<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SILICON ENERGY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 94-3290577
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1010 ATLANTIC AVENUE
ALAMEDA, CALIFORNIA 94501
(510) 263-2600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
</TABLE>
JOHN WOOLARD
CHIEF EXECUTIVE OFFICER
1010 ATLANTIC AVENUE
ALAMEDA, CALIFORNIA 94501
(510) 263-2600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
MARIO M. ROSATI KEVIN P. KENNEDY
ISSAC J. VAUGHN SIMPSON THACHER & BARTLETT
KELLY AMES MOREHEAD 3373 HILLVIEW AVENUE, SUITE 250
WILSON SONSINI GOODRICH & ROSATI PALO ALTO, CALIFORNIA 94304
PROFESSIONAL CORPORATION (650) 251-5000
650 PAGE MILL ROAD
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, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
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PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------
Common Stock $0.001 par value............................... $80,500,000.00 $21,252.00
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
Subject to Completion. Dated , 2000.
Shares
[LOGO]
SILICON ENERGY CORP.
Common Stock
----------------------
This is an initial public offering of shares of common stock by Silicon
Energy Corp. All of the shares of common stock are being sold by Silicon Energy.
Prior to this offering, there has been no public market for the common
stock. It is currently estimated that the initial public offering price per
share will be between $ and $ . Silicon Energy has applied for
quotation of its common stock on the Nasdaq National Market under the symbol
"SLCN".
See "Risk Factors" beginning on page 6 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Silicon Energy................ $ $
</TABLE>
To the extent that the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from Silicon Energy at the initial public offering price
less the underwriting discount.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO.
CIBC WORLD MARKETS
LEHMAN BROTHERS
STEPHENS INC.
----------------------
Prospectus dated , 2000.
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you should
consider before buying shares in the offering. You should read the entire
prospectus carefully.
OUR BUSINESS
Silicon Energy develops and sells Internet-based energy technology software
that enables enterprises to reduce energy costs and related expenditures. Our
Silicon Energy EEM Suite integrates multiple, geographically-dispersed energy
management systems and equipment into a single enterprise-wide network. Once
these systems are integrated, our software combines powerful analysis tools,
external data sources, state-of-the-art data visualization, and two-way Internet
control of energy assets to allow energy end users and suppliers to transform
information into meaningful cost reductions and other operational efficiencies.
Our EEM Suite:
- allows end users to effectively monitor and control enterprise-wide
energy usage and respond to price fluctuations and supply interruptions
in real time to reduce costs;
- enables enterprises to effectively integrate their power generation,
operating equipment and power quality investments into an energy
management strategy by facilitating the monitoring and intelligent
dispatch of these assets;
- reduces informational inefficiencies in the energy procurement market,
enabling end users to reduce transaction costs and negotiate more
competitive prices;
- provides non-energy-related operational efficiencies by lowering
maintenance costs, reducing equipment downtime and precisely monitoring
regulatory, safety and quality standards;
- enables energy suppliers and service providers to cost-effectively
deliver strategic energy management solutions on a large scale, providing
new revenue opportunities and improving their ability to attract and
retain customers; and
- reduces the operating risk of energy suppliers and transmission grid
operators by providing more precise end-user demand information and
enabling their customers to respond to price changes in real time,
especially during periods of peak consumption.
Critical features that distinguish our software from other energy management
tools include its:
- compatibility with a broad array of legacy systems and metering devices;
- ability to integrate information across the enterprise, rather than only
at the facility level;
- ability to gather and analyze real-time information while providing
two-way control via the Internet; and
- ability to integrate systems across energy suppliers and end users to
enable real-time information flow and price response.
We target customers across a broad range of vertical markets. We currently
have customers in the commercial, industrial, higher-education, government,
energy service provider, and utility sectors. As of September 30, 2000, we had
license or subscription agreements for our Silicon Energy EEM Suite with over 35
customers.
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<PAGE> 4
OUR MARKET OPPORTUNITY
According to the Department of Energy, end users spent approximately $290
billion on electricity and natural gas in 1999, making the energy market one of
the largest in the United States. Commercial and industrial users were the
largest consumers of energy in 1999, accounting for approximately 58% of total
dollars spent. In a 1997 survey conducted by CFO Magazine, respondents
identified energy as the least controllable expense in their overall cost
structures.
We believe that the ability to effectively manage enterprise-wide energy
usage has become increasingly important over the last few years for two primary
reasons:
- RISING ENERGY PRICES AND INCREASED PRICE VOLATILITY RESULTING FROM
GREATER DEMAND. Economic prosperity and the proliferation of
energy-intensive digital equipment have significantly increased energy
demand in the United States over the last 10 years. At the same time, the
average amount by which power generating capacity exceeds peak demand has
significantly decreased in some regions. These trends have resulted in
significant price increases and price volatility in newly deregulated
energy markets. Faced with higher levels of price risk, enterprises are
increasingly demanding solutions to effectively manage their energy usage
and efficiently procure energy at the most competitive rates available.
- THE DIGITAL ECONOMY'S ENHANCED EMPHASIS ON RELIABLE, HIGH-QUALITY
POWER. The recent growth in the use of computers, the Internet and
telecommunications products has significantly increased the need for
reliable, high-quality power. Sandia National Laboratories, a U.S.
Department of Energy national security laboratory, estimates that power
quality and reliability problems cost U.S. businesses approximately $150
billion annually in lost data, materials and productivity. In order to
avoid these costly losses, many businesses are investing in power quality
and reliability solutions, including distributed generation and power
storage. We believe that as these investments continue, enterprises will
increasingly demand solutions that will enable them to effectively
network these new assets and their existing energy infrastructures into
cohesive energy management strategies to minimize costs and improve
reliability.
OUR STRATEGY
We intend to be the leading provider of Internet-based energy technology
software. Key elements of our growth strategy are to:
- continue to develop innovative Internet-based energy technology software
to manage energy usage, procurement and distributed generation;
- expand our direct sales channels;
- target large, vertical markets and their market leaders;
- utilize third-party service providers to access small and mid-market
energy users;
- broaden product adoption through a network of alliances with systems
integrators and technology providers;
- build our international presence; and
- expand the non-energy-related applications of our software.
CORPORATE INFORMATION
We were incorporated in California in December 1997 under the corporate
name EnerNetics, Inc. and began substantive operations in January 1998. We
changed our corporate name to Silicon Energy Corp. in June 1998 and
reincorporated in Delaware in July 2000. Our principal executive offices are
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<PAGE> 5
located at 1010 Atlantic Avenue, Alameda, California 94501 and our telephone
number is (510) 263-2600. Our web site is located at
http://www.siliconenergy.com. Information contained on our web site does not
constitute part of this prospectus and the link to our web site is an inactive
textual reference only.
For the year ended December 31, 1999, we had revenue of $520,000 and a net
loss of $7.0 million. For the six months ended June 30, 2000, we had revenue of
$2.3 million and a net loss of $10.2 million.
"Silicon Energy" is a registered trademark of Silicon Energy Corp. and "EEM
Suite", the Silicon Energy logo and the Silicon Energy EEM Suite logo are
trademarks of Silicon Energy Corp. All other trademarks or service marks
appearing in this prospectus are trademarks or service marks of others.
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<PAGE> 6
THE OFFERING
Common stock offered.................... shares
Common stock to be outstanding after the
offering................................ shares
Use of proceeds......................... We plan to use the net proceeds
from this offering principally for
general corporate purposes,
including sales and marketing
expenses, research and development
of our software, general and
administrative expenses, and
working capital.
Proposed Nasdaq National Market
symbol.................................. SLCN
The number of shares of common stock to be outstanding after this offering
is based on shares outstanding as of September 30, 2000. This number excludes:
- shares issuable upon exercise of options outstanding as of
September 30, 2000 at a weighted average exercise price of $ per
share;
- shares issuable upon exercise of warrants outstanding as of
September 30, 2000 at a weighted average exercise price of $ per
share and shares issuable upon exercise of a warrant
outstanding as of September 30, 2000 with exercise prices of 85% of the
fair market value of our common stock on the dates the warrants become
exercisable; and
- a total of shares available for issuance under our various
stock plans as of September 30, 2000, excluding the annual increases in
the number of shares authorized under our 1998 Incentive Stock Option
Plan and our 2000 Employee Stock Purchase Plan.
In addition, subsequent to September 30, 2000, we issued warrants to
purchase a total of shares of our common stock at a weighted average
exercise price of $ .
Except as otherwise indicated, information in this prospectus is based on
the following assumptions:
- the conversion of all outstanding shares of our convertible preferred
stock into shares of our common stock immediately prior to the closing of
this offering;
- no exercise by the underwriters of their option to purchase additional
shares of common stock in this offering; and
- the filing of our second amended and restated certificate of
incorporation authorizing 15,000,000 shares of undesignated preferred
stock upon the closing of this offering.
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<PAGE> 7
SUMMARY FINANCIAL INFORMATION
The following table sets forth a summary of our statements of operations
data for the periods presented. The pro forma information in the following table
gives effect to the automatic conversion of all outstanding shares of our
convertible preferred stock into shares of common stock immediately prior to the
closing of this offering.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ------------------
1998 1999 1999 2000
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... $ 19 $ 520 $ 89 $ 2,264
Total cost of revenue....................................... 4 246 22 425
Gross profit................................................ 15 274 67 1,839
Total operating expenses.................................... 1,442 7,470 2,555 12,078
Loss from operations........................................ (1,427) (7,196) (2,488) (10,239)
Net loss attributable to common stockholders................ $(1,548) $(7,582) $(2,674) $(10,913)
Basic and diluted net loss per share........................ $ (1.62) $ (3.09) $ (1.31) $ (2.68)
Shares used in calculating basic and diluted net loss per
share..................................................... 953 2,453 2,041 4,076
Pro forma basic and diluted net loss per share.............. $ (0.72) $ (0.64)
Shares used in calculating pro forma basic and diluted net
loss per share............................................ 10,514 16,960
</TABLE>
The following table sets forth a summary of our balance sheet as of June
30, 2000:
- on an actual basis;
- on a pro forma basis after giving effect to the conversion of
shares of our convertible preferred stock into shares of our common stock
immediately prior to the closing of this offering; and
- on a pro forma as adjusted basis to reflect the conversion of our
convertible preferred stock and our sale of shares of common
stock in this offering at an assumed initial public offering price of
$ per share and after deducting underwriting discounts and estimated
offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27,085 $ $
Working capital............................................. 25,662
Total assets................................................ 38,436
Long-term liabilities....................................... 554
Redeemable convertible preferred stock...................... 43,626
Total stockholders' equity (deficit)........................ $(11,292) $ $
</TABLE>
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<PAGE> 8
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the risks described below, together with all of the other information
included in this prospectus, before buying shares in this offering.
RISKS RELATED TO OUR BUSINESS
WE ONLY BEGAN GENERATING SIGNIFICANT REVENUE IN 1999 AND, AS A RESULT, IT IS
DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS.
We are still in the early stages of our development. We were incorporated
in December 1997 and only began generating significant revenue in the second
quarter of 1999. In addition, during the first and second quarters of 2000, we
began to offer new versions of our software. We introduced Release 2.0 of the
Silicon Energy EEM Suite in September 2000 and are planning to introduce
additional versions of our Internet-based energy technology software in the
future. As we have only recently introduced new versions of our software, you
may have limited information about us with which to evaluate our business,
strategies, performance and prospects, or an investment in our common stock. As
a result, it may also be difficult to predict whether our software will continue
to be accepted by the market and the level of revenue that we can expect to
derive from the sales of such software.
IF WE FAIL TO SUCCESSFULLY EDUCATE POTENTIAL CUSTOMERS REGARDING THE BENEFITS OF
OUR INTERNET-BASED ENERGY TECHNOLOGY SOFTWARE OR A MARKET OTHERWISE FAILS TO
DEVELOP FOR OUR SOFTWARE, OUR ABILITY TO SELL OUR PRODUCTS AND GROW OUR BUSINESS
COULD BE SEVERELY LIMITED.
Our future success depends on widespread commercial acceptance of our
Internet-based energy technology software. The market for software that allows
enterprises to manage their energy needs is relatively new and rapidly evolving.
If we are unable to educate our potential customers and the market in general of
the advantages of our Internet-based energy technology software over competing
products, our ability to sell our software will be severely limited. Our ability
to increase revenue in the future depends on the extent to which our customers
recognize the value of our integrated software for managing energy and
energy-related costs. In addition, because the market for Internet-based energy
technology software is in an early stage of development, we cannot accurately
assess the size of the market, and we may have limited insight into trends that
may emerge and affect our business. For example, we may have difficulty in
predicting customer needs, developing software that could address those needs
and establishing a distribution strategy for this software. If a market fails to
develop for our software, our ability to grow our business could be severely
limited.
WE HAVE INCURRED LOSSES DURING OUR OPERATING HISTORY AND EXPECT TO INCUR LOSSES
FOR THE FORESEEABLE FUTURE. WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We incurred net losses of $7.0 million for the year ended December 31, 1999
and $10.2 million for the six-month period ended June 30, 2000. As of June 30,
2000, we had an accumulated deficit of $18.7 million. We have not achieved
profitability and expect to continue to incur operating losses for the
foreseeable future. We expect to continue to incur significant expenses in
research and development and in building our direct sales force. As a result, we
will need to increase our revenue at a higher rate than these expenses in order
to achieve and maintain profitability. We may not be able to sustain our recent
revenue growth rates or be able to generate sufficient revenue to achieve
profitability. If we fail to achieve profitability, the market price of our
common stock could decline substantially.
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<PAGE> 9
WE MAY INCUR SIGNIFICANT ACCOUNTING CHARGES AS A RESULT OF WARRANTS ISSUED AND
COMMON STOCK SOLD, ANY OF WHICH COULD RESULT IN SIGNIFICANT FUTURE REDUCTIONS IN
OUR REVENUE AND OPERATING INCOME AND REDUCE OUR STOCK PRICE.
We expect to incur significant non-cash accounting charges associated with
warrants we issued to ABB Future AG and PanCanadian Petroleum Limited and common
stock we sold to CapiTech, EdVenture Capital Corporation and GE Capital Equity
Investment, Inc. from June through October 2000. We have entered into various
arrangements with these parties that were designed to generate revenue for us
over the next several months or years, depending on the deal. As a result of the
CapiTech, EdVenture, GE, and PanCanadian arrangements, we may be unable to
recognize as revenue up to $2.3 million of amounts we receive from these
parties. We do not presently know, however, what amounts, if any, these parties
will generate for us over the next several quarters, and, accordingly, we can
not say with certainty to what extent our revenue will actually be reduced below
what it would have been without these non-cash offsets. In addition, the timing
of when we recognize these revenue offsets will depend on when these parties
generate revenue to us, which we cannot predict. We currently anticipate,
however, that the majority of these revenue offsets will occur by December 2001.
The effect of the ABB warrant is even more difficult for us to quantify
because the amount of the non-cash offset to revenue will be based on 85% of the
price of our common stock at the end of each of the next several years and on
the amount of revenue generated to us by ABB or its affiliates. Accordingly, we
will not be able to quantify these charges until we know these prices and
amounts. To the extent the non-cash revenue offset exceeds the amount of revenue
that ABB or its affiliates generate for us, we need to record the excess amount
as an operating expense.
As a result of the uncertainty relating to these charges, market analysts
and others trading in our securities may have difficulty in accurately
predicting our revenue and earnings for any given quarter. In addition, the
complexity of the accounting for these arrangements may confuse investors and
make them reluctant to trade in our stock. Either of these results may reduce
the price of our common stock.
WE EXPECT OUR QUARTERLY REVENUE AND OPERATING RESULTS TO FLUCTUATE. IF WE FAIL
TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET
PRICE OF OUR COMMON STOCK COULD FALL.
Our quarterly revenue and operating results have fluctuated in the past and
may vary from quarter to quarter in the future. Accordingly, we believe that
period-to-period comparisons of our results of operations may be misleading. You
should not rely upon the results of one quarter as an indication of future
performance. Our revenue and operating results may fall below the expectations
of securities analysts or investors in some future quarter or quarters. Our
failure to meet these expectations could cause the market price of our common
stock to decline.
Our quarterly revenue and operating results may vary depending on a number
of factors, including:
- demand for and acceptance of our Internet-based energy technology
software;
- delays in the implementation and delivery of our software, which may
impact the timing of our recognition of revenue;
- delays or reductions in spending for Internet-based energy technology
software by our customers and potential customers;
- the mix of our revenue during any period, particularly with regard to the
breakdown between software license and service revenues;
- development of new relationships and maintenance and enhancement of
existing relationships with customers and strategic partners;
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- deferrals of customer contracts in anticipation of software enhancements
or new software; and
- increased expenditures for sales and marketing, software development and
other corporate activities.
OUR SALES CYCLES ARE RELATIVELY LONG AND UNPREDICTABLE AND MAY BE SUBJECT TO
SEASONALITY, WHICH MAKES IT DIFFICULT TO FORECAST OUR REVENUE AND COULD RESULT
IN VOLATILITY IN OUR STOCK PRICE.
The period between initial contact with a prospective customer and the
licensing of our software varies, but it typically ranges from six to 12 months.
Prospective customers frequently view the purchase of our software as part of a
long-term enterprise-wide strategic decision. As a result, potential customers
may take an extended period of time to assess alternative solutions,
particularly if decisions are being made about whether to outsource or
internally develop energy technology tools. Potential purchasers may also defer
their licensing or purchasing decisions until the market evolves or broad
industry standards are adopted. We also target commercial and industrial energy
users and utility and energy service providers, which generally have lengthy
approval processes. The relatively long and unpredictable nature of our sales
cycle makes it difficult to forecast our revenue and could result in volatility
in our stock price.
In addition, we may experience seasonality in the sales of our software.
For example, sales could be lower in the first quarter of each year due to
patterns in the capital budgeting and purchasing cycles of our current and
prospective customers. As we expand our international markets, our sales may
also decline during summer months, particularly in European markets. These
seasonal variations in our sales may lead to fluctuations in our quarterly
operating results. Because we have limited operating results, it is difficult
for us to evaluate the degree to which this seasonality may harm our business.
OUR RESULTS OF OPERATIONS COULD BE HARMED IF OUR OPERATING EXPENSES DO NOT
CORRESPOND WITH THE TIMING OF OUR REVENUE.
Most of our operating expenses, such as employee compensation and rental
expense for properties, are either relatively fixed in the short-term or
incurred in advance of sales. Moreover, our spending levels are based in part on
our expectations regarding future revenue. As a result, if revenue for a
particular quarter is below expectations, we may not be able to proportionately
reduce operating expenses for that quarter. A shortfall in revenue, therefore,
could have a disproportionate effect on our expected operating results for that
quarter and could cause the trading price of our common stock to decline.
THE MAJORITY OF OUR REVENUE HAS BEEN DERIVED FROM THE SILICON ENERGY EEM SUITE
OF INTERNET-BASED ENERGY TECHNOLOGY SOFTWARE, AND A DECLINE IN THE SALES OF OUR
EEM SUITE COULD SERIOUSLY HARM OUR RESULTS OF OPERATIONS.
Revenue related to the Silicon Energy EEM Suite of Internet-based energy
technology software has accounted for approximately 60% of our revenue to date.
We anticipate that revenue related to this software will continue to constitute
a substantial portion of our revenue for the foreseeable future. Consequently,
our future financial performance will depend, in significant part, upon the
successful development, introduction, deployment, and customer acceptance of
enhanced versions of our Silicon Energy EEM Suite.
THE PLANNED EXPANSION OF OUR DIRECT SALES FORCE WILL INVOLVE SIGNIFICANT EXPENSE
TO US AND MAY NOT SUCCEED, WHICH COULD SERIOUSLY HARM OUR RESULTS OF OPERATIONS.
During 2000, we have increased, and expect to continue to substantially
increase, the number of our sales personnel as part of an effort to increase the
direct sale of our software and to support and develop leads for our indirect
distribution channels. This expansion will significantly increase personnel
costs and related expenditures. Our ability to increase our direct sales
operation will depend on our
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ability to recruit, train and retain top sales people with advanced sales skills
and significant technical knowledge. There is currently a high demand for sales
personnel with these qualifications, and competition for qualified personnel is
intense in our industry. Therefore, we cannot assure you that we will be
successful in hiring our target number of sales personnel. If we fail to
recruit, train and retain sufficient personnel, our ability to grow sales and
meet revenue targets may be seriously harmed. Many members of our current direct
sales force have been with us for a relatively short period. We do not know if
these or future members of our sales force will be able to meet our productivity
targets. If we fail to meet targets, the costs of this expansion may exceed the
revenue generated by the new sales personnel, which could seriously harm our
results of operations.
IF WE DO NOT INTRODUCE OUR SOFTWARE ON A TIMELY BASIS AND OUR SOFTWARE DOES NOT
ACHIEVE MARKET ACCEPTANCE, OUR REVENUE COULD BE HARMED.
We are developing new Internet-based energy technology software modules as
well as new versions of our existing software. The actual features and
introduction date of these new versions could differ materially from those
anticipated as a result of a number of factors, many of which are beyond our
control. We may not be successful in developing and marketing new versions of
our software, other software enhancements or new software that responds to
technological advances and market changes on a timely or cost-effective basis.
In addition, even if these new versions of our software are developed and
released, they may not achieve market acceptance.
We may experience delays in releasing new software and software
enhancements in the future. These delays or problems in the installation or
implementation of our new releases may cause customers to forego purchases of
our software. We also cannot assure you that our new software or the Silicon
Energy EEM Suite will meet customer performance expectations. If they do not
meet customer expectations or the market for this software fails to develop or
develops more slowly than we expect, our revenue could be harmed.
OUR EXPANSION INTO INTERNATIONAL MARKETS MAY NOT SUCCEED AND MAY EXPOSE US TO
NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
We intend to expand our operations and hire additional personnel to address
international markets. To date, we have not generated any revenue from sales in
international markets, but we expect to do so in the future. To achieve
acceptance in international markets, our software must be modified to handle a
variety of factors specific to each international market. We may be unable to
successfully localize our software for use in international markets. Even if we
do successfully adapt our software to these markets, our software may not
achieve market acceptance. As a result, we may be unable to meet future revenue
targets and our results from operations may be harmed. In addition, we will be
subject to a number of risks associated with international business activities.
These risks generally include:
- foreign currency restrictions and exchange rate fluctuations;
- compliance with a wide variety of foreign laws;
- difficulties in managing and staffing international operations;
- seasonal fluctuations in purchasing patterns;
- compliance with foreign energy market and utilities regulations and rate
structures;
- tariffs, export controls and other trade barriers;
- longer collection cycles and increased difficulties in collecting
delinquent or unpaid accounts;
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings;
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- global economic fluctuations and political instability; and
- reduced protection of intellectual property in foreign countries.
Any of these factors could impair our operations and cause our stock price to
decline.
WE DEPEND ON STRATEGIC BUSINESS ALLIANCES AND PARTNERSHIPS TO MARKET, SELL AND
IMPLEMENT OUR SOFTWARE, AND ANY FAILURE TO DEVELOP OR MAINTAIN THESE ALLIANCES
COULD HURT OUR BUSINESS AND PROSPECTS.
We expect that system integrators, technology providers and distributors,
who may recommend, install or support our software with their customers, will
facilitate sales. To augment our implementation capabilities and revenue, we
intend to continue to develop and expand relationships with these and other
potential industry partners and to generate new business opportunities through
joint marketing and sales efforts. We may encounter difficulties in forging and
maintaining long-term relationships with these companies for a variety of
reasons or these companies may discontinue their relationships with us, fail to
devote sufficient resources to market our products or develop relationships with
our competitors. As a result, we may be unable to achieve our revenue growth
targets and our stock price could decline. In addition, if these firms fail to
implement our software successfully for their customers, we may not have the
resources to implement our software on the schedule required by their customers,
which could harm our ability to generate revenue or our relationship with our
customers.
WE RELY ON THE SERVICES OF OUR KEY PERSONNEL, WHOSE KNOWLEDGE OF OUR BUSINESS
AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE.
We rely upon the continued service and performance of a relatively small
number of key technical and senior management personnel. Our future success
depends on our retention of these key employees, in particular, John Woolard,
our Chairman, President and Chief Executive Officer, and Dale Fong, our Chief
Technology Officer and a member of our board of directors. None of our key
technical or senior management personnel are bound by employment agreements,
and, as a result, any of these employees could leave with little or no prior
notice. If we lose any of our key technical and senior management personnel, our
business and results of operations could be harmed.
IF OUR SOFTWARE PRODUCES INACCURATE INFORMATION ABOUT THE TRANSACTIONS IT
PROCESSES, MARKET ACCEPTANCE OF OUR SOFTWARE COULD BE DELAYED, WHICH COULD LEAD
TO A LOSS OF REVENUE.
Our Internet-based energy technology software is complex and, accordingly,
may contain undetected errors or failures when first introduced or as new
versions are released. Software defects or inaccurate data may cause incorrect
recording, reporting or display of information about transactions to us, our
customers or their business partners. Errors in our software may also be caused
by factors outside of our control, such as defects in third-party software
incorporated into our software. We may not be able to fix these defects without
the cooperation of these software providers. Since these defects may not be as
significant to our software providers as they are to us, we may not receive the
rapid cooperation that we may require. We may not have the contractual right to
access the source code of third-party software and, even if we access the source
code, we may not be able to fix the defect.
Inaccurate information could cause errors in our customers' bills,
information systems, financial settlements with their business partners, or
license fee payments to us. Our customers may seek to hold us liable for any
damages incurred by them or their business partners or end users. Software
defects or inaccurate data may also lead to customer dissatisfaction. As a
result, we could lose customers and our reputation may be harmed. In addition,
our ability to recognize revenue in some cases depends on our customers and
their business partners supplying us with data regarding transactions processed
using our software. They may provide us with erroneous or incomplete data, which
could result in lost revenue to us.
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BECAUSE OUR SOFTWARE COULD INTERFERE WITH THE OPERATIONS OF OUR CUSTOMERS' OTHER
SOFTWARE APPLICATIONS, WE MAY BE SUBJECT TO POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS BY THESE CUSTOMERS, WHICH MAY BE COSTLY AND MAY NOT BE
ADEQUATELY COVERED BY INSURANCE.
Our software is integrated with our customers' networks and software
applications. The integration of our software may entail the risk of product
liability or warranty claims based on disruption to these networks or
applications. In addition, the failure of our software to perform to customer
expectations could give rise to warranty claims against us. Any of these claims,
even if without merit, could result in costly litigation or divert management's
attention and resources. Although we carry general liability insurance, our
current insurance coverage could be insufficient to protect us from all
liability that may be imposed under these types of claims. A material product
liability claim may seriously harm our results of operations.
FAILURE TO LICENSE NECESSARY THIRD-PARTY SOFTWARE INCORPORATED IN OUR SOFTWARE
MAY CAUSE DELAYS OR REDUCTIONS IN OUR SALES.
We license technologies from third-party software providers that are
incorporated into our software. We anticipate that we will continue to license
technologies from third parties in the future. In particular, we license key
components of our software from Broadbase Software, Inc. and Microsoft
Corporation. The license agreement with Broadbase expires in June 2003. We may
not be able to renew our license agreements for this software on commercially
reasonable terms, if at all. The loss of these technologies or other third-party
technologies could prevent sales of our software and increase our costs until
substitute technologies, if available, are developed or identified, licensed and
successfully integrated into our software. Even if substitute technologies are
available, there can be no guarantee that we will be able to license these
technologies on commercially reasonable terms, if at all.
IF OUR SOFTWARE DOES NOT CONTINUE TO OPERATE WITH A WIDE VARIETY OF HARDWARE,
SOFTWARE AND OPERATING SYSTEMS USED BY OUR CUSTOMERS, OUR CUSTOMERS MAY BE
RELUCTANT TO PURCHASE OUR SOFTWARE.
We currently serve a customer base that uses a wide variety of constantly
changing hardware, software applications and operating systems. Building
control, process control and metering systems frequently reside on non-standard
operating systems. Our Internet-based energy technology software needs to
communicate with these non-standard systems to gain broad market acceptance. Our
business depends on the following factors, among others:
- our ability to integrate our software with new and existing hardware and
software systems, including metering, building control, process control,
and distributed generation systems;
- our ability to anticipate and support new standards, especially
Internet-based standards; and
- our ability to integrate additional software modules under development
with our existing software.
If we are unable to deal with any of these factors, our revenue could be harmed.
THE DEVELOPMENT OF NEW OPERATING SYSTEMS, THE EMERGENCE OF NEW NETWORK STANDARDS
OR THE ADOPTION OF NEW PROGRAMMING LANGUAGES COULD CAUSE OUR SOFTWARE TO BECOME
OBSOLETE OR REQUIRE US TO MODIFY OR DEVELOP NEW VERSIONS OF OUR SOFTWARE, WHICH
COULD BE VERY COSTLY AND COULD HARM OUR ABILITY TO GROW OUR BUSINESS.
Our software operates on Windows NT operating systems, and we do not
currently plan to support our applications and server-based components on every
other operating system. In addition, important features of our software are
dependent upon various network standards used by our customers, and our software
is predominately written in the C++ programming language. If new operating
systems are developed, new network standards emerge or new programming languages
are
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<PAGE> 14
adopted, we may need to modify or develop new versions of our software, which
could be quite costly. Our failure to modify our software in a timely or cost
effective manner could limit our potential customer base or cause our software
to become obsolete, which could harm our ability to grow our business and
increase our revenue.
OUR REVENUE COULD BE HARMED BY A RESISTANCE TO ADOPT OUR SOFTWARE BY INTERNAL
INFORMATION TECHNOLOGY DEPARTMENTS.
Some businesses may have already made a substantial investment in other
third-party or internally developed software designed to accomplish many of the
same functions as our Internet-based energy technology software. These
businesses may be reluctant to abandon their investments in favor of our
software. In addition, information technology departments of potential customers
may resist purchasing our software for a variety of other reasons, particularly
the potential displacement of their historical role in creating and operating
software and concerns that packaged software products are not sufficiently
customizable for their enterprises. If the demand for our software does not grow
for any of these reasons, our revenue may be harmed.
IF OUR INTERNET-BASED ENERGY TECHNOLOGY SOFTWARE FAILS TO ADAPT TO RAPID CHANGES
IN THE ENERGY MARKET, THE SALES OF OUR EXISTING ENERGY TECHNOLOGY SOFTWARE COULD
DIMINISH, WHICH COULD SERIOUSLY HARM OUR REVENUE.
The market for our energy technology software is marked by rapid
technological changes, frequent new software introductions, Internet-related
technology enhancements, uncertain product life cycles, changes in customer
demands, and evolving industry standards and regulations. We may not be able to
successfully develop and market new software or software enhancements that
comply with present or emerging technology standards. Also, any new regulation
or technology standard could increase our cost of doing business.
Software based on new technologies or new industry standards could render
our existing software obsolete and unmarketable. To succeed, we may need to
enhance our current software and develop new software on a timely basis to keep
pace with developments related to the energy market and to satisfy the
increasingly sophisticated requirements of our customers. Software addressing
the procurement and management of energy assets is complex and can be expensive
to develop, and new software and software enhancements can require long
development and testing periods. Any delays in developing and releasing new or
enhanced software could cause us to lose revenue opportunities and customers.
IF WE ARE UNABLE TO HIRE AND RETAIN TECHNICAL, SALES AND MARKETING AND OTHER
PERSONNEL, OUR BUSINESS COULD BE HARMED.
Our success also depends upon our ability to attract and retain additional
highly qualified technical, sales and marketing and other personnel to support
our growing operations. Competition for qualified employees is intense,
particularly in the Internet and high technology industries. The process of
locating and hiring personnel with the combination of skills and attributes
required to carry out our strategy is time-consuming and costly. In addition,
after this offering, our ability to attract and retain qualified personnel may
be impaired because potential employees may perceive the value of our future
stock option grants offered to them to be less valuable than stock option grants
offered by other companies that are not yet public. Our inability to attract,
train or retain the number of highly qualified engineering, sales, marketing,
professional services, and customer support personnel that our business needs
may seriously harm our business and results of operations.
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WE HAVE HIRED SOME OF OUR EMPLOYEES FROM OUR CURRENT CUSTOMERS AND FROM SOME OF
OUR COMPETITORS, WHICH COULD DAMAGE OUR CUSTOMER RELATIONSHIPS AND EXPOSE US TO
POTENTIAL LITIGATION.
There is a limited supply of skilled employees in our industry. We have
hired some of our current employees from our customers and competitors. As a
result, some of our current customers might begin to view us as competitors in
the future, and one or more of our competitors could file lawsuits against us
alleging the infringement of their trade secrets and other intellectual
property. Although we do not believe that we have infringed upon the
intellectual property of our competitors, such lawsuits could divert our
attention and resources from our business operations.
WE HAVE LIMITED EXPERIENCE WITH LARGE-SCALE IMPLEMENTATIONS, WHICH ARE IMPORTANT
TO OUR FUTURE SUCCESS. IF OUR CUSTOMERS ARE NOT SATISFIED WITH THESE TYPES OF
IMPLEMENTATIONS, OUR REPUTATION COULD SUFFER.
We have limited experience in implementing our Internet-based energy
technology software on a large scale. If implementation of our software takes
substantially longer or costs substantially more than our customers anticipate,
they may become dissatisfied with us and may be less likely to recommend our
software to other potential customers. Further, if our customers cannot
successfully deploy our software on a large scale, or if they determine for any
reason that our software cannot accommodate large-scale deployment, our business
could be seriously harmed.
OUR RECENT GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT, SYSTEMS AND
RESOURCES, AND WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH.
We have experienced and are currently experiencing a period of significant
growth. Our number of full-time employees increased from 67 in January 2000 to
159 as of September 30, 2000, and we anticipate further significant increases in
the future. We integrated several employees as a result of the Energy Concepts,
Inc. and SRC Systems, Inc. acquisitions and are currently integrating employees
as a result of the EPS Solutions Incorporated acquisition. We could experience
integration issues if we engage in future acquisitions. We expect that any
future growth could cause increased strains on our management, operational and
financial resources. For example, we may not be able to install adequate
financial control systems in an efficient and timely manner, and our current or
planned information systems, procedures and controls may be inadequate to
support our future operations. The difficulties associated with installing and
implementing new systems, procedures and controls may place a significant burden
on our management and our internal resources. Additionally, as part of our
growth, we will have to expand, train and manage our employee base and maintain
close coordination within our organization. We believe that this successful
coordination is critical to our ability to manage our operations effectively and
support our anticipated future growth. If we are unable to manage our growth
effectively, our business, results of operations and financial condition could
be harmed.
RISKS RELATED TO OUR INDUSTRY
WE FACE COMPETITION FOR VARIOUS ASPECTS OF OUR INTERNET-BASED ENERGY TECHNOLOGY
SOFTWARE. AS A RESULT, OUR CUSTOMERS MAY CHOOSE TO PURCHASE COMPETITORS'
PRODUCTS AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO COMPETE EFFECTIVELY.
The market for energy technology software and applications is competitive
and we expect competition to increase in the future. Competitors vary in size
and in the scope and breadth of the products and services they offer. While
today there is no one company that competes with us on all fronts, there are
companies that address various aspects of our Internet-based energy technology
software. Our software integrates energy data collection, storage, information
analysis and decision
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support and facility control across a wide variety of legacy systems. Therefore,
we face segment competition, such as:
- meter data collection and management systems, with companies such as
Engage Networks and AEP/Datapult; and
- integrated bill management used for energy management and cost control,
with companies such as Avista Advantage and Cadence.
We also expect competition from other established and emerging companies.
For example, we anticipate competition from the internal development efforts of
energy and facility management solution vendors, such as Honeywell and Johnson
Controls, and from large enterprise software firms, such as SAP.
Some of our current and potential competitors have longer operational
histories, greater resources, greater name recognition and a higher number of
established customer relationships than we have. Many of these competitors also
have extensive knowledge of our industry. Due to these factors, some of our
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or may be able to devote greater resources
to the promotion and sale of their products. If we are not able to compete
effectively, our business could be seriously harmed.
OUR SUCCESS DEPENDS IN PART UPON OUR ABILITY TO PROTECT OUR INTELLECTUAL
PROPERTY, BUT WE MAY NOT BE ABLE TO DO SO ADEQUATELY. AS A RESULT, WE MAY LOSE A
VALUABLE ASSET OR INCUR COSTLY LITIGATION TO PROTECT OUR RIGHTS.
Our success depends in large part upon our proprietary technology. We rely
on a combination of patent, copyright, trademark and trade secret protection,
confidentiality and nondisclosure agreements and licensing arrangements to
establish and protect our intellectual property rights. We seek to avoid
disclosure of our trade secrets through a number of means, including requiring
those persons with access to our proprietary information to execute
nondisclosure agreements with us and restricting access to our source code. We
seek to protect our software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use our software. In addition, other parties may
breach confidentiality agreements or other protective contracts we have entered
into, and we may not be able to enforce our rights in the event of these
breaches. Any actions taken by us to enforce our intellectual property rights
could result in significant expense to us as well as the diversion of management
time and other resources.
Although we currently have six pending U.S. patent applications, one U.S.
patent application with allowed claims and various foreign patent applications
corresponding to the U.S. patent application with allowed claims, we do not
currently have any issued patents. There is no guarantee that patents will be
issued with respect to our current or future patent applications. Any patents
that are issued to us could be invalidated, circumvented or challenged. If
challenged, our patents might not be upheld or their claims could be narrowed.
Our intellectual property may not be adequate to provide us with a competitive
advantage or to prevent competitors from entering the markets for our software.
Additionally, our competitors could independently develop non-infringing
technologies that are competitive with, equivalent to or superior to our
technology. Monitoring infringement and misappropriation of intellectual
property can be difficult, and there is no guarantee that we would detect any
infringement or misappropriation of our proprietary rights. Even if we do detect
infringement or misappropriation of our proprietary rights, litigation to
enforce these rights could cause us to divert financial and other resources away
from our business operations. Further, we intend to license our products
internationally, and the laws of some foreign countries may not protect our
proprietary rights to the same extent as do the laws of the United States.
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We may have to litigate to enforce our intellectual property rights, to
protect our trade secrets or know-how or to determine their scope, validity or
enforceability. This enforcement would be expensive, could cause the diversion
of our resources and may not prove successful. If we are unable to protect our
intellectual property, we may lose a valuable asset.
IF WE BECOME SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, THESE CLAIMS
COULD BE COSTLY AND TIME-CONSUMING TO DEFEND, DIVERT MANAGEMENT'S ATTENTION,
CAUSE PRODUCT DELAYS AND HARM OUR REVENUE AND RESULTS OF OPERATIONS.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. It is possible
that in the future, third parties may claim that we or our current or potential
future products infringe upon their intellectual property. We expect that
software product developers and providers of Internet-based software will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. In addition, parties making these claims
may be able to obtain an injunction, which could prevent us from selling our
products in the United States or abroad. Any of these results could harm our
business. Any claims, with or without merit, could be time consuming, result in
costly litigation, divert management's attention, cause product shipment delays
or require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us or at all, which could seriously harm our business.
IF OUR CUSTOMERS ARE NOT COMFORTABLE USING OUR SOFTWARE BECAUSE OF SECURITY
CONCERNS RELATED TO THE TRANSMISSION OF DATA OVER THE INTERNET, OUR ABILITY TO
SUSTAIN AND GROW OUR REVENUE WOULD BE LIMITED.
Our software relies on the secure transmission of proprietary data over the
Internet for some of its functionality. Well-publicized compromises of Internet
security could have the effect of substantially reducing confidence in the
Internet as a medium of data transmission. The information transmitted through
the use of our software is highly important to our end users. For example, our
software could allow remote users to control energy usage levels at various
sites by allowing them to adjust the functioning of heating and cooling systems.
As a result, our customers' concerns about Internet security, whether or not
they are warranted, could be extremely harmful to our business. If a potential
customer is concerned that an unauthorized user could gain access to the
functionality of our software, that person might be less likely to license our
software. Moreover, if a security breach involving our software actually occurs,
such a breach could further reduce customers' confidence in our software and
generate negative publicity about us. Any of these consequences could harm our
business.
OUR PERFORMANCE WILL DEPEND ON THE CONTINUED GROWTH IN DEMAND FOR ENERGY
TECHNOLOGY PRODUCTS AND SERVICES.
Our future success depends heavily on the continued growth in demand for
energy technology products and services, which is difficult to predict. If
demand for energy technology products and services does not continue to grow or
grows more slowly than expected, demand for our software will be reduced.
Utilities, energy service providers and other businesses, such as commercial or
industrial customers, may be slow to adapt to changes in the energy marketplace.
This could result in less demand for our software than we currently expect.
Although our software addresses both the regulated and deregulated markets, the
market for energy technology software that addresses the deregulating energy
industry is relatively new, and potential customers may wait for widespread
adoption of products before making purchase commitments. Even if there is
significant market acceptance of energy technology products and services for the
energy industry, we may incur substantial expenses adapting our software to
changing or emerging technologies. Any of these factors could seriously harm our
business.
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THE GLOBAL ENERGY INDUSTRY IS SUBJECT TO EXTENSIVE AND VARIED GOVERNMENTAL
REGULATIONS. AS A RESULT, OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
SUCCESSFULLY DEVELOP SOFTWARE THAT ADDRESSES NUMEROUS AND CHANGING REGULATORY
REGIMES.
Although the global energy industry is becoming increasingly deregulated,
it is still subject to extensive and varied local, national and regional
regulation. If we are unable to design and develop software and services that
address these numerous and changing regulatory requirements or fail to alter our
software rapidly enough, our customers or potential customers may not purchase
our software.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF FACTORS BEYOND OUR CONTROL, AND YOU
MAY LOSE ALL OR A PART OF YOUR INVESTMENT.
Prior to this offering, there has been no public market for our common
stock. After this offering, an active public market for our common stock may not
develop or be sustained. If you purchase shares of common stock in this
offering, you will pay an initial public offering price that was negotiated and
determined with representatives of the underwriters based on several factors.
This price may vary from the prevailing market price of our common stock after
this offering for a number of reasons, many of which are beyond our control.
In addition, the stock market in general and the stocks of technology
companies in particular have been very volatile. This volatility may reduce the
price of our common stock without regard to our operating performance. In
particular, following initial public offerings, the market prices for stocks of
technology companies often reach levels that bear no relation to the operating
performance of these companies. Therefore, the market prices for technology
stocks may not be sustainable and could vary widely. If our common stock trades
to high levels following this offering, it could eventually experience a
significant decline. As a result, you may be unable to sell your shares of
common stock at or above the initial public offering price.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
stock. We may in the future be the target of similar litigation. Regardless of
its outcome, securities litigation could result in substantial costs and divert
management's attention and resources, which could harm our business and results
of operations.
OUR DIRECTORS, EXECUTIVE OFFICERS AND MAJOR STOCKHOLDERS WILL RETAIN SIGNIFICANT
CONTROL OVER OUR COMPANY AFTER THE OFFERING, WHICH COULD LEAD TO CONFLICTS WITH
OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE.
Following the completion of this offering, our directors, executive
officers and holders of five percent or more of our outstanding common stock
will beneficially own an aggregate of approximately % of our outstanding
common stock. As a result, these stockholders may be able to exert significant
control over all matters requiring stockholder approval, including the election
of directors and significant corporate transactions, such as mergers or other
business combination transactions. This control may delay or prevent a third
party from acquiring or merging with our company on terms that other
stockholders may find favorable.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD PREVENT OR DELAY A CHANGE IN
CONTROL OF OUR COMPANY, EVEN IF SUCH CHANGE OF CONTROL WOULD BE BENEFICIAL TO
OUR STOCKHOLDERS.
Provisions of our restated certificate of incorporation and bylaws as well
as provisions of Delaware law could discourage, delay or prevent a merger,
acquisition or other change in control of
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our company, even if such change in control would be beneficial to our
stockholders. These provisions include:
- establishment of a classified board of directors requiring that only a
minority of our directors is up for re-election in a year;
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- limitations on the ability of stockholders to call special meetings of
stockholders;
- prohibiting stockholder action by written consent and requiring all
stockholder actions to be taken at a meeting of our stockholders; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporations Law limits
business combination transactions with 15% stockholders that have not been
approved by the board of directors. These provisions and other similar
provisions make it more difficult for a third party to acquire us without
negotiation. These provisions may apply even if the transaction may be
considered beneficial by some stockholders.
WE WILL HAVE BROAD DISCRETION TO USE PROCEEDS FROM THIS OFFERING AND MAY NOT USE
SUCH PROCEEDS EFFECTIVELY.
We have not committed the net proceeds of this offering to any particular
purposes. As a result, our management will have broad discretion in spending the
proceeds from this offering and you must rely on the judgment of our management
to apply the proceeds effectively. However, we may spend such proceeds in ways
with which our stockholders may not agree and which may not realize the benefits
that we expect.
OF OUR TOTAL OUTSTANDING SHARES FOLLOWING THIS OFFERING, OR %,
ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have outstanding shares of common
stock based on the number of shares outstanding at September 30, 2000. This
includes the shares we are selling in this offering, which may be
resold in the public market immediately. The remaining shares will
become available for resale in the public market as shown in the chart below.
<TABLE>
<CAPTION>
NUMBER OF RESTRICTED
SHARES/
% OF TOTAL SHARES
OUTSTANDING FOLLOWING
OFFERING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
--------------------- ------------------------------------------------------
<C> <S>
/ . % 120 days after the date of this prospectus due to lock-up
agreements these stockholders have with the underwriters if
the conditions described under "Shares Eligible for Future
Sale -- Lock-up Agreements" are satisfied.
/ . % 150 days after the date of this prospectus if additional
conditions described under "Shares Eligible for Future
Sale -- Lock-up Agreements" are satisfied.
/ . % 180 days after the date of this prospectus due to the
release of the lock-up agreement these stockholders have
with the underwriters.
/ . % At some point after 180 days from the date of this
prospectus, subject to vesting requirements and the
requirements of Rule 144 (subject, in some cases, to volume
limitations), Rule 144(k) or Rule 701.
</TABLE>
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As restrictions on resale end, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them. For more detailed information, see "Shares
Eligible for Future Sale".
INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF
THEIR INVESTMENT.
The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of the outstanding common stock. If you
purchase shares of our common stock, you will incur immediate and substantial
dilution in the amount of $ per share, based on the initial price to the
public of $ per share. Investors will incur additional dilution upon the
exercise of outstanding stock options and warrants.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock we are offering will be approximately $ million, or $ million
if the underwriters exercise their overallotment option in full. We based our
estimate of our net proceeds on an assumed initial public offering price of
$ per share and deducted the underwriting discount and estimated offering
expenses payable by us.
While we cannot predict with certainty how we will use the net proceeds of
this offering and our cash on hand, we currently intend to use approximately $25
million to fund our increased sales and marketing expenses, approximately $15
million for increased research and development of our software and approximately
$5 million for general and administrative-related expenses. Any remaining
proceeds will be used for working capital purposes.
The amounts we actually spend for the above purposes may vary significantly
and will depend on a number of factors, including our future revenue and cash
generated by operations and the other factors described under "Risk Factors".
Therefore, we will have broad discretion in the way we use the net proceeds. See
"Risk Factors -- We will have broad discretion to use proceeds from this
offering and may not use such proceeds effectively" for more information.
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complementary to our business, we currently have no
commitments or agreements and are not involved in any negotiations to acquire
any technology or business. We plan to invest the net proceeds, pending their
use, in short-term, interest-bearing, investment grade securities, such as
commercial paper, corporate notes, corporate bonds, United States government
securities, and medium term notes.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business", and elsewhere in this prospectus constitute
forward-looking statements. These statements involve risks, uncertainties, and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", "continue", or the negative of these terms or other comparable
terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
Except as required by law, we do not intend to update any of the forward-
looking statements after the date of this prospectus to conform these statements
to actual results.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis;
- on a pro forma basis after giving effect to the conversion of all
outstanding shares of convertible preferred stock into shares
of common stock immediately prior to the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale of shares
of common stock at an assumed initial public offering price of $ per
share in this offering, after deducting the underwriting discount and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 27,085 $ $
======== ======== ========
Long-term liabilities....................................... $ 554 $ $
Redeemable convertible preferred stock issuable in series,
$0.001 par value per share (Series A, B, C, and D);
16,394,328 shares authorized, 16,172,093 shares issued and
outstanding, actual; shares authorized, no shares
issued and outstanding, pro forma; shares
authorized, no shares issued or outstanding, pro forma as
adjusted.................................................. 43,626 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value per share, no shares
authorized, issued or outstanding, actual and pro forma;
15,000,000 shares authorized, no shares issued or
outstanding, pro forma as adjusted...................... -- -- --
Common stock, $0.001 par value per share; 40,000,000
shares authorized, 7,434,127 shares issued and 6,917,600
shares outstanding, actual; 40,000,000 shares
authorized, shares issued and shares
outstanding, pro forma; shares authorized,
shares issued and outstanding, pro forma as
adjusted................................................ 8
Additional paid-in capital................................ 12,271
Deferred stock-based compensation......................... (3,718)
Accumulated deficit....................................... (18,714)
Notes receivable from officers............................ (938)
Treasury stock, at cost, 516,667 shares................... (201)
-------- -------- --------
Total stockholders' equity (deficit).................... (11,292)
-------- -------- --------
Total capitalization.................................. $ 32,888 $ $
======== ======== ========
</TABLE>
This table excludes the following shares:
- shares issuable upon exercise of options outstanding as of June
30, 2000 at a weighted average exercise price of $ per share;
- shares issuable upon exercise of warrants outstanding as of June
30, 2000 at a weighted average exercise price of $ per share and
shares issuable upon exercise of a warrant outstanding as of
June 30, 2000 with exercise prices of 85% of the fair market value of our
common stock on the dates the warrants become exercisable; and
- a total of shares available for issuance under our various
stock plans as of June 30, 2000, excluding the annual increases in the
number of shares authorized under our 1998 Incentive Stock Option Plan
and our 2000 Employee Stock Purchase Plan.
21
<PAGE> 24
DILUTION
The pro forma net tangible book value of our common stock, after giving
effect to the conversion of all outstanding shares of our convertible preferred
stock into shares of our common stock, on June 30, 2000 was $
million, or approximately $ per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. Dilution in net
tangible book value per share represents the difference between the amount per
share paid by purchasers of shares of our common stock in this offering and the
net tangible book value per share of our common stock immediately afterwards.
After giving effect to our sale of shares of common stock offered by
this prospectus at an assumed initial public offering price of $ per share
and after deducting the underwriting discounts and estimated offering expenses
payable by us, our net tangible book value would have been approximately $
million, or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors
purchasing shares of common stock in this offering. The following table
illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of June 30,
2000.................................................... $
Increase per share attributable to new investors..........
--------
As adjusted pro forma net tangible book value per share
after the offering........................................
--------
Dilution in pro forma net tangible book value per share to
new investors............................................. $
</TABLE>
The following table sets forth, as of June 30, 2000, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price of $ per share, calculated before deducting the
estimated underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- -------- ------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... $
New investors............................... % % $
--- --- -------- ---
Total..................................... % $ %
=== === ======== ===
</TABLE>
The foregoing discussion and tables are based upon the number of shares
actually issued and outstanding as of June 30, 2000 and assume no exercise of
options or warrants outstanding as of June 30, 2000. As of that date, there
were:
- shares issuable upon exercise of options outstanding at a weighted
average exercise price of $ per share;
- shares issuable upon exercise of warrants outstanding at a
weighted average exercise price of $ per share and shares
issuable upon exercise of a warrant outstanding as of June 30, 2000 with
exercise prices of 85% of the fair market value of our common stock on
the dates the warrants become exercisable; and
- a total of shares available for issuance under our various
stock plans as of June 30, 2000, excluding the annual increases in the
number of shares authorized under our 1998 Incentive Stock Option Plan
and our 2000 Employee Stock Purchase Plan.
Assuming the exercise in full of all outstanding options and warrants, our
pro forma as adjusted net tangible book value as of June 30, 2000 would be
$ per share, representing an immediate increase in net tangible book value of
$ per share to our existing stockholders and an immediate decrease in net
tangible book value of $ per share to new investors.
22
<PAGE> 25
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes included in this prospectus as well
as the section of the prospectus entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations". The statement of operations
data for each of the two years ended December 31, 1999 and the balance sheet
data as of December 31, 1998 and 1999 are derived from our audited financial
statements included in this prospectus. The statement of operations data for the
six months ended June 30, 1999 and June 30, 2000 and the balance sheet data as
of June 30, 2000 are derived from the unaudited financial statements included
elsewhere in this prospectus. We have prepared the unaudited information on the
same basis as the audited financial statements and have included all
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation of our financial position and operating
results for these periods. Historical results are not necessarily indicative of
future results. The pro forma net loss per share information in the following
table gives effect to the automatic conversion of all outstanding shares of our
convertible preferred stock into common stock immediately prior to the closing
of this offering.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -------------------------
1998 1999 1999 2000
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License........................................ $ -- $ 250 $ 45 $ 1,436
Services....................................... 19 270 44 828
----------- ----------- ----------- -----------
Total revenue................................ 19 520 89 2,264
----------- ----------- ----------- -----------
Cost of revenue:
License........................................ -- 32 10 75
Services....................................... 4 214 12 350
----------- ----------- ----------- -----------
Total cost of revenue........................ 4 246 22 425
----------- ----------- ----------- -----------
Gross profit..................................... 15 274 67 1,839
----------- ----------- ----------- -----------
Operating expenses:
Research and development....................... 830 3,739 1,390 3,764
Sales and marketing............................ 228 2,334 524 5,764
General and administrative..................... 332 667 276 1,140
Stock-based compensation....................... 52 730 365 1,340
Amortization of intangibles.................... -- -- -- 70
----------- ----------- ----------- -----------
Total operating expenses..................... 1,442 7,470 2,555 12,078
----------- ----------- ----------- -----------
Loss from operations............................. (1,427) (7,196) (2,488) (10,239)
Interest income.................................. -- 202 39 157
Interest expense................................. 46 20 -- 145
----------- ----------- ----------- -----------
Net loss......................................... $ (1,473) $ (7,014) $ (2,449) $ (10,227)
=========== =========== =========== ===========
Redeemable convertible preferred stock accruing
dividend....................................... (75) (568) (225) (686)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders..... $ (1,548) $ (7,582) $ (2,674) $ (10,913)
=========== =========== =========== ===========
Basic and diluted net loss per share............. $ (1.62) $ (3.09) $ (1.31) $ (2.68)
=========== =========== =========== ===========
Shares used in calculating basic and diluted
net loss per share........................... 953 2,453 2,041 4,076
=========== ----------- =========== ===========
Pro forma basic and diluted net loss per
share........................................ $ (0.72) $ (0.64)
=========== ===========
Shares used in calculating pro forma basic and
diluted net loss per share................... 10,514 16,960
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
------------ -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 3,260 $ 7,840 $ 27,085
Working capital.................................... 3,097 10,856 25,662
Total assets....................................... 3,396 12,578 38,436
Long term liabilities.............................. -- 563 554
Redeemable convertible preferred stock............. 4,681 19,510 43,626
Total stockholders' deficit........................ (1,481) (8,302) (11,292)
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in forward-looking statements for many reasons, including the risks described in
"Risk Factors" and elsewhere in this prospectus. You should read the following
discussion with the "Selected Financial Data" and our financial statements and
related notes included elsewhere in this prospectus.
OVERVIEW
We develop and sell Internet-based energy technology software that enables
enterprises and energy service providers to reduce energy costs and other
related expenditures. Silicon Energy was founded in December 1997 and began
significant operations in January 1998. From January 1998 to March 1999, we were
primarily engaged in research, product development and infrastructure building
activities. We derived our first revenue in June 1998.
We market and sell our software through our direct sales force and our
value-added resellers. Through September 30, 2000, we had not recognized any
revenue from these reseller arrangements.
SOURCES OF REVENUE AND REVENUE RECOGNITION
Our revenue consists of the sale of our software licenses and services. Our
software licenses are sold on a perpetual or subscription basis. Our services
revenue is derived from professional, maintenance, Internet, and integrated bill
management services. Software license revenue comprised 48% of our total revenue
for the year ended December 31, 1999 and 63% of our total revenue for the six
months ended June 30, 2000. Services revenue comprised 52% of our total revenue
for the year ended December 31, 1999 and 37% of our total revenue for the six
months ended June 30, 2000.
Our license agreements provide for customers to pay software license fees
for our standard application server. The amount of these license fees depends
upon the number of data points, number and type of software modules and number
and complexity of software gateways purchased by the customer. A data point is
defined as a unique data field or time-series of values representing actual data
derived from an external source or data derived from performing computations. A
software gateway allows the collection of real-time data from legacy systems,
such as building control, process control and metering systems, and provides
one-way or two-way data flow.
Professional services revenue is derived from integration and installation
of our software and includes training and consulting services. Our professional
services contracts are priced based on time and materials. Maintenance service
revenue is derived from maintenance agreements sold with the software licenses
for a one-year renewable annual period equal to a percentage of the software
license fee. The maintenance agreement provides for system support, which
includes corrections, updates and telephone assistance.
We also offer our customers Internet and integrated bill management
services. Internet services include hosting, content and transaction-based
services. Hosting services outsource the operation of hardware monitoring,
software support and system administration tasks. Content services include
hourly weather content and energy rates. Our integrated bill management service
is an outsourced bill processing solution that compiles data from energy bills
from disparate locations, pays the bills and provides customers with a
simplified analysis of complex energy information. In the future, we expect to
generate additional fees on a transaction basis for the use of some of our
applications, such as Curtailment Manager that allows energy suppliers to manage
load reduction programs. Internet and integrated bill management services are
subscription-based services.
We have entered into several reseller arrangements through which resellers
expect to sell our software licenses to third parties. To date, we have not
recognized any revenue from our reseller arrangements, but we anticipate that
our resellers will generate sales in the future. In addition, we
24
<PAGE> 27
opened a direct sales office in the United Kingdom during the third quarter of
2000. To date, we have not recognized any international revenue. However, we
believe that international sales will be an important source of revenue in the
future.
We recognize revenue when all of the following conditions are met:
- there is persuasive evidence of an arrangement;
- we have delivered the product to the customer;
- collection of the fees is probable;
- the amount of the fee to be paid by the customer is fixed or
determinable; and
- the services provided are not essential to the functionality of the
software.
Revenue from professional, maintenance, Internet, and integrated bill
management services is recognized ratably over the term of the agreement or as
services are performed.
Our software typically requires installation and significant implementation
or tailoring essential to its functionality. On contracts for which reliable
estimates cannot be made by management with respect to the extent of
installation and implementation services required for full functionality, the
license and service revenue, excluding the maintenance element, is recognized on
a completed contract method. When reliable estimates can be made, the license
and services revenue, excluding the maintenance element, is recognized on a
percentage-of-completion method using labor hours incurred compared to total
estimated hours as the measure of progress toward completion.
We record payments received in advance of revenue recognition and billings
in excess of project revenues earned as deferred revenue. Our deferred revenue
was $367,000 at December 31, 1999 and $1.5 million at June 30, 2000. Under the
terms of most of our standard contracts, we invoice advanced payments from
customers under software sales agreements and under professional service
engagements; our current terms under each type of arrangement are typically net
30 days.
COST OF REVENUE AND OPERATING EXPENSES
Our cost of license revenue includes expenses incurred to manufacture,
package and distribute software products and related documentation. Our cost of
services revenue includes salaries and related expenses for professional,
maintenance and integrated bill management services, as well as amounts paid to
third parties in connection with the provision of our Internet services. Our
operating expenses are classified into five general categories: sales and
marketing, research and development, general and administrative, stock-based
compensation, and amortization of intangibles. We allocate the costs for
overhead and facilities to each of the functional areas that use the overhead
and facilities services based on headcount. These allocated charges include
facilities rent for corporate offices, communication charges and payroll and
benefits related costs.
We expect our cost of services revenue to increase as a result of the
continued expansion of our services organization. Since services revenue has
substantially lower margins than license revenue, this expansion would reduce
our gross margins if our license revenue were not to increase at similar or
higher rates. We expect cost of services revenue as a percentage of services
revenue to vary from period to period depending on the mix of services we
provide and the overall utilization rates of services staff.
Costs for the development of new software and substantial enhancements to
existing software are expensed as incurred until technological feasibility has
been established, at which time any additional development costs would be
capitalized. To date, we have not capitalized any development costs related to
software because the time period between technological feasibility and general
release of the software has not been significant and related costs incurred
during that time period have not been material. Since inception, we have
incurred substantial research and development costs and have invested heavily in
the expansion of our sales and marketing and professional services organizations
to build an infrastructure to support our long-term growth strategy. Our
full-time
25
<PAGE> 28
employees increased from three as of December 31, 1997 to 138 as of June 30,
2000. As a result of these investments, we have incurred net losses in each
quarter since inception. As of June 30, 2000, we had an accumulated deficit of
$18.7 million. We anticipate that our operating expenses will continue to
increase for the foreseeable future as we expand our software development and
sales and marketing efforts. In addition, we expect to incur additional expenses
associated with being a public company. Accordingly, we expect to incur net
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 revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
EQUITY TRANSACTIONS WITH OUR CUSTOMERS
During fiscal year 2000, we entered into transactions with some of our
customers that involved the sale of our common stock or the issuance of a
warrant with prices which, in light of the expected initial public offering
price of our common stock in this offering, are deemed to have been below the
fair value at the date of issuance. We also entered into commercial agreements
with these customers or their affiliates. As a result, we expect to recognize
the majority of the deemed discount on our common stock totalling $2.3 million
as non-cash offsets to the gross revenue generated under these contracts by
December 2001.
We have also entered into an agreement with a customer under which we
issued a warrant to purchase up to 625,000 shares of our common stock. The
customer exercised the vested portion of the warrant in September 2000 to
purchase 105,661 shares of our common stock. The remaining shares under the
warrant vest based on the amount of revenue generated directly or indirectly by
the customer during the periods ending on December 31, 2000, 2001 and 2002. The
exercise price for the warrant is a 15% discount to the market price of our
common stock on the last day of each vesting period. At each vesting date, we
will determine the fair value of the warrants earned during the period. The
resulting amount will be recorded as a non-cash offset to the revenue generated
by the customer. To the extent the fair value of the warrant exceeds the revenue
generated, the excess amount will be recorded as a marketing expense.
We have also entered into a marketing alliance agreement under which we
issued a warrant to purchase up to 125,000 shares of our common stock at $6.75
per share. The warrant is exercisable during the six-month period between June
30, 2003 and December 31, 2003. If performance milestones are achieved, the
warrant may be exercised early. We deem the fair value of the warrant to be
$512,000, which we will record as a sales and marketing expense through the end
of 2003.
STOCK-BASED COMPENSATION
In connection with the grant of stock options prior to our initial public
offering, we recorded deferred stock-based compensation of approximately $5.8
million, representing the difference between the deemed fair value of the common
stock for accounting purposes and the option exercise price of these options at
the measurement date, which is typically the date of grant. This amount is
presented as a reduction of stockholders' equity and will be amortized to
expense as a non-cash charge over the vesting period of the applicable options,
which is generally four years, in a manner consistent with Financial Accounting
Standards Board Interpretation No. 28. For the years ended December 31, 1998 and
1999 and for the six months ended June 30, 2000, we recorded amortization of
deferred stock-based compensation of $52,000, $730,000 and $1.3 million,
respectively. At June 30, 2000,
26
<PAGE> 29
approximately $3.7 million of deferred stock-based compensation remained to be
amortized, which we expect to amortize as follows:
<TABLE>
<CAPTION>
EXPECTED AMORTIZATION OF
STOCK COMPENSATION
------------------------
(IN THOUSANDS)
<S> <C>
Six-month period ending December 31, 2000................ $ 1,147
Year ending December 31, 2001............................ 1,753
Year ending December 31, 2002............................ 785
Year ending December 31, 2003............................ 23
Year ending December 31, 2004............................ 10
</TABLE>
These amounts are subject to change due to forfeitures and additional grants of
stock options.
During the period from July 1, 2000 to September 30, 2000, we granted
options to purchase an additional 500,588 shares of our common stock to
employees at prices below the deemed accounting fair market value. We expect
that these option grants will give rise to an estimated additional stock-based
charge of $1.3 million to be recognized over the vesting period of the options.
INCOME TAXES
As of December 31, 1999, we provided a full valuation allowance against our
deferred tax asset of $3.4 million, consisting primarily of net operating loss
carryforwards of $7.0 million and $6.2 million for federal and state taxes
purposes, respectively. We have incurred losses from inception through June 30,
2000 and believe, based upon the history of such losses and other factors, that
the weight of available evidence indicates that we may not be able to realize
our deferred tax asset in the foreseeable future. See Note 5 of Notes to the
Consolidated Financial Statements.
GOODWILL AND OTHER INTANGIBLES RELATED TO ACQUISITIONS
Goodwill consists of the excess of the purchase price paid over identified
intangible and tangible net assets of acquired companies.
In May 2000, we acquired Energy Concepts, Inc., an energy bill management
company, for cash of $450,000 and the assumption of debt of $123,000. In June
2000, we acquired SRC Systems, Inc., a provider of energy analysis software
applications and services, for 142,841 shares of our common stock, with an
estimated fair value of $6.08 per share, and the assumption of debt of $800,000.
These acquisitions were accounted for under the purchase method of accounting.
The results of operations of these companies are included in the consolidated
results of operations for periods subsequent to their respective acquisition
dates.
We recorded $2.1 million of goodwill and other identifiable intangible
assets in connection with these acquisitions, which are being amortized over a
three-year period. We anticipate that the quarterly amortization expense will be
approximately $173,000 in future periods. We do not expect these acquisitions to
have a significant impact on our revenues or cost of operations in the near
term.
27
<PAGE> 30
RESULTS OF OPERATIONS
The following table sets forth financial data for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1998 1999 1999 2000
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License.............................. $ -- $ 250 $ 45 $ 1,436
Services............................. 19 270 44 828
------- ------- ------- --------
Total revenue..................... 19 520 89 2,264
------- ------- ------- --------
Cost of revenue:
License.............................. -- 32 10 75
Services............................. 4 214 12 350
------- ------- ------- --------
Total cost of revenue............. 4 246 22 425
------- ------- ------- --------
Gross profit........................... 15 274 67 1,839
------- ------- ------- --------
Operating expenses:
Research and development............. 830 3,739 1,390 3,764
Sales and marketing.................. 228 2,334 524 5,764
General and administrative........... 332 667 276 1,140
Stock-based compensation............. 52 730 365 1,340
Amortization of intangibles.......... -- -- -- 70
------- ------- ------- --------
Total operating expenses.......... 1,442 7,470 2,555 12,078
------- ------- ------- --------
Loss from operations................... (1,427) (7,196) (2,488) (10,239)
Interest income........................ -- 202 39 157
Interest expense....................... 46 20 -- 145
------- ------- ------- --------
Net loss............................... $(1,473) $(7,014) $(2,449) $(10,227)
======= ======= ======= ========
</TABLE>
The following table sets forth financial data as a percentage of total
revenue for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License.............................. -- 48.1% 50.6% 63.4%
Services............................. 100.0% 51.9 49.4 36.6
----- ----- ----- -----
Total revenue..................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue:
License.............................. -- 6.2 11.2 3.3
Services............................. 21.1 41.1 13.5 15.5
----- ----- ----- -----
Total cost of revenue............. 21.1 47.3 24.7 18.8
----- ----- ----- -----
Gross profit........................... 78.9% 52.7% 75.3% 81.2%
----- ----- ----- -----
</TABLE>
28
<PAGE> 31
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000
REVENUE
Our total revenue was $89,000 for the six months ended June 30, 1999 and
$2.3 million for the six months ended June 30, 2000, and was comprised of sales
of software licenses and related services fees from our professional,
maintenance, Internet, and bill management services. License revenue was
$45,000, or 51% of total revenue, for the first six months of 1999 and $1.4
million, or 63% of total revenue, for the first six months of 2000. Services
revenue was $44,000, or 49% of total revenue, for the six months ended June 30,
1999 and $828,000, or 37% of total revenue, for the six months ended June 30,
2000. We currently expect services revenue to be between 40% and 45% of our
total revenue for future periods. The increases in our revenue were due to
additional sales generated as a result of investment in our sales and marketing
organizations and increases in additional sales to existing customers. The U.S.
Navy accounted for all of our revenue for the six months ended June 30, 1999 and
MidAmerican Energy Company accounted for 13% of our total revenue for the six
months ended June 30, 2000. No other customer accounted for more than 10% of our
total revenue for the six months ended June 30, 2000.
COST OF REVENUE
Cost of revenue was $22,000 for the six months ended June 30, 1999 and
$425,000 for the six months ended June 30, 2000. Substantially all of the
increase in cost of revenue was due to increases in cost of services revenue
which resulted from the hiring of additional employees necessary to provide
technical support, training and consulting. From June 30, 1999 to June 30, 2000,
professional services personnel increased from two to 18.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist of
compensation and related costs for research and development personnel and
contractors. Research and development expenses increased from $1.4 million for
the six months ended June 30, 1999 to $3.8 million in the six months ended June
30, 2000. Substantially all of the increase in research and development expenses
was related to salary increases for our existing personnel, increases in the
number of software engineers and other technical staff and the increased use of
outside contractors. From June 30, 1999 to June 30, 2000, research and
development personnel grew from 24 to 50. We believe that continued investment
in research and development is critical to our strategic objectives, and we
expect that the dollar amounts of research and development expenses will
increase in future periods, but may fluctuate as a percentage of revenue from
period to period.
SALES AND MARKETING. Sales and marketing expenses consist of compensation
and related costs for sales and marketing personnel and promotional
expenditures, including public relations, advertising, trade shows, and
marketing collateral materials. Sales and marketing expenses increased from
$524,000 for the six months ended June 30, 1999 to $5.8 million for the six
months ended June 30, 2000. Approximately 75% of the increase in sales and
marketing expenses was due to payroll and benefits related expenses, recruiting
fees and travel expenses. Sales and marketing personnel increased from seven at
June 30, 1999 to 50 at June 30, 2000. An additional 10% of the increase related
to increased spending for marketing activities, including trade shows,
advertising and other promotional expenses. The remaining increase was
attributed to training and equipment costs. We anticipate that these sales and
marketing expenses will continue to increase in absolute dollar amounts in
future periods as we continue to expand our sales and marketing efforts, but may
fluctuate as a percentage of total revenue from period to period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
compensation and related costs for administrative personnel, third-party
professional services, and other general corporate expenses. General and
administrative expenses increased from $276,000 for the six months ended June
30, 1999 to $1.1 million for the six months ended June 30, 2000. The increase
was
29
<PAGE> 32
primarily due to the addition of executive, finance and administrative personnel
and additional third-party professional expenses. From June 30, 1999 to June 30,
2000, general and administrative personnel increased from three to 10. We expect
general and administrative expenses to continue to increase as we add personnel
to support expanding operations, incur additional costs related to the growth of
our business, and assume the reporting requirements of a public company. These
expenses, however, may fluctuate as a percentage of revenue from period to
period.
AMORTIZATION OF INTANGIBLES. In the first six months of 2000, we acquired
substantially all of the assets and liabilities of two companies. We recorded
$70,000 of amortization related to these acquisitions.
INTEREST INCOME, NET
Interest income, net consists of interest earned on cash and short-term
investments, offset by interest expense related to our credit facility. Interest
income, net was $39,000 for the six months ended June 30, 1999 and $12,000 for
the six months ended June 30, 2000. The decrease in interest income, net was due
to a one-time non-cash charge incurred in the 2000 period resulting from the
issuance of a warrant to one of our lenders, largely offset by higher interest
earned on higher cash balances from the proceeds of our sales of preferred stock
in October 1999 and June 2000.
YEAR ENDED DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
REVENUE
Our total revenue was $19,000 in 1998 and $520,000 in 1999 and was
comprised of sales of software products and related services fees from our
professional, maintenance and Internet services. License revenue was zero in
1998 and $250,000, or 48% of revenue, in 1999. Services revenue was $19,000, or
100%, of revenue in 1998 and $270,000, or 52%, of revenue in 1999. No customer
accounted for more than 10% of our total revenue in 1998. Schlumberger accounted
for 28%, Con Edison Solutions, Inc. accounted for 21%, Enron Energy Services
accounted for 20%, the U.S. Navy accounted for 17%, and The Planergy Group, a
subsidiary of Xcel Energy, Inc., accounted for 13% of our total revenue in 1999.
No other customer accounted for more than 10% of our total revenue in 1999.
The increase in our revenue year to year was due to several factors
including:
- Increasing market acceptance of the need for energy technology software;
- Increased investment in our sales and marketing organizations, including
the hiring of sales personnel and an increase in advertising and other
programs; and
- The release of version 1.4 of the Silicon Energy EEM Suite in December
1999.
COST OF REVENUE
Cost of revenue was $4,000 in 1998 and $246,000 in 1999. The increase in
our cost of revenue was primarily due to the increase in cost of services
revenue, which resulted from the hiring of additional employees necessary to
provide technical support, training and consulting. Cost of services revenue as
a percentage of cost of revenue was 100% in 1998 and 87% in 1999. Cost of
license revenue as a percentage of cost of revenue was zero percent in 1998 and
13% in 1999. The increase in cost of services revenue each year resulted
primarily from the hiring of additional employees.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$830,000 in 1998 to $3.7 million in 1999. Almost all of the increase in research
and development expenses was related to an increase in the number of software
engineers and other technical staff supporting the development and testing,
quality assurance and documentation of new products.
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SALES AND MARKETING. Sales and marketing expenses increased from $228,000
in 1998 to $2.3 million in 1999. The increase in sales and marketing expenses
resulted primarily from building a direct sales force and investing in sales and
marketing infrastructure. Approximately 80% of the increase was due to
personnel-related expenses, recruiting fees and travel expenses. An additional
10% of the increase related to increased spending for marketing activities,
including trade shows, advertising and other promotional expenses. The remaining
increase was attributable to related facility and equipment costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $332,000 in 1998 to $667,000 in 1999. The increase was primarily due to the
addition of finance and administrative personnel and third-party professional
expenses associated with our Series C equity financing.
INTEREST INCOME, NET
We had net interest expense of $46,000 in 1998 compared to net interest
income of $182,000 in 1999. The increase in net interest income in 1999 was due
to interest earned from higher cash balances on hand as a result of sales of
preferred stock in October 1999. Net interest expense in 1998 was primarily due
to interest incurred on borrowings.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth, for the periods presented, unaudited
quarterly financial results for the six quarters ended June 30, 2000 and those
results expressed as a percentage of total revenue for each quarter. The
statements of operations data has been derived from our quarterly unaudited
financial statements. In management's opinion, these statements have been
prepared on substantially the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information for the periods
presented. This information should be read in conjunction with the financial
statements and notes thereto included elsewhere in this prospectus. We have
experienced and expect to continue to experience fluctuations in operating
results from quarter to quarter. You should not draw any
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conclusions about our future results from the results of operations for any
quarter, as quarterly results are not indicative of the results for a full
fiscal year or any other period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License................................ $ -- $ 45 $ -- $ 205 $ 440 $ 996
Services............................... -- 44 20 206 346 482
----- ------- ------- ------- ------- -------
Total revenue........................ -- 89 20 411 786 1,478
----- ------- ------- ------- ------- -------
Cost of revenue:
License................................ -- 10 -- 22 30 45
Services............................... -- 12 5 197 125 225
----- ------- ------- ------- ------- -------
Total cost of revenue................ -- 22 5 219 155 270
----- ------- ------- ------- ------- -------
Gross profit............................. -- 67 15 192 631 1,208
----- ------- ------- ------- ------- -------
Operating expenses:
Research and development............... 576 814 780 1,569 1,609 2,155
Sales and marketing.................... 205 319 475 1,335 2,008 3,756
General and administrative............. 56 220 130 261 433 707
Stock-based compensation............... 120 245 283 82 789 551
Amortization of intangibles............ -- -- -- -- -- 70
----- ------- ------- ------- ------- -------
Total operating expenses............. 957 1,598 1,668 3,247 4,839 7,239
===== ======= ======= ======= ======= =======
Loss from operations..................... (957) (1,531) (1,653) (3,055) (4,208) (6,031)
Interest income.......................... 10 29 63 100 55 102
Interest expense......................... -- -- 5 15 48 97
Net loss................................. $(947) $(1,502) $(1,595) $(2,970) $(4,201) $(6,026)
===== ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUE
STATEMENT OF OPERATIONS DATA:
Revenue:
License................................ -- 50.6% -- 49.9% 56.0% 67.4%
Services............................... -- 49.4 100.0% 50.1 44.4 32.6
----- ------- ------- ------- ------- -------
Total revenue........................ -- 100.0 100.0 100.0 100.0 100.0
----- ------- ------- ------- ------- -------
Cost of revenue:
License................................ -- 11.2 -- 5.4 3.8 3.0
Services............................... -- 13.5 25.0 47.9 15.9 15.2
----- ------- ------- ------- ------- -------
Total cost of revenue................ -- 24.7 25 53.3 19.7 18.3
----- ------- ------- ------- ------- -------
Gross profit............................. -- 75.3% 75% 46.7% 80.3% 81.7%
===== ======= ======= ======= ======= =======
</TABLE>
Our license and services revenue fluctuated in the four quarters of 1999
due to the completed contract method of revenue recognition used in 1999, and
grew in each of the first two quarters of 2000, where the
percentage-of-completion revenue recognition method was used. Cost of revenue
also fluctuated in correlation with revenue in each of the four quarters of
1999, and increased in the first two quarters of 2000. The increase in cost of
revenue in the first half of 2000 was the result of costs associated with
increased sales and subsequent installation and implementation. Total operating
expenses increased in each quarter primarily due to increased expenses
associated with building a sales and marketing infrastructure including the
development of a direct sales force, increased spending on research and
development to support new software introductions and quality assurance testing,
and an increase in general and administrative expenses to manage our expanding
operations.
Although we have a limited operating history, we believe that quarterly
operating results may experience seasonal fluctuations in the future. For
example, as we expand into international markets, sales may decline during
summer months, particularly in European markets. Sales may also be lower in our
first fiscal quarter due to patterns in the capital budgeting and purchasing
cycles of our current and prospective customers.
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LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through private placements
of equity securities and, to a lesser extent, revenue and equipment lines of
credit. Through June 30, 2000, we have raised a total of $42.3 million through
equity financing.
We maintain an equipment line of credit with a commercial bank. The line of
credit, expiring in November 2002, permits us to borrow up to $1.75 million at
an annual rate of .75% in excess of prime. As of June 30, 2000, the total amount
outstanding on the equipment line of credit was $465,000. Additionally, we have
a revolving line of credit with the same commercial bank for $1.75 million,
which allows us to borrow monies at an annual rate of .75% in excess of prime.
As of June 30, 2000, the total amount outstanding on the general line of credit
was $332,000, which is due and payable in November 2000. As of June 30, 2000,
obligations under our equipment line of credit are $43,000 in 2000, $86,000 in
2001, and $21,000 in 2002.
Net cash used in operating activities totaled $1.2 million in 1998 and was
attributable primarily to a net loss of $1.4 million before stock-based
compensation charges of $52,000. In 1999, cash used in operating activities was
$6.1 million and was primarily attributable to a net loss of $6.3 million before
stock-based compensation charges of $730,000. Cash used in operating activities
during the six months ended June 30, 2000 was $6.7 million and was attributable
to a net loss of $8.9 million before stock-based compensation charges of $1.3
million, primarily offset by increases in accrued liabilities and deferred
revenues related to advance payments on license agreements.
Net cash used in investing activities totaled $113,000 in 1998 and $4.0
million in 1999. For the six months ended June 30, 2000, net cash used in
investing activities totaled $272,000. The increases in each period resulted
primarily from the purchase of property and equipment to support our growth.
Net cash provided by financing activities totaled $4.6 million in 1998,
$14.7 million in 1999 and $26.2 million for the six months ended June 30, 2000.
The increase in each period resulted primarily from the net proceeds from sale
of our equity securities and to a lesser extent, equipment lease-line
borrowings.
As of June 30, 2000, our principal sources of liquidity included $28.6
million of cash, cash-equivalents and investments. Capital expenditures,
including those under capital leases, were $113,000 in 1998, $958,000 in 1999
and $1.7 million for the six months ended June 30, 2000. Our capital
expenditures consist primarily of purchases of computer equipment and software,
furniture and fixtures and leasehold improvements. We anticipate a substantial
increase in our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. For the
remainder of 2000 and through 2001, we anticipate that our capital expenditures
will be at least $3.5 million.
As of June 30, 2000, our principal commitment consisted of obligations
under our operating and capital leases. Future lease commitments for our office
facilities and equipment are $530,000 in 2000, $783,000 in 2001, $745,000 in
2002 and $699,000 in 2003.
In June 2000, we sold 3,481,468 shares of Series D preferred stock at a
price of $6.75 per share for an aggregate purchase price of $23.5 million in a
private placement. In June 2000, we also sold 825,000 shares of common stock at
a price of $4.00 per share for an aggregate purchase price of $3.3 million in a
private placement. We believe that the net proceeds from this offering, combined
with current cash balances and short-term investments, will be sufficient to
meet our anticipated liquidity needs for working capital and capital
expenditures for at least 24 months from the date of this prospectus. Our
forecast of the period of time through which our financial resources will be
adequate to support operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially as a result of
the factors described above. We expect to continue to incur net losses for the
foreseeable future and we may need additional funds to expand or meet all of our
operating needs.
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If we require additional capital resources to grow our business internally
or to acquire complementary technologies and businesses at any time in the
future, we may seek to sell additional equity or debt securities or secure an
additional bank line of credit. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders. We
cannot assure you that any financing arrangements will be available in amounts
or on terms acceptable to us.
MARKET AND CURRENCY RISK
To date, all of our recognized revenue has been denominated in U.S. dollars
and exclusively from customers in the United States. We expect, however, to
begin to derive future license revenue from international markets, which may be
denominated in the currency of the applicable market. As a result, our operating
results may become subject to significant fluctuations based upon changes in the
exchange rates of some currencies in relation to the U.S. dollar. Although we
will continue to monitor our exposure to currency fluctuations, and, when
appropriate, may use financial hedging techniques in the future to minimize the
effect of these fluctuations, we cannot assure you that exchange rate
fluctuations will not adversely affect our financial results in the future.
As of June 30, 2000, we had total short-term and long-term borrowings of
$332,000 and $465,000, respectively, which contain interest rates that are tied
to the prime rate. Therefore, we are subject to exposure to interest rate risk
for these borrowings based on fluctuations in the prime rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 of Financial Accounting Standards, "Accounting for Derivative Instruments
and Hedging Activities", which requires companies to record derivative financial
instruments on their balance sheets as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. In July 1999, the Financial Accounting
Standards Board issued Statement No. 137 of Financial Accounting Standards,
"Accounting For Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133", which deferred the effective date of
Statement No. 133 to the first fiscal quarter ending June 30, 2000. We will
adopt Statement No. 133, as amended, in the first quarter of 2001. We do not
believe that the adopting of this statement will have a material impact on our
results of operations or financial position.
In March 2000, the Financial Accounting Standards Board issued
interpretation No. 44. "Accounting for Certain Transactions involving Stock
Compensation -- an interpretation of APB Opinion No. 25", or FIN 44. This
interpretation clarifies the definition of employee for purposes of applying
Accounting Practice Board Opinion No. 25. "Accounting for Stock issued to
Employees", the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in this
interpretation cover specific events that occur after either December 15, 1998
or January 12, 2000. We believe that the impact of FIN 44 will not have a
material effect on the financial position or results of operations of the
Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the Securities and
Exchange Commission. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes it has complied with the guidance in
SAB No. 101.
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BUSINESS
OVERVIEW
Silicon Energy develops and sells Internet-based energy technology software
that enables enterprises to reduce energy costs and other related expenditures.
Our software integrates multiple, geographically-dispersed energy consumption,
generation and storage systems into a single enterprise-wide network. Our
software's highly scalable design retrieves, compiles and stores non-
standardized, complex usage data from hundreds of disparate devices and systems
from multiple vendors. Our software then performs extensive analysis of this
information, provides intuitive and informative decision support and enables
simultaneous control of energy systems. By linking multiple systems throughout
the enterprise with additional external data sources, our software enables end
users to reduce energy waste, manage peak consumption, improve power quality and
reliability, and make supply decisions between utility service providers, third
party providers and distributed generating devices.
Our customers represent a broad range of vertical markets, including the
commercial, industrial, higher-education, government, energy service provider
and utility sectors. As of September 30, 2000, we had license or subscription
agreements for our Silicon Energy EEM Suite with over 35 customers.
INDUSTRY BACKGROUND
THE CURRENT ENERGY MARKET
End users spent approximately $290 billion in 1999 on electricity and
natural gas, making the energy industry one of the largest in the United States.
In addition to the direct cost of energy, enterprises spend billions more
annually on maintenance and other expenses associated with energy systems,
including efforts to hedge the risks inherent in managing their energy
portfolios. In 1999, commercial and industrial users accounted for over $160
billion of the energy consumption in the United States. In a 1997 survey
conducted by CFO Magazine, respondents identified energy as the least
controllable expense in their overall cost structures.
The recent growth in the use of computers, the Internet and
telecommunications products has significantly increased the need for reliable,
high-quality power. These digital applications are less tolerant of voltage
disturbances than conventional uses of electricity and can be severely damaged
by power disruptions. Sandia National Laboratories, a U.S. Department of Energy
national security laboratory, estimates that power quality and reliability
problems cost U.S. businesses approximately $150 billion annually in lost data,
materials and productivity. In order to avoid these costly losses, many
businesses are investing in power quality and reliability solutions, including
distributed generation and power storage assets. According to industry sources,
businesses spent in excess of $11 billion globally in 1999 on power quality and
reliability products. We believe that as these investments continue, enterprises
will increasingly demand solutions to effectively network these new assets and
their existing energy infrastructures into cohesive energy management strategies
to minimize costs and improve reliability.
Today, the U.S. energy market is highly fragmented and populated by locally
regulated utilities that act as regional monopolies. These utility providers
often design complicated pricing structures that make it difficult for end users
to understand, monitor and manage their energy usage and costs. Because of this
fragmented market, complex pricing and lack of understanding of marginal costs,
end users are typically unable to evaluate opportunities for managing
consumption to achieve energy cost reductions.
The lack of information about energy consumption also impacts energy
suppliers. Electricity cannot be stored like natural gas and its regional
availability is subject to generation and transmission constraints. As a result,
the wholesale market for the marginal supply of electricity is primarily real-
time and highly volatile. This volatility has recently increased in several
regions as the growth in peak
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energy demand has outpaced generating capacity additions. Without high quality
information or the ability to influence or predict customers' peak demand,
suppliers face significant volume and price risk. In addition, the inability to
curtail, manage or influence customers' peak consumption further limits
suppliers' ability to effectively manage risk across their portfolio.
The informational inefficiencies that exist in today's regulated energy
market are significant, and federal and state deregulation of the electricity
and natural gas industries is further adding complexity to the management of
energy costs. While many end users are now able to choose their energy supplier,
few possess sufficient information and systems to take full advantage of the
economic opportunity. Suppliers, on the other hand, are exposed to increased
levels of operating risk. They face uncertainty regarding both maintaining their
customer base and accurately predicting their volume requirements and cost
structure.
We believe that these factors, combined with the technological advantages
provided by the Internet, create a catalyst for fundamental change in the
electricity and gas industries and the need for new solutions. A new energy
information infrastructure is required that more effectively links energy
suppliers with energy users. Such a system would enable the integration of
demand and supply in real time, reducing inefficiencies in the current systems
and promoting new information-based energy technology solutions.
LIMITATIONS OF CURRENT APPROACHES
Despite the large expenditures associated with energy usage, limited tools
currently exist to manage these costs. We believe that current approaches to
energy management are largely inadequate in addressing the full spectrum of
evolving energy management challenges. Tools used by energy managers today and
their shortcomings include:
CONSULTANTS, ENGINEERS AND OTHER SPECIALISTS. Businesses often hire
consultants, engineers and other specialists to collect and analyze information
from historical records to evaluate potential energy projects and estimate
future energy requirements. These consultants are typically employed to evaluate
energy price options from regulated and unregulated energy suppliers in order to
assist their clients in selecting favorable energy contracts. This approach is
expensive because it is labor intensive and requires highly specialized
expertise. Moreover, the resulting analysis can be susceptible to error because
of incomplete, inaccurate or dated information and estimates. As a result of
these shortcomings, organizations may not realize the full potential of energy
savings opportunities.
BUILDING CONTROL SYSTEMS AND PROCESS CONTROL SYSTEMS. Over the years, many
commercial and industrial operations have made significant investments in
building and process control systems. These hardware-based monitoring and
measurement systems have been put into place primarily for environmental control
and secondarily to manage local energy consumption. Although some of these
systems provide real-time operating data, they generally do not store historical
information or collect all of the relevant energy data that businesses need to
properly understand their consumption patterns and implement cost savings
opportunities. In addition, these systems do not incorporate in-depth analysis
tools or the necessary connectivity to aggregate data across multiple facilities
for benchmarking. Finally, building and process control systems frequently do
not integrate information regarding external factors, such as utility rate
structures, weather or energy supply alternatives. As a result, they limit the
ability of users to effectively manage energy costs.
EXISTING SOFTWARE. Some businesses use in-house proprietary software,
stand-alone desktop software and spreadsheet-based analysis tools for energy
management. These tools have limited analysis capabilities, are generally
incompatible with legacy systems and are not real-time. In addition, this
software is frequently labor intensive, susceptible to errors and not fully
integrated across the enterprise. As a result, many routine tasks, such as
reviewing energy consumption data, auditing for simple bill errors and
benchmarking of best and worst performing facilities are overlooked because of
the lack of comprehensive enterprise-wide data. Many organizations, therefore,
miss significant cost savings opportunities and operational insights.
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THE SILICON ENERGY SOLUTION
Our Internet-based energy technology software is specifically designed to
network energy assets, reducing inefficiencies associated with the current
approaches and enabling new energy management solutions. Our software integrates
real-time data from existing systems across geographically-dispersed facilities
onto a single enterprise network, allowing customers to:
MONITOR ENTERPRISE-WIDE ENERGY USAGE, POWER INTERRUPTIONS AND PRICE
FLUCTUATIONS IN REAL TIME TO ENHANCE INTERNAL REPORTING FUNCTIONS AND REDUCE
COSTS. Our software is integrated into device level sensors and meters
throughout our customers' facilities to provide real-time information on energy
usage patterns and power quality events. With this information, our software's
powerful analysis methods can identify inefficiencies related to a customer's
usage patterns and can alert customers of cost-reduction opportunities. In
addition, our software provides real-time alarming of power quality events
enabling our customers to instantaneously deploy other power quality solutions
and evaluate any losses resulting from events. Our flexible analysis tools allow
customers to aggregate and analyze this information to a high level of detail
and correlate the data to operational inputs, such as sales, production or
occupancy. Our intuitive customer interface allows users to customize the output
and present the data in the form that is most meaningful to management.
ACTIVELY MANAGE ENERGY CONSUMPTION. Our software provides customers the
ability to monitor energy use in real time and forecast consumption up to 48
hours ahead. This allows customers to reduce wasteful energy use patterns and
change operations prior to incurring costly new peak demand charges. In
addition, customers can participate in utility load management and curtailment
programs.
EVALUATE PROJECTS TO REDUCE ENERGY COSTS AND ENHANCE POWER RELIABILITY. Our
software allows customers to conduct detailed analysis of potential project
economics and performance and to determine which cost reduction and energy
management investment opportunities best meet their requirements.
INTELLIGENTLY DISPATCH MULTIPLE DISTRIBUTED GENERATION RESOURCES. By
providing real-time information on usage, operational constraints and the
prevailing energy price environment, our software enables our customers to
integrate their distributed generation resources and energy consuming assets
into an energy management strategy. Our software provides customers with a high
degree of certainty regarding their demand profile and a thorough understanding
of the marginal cost of their energy. As a result, they can react to a volatile
energy price environment by utilizing their distributed generation resources as
an alternative source of energy and reduce demand or sell capacity back to the
utility.
CONSOLIDATE AND IMPROVE THE MANAGEMENT OF ENERGY BILLS. Many of our
customers have hundreds of facilities located around the country. In most cases,
they receive two or more separate utility bills for each facility. Our software
enables customers to better manage their energy bills by providing them with a
centralized Internet-based bill management system for their entire enterprise.
Our centralized system allows businesses to track energy costs on an enterprise
level, reduce general and administrative expenses by eliminating repetitive bill
processing functions and enhance cash flow by improving the bill payment
schedule and eliminating late fees. In addition, our software's analytical tools
enable customers to audit utility bills for excess charges and compare price
options more easily.
REDUCE EXCESS COST AND INEFFICIENCIES WITHIN THE PROCUREMENT PROCESS. Our
software enables customers to evaluate historical demand patterns under
different occupancy rates, production levels and weather scenarios. By providing
detailed historical usage information and powerful forecasting methods, we
enable our customers to estimate their future energy needs with a higher degree
of certainty. As a result, our customers are able to better tailor their
long-term power purchase contracts to their actual energy needs and reduce the
excess costs associated with procurement and inefficient management.
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IMPROVE NON-ENERGY ENTERPRISE MANAGEMENT SYSTEMS. Our software enables our
customers to aggregate and analyze extensive non-energy-related operational
information from a device level to an enterprise-wide level. In addition to
managing their energy costs, some of our customers are currently using our
software to:
- lower maintenance costs and minimize equipment downtime;
- maintain regulatory, safety and quality standards; and
- measure and verify equipment and system operation.
ENHANCE CUSTOMER SERVICE AND IMPROVE CUSTOMER ACQUISITION AND
RETENTION. With the onset of deregulation, a significant number of energy
suppliers are attempting to retain current customers or have created energy
service provider businesses to attract new retail energy customers. Many energy
service providers offer consulting and various additional services to help their
customers manage their energy needs. By using our software, energy service
providers and utilities are able to tailor solutions to their clients based on
quality, reliability and cost and effectively deliver these solutions on a large
scale. As a result, energy service providers may be better able to attract and
retain customers, providing new revenue opportunities.
REDUCE OPERATING RISK. The lack of real-time information regarding end user
demand creates significant operating risk for the traditional energy supplier or
transmission grid operator. Our software can provide such suppliers and
operators with enhanced visibility regarding current and future energy demands
for their end users. This visibility enables suppliers and operators to modify
end user energy demand at times of peak loading, through methods such as a
bilateral auction or directed demand response, and confirm the reduction in real
time in order to preserve the reliability of the energy delivery infrastructure.
STRENGTHS OF OUR APPROACH
THE NETWORK SOLUTION
The emergence of the Internet, increased communications bandwidth and new
software standards using Internet Protocol networks are transforming the way
business to business software applications are provided to customers. As
companies begin to rely more on the availability, performance and response time
of these applications, they are becoming increasingly important to the
operational success of a company's business. Technologies which link together
multiple systems and legacy assets that were previously acting as stand-alone
applications have become particularly important. We believe that leveraging the
Internet as a cost-effective means of connecting disparate systems creates a
significant market advantage, enabling customers to monitor, analyze and control
energy requirements and data across their enterprise on a real-time basis.
OUR SOFTWARE PRODUCTS ARE:
SCALABLE. We have designed our software architecture to gather and process
data from millions of information points across multiple and varied data
sources. Our software aggregates data points into pre-defined groups, whose
results are then transferred over a network to additional servers for processing
and analysis. This architecture gives us the ability to scale rapidly by simply
adding additional server hardware as needed to service new information data
points. Our Internet-based application enables the proliferation of multiple
servers and provides our customers with transparent access to their
enterprise-wide data through a single user interface.
FLEXIBLE AND OPEN. We have designed our software architecture to be
flexible and open to respond to each of our customer's specific needs. Our
architecture is modular, allowing our customers to implement our entire product
or only those portions critical to their particular requirements. The flexible
nature of our software architecture preserves our customers' ability to add
additional modules easily and without time consuming integration as their
requirements expand over time. In addition, our
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open architecture allows our customers to easily integrate proprietary or third
party applications on top of our product suite, as necessary, to solve their
additional business needs.
INTUITIVE AND USER FRIENDLY. We have designed our software to be easily
navigated by end users with a wide variety of skill levels with limited
incremental training. We have also capitalized on our energy industry expertise
to structure our data analysis and presentation functions to readily answer the
most common energy questions raised. In addition, we provide our customers with
technical support and a comprehensive on-line help function.
EASILY INTEGRATED. We have developed an extensive library of standardized
software gateways that enable our software to interface with a variety of legacy
systems, including many of the largest building control and energy management
systems. The openness of our software architecture model allows us to develop
and deploy new gateways efficiently.
RELIABLE AND SECURE. Given the time sensitive nature and significant cost
implications of energy management, we have designed our software to be extremely
reliable and secure. Our software incorporates sophisticated queuing technology
that signals our servers to log data and energy management directives in the
event of a communications failure. This technology ensures data integrity and
the posting of logged data and directives as soon as communication has been
restored. In addition, we use advanced encryption technologies to ensure that
all of our data feeds, analysis and energy management directives are secure.
INTERACTIVE. We have designed our software to allow users to initiate
control from a browser to connected devices and systems through our two-way
gateways. This feature of our software allows our customers to apply
enterprise-level control to distributed generation and other energy systems and
equipment.
OUR GROWTH STRATEGY
Our strategy is to be the leading provider of Internet-based energy
technology software for enterprises and energy service providers to allow them
to efficiently manage consumption, procurement and distributed energy assets in
a rapidly evolving energy market.
Key elements of our growth strategy are to:
CONTINUE TO DEVELOP INNOVATIVE INTERNET-BASED ENERGY TECHNOLOGY SOFTWARE TO
MANAGE ENERGY USAGE, PROCUREMENT AND DISTRIBUTED GENERATION. As the need for
effective energy management solutions continues to grow, we will continually
enhance and broaden the capabilities of our software in order to respond to our
customers' changing needs:
- We are currently developing extensible markup language, or otherwise
known as XML, interfaces to several existing retail energy exchanges. By
combining our meter data collection with specific analysis methods, we
will be able to automate the links from our customers to the competitive
energy market.
- We are enhancing the capabilities of our Utility Accountant product by
adding online electronic bill payment. With this feature, our Integrated
Bill Management customers will be able to integrate the existing utility
bill analysis and tracking functions with automated payment, which we
believe will enhance the cost savings opportunities.
- We are expanding our software to enhance its ability to network
distributed generation, provide intelligent controls for residences and
manage power quality.
EXPAND OUR DIRECT CHANNELS. We intend to increase the size of our direct
sales channels and establish additional offices. We will continue to hire
experienced sales people from the software, technology and energy industries who
have proven track records for closing significant transactions. In addition, we
intend to assemble a sales force with expertise in each of our targeted vertical
markets.
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TARGET LARGE, VERTICAL MARKETS AND THEIR MARKET LEADERS. We are initially
focusing our direct sales and marketing efforts on large, vertical markets,
including industrial manufacturing, commercial real estate, healthcare,
education, telecommunications, retail chains, government, and energy service
providers. Within these vertical markets, we are targeting those companies with
leading market shares and premier business practices because we believe that
having these companies as our customers will motivate others to use our
software.
UTILIZE THIRD-PARTY SERVICE PROVIDERS TO ACCESS SMALL AND MID-MARKET ENERGY
USERS. Service bureaus are third party providers of energy management services
hosting our software under an energy application service model. We intend to
reach smaller and mid-market energy users seeking to reduce their energy costs
by licensing our software to energy service bureaus and leveraging their
customer relationships and sales organizations. We believe that this approach
will facilitate the adoption of our software by smaller companies and residences
and allow us to reach a greater number of end users.
BROADEN PRODUCT ADOPTION THROUGH A NETWORK OF ALLIANCES WITH SYSTEMS
INTEGRATORS AND TECHNOLOGY PROVIDERS. We have formed strategic relationships
with systems integrators, technology providers and distributors in order to
expand our market presence, enhance our ability to enter new markets and allow
us to better leverage technology to deliver complete solutions to our customers.
We plan to continue to strengthen our existing relationships and establish new
relationships with systems integrators, technology providers and distributors in
order to broaden our customer access and provide additional value to our
customers.
BUILD OUR INTERNATIONAL PRESENCE. We believe that there are significant
international opportunities for our software. We intend to expand our sales,
marketing and service organization into the European and Asia-Pacific markets in
order to take advantage of the significant energy market inefficiencies and
Internet opportunities that exist there. We are currently modifying our software
for international markets and we plan to build direct and indirect distribution
channels.
EXPAND THE NON-ENERGY-RELATED APPLICATIONS OF OUR SOFTWARE. We believe that
our software offers a horizontal solution to many of the key non-energy-related
management issues faced by large businesses. Many of our existing customers have
already begun to utilize our software to enhance their non-energy-related
management systems. Some of our customers are currently using our software to
lower maintenance costs and minimize equipment downtime and maintain regulatory,
safety and quality standards. We expect to continue to develop software in these
and other areas where there is a significant customer need and the commercial
opportunity appears encouraging.
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<PAGE> 43
OUR PRODUCTS
Silicon Energy's EEM Suite is an integrated collection of Internet-based
energy technology software modules that enable enterprises and energy service
providers to efficiently manage consumption, procurement and distributed energy
assets.
SILICON ENERGY EEM SUITE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
SOFTWARE MODULES DESCRIPTION
---------------------------------------------------------------------------------------
<S> <C>
ENERGY ANALYST Provides detailed reporting and analysis of real-time and
historical energy data for energy consumption and
benchmarking, factoring in square footage, weather and
production units.
---------------------------------------------------------------------------------------
COST ANALYST Provides energy bill cost analysis and allocation based on
multiple pricing and usage scenarios for gas, electricity
and other commodities.
---------------------------------------------------------------------------------------
DATA ANALYST Provides detailed reporting and analysis of real-time and
historical operational data, such as temperatures, pressures
and production data.
---------------------------------------------------------------------------------------
ENTERPRISE NAVIGATOR Provides customizable graphical representation, real-time
data viewing and two-way communication and control.
---------------------------------------------------------------------------------------
ALARM MANAGER Collects and manages real-time alarm information from
multiple systems and notifies users based on
previously-defined criteria.
---------------------------------------------------------------------------------------
FORECASTING Predicts hourly energy consumption up to 48 hours in advance
for a specified building or across the enterprise.
---------------------------------------------------------------------------------------
UNIVERSAL CALCULATION Performs real-time calculations from multiple data points
ENGINE for use in automated control, alarming and in-depth
analysis.
---------------------------------------------------------------------------------------
UTILITY ACCOUNTANT Manages utility bill information across multiple sites and
provides bill entry, set up, tracking, reporting, and
analysis of utility accounts, buildings, and meters.
---------------------------------------------------------------------------------------
CURTAILMENT MANAGER Manages voluntary and mandatory load-reduction programs for
energy suppliers and automates notifications,
acknowledgement and real-time feedback or load reductions.
---------------------------------------------------------------------------------------
</TABLE>
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The Silicon Energy EEM Suite software modules operate in combination to
answer typical questions faced by our customers:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
TYPICAL QUESTIONS HOW OUR SOFTWARE OPERATES
----------------------------------------------------------------------------------------------------------------
<S> <C>
PEAK LOAD MANAGEMENT
----------------------------------------------------------------------------------------------------------------
How much can I save if I reduce my peak The Enterprise Navigator monitors energy consumption in real time
demand consumption and when is the best time and the Forecasting module can predict consumption up to 48 hours
to reduce load? in advance. Using this data, the Alarm Manager can then generate
automatic notification once actual or anticipated peak energy
consumption thresholds are exceeded. In addition, based on a
marginal cost analysis in Cost Analyst, the user can configure
the Universal Calculation Engine to signal the Enterprise
Navigator to automatically reduce peak demands during the most
expensive periods.
As a supplier, how much load reduction can I The Curtailment Manager monitors in real time which customers
expect from a voluntary load management have been notified of a load curtailment event and which have
program? accepted or acknowledged the event. It also returns to the user
the analysis of the actual loads reduced during the curtailment
event.
----------------------------------------------------------------------------------------------------------------
ENERGY PROJECT ASSESSMENT
----------------------------------------------------------------------------------------------------------------
How does my equipment compare across the The Data Analyst can track run hours, efficiency and other
enterprise? What are my best energy cost operational data of any connected equipment. An enterprise-wide
savings opportunities? comparison of power quality and usage efficiency can be generated
by combining power quality data logged in the Alarm Manager and
energy consumption information from the Energy Analyst.
Furthermore, Cost Analyst allows users to conduct analysis of
energy project economics and perform "what if scenarios" to
determine what energy efficiency, power quality or reliability
project will provide the most compelling returns.
----------------------------------------------------------------------------------------------------------------
PERFORMANCE, MEASUREMENT AND VERIFICATION
----------------------------------------------------------------------------------------------------------------
How do predicted and actual energy cost The Energy Analyst, coupled with feeds from our content service,
savings compare to my annual utilities enables users to monitor energy use at each device, factoring in
budget? the effects of weather, production and occupancy. The Cost
Analyst, with access to rate information from our content
What is my energy cost per manufactured service, can translate this information into actual cost savings.
item, rented square foot or occupied room? Finally, the Cost Analyst can generate monthly performance
reports of costs for each facility that can be compared to
corporate energy budgets on an absolute or per unit basis.
----------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
TYPICAL QUESTIONS HOW OUR SOFTWARE OPERATES
----------------------------------------------------------------------------------------------------------------
<S> <C>
DISTRIBUTED ENERGY MANAGEMENT
----------------------------------------------------------------------------------------------------------------
What is the optimal configuration of The Data Analyst provides analysis of distributed generation
distributed generation assets across my equipment status and historical operating data for health
enterprise? monitoring purposes. Additionally, the Alarm Manager can be used
to track the frequency of power quality events across all
How do I use my distributed generation facilities, and the Cost Analyst can identify the most expensive
resources as part of my strategy during peak hours to purchase energy from the utility. All of this
load demand periods? information can be used to configure the Universal Calculation
Engine and the Enterprise Navigator for both automatic and manual
dispatch of distributed generation assets.
----------------------------------------------------------------------------------------------------------------
INTEGRATED BILL MANAGEMENT
----------------------------------------------------------------------------------------------------------------
How do I plan my energy consumption The Utility Accountant can act as the enterprise repository for
expenditures, negotiate with my suppliers all utility bill information. The Utility Accountant flags errors
and determine bill accuracy and the best and creates and budget reports by facility, energy type and
rate by facility? supplier. Incorporating rates from our content service, the Cost
Analyst can generate comparisons for multiple scenarios and
How can I allocate my energy costs across my calculate tenant or department allocations for billing purposes.
internal departments or to my tenants?
----------------------------------------------------------------------------------------------------------------
PROCUREMENT OPTIMIZATION AND RISK REDUCTION
----------------------------------------------------------------------------------------------------------------
How can I optimize procurement in a Energy Analyst allows users to group facilities based on
competitive market environment? location, competitive market, eligibility rate schedule or
service voltage. The Energy Analyst can also generate Request for
Proposal reports based on energy requirements that can be
submitted electronically to interested suppliers. With
permission, these suppliers can access additional data though the
Energy Analyst and Data Analyst. Cost Analyst and rate
information from our content service can be used to compare
competitive bids from suppliers to select the best available rate
structure.
----------------------------------------------------------------------------------------------------------------
</TABLE>
SERVICES
We offer a comprehensive selection of services to our customers, including
professional, maintenance, Internet, and integrated bill management services.
PROFESSIONAL SERVICES
SOFTWARE DEPLOYMENT. We offer a comprehensive collection of services to
ensure end-to-end implementation, system testing and integration of our
software. We provide integration services for our customers, enabling them to
transition to our solutions in the following manner:
- we configure our software to accommodate our customers' requirements;
- we transfer our customers' historical data to our software; and
- we train personnel to become proficient with our software.
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<PAGE> 46
TRAINING SERVICES. We offer a complete training curriculum including three
certification programs and 14 functional and technical course offerings. These
courses are designed for basic users and information technology professionals.
Our certification program prepares students with specific technical and
functional skills. We offer courses at customer sites and in our facilities in
Alameda, California.
MAINTENANCE SERVICES
Our technical support services are available to our customers under
maintenance agreements. We field questions via our call center and through our
account executives. Our standard technical support services include responding
to inquiries regarding installation, administration and basic usage. Maintenance
upgrades and release upgrades are also included with our standard technical
support package.
INTERNET SERVICES
MANAGED SERVICE PROVIDER. We offer our customers subscription-based,
Managed Service Provider solutions that deliver hosted access to our Silicon
Energy EEM Suite and a package of services to outsource the operation of
hardware monitoring, software support and maintenance.
CONTENT SERVICES. We provide a range of content services to allow our
customers to take full advantage of the integrated offerings of the Silicon
Energy EEM Suite. Hourly weather content, including current conditions and
forecast data, is delivered to customer systems from our main servers for over
250 locations nationwide. Our tariff service provides modeling of utility
tariffs for gas, electricity and other commodities on request. Rates are
regularly maintained and changes are posted to customer servers from our central
servers.
INTEGRATED BILL MANAGEMENT SERVICES
Integrated Bill Management is an automated bill processing solution that
compiles data information from energy bills to provide customers with analysis
of complex energy information, automated bill payment and decision support.
TECHNOLOGY
Our sophisticated software can remotely interface to a variety of data
collection systems over the Internet, or via an existing intranet, and relay
that information in real time to a central repository. Interfacing to and
consolidating the data from different systems into a central data server, an
enterprise can utilize a common application platform to access and combine the
functionality of different information systems. With our Internet-based
technologies, end-use clients and data sources may be located anywhere within
the Internet or an intranet. This enables multiple clients to access any
energy-related information, historical or real-time. Data servers can also be
networked together over the Internet or an intranet, effectively allowing
massive scalability of the system. Our software has aggregation capabilities for
rolling up sets of data into pre-defined groups, whose results can be
transferred over a network to additional servers.
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Our software architecture consists of four primary components: the software
gateway, the middleware, the application server and the client browser.
SILICON ENERGY ARCHITECTURE
This page contains a graphic depicting the architecture of Silicon Energy
software and its functionality. It graphically depicts the Silicon Energy
software interacting through middleware via the Internet to energy providers,
suppliers, end users, third party applications and data sources through gateways
protected by firewalls.
The center of the graphic consists of a large cylindrical graphic depicting the
Silicon Energy application server. This cylinder contains a window in which are
located smaller graphics of various shapes. On the left side of the window are
interconnecting modules, a database, alarm processor, calculation engine, and a
real-time database. On the right side of the window are a web server and active
content server, which are linked by an arrow from the active content server to
the real time database.
The cylinder is connected to the Internet by Arrows depicting middleware through
the upper left and lower right quadrants of the graphic.
In the lower right quadrant connected to the Internet by arrows and the Silicon
Energy application server by a middleware arrow are small cylindrical graphics
depicting a third party application and a client browser behind a firewall.
In the upper left quadrant connected to the Internet by arrows and the Silicon
Energy application server by a middleware arrows are two small cylindrical
graphics, each of which is behind a firewall. These graphics depict software
gateways, one of which is surrounded by four smaller cylindrical graphics
depicting weather, rates, EMS and energy exchange. The other software gateway
graphic is surrounded by three smaller cylindrical graphics depicting a
distributed generator, BCS and meters.
SILICON ENERGY ARCHITECTURE GRAPHIC
SOFTWARE GATEWAY
Software gateways are standalone software modules that interface with
various building control systems (BCS), energy management systems (EMS),
distributed generators, energy pricing exchanges, weather data feeds, and other
enterprise information sources. In addition to data collection, gateways may
also allow two-way control over various systems. Multiple gateways may exist
throughout a single logical system, providing access to multiple types of data
sources.
MIDDLEWARE
The middleware is the software "glue" that ties all of the system
components together over a network. It allows two-way movement of live data over
the Internet or intranet in a secure and authenticated fashion, regardless of
the communication medium and enables the development of two-way event-driven
applications to act upon dynamic data changes in real-time.
APPLICATION SERVER
The Windows NT-based application server contains the most critical elements
of our system's intelligence. It consists of several key system software modules
as well as various application software modules. All of the modules are designed
to run independently among a network of multiple machines
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<PAGE> 48
or concurrently within a single machine. It also provides a platform in which
the functionality of the system can be continually extended with the development
of additional application software modules.
- The Web Server is the primary interface to the Client Browser for
information requests and interactive controls.
- The Alarm Processor and Calculation Engine apply programmable business
rules to individual data elements upon updating in the system and, if
required, trigger the Active Content Server to signal a data element's
change of status.
- The Active Content Server notifies an active content component within the
Client Browser of a change of status in a monitored data element, thereby
allowing the Client Browser to reflect the most recent value of the data
element in real time.
CLIENT BROWSER
The Client Browser hosts the interactive interface to the applications on
the Application Server. With browser technology, the applications are widely
accessible in a secure and authenticated environment. This includes dynamic data
visualization applications whereby data updates, system conditions and alerts
are automatically refreshed in the Client Browser to provide users the most
current information available. Through this interface, users can control the
dispatch and management of energy systems and equipment.
CUSTOMERS
End users of our software range from large industrial manufacturing
companies that use hundreds of millions of dollars of energy each year to small
businesses that are trying to optimize energy usage in their office space. As of
September 30, 2000, we have licensed our software to over 35 customers. We are
targeting a number of large, vertical markets, including industrial
manufacturing, commercial real estate, healthcare, education,
telecommunications, retail chains, and government. Within these vertical
markets, we target those companies that have leading market shares and premier
business practices because we believe that having these companies as our
customers will motivate others to use our software. The table below lists some
of our direct customers as of September 30, 2000.
<TABLE>
<S> <C>
3M Northeast Utilities Service Company
ABB Power T&D Company, Inc. Pepco Energy Services
Andersen Consulting Peregrine Systems, Inc.
APS Energy Services Real Energy, Inc.
California State University, Long Beach Retx. Com
Competisys San Jose State University
Conectiv Solutions Schlumberger
Con Edison Solutions, Inc. Silicon Valley Power
DTE Energy Technologies, Inc. Strategic Resource Solutions Corp.
General Electric University of California Los Angeles
Impact Building Controls Installers, LLC WebGenSystems, Inc.
MidAmerican Energy Company Xcel Energy,Inc.
Neiman Marcus Group Inc.
</TABLE>
CASE STUDY EXAMPLES
CALIFORNIA STATE UNIVERSITY, LONG BEACH
California State University, Long Beach is a large urban university with a
324-acre campus serving more than 30,000 students. The university has an
interruptible power supply and must conform to requirements under a curtailment
program with its local utility energy provider. If given notice by the utility,
Cal State Long Beach has 30 minutes to decrease its energy consumption or it
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<PAGE> 49
will face significant fines for noncompliance with the curtailment program. As a
result of heavy energy demands this summer, Cal State Long Beach was faced with
significant fines if it could not meet the curtailment requirements. Prior to
implementing our software, the university used manual operations to monitor
energy use and manage their costs, and had difficulty responding to curtailment
notices. Our software allows Cal State Long Beach to measure compliance with and
appropriately respond to curtailment requirements within the 30-minute time
frame and monitor costs in real time, generating significant savings for the
university.
CONECTIV SOLUTIONS
Conectiv Solutions provides e-commerce energy information and energy
services to more than 500 medium to large-sized commercial and industrial
customers in the mid-Atlantic region, including many Fortune 1000 corporations,
manufacturing, pharmaceutical companies, hospitals, major universities and
government agencies. Conectiv required the ability to monitor detailed,
real-time information about a company's current energy usage to significantly
reduce their energy costs. The integration of the Silicon Energy EEM Suite
allows Conectiv Solutions to expand its capabilities and automate services by
enabling an enterprise view of real-time energy consumption, cost, quality and
reliability. This is accomplished in Conectiv Solutions' Information Command,
which ties many disparate systems into a single enterprise system. The new
system is fully integrated into a customer's complete energy system, allowing
Conectiv Solutions to propose customized solutions that improve energy
procurement, enhance utilization and reduce overall energy costs.
THE NEIMAN MARCUS GROUP INC.
Neiman Marcus is one of the country's premier, upscale retailers. Neiman
Marcus' goal is to monitor energy usage and identify cost savings nationwide in
an effort to budget energy needs more frequently and accurately. They chose the
Silicon Energy EEM Suite to provide intricate load profile information
nationwide and review energy consumption profiles daily. With this information,
Neiman Marcus is able to identify operational issues to prevent energy waste. It
also allows the specialty retailer to gather and store information that can be
used in negotiations with utilities to procure energy at a more favorable price,
especially in deregulated markets.
PUGET SOUND ENERGY
Puget Sound Energy, Washington State's largest energy utility, provides
electric and natural gas service to more than 1.2 million customers. Puget Sound
required a solution that would provide secure, real-time, Internet-based two-way
control for the first residential two-way peak load demand program. Our software
was able to provide the aggregate data combined with two-way communication
protocol to allow remote thermostat control from a central location. The program
targeted over 100 customers of Puget Sound. Participants gave Puget Sound
permission to make slight adjustments to their thermostats remotely over the
Internet using our software, thus reducing their energy usage and costs during
peak-use periods. Pugent Sound uses our software in a system provided by
Schlumberger, one of our direct customers.
SALES AND MARKETING
DIRECT SALES
We sell our software primarily through our direct sales organization. As of
September 30, 2000, we had 40 people in our sales organization and 38 people in
our service and support organization. We intend to increase our direct sales
force domestically and internationally to support our sales efforts.
Our sales force consists of four regional teams in North America and one
international team based in the United Kingdom. In addition, we are adding sales
capabilities to cover other global markets. To ensure that we address the
customer's specific requirements, each team consists of both sales and
professional services personnel, who manage the ongoing customer relationship.
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INDIRECT SALES
Our direct sales force is complemented by the efforts of our indirect sales
channels, including system integrators, value-added resellers and other alliance
partners. These partners typically combine our software with other products or
services that they offer and assist us in the sales process of our software to
their customers. System integrators typically have an expertise in a specific
market and influence with prospective customers in terms of the software and
application providers selected and are a significant source of lead generation.
MARKETING
Our marketing efforts focus on brand building, product awareness and lead
generation and are directed towards executive decision makers and facility
managers across our targeted vertical markets. Our programs include advertising,
public relations, industry analyst relations, direct mail, Internet marketing,
seminars, and conferences. As of September 30, 2000, we had 11 people in our
marketing department.
COMPETITION
While today there is no one company that competes with us on all fronts,
there are companies that address various aspects of our solution. We face
segment competition, such as:
- meter data collection and management systems, with companies such as
Engage Networks and AEP/Datapult; and
- integrated bill management used for energy management and cost control,
with companies such as Avista Advantage and Cadence.
We also expect competition from other established and emerging companies.
For example, we anticipate competition from the internal development efforts of
energy and facility management solution vendors, such as Honeywell and Johnson
Controls, and from large enterprise software firms, such as SAP.
We believe that the principal competitive factors in our market include:
- service functionality, quality and performance;
- ease of use, reliability, scalability, and security of services;
- establishing a significant base of customers and distribution partners;
- ability to introduce new software and services to the market in a timely
manner; and
- ability to interface with a large number of legacy systems.
Although we believe that our software competes favorably with respect to
each of these factors, the market for our software is new and evolving. We may
not be able to maintain our competitive position against current and potential
competitors, especially those with greater resources.
RESEARCH AND DEVELOPMENT
We have made substantial investments to design and develop our
Internet-based energy technology software. We have assembled a team of highly
experienced network engineers, software developers, system architects, and test
engineers to design, implement and test our software.
The majority of our research and development activity has been directed
towards feature enhancements to our software and the development of new
functionality. Although we intend to continue to invest heavily in research and
development, we also plan to evaluate third-party suppliers for complementary
technologies that might be integrated into our offering.
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Our research and development expenditures were approximately $830,000 in
1998, $3.7 million in 1999 and $3.8 million in the six months ended June 30,
2000. As of September 30, 2000, we had a total of 56 people engaged in our
research and development efforts. We will continue to commit significant
resources to research and development in the future. All research and
development expenses have been expensed as incurred.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of patent, copyright and trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. Our success depends on the protection of the proprietary aspects of our
technology as well as our ability to operate without infringing on the
proprietary rights of others. We also enter into proprietary information and
confidentiality agreements with our employees, consultants and corporate
partners and control access to and distribution of our software documentation
and other proprietary information.
We currently have six pending U.S. patent applications, one U.S. patent
application with allowed claims and various foreign patent applications
corresponding to the U.S. patent application with allowed claims. We do not know
if our current patent applications or any future patent application will result
in a patent being issued with the scope of the claims we seek, if at all, or
whether any patents we may receive will be challenged or invalidated. In
addition, it is difficult to monitor unauthorized use of technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States, and our competitors may independently
develop technology similar to ours. We will continue to assess appropriate
occasions for seeking patent and other intellectual property protections for
those aspects of our technology that we believe constitute innovations providing
significant competitive advantages.
EMPLOYEES
As of September 30, 2000, we had a total of 159 employees. Of the total
number of employees, 40 employees were in sales, 11 employees were in marketing,
56 were in research and development, 38 were in service and support, and 14 were
in operations and administration. None of our employees is subject to a
collective bargaining agreement, and we have never experienced a work stoppage.
We consider our relations with our employees to be good.
FACILITIES
Our corporate headquarters are located in Alameda, California, under a
lease that expires in May 2005. We currently occupy approximately 28,841 square
feet in this facility, and we have the right to occupy an additional
approximately 15,159 square feet in this facility. We also occupy approximately
5,664 square feet of space in Somerset, New Jersey pursuant to a lease that
expires in June 2003 and approximately 2,887 square feet of space in Excelsior,
Minnesota pursuant to a lease that expires in September 2004. We also lease
space in Boulder, Colorado; Chicago, Illinois; Providence, Rhode Island; and
Cambridge, England, U.K. for our sales and service personnel. We believe that
our existing facilities are adequate for current requirements and that
additional space can be obtained on commercially reasonable terms to meet future
requirements.
LEGAL PROCEEDINGS
We are not currently a party to any litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages and positions as of
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John Woolard........................... 35 President, Chief Executive Officer and Chairman
of the Board
Jack Jenkins-Stark..................... 49 Senior Vice President and Chief Financial Officer
Len Berg............................... 45 Senior Vice President, Worldwide Sales and
Services
Dale M. Fong........................... 38 Chief Technology Officer and Director
Philip Mezey........................... 40 Senior Vice President, Internet Products and
Integration
Allan Schurr........................... 38 Senior Vice President, Marketing and Business
Development
Charles H. Gaylord, Jr.(1)(2).......... 55 Director
Charles Noell(1)....................... 48 Director
Mario M. Rosati........................ 54 Secretary and Director
K. Rick Turner(1)(2)................... 42 Director
Norris van den Berg(2)................. 62 Director
</TABLE>
---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
JOHN WOOLARD co-founded Silicon Energy and has been our President and Chief
Executive Officer and a member of our board of directors since December 1997.
From June 1997 to November 1997, Mr. Woolard was Product Manager of Facility
Information and Control Systems at PG&E Energy Services, a subsidiary of PG&E
Corporation providing energy and energy management services. From May 1996 to
September 1996, Mr. Woolard was an Associate for Lawrence Berkeley National
Labs, Energy and Environment Division. Mr. Woolard holds an M.B.A. from the Haas
School of Business at the University of California at Berkeley, an M.A. in
environmental planning from the University of Virginia, and a B.A. in economics
from the University of Virginia.
JACK JENKINS-STARK has been our Senior Vice President and Chief Financial
Officer since April 2000. From September 1998 to April 2000, Mr. Jenkins-Stark
was Senior Vice President and Chief Financial Officer at GATX Capital, a
commercial finance company. From June 1997 to May 1998, Mr. Jenkins-Stark was
Senior Vice President at PG&E Corporation and from November 1993 to May 1997, he
was Senior Vice President at Pacific Gas & Electric Company responsible for
natural gas transmission activities. From November 1988 to November 1993, Mr.
Jenkins-Stark was Vice President, Finance and Treasurer at Pacific Gas &
Electric Company. Mr. Jenkins-Stark holds an M.B.A. degree from the Haas School
of Business at the University of California at Berkeley and an M.A. and B.A. in
economics from the University of California at Santa Barbara.
LEN BERG has been our Senior Vice President, Worldwide Sales and Services
since February 1999. From February 1996 to April 1999, Mr. Berg was Vice
President and General Manager of Sales at Indus International, a software
company. Prior to Indus, Mr. Berg was a Senior Vice President for Management
Analysis Company, a management consulting firm, and a general manager of
national accounts for SCT, a software company. Mr. Berg holds a B.S. degree from
Florida State University.
DALE M. FONG co-founded Silicon Energy and has been our Chief Technology
Officer and a member of our board of directors since December 1997. From July
1997 to November 1997, Mr. Fong was Software Development Manager at PG&E Energy
Services, a subsidiary of PG&E Corporation, providing energy and energy
management services. From July 1983 to July 1997, Mr. Fong held
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various technical roles for PG&E Corporation, an integrated energy company. Mr.
Fong holds a B.S. degree from Cornell University.
PHILIP MEZEY has been our Senior Vice President, Internet Products and
Integration since February 2000. From April 1988 to December 1999, Mr. Mezey was
Senior Vice President of Strategy and Development at Indus International, a
software company. From July 1985 to March 1988 Mr. Mezey was a software
developer at Tenera L.P., a utility consulting and software company. Prior to
Tenera, Mr. Mezey worked at Rand Information Systems, a consulting and software
company. Mr. Mezey holds a B.A. in history from the University of California at
Berkeley.
ALLAN SCHURR has been our Senior Vice President, Marketing and Business
Development since October 1998. From June 1997 to September 1998, Mr. Schurr was
Product General Manager, Consumer Markets at PG&E Energy Services, a subsidiary
of PG&E Corporation. From September 1985 to May 1997, Mr. Schurr held various
management positions in new market development and industrial and commercial
marketing at Pacific Gas and Electric Company, a subsidiary of PG&E Corporation.
Mr. Schurr holds an M.B.A. from St. Mary's College of California and a B.S. in
mechanical engineering from the University of California at Davis.
CHARLES H. GAYLORD, JR. has served as a member of our board of directors
since September 2000. Since June 1995, Mr. Gaylord has been a member of the
Advisory Board of Technology Crossover Ventures, a group of venture capital
funds. Since October 1997, Mr. Gaylord has served as Chairman of the Advisory
Committee of Mission Ventures, a technology venture capital fund. From December
1993 to September, 1994, Mr. Gaylord was Executive Vice President for Intuit,
Inc., a software developer. From July 1990 to December 1993, Mr. Gaylord was
Chief Executive Officer of ChipSoft, a sofware publisher. Mr. Gaylord serves as
a member of the board of directors of HNC Software, Inc. He is also a director
of several privately-held companies. Mr. Gaylord holds an M.B.A. from Harvard
Business School and a B.S. and an M.S. in engineering from Georgia Institute of
Technology.
CHARLES NOELL has served as a member of our board of directors since
September 1998. Since 1992, Mr. Noell has been a General Partner at JMI Equity
Fund, a venture capital fund. From 1981 to 1991 he served as Managing Director
at Alex. Brown & Sons Incorporated, an investment banking firm. From 1975 to
1978 Mr. Noell served in the treasury division at American Security Bank. From
1978 to 1979 Mr. Noell served in the treasury division at Pittsburgh National
Bank. Mr. Noell also serves as director of Neon Systems, Inc., Peregrine Systems
Inc., Transactions Systems Architecture, Inc., and a number of privately-held
companies. Mr. Noell holds an M.B.A. from Harvard Business School and a B.A.
from the University of North Carolina.
MARIO M. ROSATI has served as our secretary and a member of our board of
directors since December 1997. Mr. Rosati has been a member of the law firm
Wilson Sonsini Goodrich & Rosati, Professional Corporation, since 1971. Mr.
Rosati is a director of Aehr Test Systems, a manufacturer of computer hardware
testing systems; Genus, Inc., a semiconductor equipment manufacturer;
MyPoints.com, Inc., a web and email-based direct marketing company; Ross
Systems, Inc., a software company; Sanmina Corporation, an electronics contract
manufacturer; Symyx Technologies, Inc., a combinatorial materials science
company; The Management Network Group, Inc., a management consulting firm
focused on the telecommunications industry; and Vivus, a specialty
pharmaceutical company; all of which are publicly-held companies. He is also a
director of several privately-held companies. Mr. Rosati holds a J.D. from Boalt
Hall at the University of California at Berkeley and a B.A. in history from the
University of California at Los Angeles.
K. RICK TURNER has served as a member of our board of directors since
October 1999. Mr. Turner has worked for the Stephens Group of companies since
1983. He is a Vice President of Stephens Group, Inc., a private merchant banking
company headquartered in Little Rock, Arkansas, which has significant
investments in media, telecommunications, life sciences, and energy, and has its
own full service investment bank called Stephens Inc. Mr. Turner is and has been
an officer and
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<PAGE> 54
director of various affiliates of Stephens Group, Inc., including NXT Energy
Exploration Technologies. Mr. Turner holds a B.S.B.A. from the University of
Arkansas and is a Certified Public Accountant.
NORRIS VAN DEN BERG has served as a member of our board of directors since
September 1998. Since 1991, Mr. van den Berg has been a general partner at JMI
Equity Partners, a venture capital fund. Previously, Mr. van den Berg held a
variety of executive positions in large systems software development and
marketing at International Business Machines, an information technology company.
Mr. van den Berg also serves as director of Neon Systems, Inc., Peregrine
Systems Inc., and a number of privately-held companies. Mr. van den Berg holds a
B.A. from the University of Maryland.
CLASSIFIED BOARD
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the members of the board will be elected to
one-year terms, two will be elected to two-year terms and three will be elected
to three-year terms. Thereafter, directors will be elected for three-year terms.
- Messrs. Noell and Rosati have been designated Class I directors whose
terms expire at the 2001 annual meeting of stockholders.
- Messrs. Turner and van den Berg have been designated Class II directors
whose terms expire at the 2002 annual meeting of stockholders.
- Messrs. Fong, Gaylord and Woolard have been designated Class III
directors whose terms expire at the 2003 annual meeting of stockholders.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
BOARD COMMITTEES
We established an audit committee in June 2000 and a compensation committee
in June 2000.
Our audit committee currently consists of Messrs. Gaylord, Noell and
Turner. The audit committee reviews our internal accounting procedures and
consults with and reviews the audit and services provided by our independent
accountants.
Our compensation committee currently consists of Messrs. Gaylord, Turner
and van den Berg. The compensation committee reviews and recommends to the board
of directors the compensation and benefits of our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
DIRECTOR COMPENSATION
We do not currently compensate our directors in cash for their service as
members of the board of directors, although they are reimbursed for expenses in
connection with attendance at board of director and committee meetings. Under
our stock option plan, directors are eligible to receive stock
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<PAGE> 55
option grants at the discretion of the board of directors or other administrator
of the plan. During 1999, the board granted:
- options to purchase 165,000 shares to Mr. Fong at an exercise price per
share of $0.55; and
- options to purchase 165,000 shares to Mr. Woolard at an exercise price
per share of $0.55.
The grants to Messrs. Fong and Woolard were in consideration of their
service to Silicon Energy as executive officers.
EXECUTIVE COMPENSATION
The table below summarizes the compensation earned for services rendered to
us in all capacities for the year ended December 31, 1999 by our named executive
officers. Our named executive officers are our Chief Executive Officer and our
next three most highly compensated executive officers who earned more than
$100,000 during the year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
--------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
--------------------------- --------- -------- ------------
<S> <C> <C> <C>
John Woolard..................................... 135,000 50,000 165,000
President and Chief Executive Officer
Len Berg......................................... 137,500 70,300 200,000
Senior Vice President, Worldwide Sales
and Services
Dale M. Fong..................................... 125,000 25,000 165,000
Chief Technology Officer
Allan Schurr..................................... 122,500 42,000 65,000
Senior Vice President, Marketing and Business
Development
</TABLE>
Mr. Jenkins-Stark joined Silicon Energy in April 2000 as its Senior Vice
President and Chief Financial Officer and will be compensated at an annual base
salary of $150,000 during the fiscal year ending December 31, 2000. Mr. Mezey
joined Silicon Energy in February 2000 as its Senior Vice President, Internet
Products and Integration and will be compensated at an annual base salary of
$180,000 during the fiscal year ending December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
In the fiscal year ended December 31, 1999, we granted options to purchase
up to an aggregate of 1,872,030 shares to employees, directors and consultants.
These options were granted under our 1998 Incentive Stock Option Plan at
exercise prices equal to the fair market value of our common stock on the date
of grant, as determined in good faith by the board of directors. All options
have a term of ten years. Optionees may pay the exercise price by cash,
certified check, delivery of already-owned shares of our common stock or, in
some cases, full recourse promissory note. Options are immediately exercisable
upon grant; however, we may repurchase any unvested shares at their cost if the
optionee's service terminates. Options vest over four years, with 25% of the
option vesting one year after the grant date, and the remaining option vesting
ratably each month.
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<PAGE> 56
The following table sets forth information with respect to stock options
granted to each of the named executive officers in the fiscal year ended
December 31, 1999. The exercise price per share of each option was equal to the
fair market value of the common stock as determined by the board of directors on
the date of grant. The potential realizable values assume that the initial
public offering price of $ per share was the fair market value of the common
stock on the date of grant and that the price of the applicable stock increases
from the date of grant until the end of the ten-year option term at the annual
rates specified. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. These assumed rates of appreciation comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN LAST PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John Woolard...................... 165,000 8.8 0.55 11/17/09
Len Berg.......................... 200,000 10.7 0.10 02/02/09
Dale M. Fong...................... 165,000 8.8 0.55 11/17/09
Allan Schurr...................... 65,000 3.5 0.15 04/22/09
</TABLE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes for our named executive officers their option
exercises for the fiscal year ended December 31, 1999, and exercisable and
unexercisable options held by them as of December 31, 1999.
The "Value of Unexercised In-the-Money Options at December 31, 1999" is
based on a value of $ per share, the assumed initial offering price of our
common stock, less the per share exercise price, multiplied by the number of
shares issued upon exercise of the option. The shares vest over four years, with
25% of the shares vesting one year after the grant date and the remaining shares
vesting ratably each month.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE DECEMBER 31, 1999 (#) DECEMBER 31, 1999 ($)
ACQUIRED REALIZED ---------------------------- ----------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John Woolard......... -- -- 165,000 -- --
Len Berg............. -- -- 200,000 -- --
Dale M. Fong......... -- -- 165,000 -- --
Allan Schurr......... -- -- 195,000 -- --
</TABLE>
INCENTIVE STOCK OPTION PLANS
1998 INCENTIVE STOCK OPTION PLAN
The 1998 Incentive Stock Option Plan, referred to as the "1998 Plan", was
approved by our Board of Directors and our stockholders in January 1998, and the
1998 Plan will again be amended and restated on the date of this prospectus. Our
1998 Plan provides for the grant of incentive stock options, within the meaning
of Section 422 of the Code, to our employees, and for the grant of nonstatutory
stock options and stock purchase rights to our employees, directors and
consultants.
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<PAGE> 57
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 1998 PLAN. As of
September 30, 2000, a total of 2,297,347 shares of our common stock were
reserved for issuance pursuant to the 1998 Plan, of which options to purchase
2,138,805 shares of our common stock were outstanding. In addition, our 1998
Plan provides for annual increases in the number of shares available for
issuance under the Plan on the first day of each year, beginning on January 1,
2002, equal to the lesser of:
- 5% of the outstanding shares of common stock on the first day of the
applicable year;
- 2,000,000 shares; or
- another amount as our board may determine.
ADMINISTRATION OF THE 1998 PLAN. Our board of directors or a committee of
our board administers the 1998 Plan. In the case of options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the committee will consist of two or more "outside directors" within the
meaning of Section 162(m) of the Code. The administrator has the power to
determine the terms of the options granted, including the exercise price, the
number of shares subject to each option, the exercisability of the options and
the form of consideration payable upon exercise.
OPTIONS. The administrator determines the exercise price of options granted
under the 1998 Plan, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code and all incentive stock options, the exercise price must at least be
equal to the fair market value of our common stock on the date of grant. The
term of an incentive stock option may not exceed ten years, except that with
respect to any participant who owns 10% of the voting power of all classes of
our outstanding capital stock, the term must not exceed five years and the
exercise price must equal at least 110% of the fair market value on the grant
date. The administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 750,000 shares
in any fiscal year. In connection with his or her initial service, however, an
optionee may be granted an option to purchase up to 1,500,000 shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for 12 months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
STOCK PURCHASE RIGHTS. Stock purchase rights, which represent the right to
purchase our common stock, may be issued under our 1998 Plan. The administrator
determined the exercise price of stock purchase rights granted under our 1998
Plan. Unless the administrator determines otherwise, a restricted stock purchase
agreement, an agreement between us and an optionee which governs the terms of
stock purchase rights, will grant us a repurchase option that we may exercise
upon the voluntary or involuntary termination of the purchaser's service with us
for any reason, including death or disability. The purchase price for shares we
repurchase will generally be the original price paid by the purchaser and may be
paid by cancellation of any indebtedness of the purchaser to us. The
administrator determines the rate at which our repurchase option will lapse.
AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. All grants of options to
our non-employee directors under the 1998 Plan are automatic. We will grant each
non-employee director an initial option to purchase 20,000 shares when such
person first becomes a non-employee director (except for those directors who
waive their right to receive an option or become non-employee directors by
ceasing to be employee directors). In addition, most non-employee directors who
have been directors for at least six months will receive a subsequent option to
purchase 5,000 shares following each annual meeting of our stockholders, except
for the first annual meeting following the
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<PAGE> 58
effective date of this offering if the meeting is held within six months of the
effective date of this offering.
All options granted under the automatic grant provisions have a term of ten
years and an exercise price equal to fair market value on the date of grant.
Each initial option becomes exercisable as to 25% of the shares subject to the
option on each anniversary of the date of grant, provided the non-employee
director remains a director on such dates. Each subsequent option becomes
exercisable as to 100% of the shares subject to the option on the anniversary of
the date of grant, provided the non-employee director remains a director on such
date.
TRANSFERABILITY OF OPTIONS. Our 1998 Plan generally does not allow for the
transfer of options and only the optionee may exercise an option during his or
her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 1998 Plan provides that in the
event of our merger with or into another corporation or a sale of substantially
all of our assets, the successor corporation will assume or substitute each
option. If the outstanding options are not assumed or substituted, the
administrator will provide notice to the optionee that he or she has the right
to exercise the option as to all of the shares subject to the option, including
shares which would not otherwise be exercisable, for a period of 15 days from
the date of the notice. The option will terminate upon the expiration of the
15-day period. In the event a non-employee director is terminated following a
merger or sale of substantially all of our assets, other than pursuant to a
voluntary resignation, the option will fully vest and become immediately
exercisable.
AMENDMENT AND TERMINATION OF OUR 1998 PLAN. Our 1998 Plan will
automatically terminate in 2010, unless we terminate it sooner. In addition, our
board of directors has the authority to amend, suspend or terminate the 1998
Plan provided it does not adversely affect any options previously granted under
our 1998 Plan.
2000 EMPLOYEE STOCK PURCHASE PLAN
Concurrently with this offering, we intend to establish an Employee Stock
Purchase Plan. The Purchase Plan was adopted by our board in October 2000
subject to approval by our stockholders.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE PURCHASE PLAN. A total
of 1,500,000 shares of our common stock will be made available for sale. In
addition, our Purchase Plan provides for annual increases in the number of
shares available for issuance under the Purchase Plan on the first day of each
year, beginning on January 1, 2002, equal to the lesser of:
- 2% of the outstanding shares of our common stock on the first day of the
applicable year;
- 750,000 shares; or
- another amount as our board may determine.
ADMINISTRATION OF THE PURCHASE PLAN. Our board of directors or a committee
of our board administers the Purchase Plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the
Purchase Plan and determine eligibility.
ELIGIBILITY TO PARTICIPATE. All of our employees are eligible to
participate in the Purchase Plan. However, an employee may not be granted an
option to purchase stock under the Purchase Plan if the employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
- has rights to purchase stock under all of our employee stock purchase
plans that accrue at a rate that exceeds $25,000 worth of stock for each
calendar year.
OFFERING PERIODS AND CONTRIBUTIONS. Our Purchase Plan is intended to
qualify under Section 423 of the Code and contains consecutive, overlapping
24-month offering periods. Each
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<PAGE> 59
offering period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after June 1 and December 1 of
each year, except for the first such offering period which will commence on the
first trading day on or after the effective date of this offering and will most
likely end on the last trading day on or after December 1, 2002. All eligible
employees will be automatically enrolled in the first offering period, but
payroll deductions and continued participation in the first offering period will
not be determined until after the effective date of the Form S-8 registration
statement which is intended to register the shares reserved for issuance under
the purchase plan.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of their eligible compensation which includes a
participant's base salary, bonuses, and commissions, but excludes all other
compensation. A participant may purchase a maximum of 5,000 shares during a
six-month purchase period.
PURCHASE OF SHARES. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at the beginning of an offering period or after a purchase period
end. If the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, participants will be
withdrawn from the current offering period following their purchase of shares on
the purchase date and will be automatically re-enrolled in a new offering
period. Participants may end their participation at any time during an offering
period, and will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with us.
TRANSFERABILITY OF RIGHTS. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and distribution
or as otherwise provided under the Purchase Plan.
ADJUSTMENTS UPON MERGER OR ASSET SALE. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute each outstanding option. If the
successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
AMENDMENT AND TERMINATION OF THE PURCHASE PLAN. Our board of directors has
the authority to amend or terminate our Purchase Plan, except that, subject to
certain exceptions described in the Purchase Plan, no such action may adversely
affect any outstanding rights to purchase stock under our Purchase Plan.
401(k) PROFIT SHARING PLAN & TRUST
We maintain a 401(k) plan that covers all eligible employees. Pursuant to
the 401(k) plan, participants may elect to reduce their eligible compensation,
on a pre-tax basis, up to 15%, or the statutorily prescribed annual limit,
whichever is lower, and have the amount of such reduction contributed to the
401(k) plan. Participants' salary reduction contributions are fully vested at
all times. In our sole discretion, we may make matching employer contributions,
additional employer contributions, qualified non-elective contributions and
qualified matching employer contributions. Additional employer contributions, if
any, are subject to a six-year graduated vesting schedule. The 401(k) plan is
intended to qualify under Section 401(a) of the Code, and its accompanying trust
is intended to be a tax-exempt trust under Section 501(a) of the Code.
Contributions made on behalf of Participants, on a pre-tax basis, to the 401(k)
plan, and income earned on the contributions, are not currently taxable to
participants. These contributions are generally tax deductible by us. The
trustee under the 401(k) plan, at the direction of participants, invests the
assets of the 401(k) plan in any of a number of designated investment options.
As of the date of this offering we have not made matching or additional employer
contributions to the 401(k) plan.
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CHANGE OF CONTROL, SEVERANCE AND EMPLOYMENT AGREEMENTS
Effective October 4, 2000, we entered into a Change of Control Agreement
with Mr. Berg. Under this agreement, upon a change of control, Mr. Berg's option
to purchase 200,000 shares will immediately vest as to the remaining unvested
shares.
Effective October 4, 2000, we entered into a Change of Control Severance
Agreement with Mr. Jenkins-Stark. Under this agreement, upon a change of
control, Mr. Jenkins-Stark's option will immediately vest as to the greater of
95,000 shares or 25% of his unvested shares, and if he is terminated without
cause or constructively terminated with the twelve months following a change of
control, he will receive four months salary and his options will vest.
Effective October 4, 2000, we entered into a Change of Control Severance
Agreement with Mr. Mezey. Under this agreement, upon a change of control, Mr.
Mezey's option will immediately vest as to 25% of his unvested shares, and if he
is terminated without cause or constructively terminated within the twelve
months following a change of control, he will receive twelve weeks salary and
his options will vest.
Effective October 4, 2000, we entered into a Change of Control Severance
Agreement with Mr. Schurr. Under this agreement, upon a change of control, Mr.
Schurr's option will vest as to 30,000 unvested shares, and if he is terminated
without cause or constructively terminated with the twelve months following a
change of control, he will receive twelve weeks salary and his exercised but
unvested options will vest.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether our bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary
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duty and may reduce the likelihood of derivative litigation against our
directors and officers, even though a derivative litigation, if successful,
might otherwise benefit us and our stockholders. A stockholder's investment in
us may be adversely affected to the extent we pay the costs of settlement or
damage awards against our directors or officers under these indemnification
provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
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<PAGE> 62
RELATED PARTY TRANSACTIONS
Since our inception in December 1997, we have not been, and we have no
plans to be, a party to any transaction or series of similar transactions in
which the amount involved exceeds $60,000 and in which any director, executive
officer or other holder of more than 5% of our common stock had or will have a
direct or indirect interest other than compensation arrangements, which are
described where required under "Management", and the transactions described
below.
John Woolard, Dale Fong and Keith Gipson, of whom Mr. Woolard and Mr. Fong
are current executive officers and directors, were involved in our founding and
organization and may be considered as our promoters. Following our inception in
December 1997, we issued 1,666,667 shares of common stock to each of Mr.
Woolard, Mr. Fong and Mr. Gipson. Mr. Woolard, Mr. Fong and Mr. Gipson each
contributed a nominal amount of capital to our initial capitalization.
EQUITY INVESTMENT TRANSACTIONS FOR CASH
From January to April 1998, we sold 1,200,000 shares of Series A preferred
stock for $0.55 per share. In September 1998, we sold 4,990,625 shares of Series
B preferred stock for $0.80 per share. In October 1999, we sold 6,500,000 shares
of Series C preferred stock for $2.20 per share. In June and July 2000, we sold
3,703,690 shares of Series D preferred stock for $6.75 per share. Listed below
are the directors, executive officers and stockholders who beneficially own more
than 5% of our securities who participated in these financings.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
NAME PREFERRED PREFERRED PREFERRED PREFERRED
---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
GE Capital Equity Investments, Inc...... -- -- -- 800,000
Entities affiliated with Integral
Capital Partners...................... -- -- 1,818,182 592,251
Entities affiliated with JMI Equity
Fund(1)............................... -- 3,153,125 1,000,000 --
Red Rock Ventures....................... -- 990,000 565,600 148,148
Entities affiliated with Stephens
Group(2).............................. -- -- 2,045,455 --
John Woolard(3)......................... 118,181 -- -- --
Jack Jenkins-Stark...................... -- 125,000 -- --
Dale M. Fong(4)......................... 500,000 75,000 -- --
Charles Noell(5)........................ -- 3,153,125 1,000,000 --
Mario Rosati(6)......................... 27,272 28,125 -- 21,851
K. Rick Turner(7)....................... -- -- 2,045,455 --
Norris van den Berg(8).................. -- 3,153,125 1,000,000 --
</TABLE>
---------------
(1) Consists of 2,806,281 shares of Series B preferred stock and 890,000 shares
of Series C preferred stock purchased by JMI Equity Fund III, L.P., and
346,844 shares of Series B preferred stock and 110,000 shares of Series C
preferred stock purchased by JMI Equity Side Fund, L.P.
(2) Consists of 1,227,275 shares of Series C preferred stock purchased by 21
individuals and entities affiliated with Stephens Group.
(3) Consists of 90,909 shares of Series A preferred stock purchased by Elizabeth
S. Woolard, Mr. Woolard's mother, and 27,272 shares of Series A preferred
stock purchased by Teresa R. Deaner, Mr. Woolard's wife.
(4) Consists of 500,000 shares of Series A preferred stock and 75,000 shares of
Series B preferred stock purchased by Diane J. Fong, Trustee, Hyperion
Ventures UTA dated January 15, 1998, a trust for the benefit of members of
Mr. Fong's family. Mr. Fong disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest.
(5) Consists of 3,153,125 shares of Series B preferred stock and 1,000,000
shares of Series C preferred stock purchased by entities affiliated with JMI
Equity Fund, for which Mr. Noell serves
60
<PAGE> 63
as a general partner. Mr. Noell disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest.
(6) Mr. Rosati is a partner in WS Investment Company 98A, WS Investment Company
98B and WS Investment Company 2000A, which purchased 24,545 shares of Series
A preferred stock, 28,125 shares of Series B preferred stock and 20,000
shares of Series D preferred stock, respectively. Mr. Rosati disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest.
(7) Includes 1,985,228 shares of Series C preferred stock held by individuals
and entities affiliated with the Stephens Group, for which Mr. Turner serves
as Vice President. Mr. Turner disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest.
(8) Includes 3,153,125 shares of Series B preferred stock and 1,000,000 shares
of Series C preferred stock purchased by entities affiliated with JMI Equity
Fund for which Mr. van den Berg serves as a general partner. Mr. van den
Berg disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest.
In addition, in June 2000, we sold 825,000 shares of common stock to GE
Capital Equity Investments, Inc. for $4.00 per share.
LOANS TO EXECUTIVE OFFICERS
In April 2000, Mr. Mezey early exercised his option to purchase 350,000
shares of common stock, and paid for the shares with a full recourse promissory
note in the amount of $437,500. The note is due in April 2002 and bears interest
at a rate of 10% per annum. We have the right to repurchase the shares in the
event Mr. Mezey's service to us terminates, which right lapses as to 1/4 of the
shares one year after the vesting start date, and as to 1/48 of the shares at
the end of each subsequent month.
In June 2000, Mr. Jenkins-Stark early exercised his option to purchase
250,000 shares, and paid for the shares with a full recourse promissory note in
the amount of $500,000.00. The note is due in June 2002 and bears interest at a
rate of 10% per annum. We have the right to repurchase the shares in the event
Mr. Jenkins-Stark's service to us terminates, which right lapses as to 1/4 of
the shares one year after the vesting start date, and as to 1/48 of the shares
at the end of each subsequent month.
In August 2000, Mr. Berg early exercised his option to purchase 75,000
shares, and paid for the shares with a full recourse promissory note in the
amount of $93,750.00. The note is due in August 2002 and bears interest at a
rate of 10% per annum. We have the right to repurchase the shares in the event
Mr. Berg's service to us terminates, which right lapses as to 1/4 of the shares
one year after the vesting start date, and as to 1/48 of the shares at the end
of each subsequent month.
In October 2000, we entered into a Settlement Agreement and Release with
Len Berg in connection with a dispute over the timing of the exercise of his
option. Under this agreement, we agreed to issue a promissory note of up to
$150,000 to Mr. Berg immediately prior to Mr. Berg's payment of alternative
minimum tax, if any, for the tax year 2000, and to reimburse Mr. Berg for any
incremental accounting fees and incremental interest expenses incurred as a
result of the Settlement Agreement and Release. If issued, the note would have a
three-year term and an interest rate equal to the applicable federal rate at the
time of issuance.
REPURCHASE OF SHARES FROM EXECUTIVE OFFICERS
In connection with the termination of his transition from an executive
officer to a part-time employee with us, in November 1999, we repurchased from
Keith Gipson 466,667 shares of common stock for an aggregate purchase price of
$1,400.00 by means of a Settlement Agreement and Mutual Release. This agreement
also provided for payment of salary to Mr. Gipson through April 2000. Mr. Gipson
had purchased 1,666,667 shares of common stock in January 1998.
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<PAGE> 64
We repurchased an additional 50,000 shares of common stock from Mr. Gipson
in June 2000, for a purchase price of $4.00 per share and an aggregate purchase
price of $200,000.00. The purchase price was paid to Mr. Gipson by means of
cancellation of outstanding debt owed to us by Mr. Gipson.
We repurchased an additional 200,000 shares of common stock from Mr. Gipson
in July 2000, for a purchase price of $4.00 per share and an aggregate purchase
price of $800,000.00. The purchase price was paid in cash.
AGREEMENTS WITH 5% STOCKHOLDERS
In June 2000, we entered into a Service Bureau Software License and Value
Added Reseller Agreement with General Electric Company, an affiliate of GE
Capital Equity Investments Inc., which beneficially owns more than 5% of our
outstanding stock.
BUSINESS RELATIONSHIP
Mario M. Rosati, our Secretary and a member of our Board of Directors, is a
member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, which we
have retained as our legal counsel.
OTHER TRANSACTIONS
We have entered into indemnification agreements with each of our executive
officers and directors.
We have granted options to some of our executive officers and some of our
directors.
Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of the preferred stock.
See "Description of Capital Stock -- Registration Rights".
We believe that all related party transactions described above were on
terms no less favorable than could have been obtained from unrelated third
parties.
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<PAGE> 65
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of September 30, 2000, by the following individuals or
groups:
- each person or entity who we know beneficially owns more than 5% of our
outstanding stock;
- each of our named executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o Silicon Energy Corp., 1010 Atlantic Avenue, Alameda,
California 94501. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
September 30, 2000, are deemed outstanding, but the shares are not deemed
outstanding for purposes of computing percentage ownership of any other person.
Except as otherwise indicated, and subject to applicable community property
laws, to our knowledge the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Applicable percentage ownership in the following table is based on
shares of common stock outstanding as of September 30, 2000, as
adjusted to reflect the conversion of all outstanding shares of preferred stock
upon the closing of this offering. The numbers shown in the table below assume
no exercise by the underwriters of their over-allotment option.
PRINCIPAL STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
PERCENTAGE
OF SHARES
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS:
GE Capital Equity Investment, Inc............... 1,625,000
Entities affiliated with Integral Capital
Partners(1)................................... 2,410,773
Entities affiliated with JMI Equity Fund(2)..... 4,153,125
Red Rock Ventures............................... 1,703,748
Entities affiliated with Stephens Group(3)...... 2,045,445
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
John Woolard(4)................................. 1,949,848
Len Berg(5)..................................... 275,000
Dale M. Fong(6)................................. 2,406,667
Allan Schurr(7)................................. 275,000
Charles H. Gaylord, Jr.......................... 20,000
Charles Noell(8)................................ 4,168,125
Mario M. Rosati(9).............................. 142,248
K. Rick Turner(10).............................. 2,060,445
Norris van den Berg(11)......................... 4,168,125
All directors and executive officers as a group
(11 persons)(12).............................. 12,037,333
</TABLE>
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<PAGE> 66
---------------
* Less than 1% of the outstanding shares of common stock.
(1) Consists of 2,393,625 shares held by Integral Capital Partners IV, L.P. and
178,148 shares held by Integral Capital Partners IV MS Side Fund, L.P.
(2) Consists of 3,696,281 shares held by JMI Equity Fund III, L.P. and 456,844
shares held by JMI Equity Side Fund, L.P.
(3) Consists of 1,227,275 shares held by 21 individuals and entities affiliated
with Stephens Group.
(4) Includes 33,333 shares held by Mary Woolard, 27,272 shares held by Teresa
R. Deaner and 90,909 shares held by Elisabeth Woolard. Mr. Woolard
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest. As of September 30, 2000, 165,000 shares held by Mr.
Woolard were unvested and subject to a right of repurchase in our favor,
which right lapses over time.
(5) As of September 30, 2000, 195,833 shares held by Mr. Berg were unvested and
subject to a right of repurchase in our favor, which right lapses over
time.
(6) Includes 575,000 shares held by Diane J. Fong as Trustee for the Hyperion
Ventures Trust UTA dated January 15, 1998, 187,718 shares held by Diane J.
Fong as Trustee of the Ariel Crystal Fong Trust UTA dated September 16,
1999, 187,718 shares held by Diane J. Fong as Trustee of the Marina Ashley
Fong Trust UTA dated September 16, 1999, 187,718 shares held by Diane J.
Fong as Trustee of the Ryan David Fong Trust UTA dated September 16, 1999,
10,000 shares held by William Woo and Anita Y.M. Woo as community property,
5,000 shares held by Lancy Woo and 5,000 shares held by Mona Woo. Mr. Fong
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest. As of September 30, 2000, 165,000 shares held by Mr.
Fong were unvested and subject to a right of repurchase in our favor, which
right lapses over time.
(7) As of September 30, 2000, 181,562 shares held by Mr. Schurr were unvested
and subject to a right of repurchase in our favor, which right lapses over
time.
(8) Consists of 3,696,281 shares held by JMI Equity Fund III, L.P. and 456,844
shares held by JMI Equity Side Fund, L.P. Mr. Noell disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest.
(9) Includes 117,670 shares held by WS Investment Company 98A, WS Investment
Company 98B, and WS Investment Company 2000A. Mr. Rosati disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest.
(10) Includes 1,985,218 shares held by 21 individuals and entities with Stephens
Group. Mr. Turner disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest.
(11) Consists of 3,696,281 shares held by JMI Equity Fund III, L.P. and 456,844
shares held by JMI Equity Side Fund, L.P. Mr. van den Berg disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest.
(12) Includes 1,387,395 shares that were unvested as of September 30, 2000 and
subject to a right of repurchase in our favor, which right lapses over
time. Includes 525,000 shares issuable upon exercise of options within 60
days of September 30, 2000, of which 419,169 would be subject to a right of
repurchase in our favor, which right lapses over time.
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<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
135,000,000 shares of common stock, $0.001 par value, and 15,000,000 shares of
undesignated preferred stock, $0.001 par value. The following description of our
capital stock does not purport to be complete and is subject to and qualified in
its entirety by our certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus forms a part,
and by the provisions of applicable Delaware law.
COMMON STOCK
As of September 30, 2000, there were shares of common stock
outstanding, which were held of record by approximately 121 stockholders, as
adjusted for the conversion of all outstanding shares of preferred stock into an
aggregate of shares of common stock, which will occur upon the
closing of this offering.
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 ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. 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 holders of common stock have 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. The shares of common stock to
be issued upon the closing 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 designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action
by the stockholders.
Upon the closing no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.
WARRANTS
As of September 30, 2000, there were warrants outstanding to purchase
shares of common stock.
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<PAGE> 68
REGISTRATION RIGHTS
The holders of shares of common stock and the holders of
preferred stock convertible into shares of common stock are
entitled to certain rights with respect to registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the holders of registrable securities and us. Beginning on the earlier
of December 31, 2000 or six months following the date of this prospectus,
holders of at least 50% of the then outstanding registrable securities may
require on two separate occasions that we register their shares for public
resale. Also, holders of registrable securities may require on three separate
occasions within any twelve-month period that we register their shares for
public resale on Form S-3. Furthermore, in the event we elect to register any of
our shares of common stock for purposes of effecting any public offering, the
holders of registrable securities are entitled to include their shares of common
stock in the registration, but we may reduce the number of shares proposed to be
registered in view of market conditions. All expenses in connection with any
registration, other than underwriting discounts and commissions, will be borne
by us. All registration rights will terminate five years following the date of
this prospectus, or, with respect to each holder of registrable securities, at
such time as the holder is entitled to sell all of its shares in any 90-day
period under Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Provisions of Delaware law and our second amended and restated certificate
of incorporation and amended and restated bylaws could make the following more
difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of
us to first negotiate with our board. 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 such proposals because negotiation of such
proposals could result in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, one class being elected each year by our
stockholders. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
STOCKHOLDER MEETINGS
Under our bylaws, only the board of directors, the chairman of the board,
the chief executive officer and the president 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 the board of directors or a committee
of the board.
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<PAGE> 69
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an
anti-takeover effect with respect to transactions not approved in advance by the
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.
ELIMINATION OF CUMULATIVE VOTING
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors.
UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of us.
AMENDMENT OF CHARTER PROVISIONS
The amendment of any of the above provisions would require approval by
holders of at least 66 2/3% of the outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
NASDAQ NATIONAL MARKET LISTING
We have applied for the listing of our shares on The Nasdaq National Market
under the symbol "SLCN".
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<PAGE> 70
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the completion of this offering, we will have shares of our
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of the outstanding
shares, all of the shares sold in this offering will be freely tradeable, except
that any shares held by directors, officers or owners of ten percent or more of
our stock, may only be sold in compliance with the limitations described below.
The remaining shares of our common stock will be deemed
"restricted securities" as defined under Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144(k) or 701 promulgated under the Securities Act,
which rules are summarized below. Subject to the lock-up agreements described
below, the provisions of Rules 144, 144(k) and 701 and a right of repurchase in
favor of us applicable to some of our common stock, additional shares will be
available for sale in the public market as follows:
- up to shares will be eligible for sale 120 days from the date
of this prospectus in the event that the locked-up shares are released
early, as described below;
- an additional shares will be eligible for sale 150 days from
the date of this prospectus in the event that the locked-up shares are
released early, as described below;
- shares will be eligible for sale upon the expiration of the
180-day lock-up period.
- shares will be eligible for sale at some point after 180 days
from the date of this prospectus.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our common
stock could decline. Furthermore, because we do not expect that any of these
shares will be available for sale for at least 120 days following this offering
as a result of the contractual and legal restrictions on resale described below,
sales of substantial amounts of our common stock in the public market after
these restrictions lapse could adversely affect the prevailing market price of
the common stock and our ability to raise equity capital in the future.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year including the holding period of any prior owner
except an affiliate would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately shares immediately after this offering; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years including the
holding period of any prior owner except an affiliate, is entitled to
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<PAGE> 71
sell such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchase shares from us under
a stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144. As of September 30, 2000, shares had been issued as a
result of exercise of stock options.
LOCK-UP AGREEMENTS
Stockholders accounting for shares of our common stock
outstanding have entered into lock-up agreements in connection with this
offering. These lock-up agreements provide that these persons will not offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of our
common stock or any securities exercisable for or convertible into our common
stock owned by them for a period of 180 days after the date of this prospectus
without the prior written consent of Goldman, Sachs & Co. or as described below.
Goldman, Sachs & Co. has advised us that it has no present intention to release
any of the shares subject to the lock-up agreements prior to the expiration of
the lock-up periods described below. These lock-up agreements do not restrict
the transfer of shares of common stock purchased under the directed share
program in connection with this offering or in the open market following the
date of this prospectus.
If our stock price is greater than twice the initial public offering price
per share for the time periods set forth below, then a percentage of the
securities subject to lock-up agreements will be released from the transfer
restrictions of the lock-up agreements at the time set forth below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
TIME PERIOD AMOUNT RELEASED TIME RELEASED
----------------------------------------------------------------------------------------------
<S> <C> <C>
20 of the 30 consecutive 20% of the securities subject The 120th day after the date
trading days preceding the to lock-up agreements as of of this prospectus.
120th day after the date of the date of this prospectus.
this prospectus.
----------------------------------------------------------------------------------------------
20 of the 30 consecutive An additional 20% of the The 150th day after the date
trading days preceding the securities subject to lock-up of this prospectus.
150th day after the date of agreements as of the date of
this prospectus. this prospectus.
----------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 72
However, if the securities to be released above would be released during
one of the Company's blackout periods, then if our stock price is greater than
twice the initial public offering price per share for the time periods set forth
below, a percentage of the securities subject to the lock-up agreements will be
released from the transfer restrictions of the lock-up agreements at the time
set forth below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
SCHEDULED RELEASE TIME PERIOD AMOUNT RELEASED ACTUAL RELEASE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The 120th day after 20 of the 30 20% of the securities The first day after
the date of this consecutive trading subject to lock-up the end of the
prospectus is during days ending on the agreements as of the blackout period.
a blackout period. last trading day of date of this
the blackout period. prospectus.
----------------------------------------------------------------------------------------------
The 150th day after 20 of the 30 An additional 20% of The first day after
the date of this consecutive trading the securities subject the end of the
prospectus is during days ending on the to lock-up agreements blackout period.
a blackout period. last trading day of as of the date of this
the blackout period. prospectus.
----------------------------------------------------------------------------------------------
</TABLE>
Our blackout period begins four weeks prior to the end of each calendar
quarter and ends three trading days after we announces our quarterly results.
During the blackout period, we do not allow our directors, officers and key
employees to trade our stock.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of shares of our
common stock will be entitled to rights to registration of their shares under
the Securities Act. Registration of those shares under the Securities Act would
result in those shares becoming freely tradable without restriction under the
Securities Act, except for shares purchased by affiliates, immediately upon the
effectiveness of such registration.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
under the Securities Act covering shares of common stock under outstanding
options or reserved for issuance under our stock option plans. Each year as the
number of shares reserved for issuance under our 1998 Incentive Stock Option
Plan and 2000 Employee Stock Purchase Plan increases, we will file an amendment
to the registration statement covering the additional shares. As of September
30, 2000, options to purchase shares of common stock were issued and
outstanding and shares were reserved for issuance under our stock
plans and employee stock purchase plan. Shares registered under that
registration statement will, upon the optionee's exercise and depending on
vesting provisions and Rule 144 volume limitations applicable to our affiliates,
be available for sale in the open market immediately after the lock-up
agreements expire.
WARRANTS
Upon consummation of this offering, warrants to purchase shares
of common stock will be outstanding.
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<PAGE> 73
UNDERWRITING
Silicon Energy and the underwriters named below have entered into an
underwriting agreement with respect to shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., CIBC World
Markets Corp., Lehman Brothers Inc., and Stephens Inc. are the representatives
of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co.........................................
CIBC World Markets Corp.....................................
Lehman Brothers Inc.........................................
Stephens Inc................................................
----------
Total.....................................................
==========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Silicon Energy to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Silicon Energy. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Silicon Energy
--------------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share......................................... $ $
Total............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
Silicon Energy has agreed with the underwriters not to dispose of or hedge
any of its common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the 180 days after the date of this prospectus, except with
the prior written consent of the representatives. This restriction does not
apply to any existing employee benefits plans or securities issues in connection
with acquisition transactions, provided that the recipients of such securities
agree to be bound by the lock-up provisions applicable to other stockholders.
Silicon Energy's directors, officers and substantially all of its
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This restriction shall terminate
as to 20% of the locked-up shares after 120 days and an additional 20% of the
locked-up shares after 150 days after the date of this prospectus, subject to
delays as a result of the timing of Silicon Energy's earnings releases and
compliance with insider trading policies, in the event that the reported last
sale price of Silicon Energy's common stock on the Nasdaq National Market is at
least twice the initial public offering price
71
<PAGE> 74
for predetermined periods ending on these dates. See "Shares Eligible for Future
Sale" for a discussion of transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among Silicon Energy and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Silicon Energy's historical performance, estimates of the
business potential and earnings prospects of Silicon Energy, an assessment of
Silicon Energy's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Silicon Energy has applied for quotation of its common stock on the Nasdaq
National Market under the symbol "SLCN".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from the issuer in the offering. The
underwriters may close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered 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 overallotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing 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 common stock in the open market after
pricing that could adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the completion of the
offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of our
stock, and together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
At the request of Silicon Energy, the underwriters are reserving up to
shares of common stock for sale at the initial public offering price
to some of its directors, officers, employees and friends through a directed
share program. The number of shares of common stock available for sale to the
general public in the public offering will be reduced to the extent these
persons purchase these reserved shares. Any shares not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered hereby.
Silicon Energy estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
72
<PAGE> 75
Silicon Energy has agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act of 1933.
A few employees of Goldman, Sachs & Co., including some of the employees
working with Silicon Energy on this offering, own shares in Silicon Energy.
Those shares were purchased from Silicon Energy for $6.75 per share and in the
aggregate, upon completion of this offering, will constitute less than % of
Silicon Energy's outstanding capital stock.
An affiliate of Lehman Brothers Inc., one of the representatives of the
underwriters, is an investor in Nth Power Technologies Fund II, which owns
148,148 shares of Silicon Energy's Series D preferred stock. These shares will
convert into shares of Silicon Energy's common stock upon completion
of this offering.
Affiliates of Stephens Inc., one of the representatives of the
underwriters, hold an aggregate of 2,045,455 shares of Silicon Energy's Series C
preferred stock. These shares will convert into shares of Silicon
Energy's common stock upon the completion of this offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Selected legal matters in connection with this offering will be
passed upon for the underwriters by Simpson Thacher & Bartlett, Palo Alto,
California. As of the date of this prospectus, investment partnerships composed
of members of and persons associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation, as well as some individual attorneys of this firm
including Mario M. Rosati, our Secretary and a Director, who is a member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an
aggregate of shares of our common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each of
the two years in the period ended December 31, 1999 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants given on the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules, which are part of the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and exhibits and schedules filed as part
of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other documents are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the filed exhibit.
Any document we file may be read and copied at the Commission's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call
the Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Our filings with the Commission are also available to the
public from the Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
73
<PAGE> 76
SILICON ENERGY CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Silicon Energy Corp.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of redeemable convertible
preferred stock, and stockholders' deficit and of cash flows present fairly, in
all material respects, the financial position of Silicon Energy Corp. and its
subsidiaries at December 31, 1998 and 1999 and the results of their operations
and their cash flows for each of the two years ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
San Francisco, California
October 5, 2000
F-2
<PAGE> 78
SILICON ENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, AT JUNE 30,
----------------- JUNE 30, 2000
1998 1999 2000 (NOTE 2)
------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 3,260 $ 7,840 $ 27,085
Short-term investments.................................... -- 3,242 1,497
Accounts receivable (net of allowance of $0, $61 and $168
in 1998, 1999 and 2000, respectively)................... 16 182 1,465
Costs in excess of billings............................... -- 219 727
Prepaid expenses and other current assets................. 17 180 436
------- ------- --------
Total current assets.................................... 3,293 11,663 31,210
Property and equipment, net................................. 98 915 2,342
Goodwill and other intangibles, net......................... -- -- 2,009
Other assets................................................ 5 -- 2,875
------- ------- --------
Total assets............................................ $ 3,396 $12,578 $ 38,436
======= ======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 42 $ 221 $ 860
Accrued and other liabilities............................. 154 219 2,823
Deferred revenue.......................................... -- 367 1,533
Borrowings -- short-term.................................. -- -- 332
------- ------- --------
Total current liabilities............................... 196 807 5,548
Borrowings -- long-term..................................... -- 465 465
Other long-term liabilities................................. -- 98 89
------- ------- --------
Total liabilities....................................... 196 1,370 6,102
------- ------- --------
Redeemable convertible preferred stock, $0.001 par value per
share, 12,690,625 and 16,394,328 shares authorized at
December 31, 1999 and June 30, 2000 (unaudited);
6,190,625, 12,690,625
16,172,093 shares issued and outstanding at December 31,
1998, 1999 and June 30, 2000 (unaudited), respectively;
(aggregate liquidation preference of $20,282 and $43,782
at December 31, 1999 and June 30, 2000 (unaudited),
respectively)............................................. 4,681 19,510 43,626 $ --
Commitments (Note 7)
Stockholders' equity (deficit)
Common stock, $0.001 par value per share, 30,000,000 and
40,000,000 shares authorized at December 31, 1999 and
June 30, 2000 (unaudited); 5,050,001, 5,078,002 and
7,434,127 shares issued and 5,050,001, 4,611,335 and
6,917,460 issued and outstanding at December 31, 1998,
1999 and June 30, 2000 (unaudited), respectively........ 5 5 8 25
Additional paid-in capital................................ 87 1,739 12,271 55,880
Deferred stock-based compensation......................... (100) (1,558) (3,718) (3,718)
Accumulated deficit....................................... (1,473) (8,487) (18,714) (18,714)
Notes receivable from officers............................ -- -- (938) (938)
Treasury stock, at cost, 466,667 and 516,667 shares at
December 31, 1999 and June 30, 2000 (unaudited),
respectively............................................ -- (1) (201) (201)
------- ------- -------- --------
Total stockholders' equity (deficit).................... (1,481) (8,302) (11,292) $ 32,334
------- ------- -------- --------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit).............. $ 3,396 $12,578 $ 38,436
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 79
SILICON ENERGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- ------------------
1998 1999 1999 2000
------------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
License................................................... $ -- $ 250 $ 45 $ 1,436
Services.................................................. 19 270 44 828
------- ------- ------- --------
Total revenue...................................... 19 520 89 2,264
------- ------- ------- --------
COST OF REVENUE
License................................................... -- 32 10 75
Services (exclusive of non-cash stock-based compensation
of $3, $37, $18 and $67 in 1998, 1999 and six months
ended June 30, 1999 (unaudited) and 2000 (unaudited),
respectively)........................................... 4 214 12 350
------- ------- ------- --------
Total cost of revenue.............................. 4 246 22 425
------- ------- ------- --------
Gross profit................................................ 15 274 67 1,839
OPERATING EXPENSES
Research and development (exclusive of non-cash
stock-based compensation of $17, $241, $120 and $442 in
1998, 1999 and six months ended June 30, 1999
(unaudited) and 2000 (unaudited), respectively)......... 830 3,739 1,390 3,764
Sales and marketing (exclusive of non-cash stock-based
compensation of $25, $350, $176 and $643 in 1998, 1999
and six months ended June 30, 1999 (unaudited) and 2000
(unaudited), respectively).............................. 228 2,334 524 5,764
General and administrative (exclusive of non-cash
stock-based compensation of $7, $102, $51 and $188 in
1998, 1999 and six months ended June 30, 1999
(unaudited) and 2000 (unaudited), respectively)......... 332 667 276 1,140
Stock-based compensation.................................. 52 730 365 1,340
Amortization of intangibles............................... -- -- -- 70
------- ------- ------- --------
Total operating expenses........................... 1,442 7,470 2,555 12,078
------- ------- ------- --------
Loss from operations........................................ (1,427) (7,196) (2,488) (10,239)
Interest income............................................. -- 202 39 157
Interest expense............................................ 46 20 -- 145
------- ------- ------- --------
Net loss................................................ (1,473) (7,014) (2,449) (10,227)
Redeemable convertible preferred stock accruing
dividend................................................ (75) (568) (225) (686)
------- ------- ------- --------
Net loss attributable to common stockholders.............. $(1,548) $(7,582) $(2,674) $(10,913)
======= ======= ======= ========
Basic and diluted net loss per share (Note 2)............... $ (1.62) $ (3.09) $ (1.31) $ (2.68)
======= ======= ======= ========
Shares used in calculating basic and diluted net loss per
share..................................................... 953 2,453 2,041 4,076
======= ======= ======= ========
Pro forma basic and diluted net loss per share (Note 2)
(unaudited)............................................... $ (0.72) $ (0.64)
======= ========
Shares used in calculating pro forma basic and diluted net
loss per share (unaudited)................................ 10,514 16,960
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 80
SILICON ENERGY CORP.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED 1998 AND 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
---------------- --------------- PAID-IN STOCK-BASED ACCUMULATED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT OFFICERS
------ ------- ------ ------ ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DATE OF INCEPTION.................. -- $ -- -- $-- $ -- $ -- $ -- $ --
Issuance of founders' common
stock............................. -- -- 5,050 5 10 -- -- --
Issuance of Series A redeemable
convertible preferred stock, net
of issuance costs of $6........... 1,200 654 -- -- -- -- -- --
Issuance of Series B redeemable
convertible preferred, net of
issuance costs of $40............. 4,991 3,952 -- -- -- -- -- --
Preferred stock Series B accruing
dividends......................... -- 75 -- -- (75) -- -- --
Deferred stock-based
compensation...................... -- -- -- -- 152 (152) -- --
Amortization of deferred
stock-based compensation.......... -- -- -- -- -- 52 -- --
Net loss........................... -- -- -- -- -- -- (1,473) --
------ ------- ----- --- ------- ------- -------- -----
BALANCE AT DECEMBER 31, 1998....... 6,191 4,681 5,050 5 87 (100) (1,473) --
Issuance of Series C redeemable
convertible preferred stock, net
of issuance costs of $39.......... 6,500 14,261 -- -- -- -- -- --
Issuance of common stock in
connection with stock option
exercises......................... -- -- 28 -- 2 -- -- --
Issuance of warrants in connection
with line of credit............... -- -- -- -- 30 -- -- --
Preferred stock Series B and C
accruing dividends................ -- 568 -- -- (568) -- -- --
Deferred stock-based
compensation...................... -- -- -- -- 2,188 (2,188) -- --
Amortization of deferred
stock-based compensation.......... -- -- -- -- -- 730 -- --
Repurchase of founders common
stock............................. -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- (7,014) --
------ ------- ----- --- ------- ------- -------- -----
BALANCE AT DECEMBER 31, 1999....... 12,691 19,510 5,078 5 1,739 (1,558) (8,487) --
Issuance of Series D redeemable
convertible preferred stock, net
of issuance costs of $70.......... 3,481 23,430 -- -- -- -- -- --
Issuance of common stock........... -- -- 825 1 3,299 -- -- --
Issuance of common stock below
deemed fair value................. -- -- -- -- 1,724
Issuance of common stock in
conjunction with acquisitions..... -- -- 143 -- 869
Issuance of common stock in
connection with stock option
exercises......................... -- -- 788 1 244 -- -- --
Issuance of warrants in connection
with line of credit............... -- -- -- -- 133 -- -- --
Issuance of common stock in
exchange for notes receivable from
officers.......................... -- -- 600 1 937 -- -- (938)
Preferred stock Series B, C and D
accruing dividends................ -- 686 -- -- (686) -- -- --
Issuance of warrants for
services.......................... -- -- -- -- 512 -- -- --
Deferred stock-based
compensation...................... -- -- -- -- 3,500 (3,500) -- --
Amortization of deferred
stock-based compensation.......... -- -- -- -- -- 1,340 -- --
Repurchase of founders' common
stock............................. -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- (10,227) --
------ ------- ----- --- ------- ------- -------- -----
BALANCE AT JUNE 30, 2000
(UNAUDITED)....................... 16,172 $43,626 7,434 $ 8 $12,271 $(3,718) $(18,714) $(938)
====== ======= ===== === ======= ======= ======== =====
<CAPTION>
TREASURY STOCK TOTAL
--------------- SHAREHOLDERS'
SHARES AMOUNT DEFICIT
------ ------ -------------
<S> <C> <C> <C>
DATE OF INCEPTION.................. -- $ -- $ --
Issuance of founders' common
stock............................. -- -- 15
Issuance of Series A redeemable
convertible preferred stock, net
of issuance costs of $6........... -- -- --
Issuance of Series B redeemable
convertible preferred, net of
issuance costs of $40............. -- -- --
Preferred stock Series B accruing
dividends......................... -- -- (75)
Deferred stock-based
compensation...................... -- -- --
Amortization of deferred
stock-based compensation.......... -- -- 52
Net loss........................... -- -- (1,473)
----- ----- --------
BALANCE AT DECEMBER 31, 1998....... -- -- (1,481)
Issuance of Series C redeemable
convertible preferred stock, net
of issuance costs of $39.......... -- -- --
Issuance of common stock in
connection with stock option
exercises......................... -- -- 2
Issuance of warrants in connection
with line of credit............... -- -- 30
Preferred stock Series B and C
accruing dividends................ -- -- (568)
Deferred stock-based
compensation...................... -- -- --
Amortization of deferred
stock-based compensation.......... -- -- 730
Repurchase of founders common
stock............................. (467) (1) (1)
Net loss........................... -- -- (7,014)
----- ----- --------
BALANCE AT DECEMBER 31, 1999....... (467) (1) (8,302)
Issuance of Series D redeemable
convertible preferred stock, net
of issuance costs of $70.......... -- -- --
Issuance of common stock........... -- -- 3,300
Issuance of common stock below
deemed fair value................. 1,724
Issuance of common stock in
conjunction with acquisitions..... 869
Issuance of common stock in
connection with stock option
exercises......................... -- -- 245
Issuance of warrants in connection
with line of credit............... -- -- 133
Issuance of common stock in
exchange for notes receivable from
officers.......................... -- -- --
Preferred stock Series B, C and D
accruing dividends................ -- -- (686)
Issuance of warrants for
services.......................... -- -- 512
Deferred stock-based
compensation...................... -- -- --
Amortization of deferred
stock-based compensation.......... -- -- 1,340
Repurchase of founders' common
stock............................. (50) (200) (200)
Net loss........................... -- -- (10,227)
----- ----- --------
BALANCE AT JUNE 30, 2000
(UNAUDITED)....................... (517) $(201) $(11,292)
===== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 81
SILICON ENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- ------------------
1998 1999 1999 2000
------------------- ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(1,473) $(7,014) $(2,449) $(10,227)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 15 167 27 279
Stock-based compensation................................ 52 730 365 1,340
Amortization of intangibles............................. -- -- -- 70
Loss on sale of short-term investments.................. -- -- -- 5
Warrant related to non-cash marketing expense........... -- -- -- 512
Warrant related to non-cash interest expense............ -- -- -- 133
Changes in current assets and liabilities:
Accounts receivable, net.............................. (16) (166) (234) (1,283)
Costs in excess of billings........................... -- (219) -- (508)
Prepaid expenses and other current assets............. (17) (133) (73) (256)
Other assets.......................................... (5) 5 -- (2,875)
Accounts payable...................................... 42 179 173 639
Accrued and other liabilities......................... 154 65 162 2,627
Deferred revenue...................................... -- 277 -- 2,890
------- ------- ------- --------
Net cash used in operating activities............... (1,248) (6,109) (2,029) (6,654)
------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments....................... -- (3,244) -- --
Proceeds from sales of short-term investments............. -- -- -- 1,740
Purchases of property and equipment....................... (113) (792) (122) (1,473)
Acquisition of Energy Concepts, Inc. (ECI)................ -- -- -- (500)
Acquisition of SRC Systems, Inc. (SRC).................... -- -- -- (52)
------- ------- ------- --------
Net cash used in investing activities............... (113) (4,036) (122) (285)
------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of redeemable convertible preferred
stock, net of issuance costs............................ 4,606 14,261 -- 23,430
Proceeds from issuance of common stock.................... 15 -- -- 3,300
Repurchase of common stock................................ -- (1) -- (200)
Proceeds from bank borrowings............................. -- 465 -- 332
Repayment of debt assumed in ECI and SRC acquisitions..... -- -- -- (923)
Proceeds from exercised stock options..................... -- -- -- 245
------- ------- ------- --------
Net cash provided by financing activities........... 4,621 14,725 -- 26,184
------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 3,260 4,580 (2,151) 19,245
Cash and cash equivalents at beginning of year.............. -- 3,260 3,260 7,840
------- ------- ------- --------
Cash and cash equivalents at end of year.................... $ 3,260 $ 7,840 $ 1,109 $ 27,085
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Exercise of stock options in exchange for notes receivable
from officers........................................... $ -- $ -- $ -- $ 938
======= ======= ======= ========
Issuance of common stock below deemed fair value.......... $ -- $ -- $ -- $ (1,724)
======= ======= ======= ========
Issuance of warrants in connection with line of credit.... $ -- $ 30 $ -- $ --
======= ======= ======= ========
Issuance of common stock for the acquisition of SRC....... $ -- $ -- $ -- $ (869)
======= ======= ======= ========
Debt assumed through acquisition of ECI and SRC........... $ -- $ -- $ -- $ (923)
======= ======= ======= ========
Assets acquired under capital leases...................... $ -- $ 166 $ -- $ 134
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ -- $ 4 $ -- $ 25
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 82
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
THE COMPANY
Silicon Energy Corp., (the "Company"), was incorporated as a California
corporation in December 1997 and began substantive operations in January 1998.
The Company develops and sells Internet-based energy technology software, that
enables enterprises to reduce energy costs and other related expenditures. The
Company's sources of revenue are license fees and professional, maintenance,
Internet, and bill management services fees.
The consolidated financial statements of Silicon Energy Corp. include the
accounts of the Company and its wholly owned subsidiaries, Energy Concepts,
Inc., acquired on May 5, 2000, and SRC Systems, Inc., acquired on June 7, 2000.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Since inception, the Company has focused on developing and marketing its
software and services and has therefore incurred losses and negative cash flows
from operating activities since inception as reflected in these financial
statements. The Company has historically relied primarily on equity capital
financing to support its operations. To the extent that the Company's existing
cash balances and cash flows provided by operations are insufficient to support
its operations, the Company will need to rely on future equity or debt
financing.
REINCORPORATION
In July 2000, the Company reincorporated in the state of Delaware. As a
result of the reincorporation, the Company is authorized to issue 40,000,000
shares of $0.001 par value common stock and 16,394,328 shares of $0.001 par
value preferred stock. The accompanying consolidated financial statements
reflect the reincorporation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements as of June 30, 2000 and for
the six month periods ended June 30, 1999 and 2000, together with the financial
data and other information for those periods disclosed in these notes to the
financial statements, are unaudited. In the opinion of management, the interim
financial statements have been prepared on the same basis as the audited
financial statements and reflect all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the interim results. The
results of the operations for the interim periods are not necessarily indicative
of the results to be expected for any future periods.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original or remaining maturity at the date of purchase of three months or less
to be cash equivalents.
F-7
<PAGE> 83
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Amounts reported for cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are considered to approximate fair
value primarily due to their short maturities. The carrying amount of borrowings
under capital leases and lines of credit approximates fair value based on the
terms of similar arrangements available to the Company.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of highly liquid, investment grade
corporate obligations purchased with an original maturity at the date of
purchase of greater than 90 days. Short-term investments are classified as
available-for-sale securities and are stated at market value with any temporary
difference between an investment's amortized cost and its market value recorded
as a separate component of stockholders' equity (deficit) until such gains or
losses are realized. Gains or losses on the sales of securities are determined
on a specific identification basis.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Risks associated with cash are mitigated by
banking with creditworthy institutions.
The Company's accounts receivable are derived from revenue earned or
deferred from customers located in the United States. The Company performs
periodic credit evaluations of its customers' financial condition and,
generally, requires no collateral. The Company maintains an allowance for
doubtful accounts receivable for potential credit losses. For the period ended
December 31, 1998 one individual customer accounted for 81% of the accounts
receivable. For the year ended December 31, 1999, three individual customers
accounted for 30%, 23% and 36%, respectively, of total accounts receivable. For
the six-month period ended June 30, 2000, one individual customer accounted for
12% of the total accounts receivable.
Revenue related to Silicon Energy EEM Suite of Internet-based energy
technology software accounted for approximately 72% and 60% of the revenue for
the year ended December 31, 1999 and the six-month period ended June 30, 2000,
respectively. For the year ended December 31, 1999, three individual customers
accounted for 28%, 21% and 20%, respectively, of gross revenue. For the
six-month period ended June 30, 2000, one individual customer accounted for 13%
of gross revenue.
RISKS AND UNCERTAINTIES
The Company licenses key technology components of its software primarily
from three third-party software providers, the license from one of which expires
in June 2003. The loss of these technologies or other third-party technologies
could prevent sales of the Company's software and increase the Company's costs
for substitute technologies.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the asset as follows:
Computer equipment.............................................3 years
Furniture and fixtures.........................................5 years
F-8
<PAGE> 84
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Leasehold improvements are amortized on a straight line basis over the
shorter of their estimated useful lives or the lease term.
When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from their separate accounts, and any gain or loss on
such sale or disposal is reflected in operations.
Maintenance and repairs are charged to expense as incurred. Expenditures
which substantially increase an asset's useful life are capitalized.
INTANGIBLE ASSETS
Intangible assets consist of goodwill, completed technology and patents,
customer lists and assembled workforce of acquired companies. Goodwill and other
intangible assets are amortized using the straight-line method over the period
of expected benefit. Valuation of intangible assets is based on forecasted
discounted cash flows and is reassessed periodically as a result of changes in
management's estimates of future performance giving consideration to existing
and anticipated competitive and economic conditions. Cash flow forecasts are
based on trends of historical performance and management's estimate of future
performance, giving consideration to existing and anticipated competitive
economic conditions. The amount of an impairment loss, if any, is determined as
the amount by which the carrying amount of an intangible asset exceeds the fair
value of the asset based on the valuation.
SOFTWARE DEVELOPMENT COSTS
Costs related to the research and development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility (in the form of a working model) of the product has
been established, at which time such costs are capitalized, subject to net
realizable value. To date, the Company has not capitalized any development costs
related to software products because the time period between technological
feasibility and general release of a product has not been significant and
related costs incurred during that time period have not been material.
INTERNAL-USE SOFTWARE COSTS
In January 1999, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal-Use", which requires software development costs associated with
internal use software to be charged to operations until certain capitalization
criteria are met.
REVENUE RECOGNITION
The Company derives revenue from fees for software licenses and services.
Our service revenue is derived from professional, maintenance, Internet and
integrated bill management services.
The Company recognizes revenue when all of the following conditions are
met:
- There is persuasive evidence of an arrangement;
- The Company has delivered the software product to the customer;
- The Company believes that collection of these fees is probable;
F-9
<PAGE> 85
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- The amount of fees to be paid by the customer is fixed or determinable;
and
- The services provided are not essential to the functionality of the
software.
Generally, the Company has vendor specific objective evidence of fair value
for the maintenance element of software arrangements based on renewal rates for
maintenance in future years as specified in the contracts. In such cases, the
Company defers the maintenance revenue at the outset of the arrangement and
recognizes it ratably over the period during which the maintenance is to be
provided, which normally commences on the date the software is delivered and
fully installed.
As the Company's license contracts involve significant implementation or
customization essential to the functionality of the Company's software product,
license and services revenue, excluding the maintenance element described above,
is recognized using contract accounting in accordance with the provisions of SOP
81-1, Accounting for Performance of Construction Type and Certain Production
Type Contracts. The Company classifies revenue from these arrangements as
product and services revenue, respectively, based upon the estimated fair value
of each element.
On contracts for which reliable estimates can not be made by management
with respect to the extent of implementation services required for full
functionality, the license and service revenue, excluding the maintenance
element, is recognized on a completed contract method. Approximately 97% and 26%
of the Company's revenue was derived from contracts accounted for under the
completed contract method for the year ended December 31, 1999 and the six month
period ended June 30, 2000, respectively.
On contracts for which reliable estimates can be made by management with
respect to the extent of implementation services required for full
functionality, the license and service revenue, excluding the maintenance
element, is recognized on a percentage-of-completion method. Management
estimates the percentage of completion for contracts based on the labor hours
incurred compared to total estimated hours as well as contract milestones
completed. Approximately 3% and 74% of the Company's revenue was derived from
contracts accounted for under the percentage-of-completion method for the year
ended December 31, 1999 and the six month period ended June 30, 2000,
respectively.
Provisions for estimated contract losses are recognized in the period in
which the loss becomes probable and can be reasonably estimated.
Fees for application hosting and integrated bill management services are
recognized as the services are provided or ratably over the term of the
agreement.
Earned but unbilled project revenues are classified under current assets as
costs in excess of billings. Deferred revenue includes billings in excess of
project revenues earned, amounts payable on behalf of and billed to customers,
and cash received and other amounts billed in advance for services to be
performed.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, ("APB No. 25") and complies with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"). Under APB No. 25,
unearned stock compensation is based on the difference, if any, on the date of
the grant, between the fair value of the Company's common stock and the exercise
price. Unearned stock compensation is amortized and expensed in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 28. The Company
accounts for stock, stock options and
F-10
<PAGE> 86
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
warrants issued to non-employees in accordance with the provisions of SFAS No.
123 and Emerging Issues Task Form No. 96-18, Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling Goods and Services.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. For the years ended
December 31, 1998 and December 31, 1999, advertising costs totaled $36,000 and
$221,000, respectively. For the six months ended June 30, 2000, advertising
costs totaled $316,000.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement prescribes the use of the liability
method whereby deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax bases of assets and liabilities
and measured at tax rates that will be in effect when the differences are
expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets where it is more likely than not that the deferred
tax asset will not be realized.
SEGMENT REPORTING
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. During each of the periods
presented, the Company operated in one operating segment with sales in the
United States.
COMPREHENSIVE LOSS
SFAS No. 130, Reporting Comprehensive Income requires an enterprise to
report by major components and as a single total, the change in its net assets
during the period from non-stockholder sources. The Company's total
comprehensive loss approximates net loss for the years ended December 31, 1998
and 1999 and for the six month period ended June 30, 2000 as unrealized
investment gains in losses in each period were insignificant.
NET LOSS PER SHARE
Basic net loss per common share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding during
the period. Diluted net loss per common share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent
shares, composed of common shares issuable upon the exercise of stock options
and warrants and upon conversion of convertible preferred stock, are included in
the diluted net loss per common share
F-11
<PAGE> 87
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
calculation to the extent these shares are dilutive. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted net loss
per common share follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- ------------------
1998 1999 1999 2000
------------ ------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NUMERATOR
Net loss..................................... $(1,473) $(7,014) $(2,449) $(10,227)
Redeemable convertible preferred stock
accruing dividend......................... $ (75) $ (568) $ (225) $ (686)
------- ------- ------- --------
Net loss attributable to common
stockholders.............................. $(1,548) $(7,582) $(2,674) $(10,913)
======= ======= ======= ========
DENOMINATOR
Weighted average common shares............... 5,050 4,906 5,050 5,689
Weighted average unvested common shares
subject to repurchase..................... (4,097) (2,453) (3,009) (1,613)
------- ------- ------- --------
Denominator for basic and diluted
calculation............................... 953 2,453 2,041 4,076
------- ------- ------- --------
Basic and diluted net loss per share......... $ (1.62) $ (3.09) $ (1.31) $ (2.68)
======= ======= ======= ========
</TABLE>
The following table summarizes common stock equivalents that are not
included in the denominator used in the diluted net loss per share available to
common stockholders calculation above because to do so would be antidilutive for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- ---------------
1998 1999 1999 2000
------------ ------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE EFFECT OF COMMON STOCK
EQUIVALENTS:
Series A redeemable convertible preferred stock... 1,150 1,200 1,200 1,200
Series B redeemable convertible preferred stock... 1,436 4,991 4,991 4,991
Series C redeemable convertible preferred stock... -- 1,870 6,500 6,500
Series D redeemable convertible preferred stock... -- -- -- 193
Options to purchase common stock.................. 405 1,722 1,296 1,989
Warrants to purchase convertible preferred and
common stock.................................... -- 1 -- 18
Unvested common stock subject to repurchase
agreements...................................... 4,097 2,453 3,009 1,613
----- ------ ------ ------
Total................................... 7,088 12,237 16,996 16,504
===== ====== ====== ======
</TABLE>
UNAUDITED PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share for the year ended December 31, 1999 and the
six months ended June 30, 2000 is computed using the weighted average number of
shares outstanding, including the conversion of the Company's redeemable
convertible preferred stock into shares of the Company's Common Stock effective
upon the closing of the Company's initial public offering, as if such conversion
occurred at January 1, 1999 or at the date of issuance, if later. The resulting
unaudited
F-12
<PAGE> 88
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pro forma adjustment includes an increase in the weighted average shares, used
to compute basic and diluted net loss per share of 8,061,000 and 12,884,000 for
the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. The calculation of pro forma diluted net loss per share excludes
incremental common stock issuable upon the exercise of stock options and
warrants, as the effect would be antidilutive.
UNAUDITED PRO FORMA INFORMATION
Upon the closing of an initial public offering, each of the outstanding
shares of redeemable convertible preferred stock will convert into one share of
common stock. The pro forma balance sheet presents the Company's balance sheet
as if this had occurred at June 30, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities. SFAS No. 133 establishes accounting and reporting standards
for derivative investments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In July 1999, the FASB issued SFAS
No. 137, Accounting for Derivative and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. SFAS No. 137 deferred the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The
Company will adopt SFAS No. 133, as amended, beginning with the first quarter of
fiscal 2001. To date, the Company has not engaged in derivative or hedging
activities. The Company believes that the impact of SFAS No. 133 will not have a
material effect on the financial position or results of operations of the
Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial
Statements," which provides guidance on the recognition , presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
believes it complies with guidance in SAB 101 for all periods presented.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB Opinion No. 25" Practice Board Opinion
No. 25, "Accounting for Stock Issued to Employees," the criteria for determining
whether a plan qualifies as a noncompensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award, and the accounting for an exchange of stock compensation awards in a
business combination. This interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company believes that the impact of
FIN 44 will not have a material effect on the financial position or results of
operation of the Company.
F-13
<PAGE> 89
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET ACCOUNTS
CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Cash............................................. $ -- $2,095 $ 7,073
Money market funds............................... 3,005 264 20,012
Commercial paper................................. 255 5,481 --
------ ------ -------
$3,260 $7,840 $27,085
====== ====== =======
</TABLE>
SHORT-TERM INVESTMENTS
The Company had no short-term investments at December 31, 1998. The cost of
short-term investments approximated the fair value and the amount of unrealized
gains or losses were not significant at December 31, 1999. Short-term
investments consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
-------------- JUNE 30,
1998 1999 2000
---- ------ -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Investment grade corporate obligations............. $-- $3,242 $1,497
== ====== ======
</TABLE>
All of the Company's investments are classified as available-for-sale since
the Company intends to sell them as needed for operations.
The Company realized no gains or losses on the sale of securities during
the years ended December 31, 1998 and December 31, 1999. For the six months
ended June 30, 2000, the Company realized a loss of $5,000 on the sale of
securities.
OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
------------ JUNE 30,
1998 1999 2000
---- ---- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Security deposit on leased facilities................. $-- $-- $1,500
Receivable from reseller.............................. -- -- 1,375
Other................................................. 5 -- --
--- --- ------
$ 5 $-- $2,875
=== === ======
</TABLE>
F-14
<PAGE> 90
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
-------------- JUNE 30,
1998 1999 2000
---- ------ -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Computer equipment................................. $107 $ 921 $2,121
Furniture and fixtures............................. 6 127 629
Leasehold improvements............................. -- 23 27
---- ------ ------
Total property and equipment.................. 113 1,071 2,777
Less: Accumulated depreciation and amortization.... 15 156 435
---- ------ ------
$ 98 $ 915 $2,342
==== ====== ======
</TABLE>
At December 31, 1999 and June 30, 2000, property, plant and equipment
includes $166,000 and $134,000, respectively, of computer equipment acquired
under capital leases. Accumulated amortization of assets under capital leases
totaled $48,000 and $80,000 at December 31, 1999 and June 30, 2000,
respectively. Depreciation expense was $15,000, $141,000 and $279,000 for the
year ended December 31, 1998, for the year ended December 31, 1999 and for the
six months ended June 30, 2000.
ACCRUED AND OTHER LIABILITIES
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
--------------------------- JUNE 30,
1998 1999 2000
------------ ------------ -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Accrued security deposit................ $ -- $ -- $1,500
Accrued compensation and related
benefits............................. 50 89 703
Obligations under capital leases --
short-term........................... -- 68 68
Other................................... 104 62 552
---- ---- ------
$154 $219 $2,823
==== ==== ======
</TABLE>
4. ACQUISITIONS
On May 5, 2000, the Company acquired substantially all of the assets and
liabilities of Energy Concepts, Inc., (ECI) a New Jersey Corporation, for
$450,000 in cash, the assumption of debt of $123,000 and acquisition costs of
$50,000. This transaction was accounted for as a purchase resulting in $428,000
allocated to goodwill and other identifiable intangible assets. The results of
operations of Energy Concepts, Inc. are included in the consolidated results of
operations for periods subsequent to the acquisition date.
On June 7, 2000, the Company acquired substantially all of the assets and
liabilities of SRC Systems, Inc., (SRC) a Nevada Corporation, in exchange for
142,841 shares of the Company's common stock with an estimated fair value of
$869,000, the assumption of debt of $800,000 and acquisition costs of $58,000.
This transaction was accounted for as a purchase resulting in $1,650,000
allocated to goodwill and other identifiable intangible assets. The results of
operations of
F-15
<PAGE> 91
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SRC are included in the consolidated results of operations for periods
subsequent to the acquisition date.
The following unaudited pro forma consolidated financial information
presents the combined results of the Company, Energy Concepts, Inc. and SRC
Systems, Inc. as if the acquisitions had occurred on January 1, 1999, after
giving effect to certain adjustments, principally amortization of goodwill and
other intangible assets. This unaudited pro forma consolidated financial
information does not necessarily reflect the results of operations that would
have occurred had the acquisitions been completed on January 1, 1999 (in
thousands except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1999 2000
------------ --------------
(UNAUDITED)
<S> <C> <C>
Revenue............................................ $ 2,711 $ 3,156
======= ========
Net loss........................................... $(7,192) $(10,159)
======= ========
Basic and diluted net loss per share............... $ (1.42) $ (1.72)
======= ========
</TABLE>
5. INCOME TAXES
Temporary differences, which give rise to significant portions of deferred
tax assets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
----- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 511 $ 3,014
Accruals and reserves.................................. 20 26
Depreciation........................................... (3) 7
Research and development credit........................ 84 340
----- -------
Total deferred tax asset.......................... 612 3,387
Valuation allowance....................................... (612) (3,387)
-----
Net deferred tax asset................................. $ -- $ --
===== =======
Increase in deferred tax asset valuation allowance........ $ 612 $ 2,775
===== =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a 100% valuation allowance to the extent of its net deferred tax
assets as no immediate benefit is expected to be received due to the uncertainty
of realizing future tax benefits from its net operating loss carryforwards and
other deferred tax assets.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $7,000,000 and $6,200,000 for federal and California purposes
respectively, available to reduce future federal and California taxable income.
The carryforwards expire beginning 2017 for federal and 2005 for California tax
purposes unless utilized.
The extent to which the loss carryforwards can be used to offset future
taxable income may be limited depending on the extent of ownership changes
within any three-year period as provided in the
F-16
<PAGE> 92
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Tax Reform Act of 1986 and the California Conformity Act of 1987. The extent of
such limitations, if any, has not yet been determined.
6. BORROWINGS AND LINES OF CREDIT
At June 30, 2000, the Company had $332,000 outstanding under a general line
of credit with Imperial Bank, which is due and payable in full in November 2000.
The line of credit provides for borrowings of up to $1,750,000, which are
collateralized by certain assets of the Company. The line of credit expires in
November 2000 and bears interest at a rate of 0.75% per annum in excess of the
prime rate, which was 9.5% at June 30, 2000 and is payable monthly.
At December 31, 1999 and June 30, 2000, the Company had $465,000
outstanding under an equipment lease financing line of credit with Imperial
Bank, which is due and payable in full in November 2002. The equipment lease
line provides for borrowings of up to $1,750,000, which are secured by certain
assets of the Company. The financing line of credit expires in November 2002 and
bears interest at a rate of 0.75% per annum in excess of the prime rate, which
was 9.5% at June 30, 2000 and is payable monthly.
Under both lines of credit, the Company is required to maintain certain
financial covenants, including minimum liquidity and minimum total net worth,
which have been met by the Company at December 31, 1999 and June 30, 2000. The
Company is also required to maintain certain reporting covenants which include
provision of audited financial statements and other financial reports by certain
dates which were waived by Imperial Bank at December 31, 1999 and June 30, 2000.
The Company expects to be in compliance with all financial and non-financial
covenants as of December 31, 2000.
Warrants to purchase 15,909 shares of Series C preferred stock at an
exercise price of $2.20 per share were issued in conjunction with the Imperial
Bank line of credit agreement in November 1999. These warrants, including put
rights for $70,000, were exercisable on or after November 29, 2001, or earlier
if the Company was sold or liquidated, and expired in November 2006. The fair
value of these warrants amounting to $30,000, which was determined using the
Black-Scholes method of valuation, is recorded as prepaid interest expense and
is amortized over the term of the line of credit.
In June 2000, the warrants for preferred stock issued in November 1999 were
canceled and replaced with new warrants to purchase 23,863 share of common stock
at an exercise price of $2.20 per share with no put rights. These warrants were
immediately exercisable and expire in November 2006. The fair value of these
warrants, which amounts to $133,000, which was determined using the
Black-Scholes method of valuation, is recorded as interest expense.
7. COMMITMENTS
LEASES
The Company leases its facilities under noncancelable operating leases with
various expiration dates through 2005. Under the terms of the leases, the
Company is responsible for its share of common area and operating expenses. A
security deposit for the Company's leased facilities of $1,500,000 is included
in other assets. Rent expense under operating leases for the years ended
December 31, 1998, 1999 and for the six months ended June 30, 2000 was $36,000,
$193,000 and $233,000, respectively. The terms of the facility leases provide
for rental payments on a graduated scale. The Company recognizes rent expense on
a straight-line basis over the lease period, and has accrued for rent expense
incurred but not paid.
F-17
<PAGE> 93
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the minimum lease commitments under all leases were
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year Ended December 31,
2000...................................................... $ 68 $ 444
2001...................................................... 68 697
2002...................................................... 57 724
2003...................................................... -- 699
2004...................................................... -- 689
2005...................................................... -- 292
---- ------
Total minimum lease payments................................ 193 $3,545
======
Less: Amounts representing interest......................... (27)
----
Present value of minimum lease payments..................... $166
Less current portion of capital lease obligations........... (68)
----
$ 98
====
</TABLE>
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
------------------------- LIQUIDATION ISSUANCE
AUTHORIZED OUTSTANDING AMOUNT COSTS
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Series A.............................. 1,200,000 1,200,000 $ 660 $ 654
Series B.............................. 4,990,625 4,990,625 4,517 3,952
---------- ---------- ------- -------
Balance at December 31, 1998............ 6,190,625 6,190,625 5,177 4,606
========== ========== ======= =======
Series C.............................. 6,500,000 6,500,000 15,105 14,261
---------- ---------- ------- -------
Balance at December 31, 1999............ 12,690,625 12,690,625 20,282 18,867
========== ========== ======= =======
Series D.............................. 3,703,703 3,481,468 23,500 23,430
---------- ---------- ------- -------
Balance at June 30, 2000 (unaudited).... 16,394,328 16,172,093 $43,782 $42,297
========== ========== ======= =======
</TABLE>
The holders of redeemable convertible preferred stock have various rights
and preferences as follows (all rights and preferences, with respect to Series D
redeemable convertible preferred stock, are unaudited):
VOTING
Each share of redeemable convertible preferred stock has voting rights
equal to an equivalent number of shares of common stock into which it is
convertible and votes together as one class with the common stock.
As long as shares of redeemable convertible preferred stock remain
outstanding, the Company must obtain approval from a majority of the holders of
redeemable convertible preferred stock in order to alter the articles of
incorporation as related to redeemable convertible preferred stock, change the
F-18
<PAGE> 94
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
authorized number of shares of redeemable convertible preferred stock,
repurchase any shares of common stock other than shares subject to the right of
repurchase by the Company, change the authorized number of Directors, authorize
a dividend for any class or series other than redeemable convertible preferred
stock, create a new class of stock or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of the voting stock
of the surviving entity.
DIVIDENDS
Holders of Series A, B, C and D redeemable convertible preferred stock are
entitled to receive noncumulative dividends at the per annum rate of $0.044 per
share for Series A and no stated rate per share for Series B, C and D, when and
if declared by the Board of Directors. The holders of Series A, B, C and D
redeemable convertible preferred stock will also be entitled to participate in
dividends on common stock, when and if declared by the Board of Directors, based
on the number of shares of common stock held on an as-if converted basis. No
dividends on redeemable convertible preferred stock or common stock have been
declared by the Board from inception through June 30, 2000.
Holders of Series B, C and D redeemable convertible preferred stock are
entitled to receive cumulative and accruing dividends (Accruing Dividends) at
the per annum rate of $0.06, $0.165 and $0.50625 per share, respectively,
whether or not earned or declared. No Accruing Dividends shall be declared or
paid to any shares of Series B, C or D unless all Accruing Dividends or pro-rata
portions are paid to Series B, C or D on an equal basis. No dividends shall be
declared or paid with respect to any shares of Series A redeemable convertible
preferred stock or common stock unless all Accruing Dividends have been paid.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition or sale of assets where the beneficial owners of
the Company's common stock and redeemable convertible preferred stock own less
than 51% of the resulting voting power of the surviving entity (Liquidation
Event), the holders of Series A, B, C and D redeemable convertible preferred
stock are entitled to receive an amount of $0.55, $0.80, $2.20 and $6.75 per
share, respectively, plus any Accruing Dividends due and declared but unpaid
dividends prior to and in preference to any distribution to the holders of
common stock. If a Liquidation Event occurs on or before December 13, 2001, the
holders of Series D are entitled to receive an amount of $8.00 per share, plus
any declared but unpaid dividends (excluding Series D Accruing Dividends) prior
to and in preference to any distribution to holders of common stock. Upon
payment of this amount to holders of Series D, the Series D Accruing Dividends
will be canceled. Upon completion of the distribution to the redeemable
convertible preferred stockholders, the holders of the common stock will receive
all remaining assets of the corporation. Should the Company's legally available
assets be insufficient to satisfy the liquidation preferences, the funds will be
distributed in an equal priority, pro-rata basis to the Series A, B, C and D
redeemable convertible preferred stock.
CONVERSION
Each share of Series A, B, C and D redeemable convertible preferred stock
is convertible, at the option of the holder, according to a conversion ratio,
subject to adjustment for dilution. The conversion ratio is equal to the
conversion price divided by the conversion value. The Series A, B, C and D
initial conversion prices and values are $0.55, $0.80, $2.20 and $6.75,
respectively. Each share of Series A, B, C and D redeemable convertible
preferred stock automatically converts into the number of shares of common stock
into which such shares are convertible at the then effective conversion ratio
upon
F-19
<PAGE> 95
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the closing of a public offering of common stock at a per share price of at
least $15 per share with gross proceeds of at least $30,000,000. At December 31,
1999 and June 30, 2000, each share of preferred stock was convertible into one
share of common stock.
At December 31, 1999, the Company reserved 1,200,000, 4,990,625 and
6,500,000 shares of common stock for the conversion of Series A, B and C and D
redeemable convertible preferred stock, respectively. In addition, at June 30,
2000, the Company reserved 3,703,703 shares of common stock for the conversion
of Series D redeemable convertible preferred stock.
REGISTRATION RIGHTS
The holders of redeemable convertible preferred stock and the holders of
825,000 shares of common stock are entitled to certain rights with respect to
registration of such shares under the Securities Act beginning on the earlier of
December 31, 2000 or six months following the effective date of an initial
public offering. All registration rights terminate five years from the date of
an initial public offering effective date or at such time as the holder is
entitled to sell all of its shares in any 90 day period under Rule 144 of the
Securities Act.
9. COMMON STOCK
The Company's second amended and restated certificate of incorporation, as
amended on September 29, 2000, authorizes the Company to issue 40,000,000 shares
of $0.001 par value common stock. A portion of the shares sold are subject to a
right of repurchase by the Company subject to vesting, which is generally over a
four year period from the earlier of grant date or employee hire date, as
applicable, until vesting is complete. At December 31, 1999 and June 30, 2000,
there were 1,111,112 and 1,624,052 shares, respectively, subject to repurchase.
COMMON STOCK SOLD TO A CUSTOMER
In June, the Company sold 825,000 shares of its common stock to a customer
at a price below the deemed fair value on the date of issuance. The Company will
record the discount on the sale of its common stock, totalling approximately
$1.7 million as a non-cash discount against the revenue recognized from the
commercial agreements with the customer.
WARRANTS
In June 2000, a fully vested warrant to purchase 125,000 shares of common
stock was issued in conjunction with a two-year marketing alliance with outside
consultant. This warrant is exercisable for six months from June 30, 2003 to
December 31, 2003. The fair value of the warrant, which amounted to $512,000 as
determined using the Black-Scholes method of valuation, was recorded as sales
and marketing expense. Accelerated exercisability can be attained if certain
performance milestones are achieved by the warrant holders.
Warrants for preferred stock and common stock were issued in connection
with the Company's line of credit agreement (see Note 6).
NOTES RECEIVABLE FROM OFFICERS
In April 2000, the Company issued 350,000 shares of common stock, in
connection with early exercises of stock options by an officer of the Company,
in exchange for a full recourse promissory note in the amount of $437,500.
Principal is due on April 28, 2002 and interest on the note accrues at an annual
rate of 10% and is due semi-monthly beginning April 30, 2000. The note
receivable has been classified as a reduction in stockholders' equity.
F-20
<PAGE> 96
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 2000, the Company issued 250,000 shares of common stock, in
connection with early exercises of stock options by an officer of the Company,
in exchange for a full recourse promissory note in the amount of $500,000.
Principal and interest are due on June 30, 2002 and interest on the note accrues
at an annual rate of 10%. The note receivable has been classified as a reduction
in stockholders' equity.
10. STOCK OPTION PLANS
In 1998, the Company adopted the 1998 Incentive Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees (including officers and
directors who are also employees). Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. The Company has reserved 4,011,171
shares of Common Stock for issuance under the Plan.
Options under the Plan may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date of
grant as determined by the Board of Directors, provided, however, that (i) the
exercise price of an ISO and NSO shall not be less than 100% and 85% of the
estimated fair value of the shares on the date of grant, respectively, and (ii)
the exercise price of an ISO and NSO granted to a 10% shareholder shall not be
less than 110% of the estimated fair value of the shares on the date of grant,
respectively. Options are exercisable immediately. Subject to repurchase options
held by the Company lapse over a maximum period of four years at such times and
under such conditions as determined by the Board of Directors. To date, options
granted generally vest over four years.
During 1998 and 1999 and for the six months ended June 30, 2000, the
Company recorded $52,000, $730,000 and $1,340,000, respectively, of deferred
stock-based compensation expense for the excess of the deemed fair market value
over the exercise price at the date of grant related to options granted. The
compensation expense is being recognized over the option-vesting period of four
years.
F-21
<PAGE> 97
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity under the 1998 Incentive Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OUTSTANDING EXERCISE
FOR GRANT SHARES PRICE
---------- ----------- --------
<S> <C> <C> <C>
Authorized................................ 1,800,000 --
Options granted at below fair value....... (649,000) 649,000 $0.07
---------- ---------- -----
Balance at December 31, 1998................ 1,151,000 649,000 0.07
Authorized................................ 1,466,667 --
Options granted at below fair value....... (1,872,030) 1,872,030 0.38
Options returned to plan.................. 88,999 (88,999) 0.29
Options exercised......................... -- (28,001) 0.05
---------- ---------- -----
Balance at December 31, 1999................ 834,636 2,404,030 0.35
Authorized................................ 744,504 --
Options granted at below fair value....... (1,411,500) 1,411,500 1.59
Options returned to plan.................. 491,490 (491,490) 0.73
Options exercised......................... -- (1,388,285) 0.86
---------- ---------- -----
Balance at June 30, 2000 (unaudited)........ 659,130 1,935,755 $0.81
========== ========== =====
</TABLE>
The following table summarizes information concerning options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE WITHOUT
AND EXERCISABLE THE RIGHT OF REPURCHASE
---------------------------- ----------------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED
WEIGHTED AVERAGE OF REMAINING EXERCISABLE AT AVERAGE
EXERCISE PRICE SHARES CONTRACTUAL LIFE DECEMBER 31, 1999 EXERCISE PRICE
---------------- --------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
$0.05 332,000 8.33 210,772 $0.05
0.10 404,000 9.00 53,209 0.10
0.15 270,000 9.33 26,709 0.15
0.20 371,500 9.58 -- 0.20
0.55 713,480 9.92 15,480 0.55
0.80 25,000 9.75 25,000 0.80
0.95 288,050 9.96 -- 0.95
--------- -------
0.35 2,404,030 9.42 331,170 0.15
===== ========= ==== ======= =====
</TABLE>
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS
F-22
<PAGE> 98
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -------------------
1998 1999 1999 2000
------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss -- available to common stockholders
As reported.................................. $(1,548) $(7,582) $(2,674) (10,913)
Pro forma.................................... $(1,552) $(7,637) $(2,776) (11,117)
Net loss per common share -- basic and diluted
As reported.................................. $ (1.62) $ (3.09) $ (1.31) $ (2.68)
Pro forma.................................... $ (1.63) $ (3.11) $ (1.36) $ (2.73)
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the Minimum Value pricing method with the following assumptions:
dividend yield at zero percent; weighted average expected option term of four
years; risk free interest rate of 4.18% to 6.66% and a volatility of zero
percent for the year ended December 31, 1998, 1999 and for the six months ended
June 30, 2000, respectively. The weighted average fair value of options granted
during 1998, 1999 and for the six months ended June 30, 2000 was $0.24, $1.34
and $3.01, respectively.
11. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually on a
discretionary basis by the Board of Directors. There have been no Company
contributions to date.
12. SUBSEQUENT EVENTS
SALE OF PREFERRED STOCK
In July 2000, the Company issued an additional 222,222 shares of Series D
redeemable convertible preferred stock for cash at $6.75 per share to various
investors. Total proceeds from this additional issuance of the Series D
redeemable convertible preferred stock totaled $1,500,000.
ACQUISITION
On October 5, 2000, the Company acquired substantially all of the assets
and liabilities of EPS Solutions Incorporated (EPS) in exchange for 35,000
shares of the Company's common stock with an estimated fair value of $350,000
and assumption of debt of $925,000. This transaction will be accounted for as a
purchase with any excess purchase price over identifiable tangible and
intangible assets recorded as goodwill. The effect of this purchase is not
expected to be significant to the Company's financial position or operating
results.
WARRANTS ISSUED TO CUSTOMERS
In August 2000, the Company issued a warrant in connection with a license
and reseller agreement for the purchase up to 650,000 shares of common stock of
the Company. The shares are earned based upon the amount of revenues provided to
the Company under the license and reseller agreement over certain discrete
periods of time from August 2000 to December 2002. The exercise price is 85% of
the fair market value at the end of each discrete revenue period. On September
28, 2000, the vested portion of this warrant to purchase 105,661 shares was
exercised at $5.82 per
F-23
<PAGE> 99
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
share. The value of the warrants will be remeasured at the end of each interim
period until the point at which the exercise price is fixed. Resulting charges
will offset related revenues and any amount in excess of revenues will be
charged to expense.
In connection with a service bureau software license arrangement, the
Company issued a warrant to a customer to purchase up to 300,000 shares of the
Company's common stock, of which 100,000 shares were immediately exercisable at
a price of $8.00 per share, and expire on October 20, 2000. The remaining
200,000 shares are exercisable beginning on the date of the final prospectus
relating to the Company's initial public offering (IPO) and expire on the third
trading day after the effective date of the IPO. The exercise price for these
warrants is the initial price at which the Company's common stock is sold to the
public in the IPO. The Black Scholes value of the initial 100,000 shares will be
measured and fixed upon issuance while the remaining 200,000 shares will be
measured and fixed upon the effective date of the IPO. Resulting charges will
offset related revenues and any amount in excess of revenues will be charged to
expense.
SALES OF COMMON STOCK TO CUSTOMERS
In September and October 2000, the Company entered into agreements with
certain of its customers to sell a total of 179,895 shares of its common stock
at prices below the deemed fair value on the date of issuance. The Company will
record the discount on these sales of its common stock, totalling approximately
$390,000, as a non-cash charge to the revenue recognized from the commercial
agreements with these customers.
NOTES RECEIVABLE FROM OFFICERS
In August 2000, the Company issued 75,000 shares of common stock, in
connection with early exercises of stock options by an officer of the Company,
in exchange for a full recourse promissory note in the amount of $93,750.
Principal and interest is due in August 2002 and interest on the note accrues at
an annual rate of 10%. The note receivable will be classified as a reduction in
stockholders equity.
CHANGE OF CONTROL SEVERANCE AGREEMENTS WITH OFFICERS
In October 2000, the Company entered into separate Change of Control
Severance Agreements with four officers. Under these agreements, upon a change
of control, the greater of a specified number of previously granted stock
options or 25% of their unvested shares will immediately vest. If they are
terminated without cause or constructively terminated within 12 months following
a change of control, their options will vest immediately.
2000 EQUITY INCENTIVE PLAN AND EMPLOYEE STOCK PURCHASE PLAN
In October 2000, the Company's Board of Directors adopted, subject to
stockholder approval, the 2000 Employee Stock Purchase Plan, which will not
become effective until the effective date of the offering. The plan will be
administered by the Board or by a committee of the Board.
A total of 1,500,000 shares of common stock are reserved for issuance under
the Employee Stock Purchase Plan ("ESPP"), plus annual increases equal to the
lesser of:
- 750,000 shares;
- 20% of the outstanding shares on such date; or
- another amount to be determined by the Board.
F-24
<PAGE> 100
SILICON ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The ESPP permits participants to purchase common stock through payroll
deductions of up to 15% of the participant's base salary, bonuses and
commissions, but not to exceed the established maximum of 5,000 shares during a
six-month period. Such amounts are applied to the purchase from the Company of
shares of common stock at the end of each offering period at a price which is
generally 85% of the lower of the fair market value of the common stock at the
beginning or at the end of the offering period. The plan contains consecutive,
overlapping 24 month offering periods. Each offering period includes four
six-month purchase periods.
REINCORPORATION
The Company reincorporated into a Delaware Corporation effective on July
19, 2000.
OPTION GRANTS
In the third quarter 2000, the Company granted options to purchase an
additional 500,588 shares of common stock to employees at prices below the
deemed fair market value. These options will have an estimated additional
stock-based charge of $1,300,000 to be recognized over the vesting period of the
options.
F-25
<PAGE> 101
----------------------------------------------------------
----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 6
Use of Proceeds.......................... 19
Dividend Policy.......................... 19
Forward Looking Statements............... 20
Capitalization........................... 21
Dilution................................. 22
Selected Financial Data.................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Business................................. 35
Management............................... 50
Related Party Transactions............... 60
Principal Stockholders................... 63
Description of Capital Stock............. 65
Shares Eligible for Future Sale.......... 68
Underwriting............................. 71
Legal Matters............................ 73
Experts.................................. 73
Where You Can Find More Information About
Us..................................... 73
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
Shares
SILICON ENERGY CORP.
Common Stock
------------------------
[LOGO]
------------------------
GOLDMAN, SACHS & CO.
CIBC WORLD MARKETS
LEHMAN BROTHERS
STEPHENS INC.
Representatives of the Underwriters
----------------------------------------------------------
----------------------------------------------------------
<PAGE> 102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Silicon Energy in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 21,252
NASD filing fee............................................. 8,550
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving costs................................ 200,000
Legal fees and expenses..................................... *
Accounting fees and expenses................................ 350,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... *
--------
Total..................................................... $ *
========
</TABLE>
---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article X of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, with respect to any
criminal action or proceeding, the indemnified party had no reason to believe
his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the underwriters for certain
liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the Underwriters for
inclusion in the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in December 1997, we have sold and issued the
following unregistered securities:
(a) On January 8, 1998, we issued an aggregate of 5,000,001 shares of
Common Stock to three founders for an aggregate consideration of $15,000.
On January 8, 1998, we also
II-1
<PAGE> 103
issued an aggregate of 50,000 shares of Common Stock to Mario Rosati and WS
Investment Company 98B for an aggregate consideration of $1,500.
(b) From January 30, 1998 to March 13, 1998 we issued an aggregate of
1,200,000 shares of Series A preferred stock to 11 investors for an
aggregate consideration of $660,000.
(c) On September 17, 1998, we issued an aggregate of 4,990,625 shares
of Series B preferred stock to 15 investors for an aggregate consideration
of $3,992,500.
(d) On October 1, 1999, we issued an aggregate of 6,500,000 shares of
Series C preferred stock to 29 investors for an aggregate consideration of
$14,300,000.
(e) On November 30, 1999, we issued warrants to purchase 10,227 and
13,636 shares of Common Stock to one of our lenders. These warrants have an
exercise price of $2.20 per share.
(f) On June 7, 2000, in consideration for the purchase of all of its
outstanding capital stock, we issued an aggregate of 150,000 shares of our
Common Stock to 13 former stockholders of SRC Systems, Inc. pursuant to an
Acquisition Agreement and a Stock Exchange Agreement
(g) On June 7, 2000, we issued a warrant to purchase 50,000 shares of
Common Stock to two principals of SRC Systems, Inc. pursuant to an
Acquisition Agreement. These warrants have an exercise price equal to the
price per share paid in our initial public offering.
(h) From June 19, 2000 to July 18, 2000, we issued an aggregate of
3,703,690 shares of Series D preferred stock to 33 investors for an
aggregate consideration of $25,000,000.
(i) On June 19, 2000 we issued 825,000 shares of Common Stock to one of
our licensing partners for an aggregate purchase price of $3,300,000.
(j) On June 30, 2000, we issued a warrant to purchase 125,000 shares of
Common Stock to one of our marketing partners. This warrant has an exercise
price of $6.75 per share.
(k) On August 31, 2000, we issued a warrant to purchase 650,000 shares
of Common Stock to one of our licensing partners. This warrant has an
exercise price of 85% of the fair market value of our Common Stock on the
last day of each relevant vesting period.
(l) On September 28, 2000, we issued 105,661 shares of Common Stock to
one of our licensing partners upon the exercise of a warrant for an
aggregate purchase price of $614,947.
(m) On September 29, 2000 we issued 129,032 shares of Common Stock to
one of our licensing partners for an aggregate purchase price of $999,998.
(n) On October 4, 2000, we issued 50,863 shares of Common Stock to one
of our licensing partners for an aggregate purchase price of $406,904.
(o) On October 4, 2000, we issued a warrant to purchase up to 300,000
shares of common stock to one of our licensing partners. This warrant has
an exercise price for the first 100,000 shares of $8.00 per share, and for
the remaining 200,000 shares of the price per share paid in our initial
public offering.
(p) On October 5, 2000, in consideration for the purchase of all of its
outstanding capital stock, we issued an aggregate of 35,000 shares of our
Common Stock to four former stockholders of EPS Solutions Incorporated
pursuant to an Acquisition Agreement.
(q) From April 30, 1998 to September 30, 2000, we have granted options
to purchase an aggregate of 4,433,118 shares of common stock to our
directors, executive officers, employees and consultants with exercise
prices ranging from $0.05 to $6.85. As of September 30, 2000, options to
purchase 1,608,474 shares had been exercised.
II-2
<PAGE> 104
None of the foregoing transactions involved any underwriters, underwriting
discounts or commissions, or any public offering, and the Registrant believes
that each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients in such
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to information
about the Registrant.
II-3
<PAGE> 105
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation (as
currently in effect)
3.2 Form of Certificate of Incorporation (to be filed with
Delaware Secretary of State prior to the closing of the
offering)
3.3 Bylaws (as currently in effect)
3.4 Form of Bylaws (to be adopted upon the closing of the
offering)
4.1* Form of Specimen Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2 1998 Incentive Stock Option Plan and form of agreements
thereunder
10.3 2000 Employee Stock Purchase Plan and form of agreements
thereunder
10.4 Amended and Restated Investors Rights Agreement dated June
19, 2000
10.5 Restricted Stock Purchase Agreement between the Company and
John Woolard
10.6 Restricted Stock Purchase Agreement between the Company and
Dale M. Fong
10.7 Change of Control Agreement with Leonard Berg
10.8 Change of Control Severance Agreement with Jack
Jenkins-Stark
10.9 Change of Control Severance Agreement with Philip Mezey
10.10 Change of Control Severance Agreement with Allan Schurr
10.11 Promissory Note and Security Agreement for Purchase of
Common Stock by Leonard Berg
10.12 Promissory Note and Security Agreement for Purchase of
Common Stock by Dale Fong
10.13 Promissory Note and Security Agreement for Purchase of
Common Stock by Jack Jenkins-Stark
10.14 Promissory Note and Security Agreement for Purchase of
Common Stock by Philip Mezey
10.15 Promissory Note and Security Agreement for Purchase of
Common Stock by John Woolard
10.16+ Broadbase Application Delivery Partner Agreement by and
between Broadbase Information Systems, Inc. and Silicon
Energy Corp., dated June 30, 2000
10.17 Sublease by and between Wind River Systems, Inc. and Silicon
Energy Corp, dated March 30, 2000
10.18 Master Lease Agreement by and between Energy Concepts Inc.
and Fleet National Bank, dated March 30, 2000
10.19 Lease Agreement between ERN Properties, and EPS Solutions
Incorporated, dated August 21, 2000
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1)
24.1 Power of Attorney (contained in the signature page to this
Registration Statement).
27.1 Financial Data Schedule
</TABLE>
---------------
+ Confidential treatment from the Commission has been requested for certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-4
<PAGE> 106
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes 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 the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Alameda,
State of California, on the 6th day of October, 2000.
SILICON ENERGY CORP.
By: /s/ JOHN WOOLARD
------------------------------------
John Woolard
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John Woolard and Jack Jenkins-Stark and
each of them acting individually, as true and lawful attorneys-in-fact and
agents each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign any and all
amendments to said Registration Statement (including post-effective amendments
and registration statements filed pursuant to Rule 462 and otherwise), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission granting unto said
attorneys-in-fact and agents the full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
foregoing, as to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN WOOLARD President, Chief Executive Officer October 6, 2000
------------------------------------------------ and Chairman of the Board
John Woolard (Principal Executive Officer)
/s/ JACK JENKINS-STARK Chief Financial Officer (Principal October 6, 2000
------------------------------------------------ Financial and Accounting Officer)
Jack Jenkins-Stark
/s/ DALE FONG Vice President, Technology, Chief October 6, 2000
------------------------------------------------ Technology Officer and Director
Dale Fong
/s/ CHARLES H. GAYLORD, JR. Director October 6, 2000
------------------------------------------------
Charles H. Gaylord, Jr.
/s/ CHARLES NOELL Director October 6, 2000
------------------------------------------------
Charles Noell
/s/ MARIO M. ROSATI Director October 6, 2000
------------------------------------------------
Mario M. Rosati
</TABLE>
II-6
<PAGE> 108
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ K. RICK TURNER Director October 6, 2000
------------------------------------------------
K. Rick Turner
/s/ NORRIS VAN DEN BERG Director October 6, 2000
------------------------------------------------
Norris van den Berg
</TABLE>
II-7
<PAGE> 109
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements as of December 31,
1998 and 1999, and for each of the two years then ended and have issued our
report thereon dated October 5, 2000 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
October 5, 2000
S-1
<PAGE> 110
SCHEDULE II
SILICON ENERGY CORP.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
DESCRIPTION YEAR ADDITIONS DEDUCTIONS YEAR
----------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Date of inception
Deferred tax valuation allowance....... $ -- $ 612 $ -- $ 612
---- ------ ---- ------
Year Ended December 31, 1998............. -- 612 -- 612
==== ====== ==== ======
Allowance for doubtful accounts........ -- 61 -- 61
Deferred tax valuation allowance....... 612 2,775 -- 3,387
---- ------ ---- ------
Year Ended December 31, 1999............. $612 $2,836 $ -- $3,448
==== ====== ==== ======
</TABLE>
S-2
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation (as
currently in effect)
3.2 Form of Certificate of Incorporation (to be filed with
Delaware Secretary of State prior to the closing of the
offering)
3.3 Bylaws (as currently in effect)
3.4 Form of Bylaws (to be adopted upon the closing of the
offering)
4.1* Form of Specimen Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2 1998 Incentive Stock Option Plan and form of agreements
thereunder
10.3 2000 Employee Stock Purchase Plan and form of agreements
thereunder
10.4 Amended and Restated Investors Rights Agreement dated June
19, 2000
10.5 Restricted Stock Purchase Agreement between the Company and
John Woolard
10.6 Restricted Stock Purchase Agreement between the Company and
Dale M. Fong
10.7 Change of Control Agreement with Leonard Berg
10.8 Change of Control Severance Agreement with Jack
Jenkins-Stark
10.9 Change of Control Severance Agreement with Philip Mezey
10.10 Change of Control Severance Agreement with Allan Schurr
10.11 Promissory Note and Security Agreement for Purchase of
Common Stock by Leonard Berg
10.12 Promissory Note and Security Agreement for Purchase of
Common Stock by Dale Fong
10.13 Promissory Note and Security Agreement for Purchase of
Common Stock by Jack Jenkins-Stark
10.14 Promissory Note and Security Agreement for Purchase of
Common Stock by Philip Mezey
10.15 Promissory Note and Security Agreement for Purchase of
Common Stock by John Woolard
10.16+ Broadbase Application Delivery Partner Agreement by and
between Broadbase Information Systems, Inc. and Silicon
Energy Corp., dated June 30, 2000
10.17 Sublease by and between Wind River Systems, Inc. and Silicon
Energy Corp, dated March 30, 2000
10.18 Master Lease Agreement by and between Energy Concepts Inc.
and Fleet National Bank, dated March 30, 2000
10.19 Lease Agreement between ERN Properties, and EPS Solutions
Incorporated, dated August 21, 2000
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (contained in Exhibit 5.1)
24.1 Power of Attorney (contained in the signature page to this
Registration Statement).
27.1 Financial Data Schedule
</TABLE>
---------------
+ Confidential treatment from the Commission has been requested for certain
portions of this exhibit. The omitted portions have been separately filed with
the Commission.
* To be filed by amendment.
