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors; and
- we must advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by
Delaware law, subject to very limited exceptions.
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We have also entered into indemnification agreements with our officers and
directors containing provisions that may require us to indemnify our officers
and directors against liabilities that may arise by reason of their status or
service as directors or officers, other than liabilities arising from willful
misconduct of a culpable nature, to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance if available on reasonable terms.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents compensation information for fiscal year 2000
paid by us for services by our chief executive officer and our four other
highest-paid executive officers whose total salary and bonus for the fiscal year
exceeded $100,000:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
--------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Rajen Jaswa................................... $168,750 $75,000 $ -- 250,000
Chief Executive Officer and President
Dr. Sanjay Mittal............................. 168,750 618,600 -- 250,000
Chief Technical Officer and Vice President
of Engineering
Ashish Mathur................................. 168,750 75,000 -- 150,000
Vice President of Worldwide Professional
Services
Charles Pendell............................... 187,500 220,500 71,250(1) 125,000
Vice President of Sales, Americas
Daniel A. Carmel.............................. 120,032 60,000 -- 400,000
Vice President of Marketing
</TABLE>
-------------------------
(1) Represents sales commissions.
Option Grants in Last Fiscal Year
The following table designates each grant of stock options during fiscal
year 2000 to our chief executive officer and our four other highest-paid
executive officers.
The figures representing percentages of total options granted to employees
in the last fiscal year are based on a total of 5,305,200 option shares granted
to our employees under our 1996 Stock Plan during fiscal year 2000.
The exercise price of each option granted is equal to the fair value of our
common stock as valued by our board of directors on the date of grant. The
exercise price may be paid in cash, in shares of our common stock valued at fair
value on the exercise date or through a cashless exercise procedure involving a
same-day sale of the purchased shares. We may also finance the option exercise
by lending the optionee sufficient funds to pay the exercise price for the
purchased shares. See "Related Party Transactions -- Loans."
The calculation of the potential realizable value is based on the ten-year
term of the option at the time of grant. We assumed stock price appreciation of
5% and 10% over the assumed offering price of $56.50 per share; this does not
represent our prediction of our stock price performance. The
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<PAGE> 57
potential realizable value is calculated based on the ten-year term of the
option at the time of grant. Stock price appreciation of 5% and 10% is assumed
according to rules promulgated by the Securities and Exchange Commission and
does not represent our prediction of our stock price performance. The potential
realizable value at 5% and 10% appreciation is calculated by assuming that the
exercise price on the date of grant appreciates at the indicated rate for the
entire term of the option and that the option is exercised at the exercise price
and sold on the last day of its term at the appreciated price.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES PRICE EXPIRATION --------------------------
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ---------------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rajen Jaswa................. 250,000 4.7% $10.00 12/14/09 $ 8,883,137 $22,511,612
Dr. Sanjay Mittal........... 250,000 4.7 10.00 12/14/09 8,883,137 22,511,612
Ashish Mathur............... 50,000 0.9 30.00 03/08/10 1,776,627 4,502,322
100,000 1.9 1.50 04/19/09 3,553,255 9,004,645
Charles Pendell............. 50,000 0.9 30.00 03/08/10 1,776,627 4,502,322
75,000 1.4 2.50 09/29/09 2,664,941 6,753,484
Daniel A. Carmel............ 400,000 7.5 2.50 09/21/09 14,213,019 36,018,580
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table presents all options exercised by our chief executive
officer and our four highest-paid executive officers during fiscal 2000. Our
chief executive officer and our four highest-paid executive officers did not
hold any unexercised options as of June 30, 2000.
The options listed in the table become vested as follows: upon the
completion of 12 months of service, 25% of the option shares vest and upon the
completion of each of the next 36 months of service, 1/48 of the option shares
vest.
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED($)
---- --------------- -----------
<S> <C> <C>
Rajen Jaswa................................................. 250,000 $ 0
Dr. Sanjay Mittal........................................... 250,000 0
Ashish Mathur............................................... 150,000 950,000
Charles Pendell............................................. 425,000 675,000
Daniel A. Carmel............................................ 400,000 0
</TABLE>
EMPLOYEE BENEFIT PLANS
1999 Equity Incentive Plan.
Our board of directors adopted our 1999 Equity Incentive Plan on November
18, 1999. Our stockholders have also approved this plan. We have reserved
2,200,000 shares of our common stock for issuance under the 1999 Equity
Incentive Plan. As of January 1 of each year, starting in 2001, the number of
shares reserved for issuance under our 1999 Equity Incentive Plan will be
increased automatically by 5% of the total number of shares of common stock then
outstanding or, if less, 1,800,000 shares. As of June 30, 2000 options to
purchase 311,065 shares had been granted under the 1999 Equity Incentive Plan.
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<PAGE> 58
Under the 1999 Equity Incentive Plan, the persons eligible to receive
awards are:
- employees;
- non-employee members of the board of directors; and
- consultants.
The types of awards that may be made under the 1999 Equity Incentive Plan
are:
- options to purchase shares of common stock;
- stock appreciation rights;
- restricted shares; and
- stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for favorable tax
treatment. With limited restrictions, if shares awarded under the 1999 Equity
Incentive Plan are forfeited, those shares will again become available for new
awards under the 1999 Equity Incentive Plan.
The compensation committee of our board of directors administers the 1999
Equity Incentive Plan. The committee has complete discretion to make all
decisions relating to the interpretation and operation of our 1999 Equity
Incentive Plan. The committee has the discretion to determine which eligible
individuals are to receive an award, and to determine the type, number, vesting
requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the 1999
Equity Incentive Plan may not be less than 100% of the fair market value of our
common stock on the option grant date. The exercise price for non-statutory
options granted under the 1999 Equity Incentive Plan may not be less than 85% of
the fair market value of our common stock on the option grant date.
Our 1999 Equity Incentive Plan provides that no participant may receive
options or stock appreciation rights covering more than 330,000 shares in the
same year, except that a newly hired employee may receive options or stock
appreciation rights covering up to 660,000 shares in the first year of
employment.
The exercise price may be paid with:
- cash;
- outstanding shares of common stock;
- the cashless exercise method through a designated broker;
- a pledge of shares to a broker; or
- a promissory note.
The purchase price for newly issued restricted shares awarded under the
1999 Equity Incentive Plan may be paid with:
- cash;
- a promissory note; or
- the rendering of past services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept the
cancellation of outstanding options or stock
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appreciation rights in return for the grant of new options or stock appreciation
rights. The new option or right may have the same or a different number of
shares and the same or a different exercise price.
Each individual who first joins our board of directors as a non-employee
director after the effective date of this offering will receive at that time an
option for 30,000 shares of our common stock. This option becomes vested as to
25% of the option shares upon the completion of 12 months of service and as to
1/48 of the option shares upon the completion of each month of service
thereafter. In addition, at each of our annual stockholders' meetings, beginning
in 2001, each non-employee director who will continue to be a director after
that meeting will automatically be granted at that meeting an option for 7,500
shares of our common stock. However, any non-employee director who receives an
option for 30,000 shares under this plan will first become eligible to receive
the annual option for 7,500 shares at the annual meeting that occurs during the
calendar year following the year in which he or she received the option for
30,000 shares. The option for 7,500 shares becomes vested upon the completion of
12 months of service from the grant date. If there is a change in control, or a
termination as a result of death, disability or retirement after reaching age
65, the options granted to non-employee directors will become fully vested.
If a change in control occurs, an option or other award under the 1999
Equity Incentive Plan will become fully exercisable and fully vested if the
option or award is not assumed by the surviving corporation or its parent or
subsidiary or if the surviving corporation or its parent or subsidiary does not
substitute comparable awards for the awards granted under the 1999 Equity
Incentive Plan. If a change in control occurs and an optionee is involuntarily
terminated within 12 months following this change in control, then the vesting
of options held by the optionee will accelerate, as if the optionee provided
another 12 months of service. This vesting acceleration will not occur if it
prevents us from completing a transaction that is a "pooling of interest"
transaction.
A change in control includes:
- a merger or consolidation after which our then-current stockholders own
less than 50% of the surviving corporation;
- a sale of all or substantially all of our assets;
- a proxy contest that results in replacement of more than one-half of our
directors over a 24-month period; or
- an acquisition of 50% or more of our outstanding stock by a person other
than a person related to us, including a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
1999 Equity Incentive Plan shall be assumed by the surviving corporation or its
parent, shall be continued by us if we are the surviving corporation, shall have
accelerated vesting and then expire early or shall be cancelled for a cash
payment.
Our board of directors may amend or terminate the 1999 Equity Incentive
Plan at any time. If our board amends the plan, stockholder approval of the
amendment will be sought only if required by applicable law. The 1999 Equity
Incentive Plan will continue in effect indefinitely unless the board decides to
terminate the plan earlier.
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1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
on November 18, 1999. Our stockholders have also approved this plan. We have
reserved 1,000,000 shares of our common stock for issuance under our 1999
Employee Stock Purchase Plan. As of May 1 each year, starting in 2001, the
number of shares reserved for issuance under our 1999 Employee Stock Purchase
Plan will be increased automatically by 2% of the total number of shares of
common stock then outstanding or, if less, 1,000,000 shares. Our 1999 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code.
Eligible employees may begin participating in the 1999 Employee Stock
Purchase Plan at the start of an offering period. Each offering period lasts 24
months. Two overlapping offering periods will start on May 1 and November 1 of
each calendar year. The first offering period started on March 9, 2000 and will
end on April 30, 2002. Purchases of our common stock will occur on approximately
April 30 and October 31 of each calendar year during an offering period.
The compensation committee of our board of directors administers this plan.
Each of our employees is eligible to participate if he or she is employed by us
for more than 20 hours per week and for more than five months per year.
Our 1999 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 15% of the employee's cash compensation. The initial
purchase period during which payroll deductions may be contributed began on
March 9, 2000 and will end on October 31, 2000. Each participant may purchase up
to 750 shares on any purchase date.
The price of each share of common stock purchased under our 1999 Employee
Stock Purchase Plan will be 85% of the lower of:
- the fair market value per share of common stock on the date immediately
before the first date of the applicable offering period; or
- the fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
- $30.00; or
- the fair market value per share of common stock on the purchase date.
Employees may end their participation in the 1999 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us.
If a change in control occurs, our 1999 Employee Stock Purchase Plan will
end and shares will be purchased with the payroll deductions accumulated to date
by participating employees, unless this plan is assumed by the surviving
corporation or its parent. Our board of directors may amend or terminate the
1999 Employee Stock Purchase Plan at any time. If our board increases the number
of shares of common stock reserved for issuance under the 1999 Employee Stock
Purchase Plan, it must seek the approval of our stockholders.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
Under their respective employment agreements, our Chief Executive Officer,
Rajen Jaswa, and our Chief Technical Officer and Vice President of Engineering,
Dr. Sanjay Mittal, will receive
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their most recent base salary for 12 months after their date of termination if
they are terminated without cause. In addition, our repurchase right with
respect to the shares of our common stock that they currently hold will lapse
entirely and all of such shares will become fully vested upon a termination
without cause.
If a change in control occurs, an option or other award under the 1999
Equity Incentive Plan will become fully exercisable and fully vested if the
option or award is not assumed by the surviving corporation or its parent or
subsidiary or if the surviving corporation or its parent or subsidiary does not
substitute comparable awards for the awards granted under the 1999 Equity
Incentive Plan. In addition, if an optionee is involuntarily terminated within
12 months following a change in control, he or she will become vested in an
additional number of option shares as if he or she completed another 12 months
of service. This vesting acceleration will not occur if it prevents us from
completing a transaction that is a pooling of interest transaction.
Under our 1996 Stock Plan, upon a merger or asset sale, if the options or
stock purchase rights are not assumed by the surviving corporation or its parent
or subsidiary or if the surviving corporation or its parent or subsidiary does
not substitute comparable awards for the options or stock purchase rights, then
the options and stock purchase rights will become fully vested.
If a change in control occurs and an executive officer or certain of our
key employees are involuntarily terminated within 12 months following this
change in control, then he or she will become vested in an additional number of
option shares equal to the greater of 50% of the then unvested option shares or
the number of option shares the executive officer would become vested in if he
or she completed another 12 months of service.
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RELATED PARTY TRANSACTIONS
Equity Financings. Since our inception we have financed our growth
primarily through the sale of Preferred Stock, resulting in the issuance of an
aggregate of 1,700,000 shares of Series A Preferred Stock at an effective
purchase price of $.091667 per share, 3,750,000 shares of Series B Preferred
Stock at a purchase price of $0.2667 per share, 3,253,126 shares of Series C
Preferred Stock at a purchase price of $0.922 per share, 4,863,935 shares of
Series D Preferred Stock at a purchase price of $1.47 per share and 6,143,896
shares of Series E Preferred Stock at a purchase price of $4.382 per share. The
buyers of our Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock included
the following directors, executive officers and 5% stockholders.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Betsy Atkins........................................ -- 93,750 81,328 -- 40,165
Stephen Bennion..................................... -- -- -- -- 22,820
Daniel A. Carmel.................................... -- -- -- -- 57,051
John Fisher......................................... -- -- -- -- 114,103
Rajen Jaswa......................................... 740,000.. 281,250 -- -- --
Thomas Neustaetter.................................. -- -- -- -- 22,820
ENTITIES ASSOCIATED WITH DIRECTORS AND 5%
STOCKHOLDERS
Entities associated with Draper Fisher
Jurvetson(1)...................................... -- -- 2,439,844 714,285 342,308
Draper International India, L.P.(2)................. -- 2,812,500 542,188 510,204 117,103
Entities associated with Zilkha Venture
Partners(3)....................................... -- -- -- 2,448,979 228,206
JK&B Capital III, L.P.(4)........................... -- -- -- -- 1,141,030
</TABLE>
-------------------------
(1) John Fisher, one of our directors, is a general partner of venture funds
associated with Draper Fisher Jurvetson.
(2) Robin Richards Donohoe, one of our directors, is a general partner of Draper
International India, L.P.
(3) Michael Lyons, one of our directors, is a general partner of venture funds
associated with Zilkha Venture Partners.
(4) Thomas Neustaetter, one of our directors, is a member of JK&B Management
LLC, the general partner of JK&B Capital III, L.P.
Bridge Financing. On May 14, 1999 we entered into a Note and Warrant
Purchase Agreement with Draper International, L.P., Draper Fisher Associates
Fund IV, Draper Fisher Partners IV and Betsy Atkins, collectively, the Bridge
Investors. Pursuant to that Note and Warrant Purchase Agreement, the Bridge
Investors agreed to loan us an aggregate of $1,000,000 accruing interest at a
rate of 1% plus the prime rate, in exchange for a promissory note, which would
either convert into our securities upon our next round of equity financing or be
repaid by June 30, 1999 and warrants to purchase an aggregate of 15,000 shares
of Series E Preferred Stock.
Selectica Configurators India Pvt. Ltd. Beginning in June 1997, Selectica
Configurators India Pvt. Ltd., Selectica India, an Indian corporation, has
conducted research and development and quality assurance operations in India for
us. This company was owned by the parents of Rajen Jaswa, our President and
Chief Executive Officer. We paid $51,000 and $303,000 in fiscal years 1998 and
1999, respectively for consulting services. On July 1, 1999, we purchased
637,500 previously unissued shares of Selectica India. Following this purchase,
we owned 99.997% of the outstanding shares of SCIPL and Mr. Jaswa's parents own
the remaining .003%.
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Employment Agreements and Bonuses. In August 1996, we entered into
employment agreements with Mr. Jaswa and Dr. Mittal. These agreements are
substantially similar in form and provide for employment on an "at will" basis
and severance payments in an amount equal to 12 months salary in the event that
these employees are terminated without cause. In June 1999, we paid Dr. Mittal a
bonus of $544,000 in exchange for services rendered to us since our inception.
Catalogics. In July 1996, we purchased all of the outstanding shares of
Catalogics. Catalogics was founded and was majority owned by Dr. Mittal, our
Chief Technology Officer. We exchanged 2,750,000 shares of our common stock for
3,250,000 shares of Catalogics common stock that was owned by Dr. Mittal. Of the
2,750,000 shares of our common stock issued to Dr. Mittal, 1,250,000 shares were
subject to a repurchase right by us. The repurchase right lapses over 48 months
beginning July 1, 1996. The fair value of the 1,250,000 shares of common stock
subject to repurchase was $12,500. After our purchase of all of the capital
stock of Catalogics from Dr. Mittal and the other Catalogics shareholder, we
owned all the stock of Catalogics, and Catalogics became a wholly owned
subsidiary.
Loans. In connection with our start-up phase, on July 25, 1996, Mr. Jaswa
loaned to us the principal sum of $50,000 which accrued interest at a rate of 2%
plus the prime rate compounded annually. Such loan was repaid in January 1997 in
connection with the issuance of our Series B Preferred Stock. On November 4,
1999, Mr. Carmel exercised his option to purchase 400,000 shares of common
stock. He paid for those shares with full recourse promissory notes for
$1,000,000 bearing 6.02% annual interest, secured by the purchased shares. On
October 15, 1999, Mr. Bennion exercised his option to purchase 300,000 shares of
common stock. He paid for those shares with a full recourse promissory note for
$750,000 bearing 6.02% annual interest, secured by the purchased shares. On
October 25, 1999, Mr. Pendell exercised his option to purchase 375,000 shares of
common stock. He paid for these shares with full recourse promissory notes for
$262,500 bearing 6.02% annual interest, secured by the purchased shares. On
December 15, 1999, Dr. Mittal exercised his options to purchase 240,000 shares
of common stock. He paid for those shares with two full recourse promissory
notes for $2,300,000 and $100,000 respectively each bearing 6.20% annual
interest, secured by the purchased shares. On December 15, 1999 Mr. Jaswa
exercised his options to purchase 240,000 shares of common stock. He paid for
those shares with two full recourse promissory notes for $2,300,000 and $100,000
respectively each bearing 6.20% annual interest, secured by the purchased
shares. On March 10, 2000, Mr. Bennion exercised his options to purchase 50,000
shares of common stock. He paid for those shares with a full recourse note for
$1,499,995 bearing 6.80% annual interest, secured by the purchased shares. On
March 10, 2000, Mr. Mathur exercised his options to purchase 50,000 shares of
common stock. He paid for those shares with a full recourse note for $1,499,995
bearing 6.80% annual interest, secured by the purchased shares. On March 10,
2000, Mr. Pendell exercised his options to purchase 50,000 shares of common
stock. He paid for those shares with a full recourse note for $1,499,995 bearing
6.80% annual interest, secured by the purchased shares.
Repurchase of Common Stock. In June 1999, we purchased 228,200 shares of
our common stock from Dr. Mittal at a price of $2.00 per share.
Indemnification. We have entered into an indemnification agreement with
each of our officers and directors. See "Management -- Indemnification" for a
description of the indemnification available to our officers and directors under
our Second Amended and Restated Certificate of Incorporation and our bylaws.
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PRINCIPAL AND SELLING STOCKHOLDERS
The table on the next page presents selected information regarding
beneficial ownership of our outstanding common stock as of June 30, 2000, and as
adjusted to reflect the sale of the common stock being sold in this offering
for:
- each of our directors, our chief executive officer and our four other
highest-paid executive officers and each other person known by us to own
beneficially more than 5% of our common stock;
- each other person known by us to own beneficially more than 1% of our
common stock;
- all of our directors and executive officers as a group; and
- all other selling stockholders.
Percentage ownership calculations are based on 35,935,812 shares of common
stock outstanding as of June 30, 2000 and 37,935,812 shares of common stock
outstanding after the completion of the offering. The numbers shown in the table
below assume no exercise by the underwriters of their over-allotment option to
purchase up to 600,000 shares.
Unless otherwise indicated, the address for each listed stockholder is: c/o
Selectica, Inc., 3 West Plumeria Drive, San Jose, California 95134. To our
knowledge, except as indicated in the footnotes to this table and under
applicable community property laws, the persons or entities identified in this
table have sole voting and investment power over all shares of common stock
shown as beneficially owned by them. The percentage contained in the "After
Offering" column assumes that the underwriters do not exercise their
over-allotment option for up to 600,000 additional shares.
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<PAGE> 65
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER
OWNED PRIOR OF SHARES BENEFICIALLY
TO OFFERING SHARES OWNED AFTER OFFERING
--------------------- BEING ---------------------
NAMED EXECUTIVE OFFICERS AND DIRECTORS NUMBER PERCENT OFFERED NUMBER PERCENT
-------------------------------------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Rajen Jaswa(1)..................... 2,551,250 7.10% 75,000 2,476,250 6.53%
Sanjay Mittal(2)................... 2,893,050 8.05% 50,000 2,843,050 7.49%
Ashish Mathur...................... 500,000 1.39% 31,000 469,000 1.24%
Dan Carmel(3)...................... 457,051 1.27% 7,500 449,551 1.19%
Charles Pendell(4)................. 425,000 1.18% 11,000 414,000 1.09%
Betsy Atkins(5).................... 264,493 * 26,449 238,044 *
Robin Richards Donohoe(6).......... 4,027,636 11.21% 402,764 3,624,872 9.56%
John Fisher(7)..................... 3,620,290 10.07% 0 3,620,290 9.54%
Michael Lyons(8)................... 2,677,185 7.45% 267,719 2,409,466 6.35%
Thomas Neustatetter(9)............. 1,163,851 3.24% 0 1,163,851 3.07%
All executive officers and directors
as a group (13 persons)(10)...... 19,171,619 53.12% 880,932 18,290,687 48.21%
5% SHAREHOLDERS
--------------------------------
Draper International India, L.P.(11).. 4,027,636 11.21% 402,764 3,624,872 9.56%
Entities Associated with Draper Fisher
Jurveston(12).................... 3,690,283 10.27% 0 3,690,283 9.73%
Entities Associated with Zilkha
Venture Partners(13)............. 2,677,185 7.45% 267,719 2,409,466 6.35%
GREATER THAN 1% SELLING STOCKHOLDERS
--------------------------------
Entities affiliated with Chatterjee
Management Company(14)........... 1,453,999 4.05% 145,400 1,308,599 3.45%
Samsung SDS Co. Ltd. .............. 1,200,000 3.34% 120,000 1,080,000 2.85%
Intel 64 Fund Operations, LLC...... 1,141,030 3.18% 114,103 1,026,927 2.71%
Vasuduv Blandarkar................. 942,250 2.62% 85,000 848,025 2.24%
OTHER SELLING EXECUTIVE OFFICERS
--------------------------------
S.S. Sundarajian(15)............... 125,000 * 2,500 122,500 *
Stephen Bennion(16)................ 366,820 1.02% 7,000 359,820 *
Alfredo Perez(17).................. 30,000 * 0 30,000 *
Additional selling stockholders, each
holding less than 1% of the
outstanding common stock prior to
this offering.................... 539,378
</TABLE>
-------------------------
* Less than 1% of the outstanding shares of common stock.
(1) As of June 30, 2000, we had the right to repurchase 250,000 of Mr. Jaswa's
shares.
(2) Includes 300,000 shares of common stock held by Smita Mittal and Shikha
Mittal, Dr. Mittal's daughters. As of June 30, 2000, we had the right to
repurchase 250,000 of Dr. Mittal's shares.
(3) Includes 4,500 shares of our common stock held by the Samuel Isaac Carmel
1999 Irrevocable Trust, 4,500 shares of our common stock held by the
Jennifer Sara Carmel 1999 Irrevocable Trust, 4,500 shares of our common
stock held by the Madeline Rose Carmel 1999 Irrevocable Trust. Mr. Carmel's
children are the beneficiaries of the trusts in the foregoing sentence.
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<PAGE> 66
(4) Includes 4,000 shares held by Clifford Pendell and Garrett Pendell, Mr.
Pendell's sons.
(5) Ms. Atkins address is 10 Edgewater Drive, Penthouse F, Coral Gables,
Florida 33133.
(6) Includes 4,027,636 shares held by Draper International India, L.P., located
at 50 California Street, Suite 2925, San Francisco, California 94025. Ms.
Richards Donohoe and Mr. William Draper have power to vote and dispose of
shares held by Draper International India, L.P. Ms. Richards Donohoe, a
general partner of Draper International India, L.P., disclaims beneficial
ownership of such shares except to the extent of her pecuniary interests
therein.
(7) This number includes:
- 3,251,687 shares held by Draper Fisher Associates Fund IV, L.P.;
- 244,750 shares held by Draper Fisher Partners IV L.L.C.; and
- 114,103 shares held by Mr. John Fisher. Mr. Fisher is either a managing
member of the entities listed above or a managing member of the general
partner of the entities listed above.
Timothy Draper, John Fisher and Steve Jurvetson have the power to vote and
dispose of shares held by Draper Fisher Associates IV L.P. and Draper
Fisher Partners IV L.L.C. Mr. Fisher disclaims beneficial ownership of such
shares except to the extent of his pecuniary interests therein. The address
of these individuals and entities is Draper Fisher Jurvetson, 400 Seaport
Court, Suite 250, Redwood City, California 94063.
(8) Includes 2,448,979 shares held by Selectica L.P. and 228,206 shares held by
Zilkha Venture Partners L.P. John P. Rigas, Donald Zilkha and Michael Lyons
have the power to vote and dispose of shares held by Selectica L.P. and
Zilkha Venture Partners. Mr. Lyons, a member of Zilkha Venture Investments,
LLC, the General Partner of both of the entities in the preceding sentence,
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interests therein. Mr. Lyons address is Zilkha Ventures, 1510
Page Mill Road, Palo Alto, California 94304.
(9) Includes 1,141,031 shares held by JK&B Capital III, L.P., David Kronfeld,
Thomas Neustaetter and Albert DaValle have the power to vote and dispose of
shares held by JK&B Capital III, L.P. Mr. Neustaetter, a member of JK&B
Capital Management LLC, the general Partner of JK&B Capital III, L.P.,
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein. Mr. Neustaetter's address is JK&B Capital, 205
North Michigan Avenue, Suite 808, Chicago, Illinois 60601.
(10) This number includes the shares beneficially owned by the persons and
entities described in the footnotes above and includes 155,000 shares of
common stock issuable pursuant to options exercisable within 60 days of
June 30, 2000.
(11) This number includes the shares beneficially owned by the persons and
entities described in footnote 6.
(12) This number includes:
- 3,260,755 shares held by Draper Fisher Associates Fund IV, L.P.;
- 245,431 shares held by Draper Fisher Partners IV L.L.C.;
- 114,103 shares held by Mr. John Fisher. Mr. Fisher is either a managing
member of the entities listed above or a managing member of the general
partner of the entities listed above;
- 45,461 shares held by Ms. Polly Draper. Ms. Draper is the sister of Tim
Draper. Mr. Draper is either a managing member of the entities listed
above or a managing member of the general partner of the entities listed
above;
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<PAGE> 67
- 22,821 shares held by Mr. Steve Jurvetson. Mr. Jurvetson is either a
managing member of the entities listed above or a managing member of the
general partner of the entities listed above;
- 1,141 shares held by the Fonstad Living Trust Dated March 26, 1999. Ms.
Fonstad is either a member of the entities listed above or a member of
the general partner of the entities listed above; and
- 570 shares held by Mr. Warren Packard. Mr. Packard is either a member of
the entities listed above or a member of the general partner of the
entities listed above.
Mr. Fisher disclaims beneficial ownership of such shares except to the
extent of his pecuniary interests therein. The address of these individuals
and entities is Draper Fisher Jurvetson, 400 Seaport Court, Suite 250,
Redwood City, California 94063.
(13) This number includes the shares beneficially owned by the persons and
entities described in footnote 8.
(14) Includes 624,959 shares held by Winston Partners II, LLC and 829,040 shares
held by Winston Partners, L.P.
(15) Includes 125,000 shares of common stock issuable pursuant to options
exercisable within 60 days of June 30, 2000.
(16) Includes 2,000 shares held by Sean Bennion and Daniel Bennion, Mr.
Bennion's sons.
(17) Includes 30,000 shares of common stock issuable pursuant to options
exercisable within 60 days of June 30, 2000.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common
stock, and 10,000,000 shares of undesignated preferred stock. The following is a
summary description of our capital stock. Our bylaws and our Second Amended and
Restated Certificate of Incorporation, provide further information about our
capital stock.
COMMON STOCK
As of June 30, 2000, there were 35,935,812 shares of common stock
outstanding that were held of record by approximately 327 stockholders. There
will be 37,935,812 shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and assuming no exercise after June 30,
2000 of outstanding options or warrants after giving effect to the sale of the
shares of common stock to the public offered in this prospectus.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive dividends, if any, as may be declared from time to time by
the board of directors out of funds legally available. See "Dividend Policy." In
the event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable, and the shares of common stock to be issued upon
completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to fix the rights, preferences, privileges and related restrictions, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of the series. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of us without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. At present, we have no plans to issue any of our
preferred stock.
WARRANTS
There is one outstanding warrant to purchase a total of 800,000 shares of
common stock at an exercise price of $13.00 per share which expires in January
2002.
REGISTRATION RIGHTS
The holders of approximately 20,410,957 shares of common stock are entitled
to rights with respect to the registration of these shares under the Securities
Act. Under the terms of the agreement between us and the holders of these
registrable securities, if we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security
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<PAGE> 69
holders exercising registration rights, these holders are entitled to notice of
registration and are entitled to include their shares of common stock in the
registration. Holders of 18,010,957 shares of the registrable securities are
also entitled to specified demand registration rights under which they may
require us to file a registration statement under the Securities Act at our
expense with respect to our shares of common stock, and we are required to use
our best efforts to effect this registration. Further, the holders of these
demand rights may require us to file additional registration statements on Form
S-3. All of these registration rights are subject to conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in the registration and our right not to effect a requested
registration within six months following the initial offering of our securities,
including this offering.
ANTI-TAKEOVER PROVISIONS
Selected provisions of Delaware law, and our certificate of incorporation
and bylaws, could make more difficult the acquisition of us by means of a tender
offer or a proxy contest and the removal of incumbent officers and directors.
These provisions, summarized below, are expected to discourage particular types
of coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging these proposals
because, among other things, negotiation of these proposals could result in an
improvement of their terms. However, these provisions could have the effect of
discouraging others from making tender offers for our shares and, as a
consequence, they may also inhibit fluctuations in the market price of our
shares that could result from actual or rumored takeover attempts.
Stockholder Meetings. Under our bylaws, only our board of directors, the
Chairman of the Board and the Chief Executive Officer may call special meetings
of stockholders.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of our board of
directors or a related committee.
Delaware Anti-Takeover Law. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. Generally, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
- before the date of the business combination, the transaction is approved
by the board of directors of the corporation;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding stock; or
- on or after the date the transaction is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder.
A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with
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respect to transactions not approved in advance by our board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Classified Board of Directors. Our certificate of incorporation provides
that our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, only one of the three classes of our
board of directors will be elected each year. 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 us and may maintain the
incumbency of our board of directors by increasing the difficulty of replacing a
majority of the directors.
Elimination of Stockholder Action by Written Consent. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for our board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to obtain control of us.
Amendment of Restated Charter. The amendment of any of the above provisions
would require approval by holders of at least 66 2/3% of our outstanding common
stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.
NASDAQ NATIONAL MARKET LISTING
Our common stock is quoted on The Nasdaq Stock Market's National Market
under the symbol "SLTC."
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<PAGE> 71
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public
market, or the possibility of these sales occurring, could adversely affect
prevailing market prices of our common stock or our future ability to raise
capital through an offering of equity securities.
As of June 30, 2000, we had 35,935,812 shares of common stock outstanding.
Upon completion of this offering, assuming no exercise of options after June 30,
2000 we will have 37,935,812 shares of common stock outstanding. Of these
37,935,812 shares, the 4,000,000 shares sold by us and by the selling
stockholders in this offering, 4,600,000 shares if the underwriters'
over-allotment option is exercised in full, as well as the 4,600,000 shares sold
in our initial public offering, will be freely tradable without restriction or
further registration under the Securities Act, except that any shares held by
persons that directly or indirectly control, or are controlled by, or are under
common control with us, may generally only be sold in compliance with the
limitations of Rule 144 of the Securities Act described below
SALES OF RESTRICTED SHARES
The remaining approximately 29,335,812 shares outstanding upon completion
of this offering will be restricted securities as that term is defined under
Rule 144. We issued and sold these restricted securities in private transactions
in reliance on exemptions from registration under the Securities Act. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701 under
the Securities Act, as summarized below.
Pursuant to lock-up agreements entered into in connection with our initial
public offering in March 2000, all the executive officers, directors and
stockholders of Selectica agreed not to dispose of their shares for a period of
180 days following the initial public offering; provided, however, that Credit
Suisse First Boston Corporation has the right, in its sole discretion, to
release all or any portion of the shares subject to the initial public offering
lock-up agreements at any time and without notice. In addition, our officers,
directors, selling stockholders in this offering and other stockholders agreed
not to dispose of their shares for a period of 90 days following the date of
this prospectus. Credit Suisse First Boston Corporation may in its sold
discretion, at any time without notice, release all or any portion of the shares
subject to these lock-up agreements.
Taking into account the lock-up agreements, the following shares will be
eligible for sale in the public market at the following times:
- Upon completion of this offering, the 4,000,000 shares sold in the
offering, as well as the 4,600,000 shares sold in our initial public
offering, will be immediately available for sale in the public market.
- On September 6, 2000, lock-up restrictions in connection with our initial
public offering will expire on approximately 1,714,815 shares, and these
shares will then be immediately available for sale in the public market
subject, in certain cases, to volume, manner of sale, or other
limitations under Rule 144.
- On November , 2000, lock-up restrictions in connection with this
offering will expire on approximately 24,180,015 shares and these shares
will then be immediately available for sale in the public market lock-up
period following this offering, subject in certain cases, to volume,
manner of sale, or other limitation under Rule 144.
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- The remaining approximately 3,677,383 shares will be eligible for sale
beginning on various dates thereafter subject, in certain cases, to
volume, manner of sale, or other limitations under Rule 144.
Following the expiration of the lock-up period, shares issued upon exercise
of options we granted prior to our initial public offering of our common stock
will also be available for sale in the public market pursuant to Rule 701 under
the Securities Act. In general, under Rule 144, after the expiration of the
lock-up period, a person who has beneficially owned restricted securities for at
least one year would be entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of:
- 1% of the then-outstanding shares of common stock, or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
Selectica. Under Rule 144(k), a person who has not been our affiliate at any
time during the three months before a sale and who has beneficially owned the
shares proposed to be sold for at least two years can sell these shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
We filed a registration statement on Form S-8 to register approximately
8,577,266 shares of common stock reserved for issuance under the Selectica 1996
stock plan, the 1999 equity incentive plan, the 1999 employee stock purchase
plan and certain additional option agreements. Shares issued under the foregoing
stock and option plans, after the filing of the registration statements on Form
S-8, may be sold in the open market, subject, in the case of some holders, to
the Rule 144 limitations applicable to affiliates, the lock-up agreements and
vesting restrictions imposed by us.
In addition, following this offering, the holders of approximately
20,410,957 shares of outstanding common stock will, under some circumstances,
have rights to require us to register their shares for future sale. For a
description of the registration rights we have granted see "Description of
Capital Stock -- Registration Rights."
71
<PAGE> 73
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated August , 2000, we and the selling stockholders have agreed to
sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, U.S. Bancorp Piper Jaffray, Inc., Wit SoundView Corporation and
Banc of America Securities LLC are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
U.S. Bancorp Piper Jaffray, Inc. ...........................
Wit SoundView Corporation...................................
Banc of America Securities LLC..............................
---------
Total............................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
The selling stockholders have granted to the underwriters a 30-day option
to purchase on a pro rata basis up to 600,000 additional shares at the public
offering price less the underwriting discounts and commissions. This option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the public offering, the public offering
price and concession and discount to broker/dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $
Expense payable by us.... $ $ $ $
Underwriting discounts
and commissions paid by
selling stockholders... $ $ $ $
</TABLE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to any shares of our common stock or securities convertible into or exchangeable
or exercisable for any of our shares of common stock, or publicly disclose the
intention to make any offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse First Boston Corporation for a period of
90 days after the date of this prospectus, except issuances pursuant to the
exercise of employee stock options outstanding on the date of this prospectus
and grants of employee stock options under plans in effect on the date of this
prospectus.
72
<PAGE> 74
Our officers and directors and the selling stockholders have agreed that
they will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
or exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make any
such offer, sale, pledge or disposition, or to enter into any such transaction,
swap, hedge or other arrangement, without, in each case, the prior written
consent of Credit Suisse First Boston Corporation for a period of 90 days after
the date of this prospectus.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments that the
underwriters may be required to make in that respect.
The common stock is quoted on the Nasdaq Stock Market's National Market
under the symbol SLTC.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and "passive" market making in
accordance with Regulation M under the Exchange Act.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares which they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option -- a naked short position -- that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
73
<PAGE> 75
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
A prospectus in electronic format will be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters and
dealers for sale to their online brokerage account holders. Internet
distributions will be allocated by the underwriters that will make Internet
distributions on the same basis as other allocations. Wit Capital Corporation is
an on-line broker/dealer that will receive an allocation of shares of common
stock through its affiliate, Wit SoundView Corporation.
74
<PAGE> 76
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where required
by law, that the purchaser is purchasing as principal and not as agent, and
(iii) the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recession or rights of action under the civil liability provisions of
the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or these persons. All or a substantial portion of the assets of the
issuer and these persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the issuer or these persons in
Canada or to enforce a judgment obtained in Canadian courts against the issuer
or these persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by the purchaser in this offering. Such report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one report must be filed
in respect of common stock acquired on the same date and under the same
prospectus exemption.
75
<PAGE> 77
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
76
<PAGE> 78
LEGAL MATTERS
The validity of the common stock being offered will be passed upon for
Selectica by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. The underwriters have been represented by Wilson Sonsini
Goodrich & Rosati, Palo Alto, California. As of the date of this prospectus,
some members and employees of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP beneficially owned an aggregate of 28,631 shares of our stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at March 31, 2000 and 1999, and for each of
the three years in the period ended March 31, 2000, as set forth in their
report. We have included our financial statements and schedule in the prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
being offered. This prospectus does not contain all of the information presented
in the registration statement and the exhibits to the registration statement.
For further information with respect to Selectica and our common stock we are
offering, reference is made to the registration statement and the exhibits filed
as a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document referred to may be
only summaries of these documents. The exhibits to this registration statement
should be referenced for the complete contents of these contracts and documents.
Each statement is qualified in all respects by reference to the exhibit. The
registration statement, including the exhibits, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
all or any part may be obtained from this office after payment of fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants, including us, that file electronically with the
Commission. The address of the site is www.sec.gov.
77
<PAGE> 79
SELECTICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999... F-3
Consolidated Statements of Operations -- Years ended March
31, 2000, 1999, and 1998.................................. F-4
Consolidated Statements of Stockholders' Equity -- Years
ended March 31, 2000, 1999, and 1998...................... F-5
Consolidated Statements of Cash Flows -- Years ended March
31, 2000, 1999, and 1998.................................. F-7
Notes to Consolidated Financial Statements.................. F-8
Condensed Consolidated Balance Sheets at June 30, 2000 and
March 31, 2000 (Unaudited)................................ F-25
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2000 and 1999 (Unaudited)..... F-26
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 2000 and 1999 (Unaudited)..... F-27
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-28
</TABLE>
F-1
<PAGE> 80
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Selectica, Inc.
We have audited the accompanying consolidated balance sheets of Selectica
Inc. as of March 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 2000. 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 the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Selectica Inc.
at March 31, 2000 and 1999, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended March 31, 2000,
in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
San Jose, California
May 26, 2000
F-2
<PAGE> 81
SELECTICA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $215,818,250 $ --
Accounts receivable, net of allowance for doubtful
accounts of $414,548 at March 31, 2000, and $104,000 at
March 31, 1999......................................... 5,731,122 1,634,577
Advances to related party................................. 17,822 17,730
Prepaid expenses and other current assets................. 9,417,602 166,454
------------ ------------
Total current assets...................................... 230,984,796 1,818,761
Property and equipment, net................................. 6,127,401 1,012,469
Goodwill, net of amortization of $116,375 at March 31, 2000,
and $92,675 at March 31, 1999............................. 29,625 53,325
Advances to related party, noncurrent....................... -- 155,000
Other assets................................................ 2,053,818 53,926
Investments, restricted..................................... 99,845 99,845
Development agreement, net of amortization of $1,011,194 at
March 31, 2000 and none at March 31, 1999................. 3,156,073 --
------------ ------------
Total assets................................................ $242,451,558 $ 3,193,326
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,257,718 $ 585,610
Accrued payroll and related liabilities................... 1,879,523 258,105
Other accrued liabilities................................. 3,754,937 328,609
Deferred revenues......................................... 18,481,542 1,285,144
Advances from officers.................................... -- 332
------------ ------------
Total current liabilities................................. 28,373,720 2,457,800
Commitments
Stockholders' equity:
Preferred stock, $0.0001 par value:
Authorized shares -- 10,000,000 at March 31, 2000; none
issued and
outstanding............................................... -- --
Convertible preferred stock, $0.0001 par value, issuable in
series Authorized shares -- None at March 31, 2000 and
25,000,000 at March 31, 1999
Issued and outstanding -- None at March 31, 2000 and
13,567,061 at
March 31, 1999............................................ -- 1,356
Common stock, $0.0001 par value:
Authorized shares -- 150,000,000 at March 31, 2000
Issued and outstanding -- 35,740,291 at March 31, 2000,
and 6,237,877
at March 31, 1999......................................... 3,574 624
Additional paid-in capital.................................. 281,772,647 11,878,365
Deferred compensation....................................... (11,860,133) (255,586)
Stockholder notes receivable................................ (12,715,887) --
Accumulated deficit......................................... (43,122,363) (10,889,233)
------------ ------------
Total stockholders' equity.................................. 214,077,838 735,526
------------ ------------
Total liabilities and stockholders' equity.................. $242,451,558 $ 3,193,326
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 82
SELECTICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
License.......................................... $ 9,181,213 $ 1,656,015 $ 169,505
Services......................................... 6,906,781 1,788,467 --
------------ ----------- -----------
Total revenues........................... 16,087,994 3,444,482 169,505
Cost of revenues:
License.......................................... 4,519,809 183,715 9,000
Services......................................... 14,551,558 881,017 --
Services -- related party........................ 135,000 302,511 51,200
------------ ----------- -----------
Total cost of revenues................... 19,206,367 1,367,243 60,200
------------ ----------- -----------
Gross profit (loss)................................ (3,118,373) 2,077,239 109,305
Research and development......................... 7,347,037 3,893,750 1,950,101
Sales and marketing.............................. 17,025,515 4,429,368 1,054,798
General and administrative....................... 4,554,111 1,389,554 292,494
------------ ----------- -----------
Total operating expenses........................... 28,926,663 9,712,672 3,297,393
------------ ----------- -----------
Loss from operations............................... (32,045,036) (7,635,433) (3,188,088)
Other income (expense), net........................ (1,765) -- 5,091
Interest income.................................... 1,302,959 127,388 81,548
Interest expense................................... (59,856) (28,856) --
------------ ----------- -----------
Loss before provision for income taxes............. (30,803,698) (7,536,901) (3,101,449)
Provision for income taxes......................... 50,000 -- --
------------ ----------- -----------
Net loss........................................... (30,853,698) (7,536,901) (3,101,449)
Deemed dividend on Series E convertible preferred
stock............................................ 925,314 -- --
------------ ----------- -----------
Net loss applicable to common stockholders......... $(31,779,012) $(7,536,901) $(3,101,449)
============ =========== ===========
Basic and diluted, net loss per share applicable to
common stockholders.............................. $ (4.54) $ (1.58) $ (0.91)
============ =========== ===========
Weighted-average shares of common stock used in
computing basic and diluted, net loss per share
applicable to common stockholders................ 6,999,061 4,782,235 3,425,395
============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 83
SELECTICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
--------------------- ------------------- PAID-IN DEFERRED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------------ ------ ---------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997........... 5,450,000 $ 545 5,170,561 $ 517 $ 1,214,740 $ (7,927) $ --
Issuance of Series C convertible
preferred stock (net of issuance
costs of $11,000)................. 3,253,126 325 -- -- 2,988,058 -- --
Exercise of stock options by
employees and consultants......... -- -- 338,000 34 7,306 -- --
Issuance of common stock to
consultants in exchange for
services.......................... -- -- 12,000 1 919 -- --
Amortization of deferred
compensation...................... -- -- -- -- 3,541 --
Net and comprehensive loss.......... -- -- -- -- -- -- --
------------ ------ ---------- ------ ------------ ------------ ------------
Balance at March 31, 1998........... 8,703,126 870 5,520,561 552 4,211,023 (4,386) --
Issuance of Series D convertible
preferred stock (net of issuance
costs of $57,658)................. 4,863,935 486 -- -- 7,091,856 -- --
Exercise of stock options by
employees and consultants, net of
repurchases....................... -- -- 671,012 67 38,507 -- --
Issuance of common stock to
consultants in exchange for
services.......................... -- -- 46,304 5 42,565 -- --
Warrants issued in conjunction with
credit agreement.................. -- -- -- -- 25,714 -- --
Deferred compensation related to
options granted at less than fair
value............................. -- -- -- -- 298,700 (298,700) --
Compensation expense related to
acceleration of stock options..... -- -- -- -- 170,000 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 47,500 --
Net and comprehensive loss.......... -- -- -- -- -- -- --
------------ ------ ---------- ------ ------------ ------------ ------------
Balance at March 31, 1999........... 13,567,061 1,356 6,237,877 624 11,878,365 (255,586) --
Issuance of Series E convertible
preferred (net of issuance costs
of $930,921)...................... 4,403,068 440 -- -- 24,345,272 -- --
Issuance of Series E convertible
preferred Stock in exchange for
convertible notes payable (net of
issuance costs of $48,173)........ 229,876 23 -- -- 944,447 -- --
Repurchase of common stock held by
founder........................... -- -- (228,200) (23) (2,259) -- --
Warrants issued in connection with
Series E convertible preferred
stock financing................... -- -- -- -- 615,654 -- --
Warrants issued in connection with
convertible notes payable......... -- -- -- -- 49,781 -- --
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance at March 31, 1997........... $ (250,883) $ 956,992
Issuance of Series C convertible
preferred stock (net of issuance
costs of $11,000)................. -- 2,988,383
Exercise of stock options by
employees and consultants......... -- 7,340
Issuance of common stock to
consultants in exchange for
services.......................... -- 920
Amortization of deferred
compensation...................... -- 3,541
Net and comprehensive loss.......... (3,101,449) (3,101,449)
------------ ------------
Balance at March 31, 1998........... (3,352,332) 855,727
Issuance of Series D convertible
preferred stock (net of issuance
costs of $57,658)................. -- 7,092,342
Exercise of stock options by
employees and consultants, net of
repurchases....................... -- 38,574
Issuance of common stock to
consultants in exchange for
services.......................... -- 42,570
Warrants issued in conjunction with
credit agreement.................. -- 25,714
Deferred compensation related to
options granted at less than fair
value............................. -- --
Compensation expense related to
acceleration of stock options..... -- 170,000
Amortization of deferred
compensation...................... -- 47,500
Net and comprehensive loss.......... (7,536,901) (7,536,901)
------------ ------------
Balance at March 31, 1999........... (10,889,233) 735,526
Issuance of Series E convertible
preferred (net of issuance costs
of $930,921)...................... -- 24,345,712
Issuance of Series E convertible
preferred Stock in exchange for
convertible notes payable (net of
issuance costs of $48,173)........ -- 944,470
Repurchase of common stock held by
founder........................... (454,118) (456,400)
Warrants issued in connection with
Series E convertible preferred
stock financing................... -- 615,654
Warrants issued in connection with
convertible notes payable......... -- 49,781
</TABLE>
F-5
<PAGE> 84
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
--------------------- ------------------- PAID-IN DEFERRED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------------ ------ ---------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Compensation expense related to
accelerated stock options......... -- -- -- -- 65,625 -- --
Exercise of warrants issued in
connection with Series E preferred
stock financing................... 72,000 8 -- -- 315,477 -- --
Warrants issued in connection with
development agreement............. -- -- -- -- 381,330 -- --
Warrants issued in connection with
license and services agreement.... -- -- -- -- 16,400,000 -- --
Exercise of stock options by
employees, net of repurchase...... -- -- 1,035,587 103 1,706,058 -- --
Exercise of stock by employees for
notes............................. -- -- 2,034,250 203 12,715,684 -- (12,715,887)
Issuance of common stock for
services.......................... -- -- 33,070 4 106,404 -- --
Issuance of Series E convertible
stock for less than fair value.... 1,505,702 151 -- -- 4,976,264 -- --
Issuance of common stock in public
offering, (net of issuance costs
of $11,280,774)................... -- -- 4,450,000 445 122,218,781 -- --
Issuance of common stock in private
placement......................... -- -- 2,400,000 240 71,999,760 -- --
Conversion of convertible preferred
stock in connection with initial
public offering................... (19,777,707) (1,978) 19,777,707 1,978 -- -- --
Deferred compensation related to
options granted at less than fair
value............................. -- -- -- -- 12,866,004 (12,866,004) --
Amortization of deferred
compensation...................... -- -- -- -- -- 1,261,457 --
Compensation expense related to
issuance of common stock options
to consultant..................... -- -- -- -- 190,000 -- --
Net and comprehensive loss.......... -- -- -- -- -- -- --
------------ ------ ---------- ------ ------------ ------------ ------------
Balance at March 31, 2000........... -- $ -- 35,740,291 $3,574 $281,772,647 $(11,860,133) $(12,715,887)
============ ====== ========== ====== ============ ============ ============
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Compensation expense related to
accelerated stock options......... -- 65,625
Exercise of warrants issued in
connection with Series E preferred
stock financing................... -- 315,485
Warrants issued in connection with
development agreement............. -- 381,330
Warrants issued in connection with
license and services agreement.... -- 16,400,000
Exercise of stock options by
employees, net of repurchase...... -- 1,706,161
Exercise of stock by employees for
notes............................. -- --
Issuance of common stock for
services.......................... -- 106,408
Issuance of Series E convertible
stock for less than fair value.... (925,314) 4,051,101
Issuance of common stock in public
offering, (net of issuance costs
of $11,280,774)................... -- 122,219,226
Issuance of common stock in private
placement......................... -- 72,000,000
Conversion of convertible preferred
stock in connection with initial
public offering................... -- --
Deferred compensation related to
options granted at less than fair
value............................. -- --
Amortization of deferred
compensation...................... -- 1,261,457
Compensation expense related to
issuance of common stock options
to consultant..................... -- 190,000
Net and comprehensive loss.......... (30,853,698) (30,853,698)
------------ ------------
Balance at March 31, 2000........... $(43,122,363) $214,077,838
============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 85
SELECTICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
----------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(30,853,698) $(7,536,901) $(3,101,449)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 863,688 208,947 59,359
Amortization.............................................. 23,700 33,700 33,700
Issuance of stock in exchange for services................ 106,408 42,570 920
Increase of fair value in Series E shares................. 265,012 -- --
Amortization of development agreement..................... 1,011,195 -- --
Amortization of deferred compensation..................... 1,261,457 47,500 3,541
Issuance of common stock options to consultant............ 190,000 -- --
Value of warrants in excess of contract................... 9,657,487 -- --
Accrued interest on convertible notes converted to
convertible preferred stock............................. 7,317 -- --
Warrants issued in conjunction with credit agreement...... -- 25,714 --
Warrants issued in conjunction with debt financing........ 35,107 -- --
Accelerated vesting of stock options to employees......... 65,625 170,000 --
Loss on disposal of property and equipment................ 73,565 -- --
Changes in assets and liabilities:
Accounts receivable..................................... (4,096,545) (1,246,633) (387,944)
Advances to related party............................... 304,908 (171,110) (1,620)
Prepaid expenses and other current assets............... (4,341,968) (136,054) (22,635)
Other assets............................................ (1,999,892) -- (51,427)
Accounts payable........................................ 3,672,108 483,830 75,910
Accrued payroll and related liabilities................. 1,621,418 257,740 202
Other accrued liabilities............................... 3,426,328 328,609 --
Deferred revenues....................................... 17,196,398 901,962 383,182
Advances from officers.................................. (332) (15,691) 15,823
------------ ----------- -----------
Net cash used in operating activities............... (1,510,714) (6,605,817) (2,992,438)
INVESTING ACTIVITIES
Capital expenditures........................................ (6,131,935) (928,833) (287,877)
Proceeds from disposition of property and equipment......... 79,750 -- --
Purchases of available-for-sale investments................. -- (5,576,918) (8,569,135)
Sales of available-for-sale investments..................... -- 5,774,612 8,962,331
Acquisition of Selectica, India............................. (150,000) -- --
------------ ----------- -----------
Net cash provided by (used in) investing activities......... (6,202,185) (731,139) 105,319
FINANCING ACTIVITIES
Net proceeds from initial public offering................... 122,219,226 -- --
Net proceeds from private placement......................... 72,000,000 -- --
Net proceeds from issuance of convertible preferred stock... 24,913,344 7,092,342 2,988,383
Exercise of warrants in exchange for preferred stock........ 315,485 -- --
Repurchase of common stock.................................. (456,400) -- --
Proceeds from issuance of convertible notes................. 1,000,000 -- --
Proceeds from issuance of warrants.......................... 800,000 -- --
Proceeds from issuance of common stock...................... 1,706,161 38,574 7,340
Proceeds from revenue contract.............................. 1,033,333 -- --
------------ ----------- -----------
Net cash provided by financing activities................... 223,531,149 7,130,916 2,995,723
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 215,818,250 (206,040) 108,604
Cash and cash equivalents at beginning of the period........ -- 206,040 97,436
------------ ----------- -----------
Cash and cash equivalents at end of the period.............. $215,818,250 $ -- $ 206,040
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................................... $ 52,539 $ 3,142 $ --
Conversion of preferred stock in common stock............... $ 1,978 $ -- $ --
Deferred compensation related to stock options.............. $ 12,866,004 $ 298,700 $ --
Convertible notes payable and accrued interest converted to
convertible preferred stock............................... $ 944,470 $ -- $ --
Warrants issued in conjunction with convertible notes
payable................................................... $ 49,781 $ -- $ --
Warrants issued in conjunction with convertible preferred
stock financing........................................... $ 615,654 $ -- $ --
Warrants issued in connection with development agreement.... $ 381,330 $ -- $ --
Warrant issued in conjunction with revenue contract......... $ 16,400,000 $ -- $ --
Issuance of stock in exchange for notes..................... $ 12,715,887 $ -- $ --
Deferred charge on development agreement.................... $ 4,711,252 $ -- $ --
</TABLE>
See accompanying notes.
F-7
<PAGE> 86
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Selectica, Inc. (the Company or Selectica) was incorporated in the state of
California on June 6, 1996 and subsequently reincorporated in the State of
Delaware on January 19, 2000. The Company was organized to develop and market
Internet selling system software for electronic commerce, sales force
automation, and build-to-order applications.
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Foreign Currency Transactions
Foreign currency transactions at foreign operations are measured using the
U.S. dollar as the functional currency. Accordingly, monetary accounts
(principally cash and cash equivalents, accounts receivable, accounts payable,
and accrued liabilities) are remeasured using the foreign exchange rate at the
balance sheet date. Operations accounts and non-monetary balance sheet accounts
are remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations and were
immaterial for all periods presented.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company places its
short-term investments in high-credit quality financial institutions. The
Company is exposed to credit risk in the event of default by these institutions
to the extent of the amount recorded on the balance sheet. As of March 31, 2000
all money market funds are invested in two funds, the Monarch Fund and The
Dreyfus Institutional Preferred Money Market Fund. Accounts receivable are
derived from revenue earned from customers primarily located in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for potential credit losses, and historically, such losses
have been immaterial.
F-8
<PAGE> 87
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Customer Concentrations
A limited number of customers have historically accounted for a substantial
portion of the Company's revenues.
Customers who accounted for at least 10% of total revenues were as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Samsung SDS................................................. 12% * *
LVMH Group.................................................. 12% * *
3Com Corporation............................................ 10% * *
Fireman's Fund Insurance.................................... 10% * *
BMW of North America........................................ * 60% *
Olicom, Inc................................................. * 10% *
Hewlett Packard of Germany.................................. * * 45%
Ascend Communications, Inc.................................. * * 27%
InterVoice, Inc............................................. * * 16%
Insight Enterprises, Inc. .................................. * * 12%
</TABLE>
---------------
* Revenues were less than 10%.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of short-term, highly liquid financial
instruments, principally money markets funds and commercial paper with
insignificant interest rate risk that are readily convertible to cash and have
maturities of three months or less from the date of purchase. As of March 31,
2000 all money market funds are invested in two funds, the Monarch Fund and The
Dreyfus Institutional Preferred Money Market Fund. The fair value, based on
quoted market prices, of cash equivalents is substantially equal to their
carrying value at March 31, 2000 and 1999.
Management classifies investments as available-for-sale at the time of
purchase and periodically reevaluates such designation. Unrecognized gains or
losses on available-for-sale securities are included, net of tax, in
stockholders' equity until their disposition. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in interest income. The cost of securities sold is based
on the specific-identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Amortization of leasehold improvements is
computed using the straight line method over the shorter of the lease term or
the estimated useful life.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price of acquired companies
over estimated fair values of tangible and intangible net assets acquired.
Goodwill is amortized on a straight-line basis over the estimated useful life,
generally five years. The carrying values of long-term assets and intangibles
are reviewed if facts and circumstances suggest that they may be impaired. If
this review indicates that carrying values of long-term assets, other
intangibles, and associated goodwill will not
F-9
<PAGE> 88
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be recoverable based on projected undiscounted future cash flows, carrying
values are reduced to estimated fair values by first reducing goodwill and
second by reducing long-term assets and other intangibles.
Revenue Recognition
The Company enters into arrangements for the sale of 1) licenses of
software products and related maintenance contract; 2) bundled license,
maintenance, and services; and 3) services on a time and material basis. In
instances where maintenance is bundled with a license of software products, such
maintenance term is typically one year.
For each arrangement, the Company determines whether evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collection is probable. If any of these criteria are not met, revenue
recognition is deferred until such time as all of the criteria are met.
Arrangements consisting of license and maintenance only. For those
contracts that consist solely of license and maintenance the Company recognizes
license revenues based upon the residual method after all elements other than
maintenance have been delivered as prescribed by Statement of Position 98-9
"Modification of SOP No. 97-2 with Respect to Certain Transactions." The Company
recognizes maintenance revenues over the term of the maintenance contract as
vendor specific objective evidence of fair value for maintenance exists.
Arrangements consisting of license, maintenance and other
services. Services can consist of maintenance, training and/or consulting
services. Consulting services include a range of services including installation
of off-the-shelf software, customization of the software for the customer's
specific application, data conversion and building of interfaces to allow the
software to operate in customized environments.
In all cases, the Company assesses whether the service element of the
arrangement is essential to the functionality of the other elements of the
arrangement. In this determination the Company focuses on whether the software
is off-the-shelf software, whether the services include significant alterations
to the features and functionality of the software, whether the services involve
the building of complex interfaces, the timing of payments and the existence of
milestones. Often the installation of the software requires the building of
interfaces to the customer's existing applications or customization of the
software for specific applications. As a result, judgment is required in the
determination of whether such services constitute "complex" interfaces. In
making this determination the Company considers the following: (1) the relative
fair value of the services compared to the software, (2) the amount of time and
effort subsequent to delivery of the software until the interfaces or other
modifications are completed, (3) the degree of technical difficulty in building
of the interface and uniqueness of the application, (4) the degree of
involvement of customer personnel, and (5) any contractual cancellation,
acceptance, or termination provisions for failure to complete the interfaces.
The Company also considers the likelihood of refunds, forfeitures and
concessions when determining the significance of such services.
In those instances where the Company determines that the service elements
are essential to the other elements of the arrangement, the Company accounts for
the entire arrangement using contract accounting.
For those arrangements accounted for using contract accounting that do not
include contractual milestones or other acceptance criteria the Company utilizes
the percentage of completion method based upon input measures of hours. For
those contracts that include contract milestones or
F-10
<PAGE> 89
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
acceptance criteria the Company recognizes revenue as such milestones are
achieved or as such acceptance occurs.
In some instances the acceptance criteria in the contract require
acceptance after all services are complete and all other elements have been
delivered. In these instances the Company recognizes revenue based upon the
completed contract method after such acceptance has occurred.
For those arrangements for which the Company has concluded that the service
element is not essential to the other elements of the arrangement the Company
determines whether the services are available from other vendors, do not involve
a significant degree of risk or unique acceptance criteria, and whether the
Company has sufficient experience in providing the service to be able to
separately account for the service. When the service qualifies for separate
accounting the Company uses vendor specific objective evidence of fair value for
the services and the maintenance to account for the arrangement using the
residual method, regardless of any separate prices stated within the contract
for each element.
Vendor-specific objective evidence of fair value of services is based upon
hourly rates. As previously noted, the Company enters into contracts for
services alone and such contracts are based upon time and material basis. Such
hourly rates are used to assess the vendor specific objective evidence of fair
value in multiple element arrangements.
In accordance with paragraph 10 of Statement of Position 97-2, "Software
Revenue Recognition," vendor specific objective evidence of fair value of
maintenance is determined by reference to the price the customer will be
required to pay when it is sold separately (that is, the renewal rate), which is
based on the price established by management, having the relevant authority to
establish such a price. Each license agreement offers additional maintenance
renewal periods at a stated price. Maintenance contracts are typically one year
in duration.
Customer billing occurs in accordance with contract terms. Customer
advances and amounts billed to customers in excess of revenue recognized are
recorded as deferred revenues. Amounts recognized as revenue in advance of
billing (typically under percentage-of-completion accounting) are recorded as
unbilled receivables.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising expense for
the year ended March 31, 2000 was $891,364. Advertising expenses were immaterial
for all other years presented.
Development Costs
Costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. The Company believes its current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility; accordingly, software costs incurred
after the establishment of technological feasibility have not been material and,
therefore, have been expensed.
F-11
<PAGE> 90
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Loss
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" in the year ended March 31, 1999. The Company
had no items of other comprehensive income to report in any of the periods
presented.
Net Loss Per Share
Basic and diluted net loss per common share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per share have been computed using the weighted-average number of
shares of common stock outstanding during the period, less shares subject to
repurchase.
The following table presents the computation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common
stockholders............................. $(31,779,012) $(7,536,901) $(3,101,449)
============ =========== ===========
Basic and diluted:
Weighted-average shares of common stock
outstanding........................... 8,629,720 5,987,019 5,243,255
Less weighted-average shares subject to
repurchase............................ (1,630,659) (1,204,784) (1,817,860)
------------ ----------- -----------
Weighted-average shares used in computing
basic and diluted, net loss per share
applicable to common stockholders..... 6,999,061 4,782,235 3,425,395
============ =========== ===========
Basic and diluted, net loss per share
applicable to common stockholders..... $ (4.54) $ (1.58) $ (0.91)
============ =========== ===========
</TABLE>
The Company has excluded all outstanding stock options and shares subject
to repurchase by the Company from the calculation of basic and diluted net loss
per share because these securities are antidilutive for all periods presented.
Options and warrants to purchase 4,267,035, 1,444,058, and 1,279,600 shares of
common stock for the years ended March 31, 2000, 1999, and 1998 were not
included in the computation of diluted net loss per share applicable to common
stockholders because the effect would be antidilutive. Such securities, had they
been dilutive, would have been included in the computation of diluted net loss
per share using the treasury stock method.
Stock-Based Compensation
The Company accounts for employee stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25), and related interpretations. Pro forma net loss, as presented
in Note 10, is a disclosure required by Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (FAS 123).
Segment Information
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker or group in deciding how to allocate resources
and in assessing performance. The Company operates in one
F-12
<PAGE> 91
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
segment, Internet selling system software for electronic commerce. The Company
primarily markets its products in the United States. For the fiscal year ended
March 31, 2000, sales to international locations, principally Asia, represented
15% of total revenues. Foreign sales were less than 10% for the fiscal year
ended March 31, 1999. For the fiscal year ended March 31, 1998, sales to
international locations, principally Europe, represented 46% of total revenues.
Export revenues are attributable to countries based on the location of the
customers.
The Company holds long-lived assets in India with a net book value of
$370,145 at March 31, 2000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. The Company will be required to
implement FAS 133 for the fiscal year ending March 31, 2002. Because the Company
does not currently hold any derivative instruments and does not engage in
hedging activities, the Company does not expect that the adoption of FAS 133
will have a material impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements. SAB 101 is effective for years beginning after
December 15, 1999 and is required to be reported beginning in the quarter ended
March 31, 2001. SAB 101 is not expected to have a significant effect on the
Company's consolidated results of operations, financial position, or cash flows.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25". FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the
F-13
<PAGE> 92
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
application of FIN 44 to have a material impact on the Company's results of
operations, financial position, or cash flows.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All cash equivalents as of March 31, 2000 are classified as
available-for-sale securities and consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
2000
------------
<S> <C>
Cash equivalents:
Money market fund......................................... $200,001,514
Commercial paper.......................................... 9,963,375
------------
Total............................................. $209,964,889
============
</TABLE>
There was no cash equivalents at March 31, 1999.
The Company has an operating lease that requires a security deposit to be
maintained at a financial institution for the term of the lease. The security
deposit in the amount of $99,845 is classified as a restricted long-term
investment and is held in commercial paper. The interest earned on the
investment can be used in operations.
Unrealized holding gains and losses on available-for-sale securities at
March 31, 2000, 1999, and 1998 and gross realized gains and losses on sales of
available-for-sale securities during the years ended March 31, 2000, 1999 and
1998 were not significant.
3. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
Furniture and equipment............................. $1,033,762 $ 191,681
Computers and software.............................. 4,385,321 1,097,657
Leasehold improvements.............................. 1,664,095 --
---------- ----------
7,083,178 1,289,338
Less: accumulated depreciation and amortization..... (955,777) (276,869)
---------- ----------
Total property and equipment, net......... $6,127,401 $1,012,469
========== ==========
</TABLE>
4. NOTES RECEIVABLE
In consideration for the issuance of the Company's common stock, various
key employees executed promissory notes in the principal amount of $12,715,887.
The notes bear interest at rates from 6.02% to 6.20% per annum, and are due and
payable four years from the date of issuance. The notes are full recourse, and
in addition, each of the employees has pledged the common stock, 2,034,250
shares of common stock in aggregate, as collateral to secure the obligations
under the notes.
F-14
<PAGE> 93
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OPERATING LEASE COMMITMENTS
The Company leases office space under operating lease agreements that
expire at various dates through 2010. The Company vacated the premises at 2890
Zanker Road in January 2000 and entered into a sublet agreement. Rental receipts
under the sublet agreement are materially consistent with future payments.
Aggregate future minimum annual payments under these lease agreements,
which have non-cancelable lease terms, as of March 31, 2000, are as follows:
<TABLE>
<S> <C>
2001.................................................... $ 2,433,527
2002.................................................... 2,453,789
2003.................................................... 2,401,892
2004.................................................... 1,575,072
Thereafter.............................................. 14,110,527
-----------
Total future minimum payments................. 22,974,807
Future receipts under sublet agreement.................. (875,067)
-----------
Total net future minimum payments............. $22,099,740
===========
</TABLE>
Rent expense was $1,763,985, $489,649 and $147,710 for the years ended
March 31, 2000, 1999, and 1998, respectively.
6. LITIGATION
The Company is a party to various litigation and claims in the ordinary
course of business. Although the results of litigation and claims cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
7. LINE OF CREDIT
The Company has a $100,000 available letter of credit in connection with
the Company's lease agreement. No amounts were committed under this letter of
credit at March 31, 2000.
8. CONVERTIBLE PROMISSORY NOTES
In May 1999, the Company issued convertible promissory notes in the
principal amount of $1,000,000 that earned interest at a rate of prime plus 1%.
During June 1999, the convertible promissory notes and related accrued but
unpaid interest of $7,317 were converted into 228,206 shares of Series E
convertible preferred stock.
9. ACQUISITIONS
Catalogics Acquisition
In July 1996, the Company acquired the assets of Catalogics Software
Corporation (Catalogics), a development stage software company in the business
of internet software development. In exchange for the assets of Catalogics, the
Company paid $150,000 and issued 2,750,000 shares of the Company's common stock.
Of the 2,750,000 shares of the Company's common stock, issued to Dr. Mittal,
1,250,000 shares were subject to a repurchase right by the Company. The
repurchase right lapses over 48 months beginning July 1, 1996. (see Note 10).
Through this acquisition, the Company
F-15
<PAGE> 94
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
received an assembled workforce consisting solely of the founder of Catalogics,
and the rights to software in the development stage. The acquisition was
accounted for as a purchase, and the total purchase price was allocated as
described below. The assembled workforce intangible is being amortized over
three years, and the related goodwill is being amortized over five years, their
estimated useful lives.
<TABLE>
<S> <C>
Workforce intangible........................................ $ 30,000
In-process research and development......................... 16,500
Goodwill.................................................... 118,500
--------
$165,000
========
</TABLE>
As of March 31, 2000 and 1999, accumulated amortization of intangible
assets was approximately $116,375 and $92,675, respectively.
Selectica India Acquisition
In July 1999, the Company converted $150,000 of advances to Selectica
Configurators India Pvt. Ltd. (Selectica India) into 637,500 shares of common
stock of Selectica India, representing 99.9% of total outstanding shares.
Through this acquisition, the Company received various property and equipment
and an assembled workforce and assumed various liabilities. The acquisition was
accounted for as a purchase, and the total purchase price was allocated to net
tangible assets.
10. STOCKHOLDERS' EQUITY
Common Stock
In July 1996, the Company issued 2,500,000 shares of common stock to the
founders of the Company in exchange for $12,500, the then estimated fair value
of common stock. Such shares vest ratably over 48 months. As of March 31, 2000
and 1999, 156,250, and 781,250 shares are subject to repurchase at $0.01 per
share, respectively.
In March, 2000, the Company completed its initial public offering, of
4,450,000 shares of common stock, which included 450,000 shares purchased by the
underwriters over-allotment option. In addition, 2,400,000 shares were issued in
a private placement. At the closing of the offering, all issued and outstanding
shares of the Company's preferred stock were converted into 19,777,707 shares of
common stock.
Common Stock Reserved for Future Issuance
At March 31, 2000, common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
Stock option plans:
Outstanding............................................... 3,446,627
Reserved for future grants................................ 2,334,179
Employee Stock Purchase Plan................................ 1,000,000
Warrants to purchase common stock........................... 820,408
---------
Total common stock reserved for future issuance... 7,601,214
=========
</TABLE>
F-16
<PAGE> 95
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Convertible Preferred Stock
Prior to the Company's initial public offering in March 2000, the Company
had 19,777,707 shares of convertible preferred stock authorized. In accordance
with the convertible preferred stock rights, all preferred stock outstanding
automatically converted into 19,777,707 shares of common stock upon closing of
the initial public offering. There was no convertible stock authorized, issued,
or outstanding at March 31, 2000.
Convertible Preferred Stock at March 31, 1999 was as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND
AUTHORIZED SHARES OUTSTANDING
----------------- -----------------
<S> <C> <C>
Series A....................................... 1,800,000 1,700,000
Series B....................................... 4,000,000 3,750,000
Series C....................................... 3,300,000 3,253,126
Series D....................................... 5,000,000 4,863,935
Undesignated................................... 10,900,000 --
---------- ----------
25,000,000 13,567,061
========== ==========
</TABLE>
Preferred Stock
The Company's Certificate of Incorporation was amended to authorize
25,000,000 shares of preferred stock at a par value of $0.0001 per share upon
reincorporation in Delaware in January 2000. There was no preferred stock issued
and outstanding at March 31, 2000.
The Board of Directors has the authority, without action by the
stockholders, to designate and issue the preferred stock in one or more series
and to fix the rights, preferences, privileges and related restrictions,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of the series. The
accompanying consolidated financial statements have been retroactively restated
to give effect to the reincorporation.
Warrants
The Company had previously issued convertible preferred stock warrants.
Upon the effectiveness of the Company's initial public offering, all such
warrants became exercisable as common stock.
In association with a credit agreement entered into with a financial
institution, the Company issued a warrant that entitles the holder to purchase
20,408 shares of Series D convertible preferred stock at an exercise price of
$1.47 per share. The warrant expires April 17, 2005. The fair value of the
warrant, $25,714, was amortized over the life of the credit agreement, which
expired on June 1999. The Company determined the fair value of the warrants
using the Black-Scholes valuation model assuming a fair value of the Company's
Series D convertible preferred stock of $1.47, a risk-free interest rate of
6.0%, a volatility factor of 147%, and a life of five years.
In connection with convertible promissory notes issued in May 1999, the
Company issued warrants to purchase 15,000 shares of Series E convertible
preferred stock at $4.382 per share. This transaction resulted in the valuation
of warrants of $49,781 of which $35,107 was amortized as interest expense prior
to the conversion of the convertible debt into Series E convertible preferred
stock on June 16, 1999. The Company determined the fair value of the warrants
using the Black-Scholes valuation model assuming a fair value of the Company's
Series E convertible preferred stock
F-17
<PAGE> 96
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of $4.382, risk free interest rate of 5.9%, volatility factor of 96.1%, and a
life of five years. The warrants were exercised in fiscal 2000.
In connection with the issuance of shares of the Company's Series E
convertible preferred stock in fiscal 2000, the Company issued warrants to
purchase 187,129 shares of the Company's Series E convertible preferred stock at
$4.382 per share. The warrants were exercised on February 25, 2000. The Company
determined the fair value of the warrants of $3.29 using the Black-Scholes
valuation model assuming a fair value of the Company's Series E convertible
preferred stock of $4.382, risk free interest rate of 5.78%, volatility factor
of 96.1%, and a life of five years.
In September 1999, the Company entered into a development agreement with an
investor whereby the investor and the Company will work to port the current
suite of ACE products to additional platforms. In connection with the
development agreement, the Company issued warrants to purchase 57,000 shares of
Series E convertible preferred stock at $4.382 per share. The warrants were
issued in December 1999 and were exercised on March 9, 2000. The Company
determined the fair value of the warrants using the Black-Scholes valuation
model assuming a fair value of the Company's Series E convertible preferred
stock of $19.00, risk free interest rate of 5.5%, volatility factor of 80% and a
life of 22 months. The fair value of $381,000 is being amortized over the
remaining life of the development agreement. As March 31, 2000, total
amortization of this warrant was approximately $65,000.
In November 1999, the Company entered into a license agreement and one year
maintenance contract in the amount of $3.0 million with a customer and in
connection with the agreement committed to the issuance of a warrant to purchase
800,000 shares of common stock. In January 2000 the warrant was issued with an
exercise price of the lesser of $13.00 or the initial public offering price of
the Company. The holder of the warrant may elect to net exercise this warrant.
The warrants are immediately exercisable and expire in January 2002. The value
of the warrants was estimated to be $16.4 million and was based upon a
Black-Scholes valuation model with the following assumptions: risk free interest
rate of 5.5%, dividend yield of 0%, volatility of 80%, expected life of 2 years,
exercise price of $13.00 and fair value of $30.00. As the warrant value less the
warrant purchase price of $800,000, exceeds the related license and maintenance
revenue under the agreement and subsequent services agreements, the Company has
recorded a $9.7 million loss on the contract for the year ended March 31, 2000.
Stock Option Plan
The Company's 1996 Stock Plan (the Plan) was adopted by the Board of
Directors on August 26, 1996. The Plan provides for granting of incentive stock
options to employees and nonstatutory stock options to outside directors and
consultants. Incentive stock options are granted at an exercise price of not
less than the fair value per share of the common stock on the date of grant as
determined by the Board of Directors. Nonstatutory stock options are granted at
an exercise price of not less than 85% of the fair value per share on the date
of grant as determined by the Board of Directors. Vesting and exercise
provisions are determined by the Board of Directors at the time of grant.
Options generally vest with respect to 25% of the shares one year after the
options' vesting commencement date and the remainder ratably over the following
three years. Options granted under the Plan have a maximum term of ten years.
Options can be exercised at any time and stock issued under the Plan may be, as
determined by the Board of Directors, subject to repurchase by the Company. This
right to repurchase generally lapses over four years from the original date of
issuance or grant.
F-18
<PAGE> 97
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999 Employee Stock Purchase Plan
On November 18, 1999, the Company's Board of Directors approved, subject to
shareholder approval, the adoption of the 1999 Employee Stock Purchase Plan (the
Purchase Plan). A total of 1,000,000 shares of common stock has been reserved
for issuance under the Purchase Plan. On each May 1, starting in 2001, the
number of shares will be automatically increased by the lesser of 2% of then
outstanding shares of common stock or 1,000,000 shares. Each offering period
will consist of four consecutive purchase periods of six months duration. The
initial offering period is expected to begin on March 10, 2000 and ends on April
30, 2002.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
the Company's common stock at the beginning of each offering period or at the
end of each purchase period. Employees who work more than five months per year
and more than twenty hours per week are eligible to participate in the Purchase
Plan. Stockholders who own more than 5% of outstanding common stock are excluded
from participating in the Purchase Plan. Each eligible employee is limited to
purchase no more than 750 shares per purchase date (1,500 shares per year) and
no more than $25,000 of stock per calendar year. If not terminated earlier, the
Purchase Plan has a term of twenty years.
Activity under all stock option plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------------
SHARES NUMBER OF WEIGHTED-AVERAGE
AVAILABLE SHARES EXERCISE PRICE EXERCISE PRICE
---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997........... 397,439 655,000 $0.010 - $0.030 $ 0.02
Increase in shares reserved....... 1,339,500 -- $- $ --
Options granted................... (970,100) 970,100 $0.030 - $0.100 $ 0.07
Options exercised................. -- (338,000) $0.010 - $0.100 $ 0.02
Options canceled.................. 7,500 (7,500) $0.100 $ 0.10
Stock grant for services.......... (12,000) -- $0.077 $ 0.08
---------- ----------
Balance at March 31, 1998........... 762,339 1,279,600 $0.030 - $0.100 $ 0.06
Increase in shares reserved....... 750,000 -- $- $ --
Options granted................... (1,315,500) 1,315,500 $0.100 - $1.250 $ 0.37
Options exercised................. -- (702,262) $0.030 - $0.500 $ 0.05
Options canceled.................. 469,188 (469,188) $0.030 - $0.500 $ 0.10
Shares repurchased................ 31,250 -- $0.010 $ 0.01
Stock grant for services.......... (46,304) -- $0.020 - $0.300 $ 0.26
---------- ----------
Balance at March 31, 1999........... 650,973 1,423,650 $0.030 - $2.500 $ 0.35
Increase in shares reserved....... 6,809,090 -- $- $ --
Options granted................... (5,305,200) 5,305,200 $1.500 - $30.00 $10.04
Options exercised................. -- (3,085,818) $0.030 - $30.00 $ 4.71
Options canceled.................. 196,405 (196,405) $0.100 - $25.50 $ 2.60
Shares repurchased................ 15,981 -- $0.100 - $0.500 $ .22
Stock grant for services.......... (33,070) -- $1.500 - $4.380 $ 2.37
---------- ----------
Balance at March 31, 2000........... 2,334,179 3,446,627 $0.100 - $30.00 $11.19
========== ==========
</TABLE>
F-19
<PAGE> 98
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------------------- ---------------------
NUMBER OF WEIGHTED WEIGHTED-
OUTSTANDING AVERAGE WEIGHTED- OPTIONS AVERAGE
SHARES AS OF REMAINING AVERAGE VESTED AT AGGREGATE
RANGE OF MARCH 31, CONTRACTUAL EXERCISE MARCH 31, PURCHASE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
--------------- ------------ ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.1000 - $0.1000 66,076 7.84 $0.1000 20,832 $0.1000
$0.2000 - $0.5000 181,117 8.43 $0.2884 32,529 $0.3271
$1.0000 - $1.2500 108,406 8.87 $1.0874 26,964 $1.0548
$1.5000 - $2.5000 659,615 9.32 $2.0901 45,520 $1.9361
$4.3800 - $4.3800 205,350 9.57 $4.3800 6,552 $4.3800
$8.5000 - $10.0000 313,423 9.74 $9.6100 3,402 $8.9414
$11.000 - $11.0000 1,246,990 9.86 $11.000 24,326 $11.000
$25.500 - $30.0000 665,650 9.94 $29.127 -- $0.0000
--------- ---- ------- ------- -------
$0.1000 - $30.0000 3,446,627 9.60 $11.191 160,125 $2.8478
========= =======
</TABLE>
All shares granted under the Plan are exercisable, however, shares
exercised but not vested are subject to repurchase. At March 31, 2000, 2,612,917
shares were subject to repurchase under the Plan.
1999 Equity Incentive Plan
The Company adopted the 1999 Equity Incentive Plan (the Equity Incentive
Plan) in fiscal 2000. A total of 2,200,000 shares of common stock has been
reserved under the Equity Incentive Plan. On each January 1, starting in 2001,
the number of shares will be automatically increased by the lesser of 5% of then
outstanding shares or 1,800,000. The Equity Incentive Plan includes Incentive
Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Shares of
Restricted Stock, and Stock Units. All employees, nonemployee directors, and
consultants are eligible to participate in the Equity Incentive Plan. Each
eligible participant is limited to being granted 330,000 shares per year, except
in the first year of employment where the limit is 660,000 shares. The Equity
Incentive Plan has a term of 10 years.
Stock Issued for Services
Under the terms of the Company's 1996 Stock Plan from time to time the
Company issues shares of common stock in exchange for services. All services
were complete at the date of grant and the value of the services was based upon
the then fair value of the common stock. During fiscal 1998 the Company issued
12,000 shares of common stock at a weighted average fair value of $0.077 in
exchange for accounting services. During fiscal 1999, the Company issued 46,304
shares of common stock at a weighted average fair value of $0.919 in exchange
for various services including legal, marketing, business development, and
recruiting services. During fiscal 2000, the Company issued 33,070 shares of
common stock at a weighted average fair value of $3.218 in exchange for various
services including legal, accounting, recruiting, and consulting.
Deferred Compensation
During the years ended March 31, 2000, 1999, and 1998, the Company recorded
aggregate deferred compensation of $13,164,704 representing the difference
between the exercise price of stock options granted and the then deemed fair
value of the Company's common stock. The amortization of deferred compensation
is charged to operations over the vesting period of the options using the
F-20
<PAGE> 99
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
straight-line method, which is typically four years. For the years ended March
31, 2000, 1999 and 1998, the Company amortized $1,261,457, $47,500, and $3,541,
respectively.
Accelerated Options
In March 1999, in association with an employee termination agreement, the
Company accelerated 137,000 shares of unvested common stock and recorded
$170,000 of related compensation expense.
Accounting for Stock-Based Compensation
As permitted under FAS 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its stock based awarded to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding net loss is required by FAS 123 and has
been determined as if the Company had accounted for its employee stock options
granted under the fair value method of FAS 123. The fair value of options
granted was estimated at the date of grant using the minimum-value method. The
minimum-value option valuation model was developed for use in estimating the
fair value of nonpublicly traded options that have no vesting restrictions and
are fully transferable. In addition option valuation models require the input of
highly subjective assumptions, including expected life and risk-free interest
rates. Because the Company's options have characteristics significantly
different from those of traded options and because the changes in the subjective
input assumptions can materially affect the fair value estimate, the existing
model does not necessarily provide a reliable single measure of the fair value
of its options.
The Company has not granted stock options subsequent to the initial public
offering on March 10, 2000. The Company will value options granted subsequent to
the initial public offering using the Black-Scholes valuation model.
The fair value of stock options granted in fiscal years 2000, 1999 and 1998
were estimated at the date of grant using the following weighted average
assumptions:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.96% 5.05% 5.94%
Expected dividend yield..................................... 0.00% 0.00% 0.00%
Volatility.................................................. 0.00% 0.00% 0.00%
Expected life of options in years........................... 7.00 7.00 7.00
</TABLE>
The weighted-average fair value where exercise price is equal to the deemed
fair value of common stock on date of grant for the years ended March 31, 2000,
1999 and 1998 was $4.90, $0.11 and $0.02, respectively. The weighted-average
fair value where exercise price is less than the deemed fair value of common
stock on date of grant for the years ended March 31, 2000 and 1999 was $6.75 and
$0.56, respectively. There were no options where the exercise price was less
than the deemed fair value of common stock on the date of grant for the year
ended March 31, 1998. The Company has accounted for the differential between the
exercise price and deemed fair value as deferred compensation.
F-21
<PAGE> 100
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for the Company's stock based compensation plan been
determined based on the fair value at the grant date for awards under those
plans consistent with the method of FAS 123, the Company's net loss and net loss
per share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported.............................. $(31,779,012) $(7,536,901) $(3,101,449)
Pro forma................................ $(33,576,947) $(7,551,879) $(3,111,548)
Basic and diluted, pro forma net loss per
share applicable to common
stockholders............................. $ (4.80) $ (1.58) $ (0.91)
</TABLE>
11. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 2000
--------------
<S> <C>
Current provision:
State..................................................... $20,000
Foreign................................................... 30,000
-------
$50,000
=======
</TABLE>
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate (35%) to income
before taxes is explained below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate.... $(10,781,000) $(2,637,000) $(1,085,000)
Loss for which no tax benefit is currently
recognizable............................. 10,781,000 2,637,000 1,085,000
State taxes................................ 20,000 -- --
Foreign taxes.............................. 30,000 -- --
------------ ----------- -----------
Total provision.................. $ 50,000 $ -- $ --
============ =========== ===========
</TABLE>
F-22
<PAGE> 101
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 4,416,000 $ 3,967,000 $ 1,188,000
Tax credit carryforwards................ 619,000 296,000 103,000
Deferred revenue........................ 7,522,000 314,000 153,000
Accruals and reserves not currently
deductible........................... -- 136,000 --
Nondeductible deferred charge............. 3,952,000 -- --
Other..................................... 723,000 -- --
------------ ------------ -----------
Total deferred tax assets................. 17,232,000 4,713,000 1,444,000
Valuation allowance....................... (17,232,000) (4,713,000) (1,444,000)
------------ ------------ -----------
Net deferred tax assets......... $ -- $ -- $ --
============ ============ ===========
</TABLE>
The Company has recorded a tax provision of $50,000 for the year ended
March 31, 2000. The provision for income taxes consists primarily of state
income taxes and foreign taxes. There is no provision for income taxes for the
years ended March 31, 1999 and 1998.
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based on the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
The valuation allowance increased by $12,519,000 and $3,269,000 during the
years ended March 31, 2000 and 1999, respectively.
As of March 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately $10,900,000 and $10,300,000, respectively. As of
March 31, 2000, the Company also had federal and state research and development
tax credit carryforwards of approximately $400,000 and $300,000, respectively.
The net operating loss and tax credit carryforwards will expire at various dates
beginning in 2005 through 2020, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of the net operating loss and
credit carryforwards before utilization.
12. RELATED PARTY
During the years ended March 31, 2000, 1999, and 1998, certain services
were performed by Selectica Configurators India Pvt. Ltd. (Selectica India), a
related party. These efforts included quality and assurance testing and
consulting services. Prior to June 30, 1999, Selectica India was owned by the
parents of the chief executive officer and founder of the Company. Total
expenses related to these efforts, which are included in the Company's
statements of operations, by Selectica India, amounted to $135,000, $302,511,
and $51,200 for the years ended March 31, 2000, 1999, and 1998, respectively.
The Company also advanced $155,000 to Selectica India during 1999 for future
services efforts. Amounts included in accounts payable were immaterial for all
periods presented.
F-23
<PAGE> 102
SELECTICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During July 1999, the Company acquired a majority ownership of Selectica, India.
See Note 9 for further details.
In December 1999, the Company acquired approximately 2% of the equity in
LoanMarket Resources, LLC in exchange for a license and consulting service
agreement. As there is no readily determinable fair value for the equity
position in LoanMarket Resources, LLC, because this is a privately held company,
the Company has not ascribed any value to the investment. Revenue recognized on
the agreement was approximately $434,000 for the year and represented the
percentage-of-completion to date. Amounts recognized under the contract were
less than total cash received to date. Remaining cash receipts of approximately
$366,000 are included in deferred revenues as of March 31, 2000.
13. BENEFIT PLAN
Effective February 1998, the Company adopted a tax-deferred savings plan,
the Selectica 401(k) Plan (the 401(k) Plan), for the benefit of qualified
employees. The 401(k) Plan is designed to provide employees with an accumulation
of funds at retirement. Qualified employees may elect to make contributions to
the 401(k) Plan on a monthly basis. The 401(k) Plan does not require the Company
to make any contributions. No contributions were made by the Company for the
years ended March 31, 2000, 1999, and 1998. Administrative expenses relating to
the 401(k) Plan are insignificant.
F-24
<PAGE> 103
SELECTICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000*
-------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $125,144 $215,818
Short-term investments.................................... 57,166 --
Accounts receivable, net of allowance for doubtful
accounts of $555 and $415, respectively................ 9,308 5,731
Advances to related party................................. 18 18
Prepaid expenses and other current assets................. 6,868 9,418
-------- --------
Total current assets.............................. 198,504 230,985
Property and equipment, net................................. 7,926 6,127
Goodwill, net of amortization of $122 and $116,
respectively.............................................. 24 30
Other assets................................................ 2,247 2,054
Long-term investments....................................... 21,295 --
Investments, restricted..................................... 98 100
Development agreement, net of amortization of $1,541 and
$1,011, respectively...................................... 2,626 3,156
-------- --------
Total assets...................................... $232,720 $242,452
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,163 $ 4,258
Accrued payroll and related liabilities................... 3,375 1,879
Other accrued liabilities................................. 1,327 3,755
Deferred revenues......................................... 23,340 18,482
-------- --------
Total current liabilities......................... 31,205 28,374
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................... -- --
Common stock.............................................. 3 3
Additional paid-in capital................................ 282,258 281,773
Deferred compensation..................................... (11,081) (11,860)
Stockholder notes receivable.............................. (12,716) (12,716)
Accumulated deficit....................................... (56,715) (43,122)
Accumulated other comprehensive loss...................... (234) --
-------- --------
Total stockholders' equity........................ 201,515 214,078
-------- --------
Total liabilities and stockholders' equity........ $232,720 $242,452
======== ========
</TABLE>
---------------
* Amounts derived from audited financial statements
See accompanying notes.
F-25
<PAGE> 104
SELECTICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- -------
<S> <C> <C>
Revenues:
License................................................... $ 3,674 $ 708
Services.................................................. 3,907 493
-------- -------
Total revenues.................................... 7,581 1,201
Cost of revenues:
License................................................... 231 52
Services.................................................. 5,227 1,069
Services -- related party................................. -- 135
-------- -------
Total cost of revenues............................ 5,458 1,256
-------- -------
Gross profit (loss)......................................... 2,123 (55)
Operating expenses:
Research and development.................................. 4,382 1,479
Sales and marketing....................................... 12,723 1,885
General and administrative................................ 1,953 498
-------- -------
Total operating expenses.......................... 19,058 3,862
-------- -------
Loss from operations........................................ (16,935) (3,917)
Other income (expense):
Interest income........................................... 3,342 --
Interest expense.......................................... -- (47)
-------- -------
Loss before provision for income taxes...................... (13,593) (3,964)
Provision for income taxes.................................. -- 26
-------- -------
Net loss.................................................... $(13,593) $(3,990)
======== =======
Basic and diluted, net loss per share..................... $ (0.41) $ (0.21)
======== =======
Weighted-average shares of common stock used in computing
basic and diluted, net loss per share..................... 33,340 19,380
======== =======
</TABLE>
See accompanying notes.
F-26
<PAGE> 105
SELECTICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(13,593) $(3,990)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 486 140
Amortization of private placement discount................ 534 --
Amortization of warrants in connection with license and
service agreement...................................... 2,728 --
Issuance of common stock in exchange for services......... -- 22
Accrued interest on convertible notes converted to
convertible preferred stock............................ -- 7
Amortization of goodwill.................................. 6 6
Amortization of development agreement..................... 530 --
Amortization of deferred compensation..................... 849 25
Accelerated vesting of stock options to employees......... 475 66
Warrants issued in conjunction with debt financing........ -- 35
Changes in assets and liabilities:
Accounts receivable.................................... (3,577) (2,312)
Advances to related party.............................. -- (14)
Prepaid expenses and other current assets.............. (178) (163)
Other assets........................................... (191) 2
Accounts payable....................................... (1,095) 301
Accrued payroll and related liabilities................ 1,496 284
Other accrued liabilities.............................. (2,428) (194)
Deferred revenues...................................... 4,324 2,666
-------- -------
Net cash used in operating activities....................... (9,634) (3,119)
INVESTING ACTIVITIES
Capital expenditures...................................... (2,285) (488)
Purchase of short term investments........................ (57,418) --
Purchase of long term investments......................... (21,277) --
-------- -------
Net cash used in investing activities....................... (80,980) (488)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible notes........... -- 1,000
Net proceeds from initial public offering................. (98) --
Net proceeds from issuance of convertible preferred
stock.................................................. -- 13,929
Proceeds from issuance of common stock, net of
repurchases............................................ 38 20
-------- -------
Net cash provided by financing activities................... (60) 14,949
-------- -------
Net increase (decrease) in cash and cash equivalents........ (90,674) 11,342
Cash and cash equivalents at beginning of the period........ 215,818 --
-------- -------
Cash and cash equivalents at end of the period.............. $125,144 $11,342
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Deferred compensation related to stock options.............. $ 284 $ 261
Convertible notes payable and accrued interest converted to
convertible preferred stock............................... $ -- $ 944
Warrants issued in conjunction with convertible notes
payable................................................... $ -- $ 50
Warrants issued in conjunction with convertible preferred
stock financing........................................... $ -- $ 616
</TABLE>
See accompanying notes.
F-27
<PAGE> 106
SELECTICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated balance sheets as of June 30, 2000, the
condensed consolidated statements of operations for the three months ended June
30, 2000 and 1999, and the condensed consolidated statements of cash flows for
the three months ended June 30, 2000 and 1999, have been prepared by the Company
and are unaudited. In the opinion of management, all necessary adjustments
(which include normal recurring adjustments) have been made to present fairly
the financial position, results of operations, and cash flows at June 30, 2000
and for all periods presented. Interim results are not necessarily indicative of
the results for a full fiscal year. The condensed consolidated balance sheet as
of March 31, 2000 has been derived from audited consolidated financial
statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements and
notes included in this prospectus and the Company's Annual Report on Form 10-K
for the year ended March 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Customer Concentrations
A limited number of customers have historically accounted for a substantial
portion of the Company's revenues.
Customers who accounted for at least 10% of total revenues were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
2000 1999
---- ----
<S> <C> <C>
Samsung SDS............................................... 31% *
Southwestern Bell......................................... 19% *
Dell...................................................... 14% *
RTS Software.............................................. * 39%
Watlow Electric........................................... * 19%
BMW of North America...................................... * 18%
Centigram Communications.................................. * 15%
</TABLE>
---------------
* Revenues were less than 10%.
F-28
<PAGE> 107
SELECTICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS
All investments as of June 30, 2000 are classified as available-for-sale
securities. The Company did not hold any investments as of March 31, 2000. The
following is a summary of the aggregate cost, gross unrealized losses, and
estimated fair value of the Company's short-term and long-term investments:
<TABLE>
<CAPTION>
JUNE 30,
2000
--------------
(IN THOUSANDS)
<S> <C>
SHORT-TERM INVESTMENTS:
Certificate of deposit.................................... $10,112
Corporate notes and bonds................................. 20,740
Municipal bonds........................................... 2,516
Government agencies....................................... 24,038
-------
Short-term investments at cost......................... 57,406
Unrealized losses......................................... (240)
-------
Fair value............................................. $57,166
=======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
2000
--------------
(IN THOUSANDS)
<S> <C>
LONG-TERM INVESTMENTS:
Corporate notes and bonds................................. $ 5,078
Government agencies....................................... 7,916
U.S. treasury notes....................................... 8,283
-------
Short-term investments at cost......................... 21,277
Unrealized gains.......................................... 18
-------
Fair value............................................. $21,295
=======
</TABLE>
Unrealized holding gains and losses on available-for-sale securities at
March 31, 2000 and gross realized gains and losses on sales of
available-for-sale securities during the three months ended June 30, 2000 and
1999 were not significant.
3. STOCKHOLDERS' EQUITY
Warrants
In September 1999, the Company entered into a development agreement with an
investor whereby the investor and the Company will work to port the current
suite of ACE products to additional platforms. In connection with the
development agreement, the Company issued warrants to purchase 57,000 shares of
Series E convertible preferred stock at $4.382 per share. The warrants were
issued in December 1999 and were exercised on March 9, 2000. The Company
determined the fair value of the warrants using the Black-Scholes valuation
model assuming a fair value of the Company's Series E convertible preferred
stock of $19.00, risk free interest rate of 5.5%, volatility factor of 80% and a
life of 22 months. The fair value of $381,000 is being amortized over the
remaining life of the development agreement. As June 30, 2000, total
amortization of this warrant was approximately $121,000.
F-29
<PAGE> 108
SELECTICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1999, the Company entered into a license agreement and one year
maintenance contract in the amount of $3.0 million with a customer and in
connection with the agreement committed to the issuance of a warrant to purchase
800,000 shares of common stock. In January 2000 the warrant was issued with an
exercise price of $13.00. The holder of the warrant may elect to net exercise
this warrant. The warrants are immediately exercisable and expire in January
2002. The value of the warrants was estimated to be $16.4 million and was based
upon a Black-Scholes valuation model with the following assumptions: risk free
interest rate of 5.5%, dividend yield of 0%, volatility of 80%, expected life of
2 years, exercise price of $13.00 and fair value of $30.00. As the warrant value
less the warrant purchase price of $800,000, exceeds the related license and
maintenance revenue under the agreement and subsequent services agreements, the
Company recorded a $9.7 million loss on the contract in the year ended March 31,
2000. The Company amortized $2.6 million related to the fair value of the
warrants in the three months ended June 30, 2000.
Deferred Compensation
During the three months ended June 30, 2000, the Company granted 311,065
options to employees with exercise price that were less than fair value and
recorded deferred compensation of $284,000. Such compensation will be amortized
over the vesting period of the options, typically four years. For the three
months ended June 30, 2000 and 1999, the Company amortized $849,000 and $25,000,
respectively.
Accelerated Options
During the three months ended June 30, 2000, in association with employee
termination agreements, the Company accelerated 19,807 shares of unvested common
stock and recorded $475,000 of related compensation expense.
4. INCOME TAXES
There was no provision for income taxes for the three months ended June 30,
2000 due to the net operating losses. The Company has recorded a tax provision
of $26,000 for the three months ended June 30, 1999 primarily for state and
foreign taxes.
5. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Financial
Accounting Standards Board No. 128, Earnings per Share. The diluted net loss per
share is equivalent to the basic net loss per share because the Company has
experienced losses since inception and thus no potential common shares from the
exercise of stock options, conversion of convertible preferred stock, or
exercise of warrants have been included in the net loss per share calculation.
Options to purchase 2,161,569 shares of common stock and warrants to purchase
800,000 shares of common stock were excluded from the June 30, 2000 computation
as their effect is antidilutive.
F-30
<PAGE> 109
SELECTICA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPREHENSIVE LOSS
The components of comprehensive loss for the three months ended June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Net loss................................................ $(13,593) $(3,990)
Change in unrealized losses on securities............... (234) --
-------- -------
Comprehensive loss...................................... $(13,827) $(3,990)
======== =======
</TABLE>
Accumulated other comprehensive loss as of June 30, 2000, represents net
unrealized losses on securities. There were no elements of accumulated other
comprehensive income at March 31, 2000.
7. ACQUISITIONS
In July 2000, the Company entered into an agreement to acquire Wakely
Software, Inc., a provider of rating software and actuarial services for the
insurance industry for 175,000 shares of the Company's common stock and
$4,350,000. Combined with Wakely Software, the Company intends to offer a
multi-channel Internet sales solution developed for the insurance industry. The
purchase price is estimated to be approximately $18 million, excluding
transaction costs. The Company will account for the acquisition as a purchase
transaction when it is consummated. The purchase price will be allocated to the
assets acquired and liabilities assumed based on their respective fair values.
The Company believes that a significant portion of the purchase price will be
allocated to intangible assets, including goodwill which will be amortized over
the estimated useful lives.
F-31
<PAGE> 110
[Selectica Logo]
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table presents the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 88,500
NASD fee.................................................... 16,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Blue sky fees and expenses.................................. 10,000
Custodian and transfer agent fees........................... 10,000
Miscellaneous fees and expenses............................. 125,500
----------
Total............................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit indemnification
under limited circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI, Section 6.1 of our bylaws provides for mandatory
indemnification of our directors, officers and employees to the maximum extent
permitted by the Delaware General Corporation Law. Our Certificate of
Incorporation provides that, under Delaware law, our officers and directors
shall not be liable for monetary damages for breach of the officers' or
directors' fiduciary duty as officers or directors to our stockholders and us.
This provision in the Certificate of Incorporation does not eliminate the
officers' or directors' fiduciary duty, and in appropriate circumstances,
equitable remedies like injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each officer or director will
continue to be subject to liability for breach of the officer's or director's
duty of loyalty to us for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the officer or director and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect an officer's or
director's responsibilities under any other law, such as the federal securities
laws or state or federal environmental laws. We have entered into
indemnification agreements with our officers and directors, a form of which is
attached as Exhibit 10.1 and incorporated by reference. The indemnification
agreements provide our officers and directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. Reference
is made to Section 7 of the underwriting agreement contained in Exhibit 1.1 to
this prospectus, indemnifying officers and directors of ours against limited
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1996, we have issued and sold the following securities:
1. We granted direct issuances or stock options to purchase 9,299,300
shares of our common stock at exercise prices ranging from $0.01 to
$74.6875 per share to employees, consultants, directors and other service
providers under our stock option plans.
II-1
<PAGE> 112
2. We issued and sold an aggregate of 4,837,340 shares of our common
stock to employees, consultants, and other service providers for aggregate
consideration of approximately $14,661,672 under direct issuances or
exercises of options granted under our stock option plans.
3. In July 1996, we issued and sold 1,500,000 shares of our Series A
Preferred Stock for an aggregate purchase price of approximately $137,501
and 1,250,000 shares of our common stock for an aggregate purchase price of
$12,500 to Rajen Jaswa under a stock purchase agreement.
4. In July 1996, we issued an aggregate of 2,750,000 shares of our
common stock to Dr. Sanjay Mittal in exchange for 3,250,000 shares of
Catalogics. Of the 2,750,000 shares of our common stock Dr. Mittal received
1,250,000 shares were subject to a repurchase right by us. The repurchase
right lapses over 48 months beginning July 1, 1996. The fair value of the
1,250,000 shares of common stock subject to repurchase was $12,500.
5. In October 1996, we issued 200,000 shares of our Series A
Preferred Stock and 89,000 shares of our common stock to Vasudev Bhandarkar
and an additional 11,000 shares of our common stock to a group of employees
of Alma Enterprises in exchange for the fixed assets of Alma Enterprises.
6. In October 1996, we issued and sold 473,000 shares of common stock
for an aggregate purchase price of $4,730 to Vasudev Bhandarkar under a
stock purchase agreement.
7. In January 1997, we issued and sold 3,750,000 shares of our Series
B Preferred Stock for an aggregate purchase price of approximately
$1,001,330 to a group of investors under a stock purchase agreement.
8. From July 24, 1997 through October 1, 1997, we issued and sold
3,253,126 shares of our Series C Preferred Stock for an aggregate purchase
price of approximately $2,999,382 to a group of investors under a stock
purchase agreement.
9. On April 17, 1998 we issued a warrant to purchase 32,609 shares of
our Series C Preferred Stock with an exercise price of $0.92 per share to
Imperial Bank. The warrant was subsequently amended on July 1, 1998 to be
exercisable for 20,408 shares of our Series D Preferred Stock with an
exercise price of $1.47 per share. The warrant was subsequently exercised
and we issued 20,177 shares thereunder.
10. From June 17, 1998 through July 27, 1998 we issued and sold
4,863,935 shares of our Series D Preferred Stock for an aggregate purchase
price of approximately $7,149,984 to a group of investors under a stock
purchase agreement.
11. On February 11, 1999, we issued a warrant to purchase 187,129
shares of our Series E Preferred Stock with an exercise price of up to
$4.38 per share to Deutsche Bank Securities. The warrant was subsequently
exercised and we issued 159,795 shares thereunder.
12. On May 14, 1999, we issued and sold warrants to purchase 15,000
shares of our Series E Preferred Stock with an exercise price of $4.38 per
share to a group of investors under a note and warrant purchase agreement
for an aggregate purchase price of $375.00. The warrants were subsequently
exercised and we issued 15,000 shares thereunder.
13. From June 16, 1999 through October 12, 1999 we issued and sold
6,138,646 shares of our Series E Preferred Stock for an aggregate purchase
price of approximately $26,879,546 to a group of investors under a stock
purchase agreement.
14. On December 10, 1999 we issued warrants to purchase 57,000 shares
of our Series E Preferred Stock with an exercise price of $4.38 per share
to Intel Corporation. The warrant was subsequently exercised and we issued
57,000 shares thereunder.
II-2
<PAGE> 113
15. On January 7, 2000 we issued and sold a warrant to purchase
800,000 shares of our common stock with an exercise price of $13.00 per
share to Cisco Systems, Inc. for an aggregate purchase price of
approximately $800,000.
16. On January 19, 2000 Selectica, Inc., a California corporation
(Selectica California), was merged with and into its wholly-owned
subsidiary, Selectica, Inc., a Delaware corporation (Selectica Delaware),
for purposes of reincorporating into the State of Delaware. In connection
with the reincorporation, Selectica Delaware issued shares of its common
stock and preferred stock to the holders of common stock and preferred
stock of Selectica California, such that each holder of common stock or
preferred stock of Selectica California received a proportionate interest
in the common stock or preferred stock of Selectica Delaware. The issuance
of shares in the reincorporation was pursuant to an exemption from the
registration requirements of the Securities Act provided by Rule 145
promulgated thereunder.
17. On March 15, 2000 we issued and sold 1,200,000 shares of our
common stock to Samsung SDS Co. Ltd., at an aggregate purchase price of
$34,560,000 under a stock purchase agreement.
18. On March 15, 2000 we issued and sold 1,200,000 shares of our
common stock to Dell USA, L.P. at an aggregate purchase price of
$33,480,000 under a stock purchase agreement.
19. On July 17, 2000 we entered into an agreement to acquire Wakely
Software, Inc. pursuant to which we will issue 175,000 shares of our common
stock.
Except as otherwise stated, the sale of the above securities was deemed to
be exempt from registration under the Securities Act in reliance upon Section
4(2) of the Securities Act or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving any public offering or transactions under compensation
benefit plans and contracts relating to compensation as provided under Rule 701.
The recipients of securities in each transaction represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution and appropriate legends were affixed to the
share certificates issued in these transactions. All recipients had adequate
access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.2* Second Amended and Restated Certificate of Incorporation.
3.3* Amended and Restated Bylaws of the Registrant.
4.1* Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2* Form of Registrant's Common Stock certificate.
4.3* Amended and Restated Investor Rights Agreement dated June
16, 1999.
4.4* Warrant to Purchase Stock between the Registrant and
Imperial Bank, dated April 17, 1998; First Amendment to
Warrant between the Registrant and Imperial Bank, dated July
1, 1998.
4.5* Warrant to Purchase Stock between the Registrant and Cisco
Systems, Inc., dated January 14, 2000.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1* Form of Indemnification Agreement.
10.2* 1996 Stock Plan.
</TABLE>
II-3
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3* 1999 Employee Stock Purchase Plan.
10.4* 1999 Equity Incentive Plan.
10.5* Lease between Spieker Properties L.P. and the Registrant,
dated December 8, 1997.
10.6* Lease between John Arrillaga Survivors Trust and the Richard
T. Perry Separate Property Trust as Landlord and the
Registrant as Tenant, dated October 1, 1999.
10.7*+ Major Account License Agreement between the Registrant and
Fujitsu Network Communications, dated November 4, 1998.
10.8*+ Agreement for Web Site Design and Development Service
between the Registrant and BMW of North America, dated July
15, 1998.
10.9*+ Major Account License Agreement between the Registrant and
the Fireman's Fund Insurance Company, dated June 24, 1999.
10.10*+ Major Account License Agreement between the Registrant and
LoanMarket Resources, dated June 30, 1999.
10.11*+ Major Account License Agreement between the Registrant and
Aspect Telecommunications, dated May 17, 1999.
10.12*+ A Consulting Engagement Proposal from the Registrant to
3Com, dated July 29, 1999.
10.13*+ A Consulting Engagement Proposal from the Registrant to
3Com, dated August 10, 1999.
10.14* Employment Agreement between the Registrant and Rajen Jaswa,
dated as of July 1, 1997.
10.15* Employment Agreement between the Registrant and Dr. Sanjay
Mittal, dated as of July 1, 1997.
10.16* Offer letter from the Registrant to Stephen Bennion dated as
of September 16, 1999.
10.17* Offer letter from the Registrant to Daniel A. Carmel dated
as of July 23, 1999.
10.18*+ Major Account License Agreement between the Registrant and
Samsung SDS Co., Ltd., dated January 12, 2000; Amendment #1
to Major Account License Agreement between the Registrant
and Samsung SDS Co., Ltd., dated February 10, 2000.
10.19*+ International Value Added Reseller Agreement between the
Registrant and Samsung SDS Co., Ltd., dated January 12,
2000; Amendment #1 to International Value Added Reseller
Agreement between the Registrant and Samsung SDS Co., Ltd.,
dated February 29, 2000.
10.20* Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated January 31, 2000; Amendment #1 to the
Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated February 8, 2000.
10.21* Lease between John Arrillaga Survivors Trust and Richard T.
Perry Separate Property Trust as Landlord and the Registrant
as Tenant, dated October 1, 1999.
10.22* Stock Purchase Agreement between the Registrant and Dell
USA, L.P., dated February 14, 2000.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
---------------
* Incorporated by reference to similarly number exhibit to the Registration
Statement on Form S-1 filed by the Registrant (Reg. No. 333-92545).
** To be filed by amendment.
*** Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
II-4
<PAGE> 115
(b) The following financial schedule is filed with this registration
statement:
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
We undertake to provide to the underwriters at the closing specified in the
underwriting agreement, certificates in the denominations and registered in the
names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant under the Delaware General Corporation Law, the Certificate of
Incorporation or our bylaws, the underwriting agreement, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against these liabilities, other than the payment by us of expenses incurred or
paid by a director, officer, or controlling person of ours in the successful
defense of any action, suit or proceeding, is asserted by a director, officer or
controlling person in connection with the securities being registered in this
offering, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether this indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
We undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us under 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, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered, and the offering of these securities at that time shall be deemed
to be the initial bona fide offering.
II-5
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, 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 San Jose, State of California, on this 26th day of July 2000.
SELECTICA, INC.
By: /s/ RAJEN JASWA
--------------------------------------
Rajen Jaswa
President and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ RAJEN JASWA Chief Executive Officer and President July 26, 2000
--------------------------------------------- (Principal Executive Officer) and
Rajen Jaswa Chairman of the Board
/s/ SANJAY MITTAL* Chief Technology Officer, Vice July 26, 2000
--------------------------------------------- President, Engineering and Vice
Sanjay Mittal Chairman of the Board
/s/ STEPHEN BENNION Chief Financial Officer (Principal July 26, 2000
--------------------------------------------- Financial and Accounting Officer)
Stephen Bennion
/s/ BETSY S. ATKINS* Director July 26, 2000
---------------------------------------------
Betsy S. Atkins
/s/ ROBIN RICHARDS DONOHOE* Director July 26, 2000
---------------------------------------------
Robin Richards Donohoe
/s/ MICHAEL LYONS* Director July 26, 2000
---------------------------------------------
Michael Lyons
/s/ THOMAS NEUSTAETTER* Director July 26, 2000
---------------------------------------------
Thomas Neustaetter
/s/ JOHN FISHER* Director July 26, 2000
---------------------------------------------
John Fisher
/s/ *RAJEN JASWA
---------------------------------------------
Attorney-in-fact
/s/ *STEPHEN BENNION
---------------------------------------------
Attorney-in-fact
</TABLE>
II-6
<PAGE> 117
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT
SELECTICA, INC.
JUNE 30, 2000
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AS OF CHARGED TO BALANCE AS
BEGINNING COSTS AND OF END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts........... $ -- $ -- $ -- $ --
Year ended March 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts........... $ -- $ 29,750 $ -- $ 29,750
Year ended March 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts........... $ 29,750 $ 74,250 $ -- $104,000
Year ended March 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts........... $104,000 $325,000 $14,000 $415,000
Three months ended June 30, 2000
Deducted from asset accounts:
Allowance for doubtful accounts........... $415,000 $185,000 $44,000 $556,000
</TABLE>
<PAGE> 118
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.2* Second Amended and Restated Certificate of Incorporation.
3.3* Amended and Restated Bylaws of the Registrant.
4.1* Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2* Form of Registrant's Common Stock certificate.
4.3* Amended and Restated Investor Rights Agreement dated June
16, 1999.
4.4* Warrant to Purchase Stock between the Registrant and
Imperial Bank, dated April 17, 1998; First Amendment to
Warrant between the Registrant and Imperial Bank, dated July
1, 1998.
4.5* Warrant to Purchase Stock between the Registrant and Cisco
Systems, Inc., dated January 14, 2000.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1* Form of Indemnification Agreement.
10.2* 1996 Stock Plan.
10.3* 1999 Employee Stock Purchase Plan.
10.4* 1999 Equity Incentive Plan.
10.5* Lease between Spieker Properties L.P. and the Registrant,
dated December 8, 1997.
10.6* Lease between John Arrillaga Survivors Trust and the Richard
T. Perry Separate Property Trust as Landlord and the
Registrant as Tenant, dated October 1, 1999.
10.7*+ Major Account License Agreement between the Registrant and
Fujitsu Network Communications, Inc., dated November 4,
1998.
10.8*+ Agreement for Web Site Design and Development Service
between the Registrant and BMW of North America, Inc., dated
July 15, 1998.
10.9*+ Major Account License Agreement between the Registrant and
the Fireman's Fund Insurance Company, dated June 24, 1999.
10.10*+ Major Account License Agreement between the Registrant and
LoanMarket Resources, LLC., dated June 30, 1999.
10.11*+ Major Account License Agreement between the Registrant and
Aspect Telecommunications, dated May 17, 1999.
10.12*+ A Consulting Engagement Proposal from the Registrant to
3Com, dated July 29, 1999.
10.13*+ A Consulting Engagement Proposal from the Registrant to
3Com, dated August 10, 1999.
10.14* Employment Agreement between the Registrant and Rajen Jaswa,
dated as of July 1, 1997.
10.15* Employment Agreement between the Registrant and Dr. Sanjay
Mittal, dated as of July 1, 1997.
10.16* Offer letter from the Registrant to Stephen Bennion dated as
of September 16, 1999.
10.17* Offer letter from the Registrant to Daniel A. Carmel dated
as of July 23, 1999.
10.18*+ Major Account License Agreement between the Registrant and
Samsung SDS Co., Ltd., dated January 12, 2000; Amendment #1
to Major Account License Agreement between the Registrant
and Samsung SDS Co., Ltd., dated February 10, 2000.
10.19*+ International Value Added Reseller Agreement between the
Registrant and Samsung SDS Co., Ltd., dated January 12,
2000; Amendment #1 to International Value Added Reseller
Agreement between the Registrant and Samsung SDS Co., Ltd.,
dated February 29, 2000.
10.20* Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated January 31, 2000; Amendment #1 to the
Stock Purchase Agreement between the Registrant and Samsung
SDS Co., Ltd., dated February 8, 2000.
10.21* Lease between John Arrillaga Survivors Trust and Richard T.
Perry Separate Property Trust as Landlord and the Registrant
as Tenant, dated October 1, 1999.
10.22* Stock Purchase Agreement between the Registrant and Dell
USA, L.P., dated February 14, 2000.
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Counsel. Reference is made to Exhibit 5.1.
24.1*** Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
---------------
* Incorporated by reference to similarly numbered exhibit to the Registration
Statement on Form S-1 filed by the Registrant (Reg. No. 333-9245).
** To be filed by amendment.
*** Previously filed.
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
