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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 18, 2000
REGISTRATION NO. 333-91383
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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WITNESS SYSTEMS, INC.
(Exact name of Registrant as Specified in its Charter)
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DELAWARE 7372 23-2518693
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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1105 SANCTUARY PARKWAY
ALPHARETTA, GEORGIA 30004
(770) 754-1900
(Address, including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
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DAVID B. GOULD
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
WITNESS SYSTEMS, INC.
1105 SANCTUARY PARKWAY
ALPHARETTA, GEORGIA 30004
(770) 754-1900
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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COPIES TO:
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JOHN C. YATES, ESQ. BRYAN E. DAVIS, ESQ.
JEFFREY L. SCHULTE, ESQ. CHRISTOPHER W. HAFFKE, ESQ.
VIPANJ B. PATEL, ESQ. ASHLEY E. HUFFT, ESQ.
MORRIS, MANNING & MARTIN, LLP ALSTON & BIRD LLP
1600 ATLANTA FINANCIAL CENTER ONE ATLANTIC CENTER
3343 PEACHTREE ROAD, NE 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30326-1044 ATLANTA, GEORGIA 30309-3424
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement is declared effective.
If any of the securities being registered on this form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 18, 2000
PROSPECTUS
3,800,000 SHARES
WITNESS SYSTEMS INC LOGO
COMMON STOCK
This is an initial public offering of common stock by Witness Systems, Inc.
We are selling 3,800,000 shares of common stock. The estimated initial public
offering price is between $12.00 and $14.00 per share.
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Prior to this offering, there has been no public market for the common
stock. The shares of common stock have been proposed to be listed for quotation
on the Nasdaq National Market under the symbol WITS.
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<CAPTION>
PER SHARE TOTAL
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Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Witness Systems, before expenses................ $ $
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Witness Systems and a selling stockholder have granted the underwriters an
option for a period of 30 days to purchase up to 570,000 additional shares of
common stock.
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INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
, 2000
<PAGE> 3
Artwork Depicted in Prospectus
1. Inside front page gate-fold portrays the following: Title bar at the top of
page states: "Recording, evaluating and analyzing" underneath which is an
indented title bar stating "Multimedia Customer Interactions".
In the center of the page are three concentric circles each with a line of
text. The text in the center circle states: "eQuality". On the top the
first layered circle text states: "eQuality Analysis". On the left side of
the second layered circle text states: "telephone...web chat...e-mail...
e-commerce." On the right side of the third concentric circle text states:
"optimizing customer relationships." Three boxes of text extend from the
left side of the circle diagram. The text in the top box states: "Key
Customers". The text in the second box states "Marketing Campaigns". The
text in the third and bottom box states "Specific Products". Below the
bottom box of text is the stylized Witness Systems logo. Underneath the
logo are three lines of text stating "WITNESS SYSTEMS INC,"
"www.witness.com," and "(c) 2000 Witness Systems Inc." Four triangles
extend from the right side of the circle diagram. At the end of the first
triangle text states: "improve customer loyalty. At the end of the second
triangle text states: "increase revenue opportunities." At the end of the
third triangle text states: "enhance profitability." At the end of the
fourth triangle text states "improve quality of services." On the top right
corner of the page is the stylized Witness logo. Lightly shaded strings of
numerals are embedded in the background of the page.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 39
Management.................................................. 54
Related Party Transactions.................................. 63
Principal and Selling Stockholders.......................... 66
Description of Capital Stock................................ 69
Shares Eligible for Future Sale............................. 72
Underwriting................................................ 74
Legal Matters............................................... 76
Experts..................................................... 77
Additional Information...................................... 77
Index to Consolidated Financial Statements.................. F-1
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PROSPECTUS SUMMARY
The summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all the information you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the financial statements, before making
an investment decision.
WITNESS SYSTEMS
We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions. Our eQuality software
is designed to enable companies to optimize their customer relationship
management. As a result, we believe our customers are able to generate
additional revenue opportunities, improve profitability, enhance customer
retention and achieve greater customer intimacy.
Our eQuality software is designed to enable customer contact centers within
a company to record and evaluate complete customer interactions through multiple
communications media, such as telephone, Web chat and e-mail. By capturing both
voice and computer desktop activity and synchronizing them during replay, a
company can observe and analyze complete customer interactions as they actually
occurred. Our software allows companies to selectively record and analyze
customer interactions based on business criteria which they define, such as key
customers, important marketing campaigns, specific products and selected
customer service representatives.
Our customers include American Express, Bank of America, Bell Atlantic
Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS, Federal
Express, Federated Department Stores, General Motors/Saturn, GTE, MCI WorldCom,
Merck-Medco, Pepsi, Sabre, Southern Company, Travelocity.com, VISA, Wells Fargo
and Xerox.
THE MARKET OPPORTUNITY
The rapid growth of the Internet and eCommerce permits customers to easily
change vendors at relatively low cost, consequently increasing the importance
companies place on their customer relationships. As a result, companies
increasingly are seeking customer relationship management products and services
that enhance their direct customer interactions. AMR Research predicted that the
market for technology related to customer relationship management will grow at a
compound annual rate of 49% from 1998 to 2003, exceeding $16.8 billion by 2003.
To understand and improve customer relationships, companies must first
improve specific business processes which involve a high degree of direct
customer interaction. Today, many of a company's direct customer interactions
occur through contact centers. The PELORUS Group estimates that by the end of
2003, the number of installed call center systems will exceed 117,000, with the
number of agent positions reaching approximately 5.3 million. As a result, many
companies are focused on developing and improving the efficiency of their
contact center operations.
While a number of applications have emerged to attempt to address the need
to better manage the increasing complexity of customer interactions conducted
over a variety of media, such as telephone, Web chat and e-mail, we believe that
most currently available solutions do not provide active recording, evaluation
and analysis of customer service representative performance. As a result, we
believe that there is a significant opportunity for a comprehensive, integrated
multimedia solution which optimizes a company's customer interactions.
OUR EQUALITY SOLUTION
We believe our software provides our customers with the following key
business benefits:
- Increases revenue opportunities. Our software enables companies to
customize sales and marketing efforts to individual customer preferences,
improve the selling techniques of customer service representatives and
sell additional complementary or higher-end products and services to
existing customers.
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- Enables improved profitability. Our software enables companies to
increase profitability by improving the efficiency of customer service
representatives and by reducing costs associated with customer service
representative turnover and customer turnover.
- Enhances customer retention. Using our software, companies can develop
more intimate knowledge of their customers, which should improve the
overall quality of the products and services being delivered to customers
and facilitate longer-term, more profitable customer relationships.
We believe that we are able to provide these key business benefits through
the innovative features of our software solution, which include the following:
- Enables synchronized replay of voice and computer desktop data. Our
software captures both voice and computer desktop activity and enables
synchronized replay, which allows companies to observe and analyze
complete customer interactions as they actually occurred.
- Captures customer interactions across multiple communications media. Our
software captures customer interactions from a variety of communications
media, including telephone, Web chat and e-mail. This multimedia
capability allows companies to deliver consistent, high quality customer
service regardless of the communication channel.
- Records based on company-selected criteria. Our software allows
companies to selectively record and analyze customer interactions based
on business criteria which they define, such as key customers, important
marketing campaigns, specific products and selected customer service
representatives.
- Provides performance analysis and feedback. Our software facilitates the
evaluation and analysis of customer service representative performance
through easy-to-use reports, graphs and tables.
- Integrates with third party software and hardware. Our software is
designed to integrate with a variety of third party software, such as
customer relationship management and enterprise resource planning
applications, and with existing telephony and computer network hardware
and software.
- Provides an open architecture that scales to support small to large
installations. Our software operates on the Windows NT platform and is
compatible with standard voice cards and databases. It is also designed
to support the needs of small single site installations, as well as large
multi-site installations.
- Enables rapid deployment. We typically implement our software at a
customer's initial site within 30 to 45 days from the date the software
agreement is signed by a new customer. We ordinarily complete the actual
software installation within three to five days. We can implement
additional sites for that customer in five to seven days.
OUR STRATEGY
Our objective is to be the leading provider of software that enables
companies to optimize their customer interactions across a variety of
communications media, including telephone, Web chat, Internet self-service and
e-mail. Key elements of our strategy include:
- extend the breadth and depth of our product offerings;
- increase sales to existing and new customers;
- expand our network of application software and Internet infrastructure
business alliances; and
- expand our international presence.
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RECENT DEVELOPMENTS
For the twelve months ended December 31, 1999, we had total revenues of
approximately $23.0 million, consisting of license revenues of $16.7 million,
services revenues of $6.2 million, and hardware revenues of $46,000, compared to
total revenues of $13.3 million for the twelve months ended December 31, 1998,
consisting of license revenues of $8.7 million, services revenues of $2.4
million, and hardware revenues of $2.2 million. For the three months ended
December 31, 1999, we had total revenues of $7.8 million, consisting of license
revenues of $5.7 million and services revenues of $2.1 million, compared to
total revenues of $4.2 million for the three months ended December 31, 1998,
consisting of license revenues of $3.0 million, services revenues of $787,000,
and hardware revenues of $421,000. We had no hardware revenues during the three
months ended December 31, 1999 because we discontinued hardware sales in the
first quarter of 1999. We currently anticipate that the higher revenue levels
for the three months ended December 31, 1999 will not result in correspondingly
lower net losses for that period.
Our headquarters are located at 1105 Sanctuary Parkway, Suite 210,
Alpharetta, Georgia 30004, our telephone number is (770) 754-1900 and our Web
site address is www.witness.com. We were originally incorporated in Georgia in
1988 and reincorporated in Delaware in 1997. Information contained on our Web
site does not constitute part of this prospectus, and you should rely only on
the information contained in this prospectus in deciding whether to invest in
our common stock. WITNESS(R) and the WITNESS logo are our registered trademarks,
and we have filed applications with the United States Patent and Trademark
Office to register our marks eQuality(TM) and Bringing eQuality to
eBusiness(TM). This prospectus also includes trademarks, service marks and trade
names of other companies. This prospectus refers to market research reports
prepared by various organizations, which typically do not disclose their
underlying limitations or assumptions. You should not rely on these market
reports as being necessarily indicative of future developments.
3
<PAGE> 8
THE OFFERING
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Common stock offered by Witness Systems................. 3,800,000 shares
Common stock to be outstanding after this offering...... 21,079,647 shares
Use of proceeds......................................... For repayment of debt, expansion of
sales and marketing capabilities,
product development, working capital
and potential acquisitions of products,
technologies and businesses. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.................. WITS
</TABLE>
The number of shares to be outstanding after this offering is based on the
number of shares outstanding as of January 10, 2000 and does not include the
following:
- 2,883,106 shares of common stock issuable under options outstanding as of
January 10, 2000 with a weighted average exercise price of $2.44 per
share;
- 153,000 shares of common stock that could be issued under warrants
outstanding as of January 10, 2000 with a weighted average exercise price
of $2.58 per share; and
- 1,658,511 shares of common stock that could be issued under our amended
and restated stock incentive plan and 990,000 shares of common stock
reserved for issuance under our employee stock purchase plan.
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Except as otherwise indicated, all information in this prospectus:
- reflects the payment of preferred stock dividends in the form of
additional shares of our preferred stock and the conversion of each
outstanding share of our preferred stock into 1.8 shares of our common
stock, which will occur immediately before the completion of this
offering;
- reflects a 1.8 for 1 stock split of the issued and outstanding shares of
common stock that occurred on December 27, 1999;
- reflects the amendment and restatement of our certificate of
incorporation and bylaws, which will occur immediately before the
completion of this offering;
- assumes no exercise of the underwriters' over-allotment option; and
- assumes the initial public offering price of our common stock will be
$13.00 per share.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table is a summary of the consolidated financial data for our
business. You should read this information together with the consolidated
financial statements and the related notes appearing at the end of this
prospectus and the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds." For an
explanation of the determination of the number of shares used to compute
historical and pro forma basic and diluted net loss per share, see note 1(l) of
the notes to our consolidated financial statements. The pro forma consolidated
balance sheet data summarized below gives effect to the payment of preferred
stock dividends in the form of additional shares of our preferred stock and the
conversion of each outstanding share of our preferred stock into 1.8 shares of
our common stock, which will occur immediately before the completion of this
offering as if the conversion occurred on September 30, 1999. The pro forma as
adjusted consolidated balance sheet data summarized below also reflects the sale
of the common stock offered by us at an assumed initial offering price of $13.00
per share, after deducting underwriting discounts and estimated offering
expenses payable by us, and our receipt and application of the net proceeds from
the offering.
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1996 1997 1998 1998 1999
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues:
License............................... $ 764 $ 3,775 $ 8,682 $ 5,726 $11,011
Services.............................. 425 1,138 2,444 1,657 4,079
Hardware.............................. 632 1,271 2,171 1,750 46
------- ------- ------- ------- -------
Total revenues................ 1,821 6,184 13,297 9,133 15,136
------- ------- ------- ------- -------
Gross profit............................ 249 3,242 7,979 5,057 12,236
Acquired in-process research and
development........................... -- -- -- -- 3,506
Operating loss.......................... (2,195) (2,275) (4,738) (3,922) (6,040)
Net loss................................ $(2,191) $(2,213) $(4,769) $(3,948) $(6,360)
======= ======= ======= ======= =======
Net loss applicable to common
stockholders.......................... $(2,191) $(2,297) $(5,271) $(4,025) $(7,450)
======= ======= ======= ======= =======
Historical net loss per share -- basic
and diluted........................... $ (0.21) $ (0.32) $ (0.76) $ (0.56) $ (1.15)
======= ======= ======= ======= =======
Shares used in computing historical net
loss per share -- basic and diluted... 10,307 7,238 6,964 7,245 6,469
======= ======= ======= ======= =======
Pro forma net loss per share -- basic
and diluted........................... $ (0.36) $ (0.42)
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Shares used in computing pro forma net
loss per share -- basic and diluted... 13,399 15,276
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SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 52 $ 52 $41,691
Working capital (deficit)................................... (1,873) (1,873) 40,668
Total assets................................................ 8,919 8,919 50,558
Long-term debt, less current portion........................ 2,210 2,210 --
Stockholders' (deficit) equity.............................. (24,297) (2,184) 42,567
</TABLE>
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RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could harm our business, financial condition and results of
operations and could result in a complete loss of your investment.
RISKS RELATED TO OUR BUSINESS
WE HAVE NOT ACHIEVED PROFITABILITY TO DATE, WE EXPECT LOSSES IN THE FUTURE AND
WE MAY NOT EVER BECOME PROFITABLE
We have incurred substantial losses since our inception and expect to
continue to suffer losses in the future. In every fiscal period since we began
operations, our business has not experienced sufficient cash flow to fund our
operations without acquiring capital from other sources. As a result of our
accumulated operating losses, as of September 30, 1999, we had an accumulated
deficit of approximately $19.9 million. In addition, we expect to continue to
devote substantial resources to research and development, professional services
and sales and marketing activities. As a result, we will need to generate
significant revenues to achieve and sustain profitability in any future period,
and we may never be able to do so. If we fail to achieve profitability at all or
within the time frame expected by investors, it will materially and adversely
affect the market price of our stock.
OUR QUARTERLY REVENUES, EXPENSES AND OPERATING RESULTS ARE LIKELY TO FLUCTUATE,
WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE
Our quarterly revenues, expenses and operating results could vary
significantly from period to period. In particular, we derive a significant
portion of our software license revenue in each quarter from a small number of
relatively large orders. A delay in the recognition of revenues from one of
these orders may cause our results of operations during a quarter to be lower
than we expect. The delay or failure to close anticipated sales in a particular
quarter could reduce our revenues in that quarter and subsequent quarters over
which revenues for the sale would likely be recognized. In addition, because our
revenues from implementation, maintenance and training services largely
correlates with our license revenues, a decline in license revenues could also
cause a decline in our services revenues in the same quarter or in subsequent
quarters. Our revenues, expenses and operating results may vary significantly in
response to the risk factors described in this section, as well as the following
factors, some of which are beyond our control:
- a decrease in demand for our software or, more generally, for products
that record and analyze the interactions between a business and its
customers;
- announcements or introductions of new products and services by our
competitors;
- product pricing decisions by our competitors;
- our ability to develop, market and manage new software, software
enhancements and services;
- the deferral of orders for our software or delays in the implementation
of our software from one quarter to a later quarter;
- how quickly we are able to develop new software, software enhancements
and services that our customers require;
- how much money we have to spend to improve our software, services and
operations;
- customer delays in purchasing our software or services in late 1999 and
early 2000 due to Year 2000 concerns;
- the lengthiness and unpredictability of sales cycles for our software;
- the mix of revenue generated by software licenses and related services;
- the timing and size of our capital expenditures and changes in our
working capital; and
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- general economic factors and changes in technology that could cause our
existing and potential customers to decrease what they spend on customer
relationship management software.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results may not be a good indication of our future
performance, and you should not rely on them to predict our future performance
or the future performance of our stock price. Historically, our revenue growth
has fluctuated from as low as 1% to as high as 58% from one quarter to the next.
If our future revenues or operating results fall below the expectations of
investors or securities analysts, the price of our common stock would likely
decline.
SEASONAL TRENDS IN SALES OF BUSINESS SOFTWARE OR CUSTOMER INTERACTION LEVELS MAY
AFFECT OUR QUARTERLY REVENUES
The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenues. We believe that these fluctuations
are caused in part by customer buying patterns, which are influenced by year-end
budgetary pressures and by sales force commission structures. Customer
interaction centers typically experience much higher volumes of customer contact
during and immediately following the year-end holiday season. As a result, many
customers may elect to defer installation of our software during this time. This
has caused us to experience, and we expect to continue to experience, seasonal
fluctuations in our revenues. As our revenues grow, seasonal fluctuations in our
revenues may become more evident.
WE FACE INTENSE COMPETITION THAT COULD ADVERSELY AFFECT OUR REVENUES,
PROFITABILITY AND MARKET SHARE
The market for products that record and analyze customer interactions is
intensely competitive and experiences rapid changes in technology. We believe
our principal competitors include, but are not limited to:
- quality monitoring suppliers to the contact center industry;
- traditional call-logging vendors;
- systems integrators and consulting firms; and
- new, larger and more established entities that may acquire, invest in or
form joint ventures with providers of recording or performance enhancing
software solutions.
Many of our current and potential competitors have longer operating
histories, more established business relationships, larger customer bases, a
broader range of products and services, greater name recognition and
substantially greater financial, technical, marketing, personnel, management,
service, support and other resources than we do. This could allow our current
and potential competitors to respond more quickly than we can to new or emerging
technologies and changes in customer requirements, better take advantage of
acquisitions and other opportunities, devote greater resources to the marketing
and sale of their products and services and adopt more aggressive pricing
policies. In addition, many of our competitors market their products through
resellers and companies that integrate their technology and products with those
of the competitor. These resellers and technology partners of our competitors
often have strong business relationships with our customers and potential
customers. Our competitors may use these business relationships to market and
sell their products and compete for customers with us. We cannot assure you that
our competitors will not offer or develop products and services that are
superior to ours.
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In addition, we have developed, and intend to continue to develop,
relationships with companies that resell our software and companies that provide
us with customer referrals or leads. Revenues from our resellers accounted for
approximately 10% of our total revenues for the nine months ended September 30,
1999. We expect revenues from our resellers, and accordingly our dependence on
resellers, to increase as we establish more relationships with companies to
resell our software worldwide. We engage in joint marketing and sales efforts
with our resellers, and rely on them for recommendations of our software during
the evaluation stage of the purchase process. When we enter into agreements with
these companies, the agreements are not exclusive and may ordinarily be
terminated by either party. Some of these companies have similar, and often more
established, relationships with our competitors, and may recommend the products
and services of our competitors to customers instead of our software and
services. In addition, through their relationships with us, these companies
could learn about our software and the market for our software and services and
could develop and sell competing products and services. As a result, our
relationships with these companies could lead to increased competition for us.
Our software must integrate with software and hardware solutions provided
by a number of our existing and potential competitors. These competitors or
their business partners could alter their products so that our software no
longer integrates well with them, or they could delay or deny our access to
software releases that allow us to timely adapt our software to integrate with
their products. They could thus effectively prevent us from modifying our
software to keep pace with the changing technology of their products. If we
cannot adapt our software to changes in our competitors' technology, it may
significantly impair our ability to compete effectively, particularly if our
software must integrate with the software and hardware solutions of our
competitors.
We expect that competition will increase as other established and emerging
companies enter our market and as new products, services and technologies are
introduced. Increased competition may result in price reductions, lower gross
margins and loss of our market share. This could materially and adversely affect
our business, financial condition and results of operations.
OUR SOFTWARE HAS A LONG SALES CYCLE WHICH MAKES IT DIFFICULT TO PLAN OUR
EXPENSES AND FORECAST OUR RESULTS
Although it typically takes three to six months from the time we qualify a
sales lead until we sign a contract with the customer, we occasionally
experience a longer sales cycle. It is therefore difficult to predict the
quarter in which a particular sale will occur. If our sales cycle unexpectedly
lengthens for one or more large orders or a significant number of small orders,
it would adversely affect the timing of our revenues and the timing of our
corresponding expenditures. This could harm our ability to meet our financial
forecasts for a given quarter. Our customers' decisions regarding their purchase
of our software and services is relatively long due to several factors,
including:
- the complex nature of our software;
- our need to educate potential customers about the uses and benefits of
our software;
- the investment of money and other resources required by customers to
purchase and implement our software;
- customers' budget cycles and operating activities, which affect the
timing of their purchases;
- the competitive evaluation and internal approval process many of our
customers undertake before purchasing our software and services;
- delayed purchases due to announcements or planned introductions of new
software or software enhancements by us or our competitors; and
- the length of time some of our larger customers require to make a
decision to purchase our software and services.
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IF WE FAIL TO DEVELOP NEW SOFTWARE OR IMPROVE OUR EXISTING SOFTWARE TO MEET OR
ADAPT TO THE CHANGING NEEDS AND STANDARDS OF OUR TARGET MARKET, SALES OF OUR
SOFTWARE AND SERVICES MAY DECLINE
Our future success depends upon our ability to develop and introduce new
software and software enhancements which meet the needs of companies seeking to
record and analyze their interactions with customers. To achieve increased
market acceptance of our software and services, we must, among other things,
continue to:
- improve our existing software and introduce new software solutions;
- incorporate new technology into our software and services on a timely and
cost-effective basis;
- keep pace with the products and services of our competitors;
- satisfy the changing requirements of our current and potential customers;
- improve the effectiveness of our software, particularly in
implementations involving very large databases and large numbers of
simultaneous users;
- enhance our software's ease of administration;
- improve our software's ability to extract data from existing software
systems; and
- adapt to rapidly changing computer operating system, database and
software platform standards and Internet technology.
We may require substantial product development expenditures and lead-time
to keep pace and ensure compatibility with new technology in our industry. If we
fail to develop and introduce new software and enhancements for our existing
software, our software and services may not achieve market acceptance and we may
be unable to attract new customers. We may also lose existing customers, to whom
we seek to sell additional software and services. Also, we have only recently
released our eQuality Analysis and eQuality Interactive software that permit
recording and analysis of Web chat interactions. To date, we have not received
any revenues from eQuality Analysis or eQuality Interactive software and cannot
assure you that we will derive revenues from these products in the future.
Moreover, we cannot be certain how the emergence of the Internet will impact our
business. It may lead to a change in the way call and contact centers operate,
which may ultimately reduce the demand for our software. If this happens it
would materially and adversely affect our business, financial condition and
results of operations.
In September 1999, we acquired technology to store and retrieve
substantially larger volumes of data than our software is currently capable of
storing and retrieving. As of September 30, 1999, this technology had not yet
progressed to a stage where it had reached technological feasibility, and we are
currently working on a project to develop this technology. We cannot assure you
that we will successfully complete this project in a timely manner. If we are
unable to develop this technology in a timely manner, it may adversely affect
our ability to compete and our ability to attract new customers.
We believe that our future success also depends upon the continued ability
of our software to work with the products and other technologies offered by
other software and hardware companies. New products may not be compatible with
our software, but may be compatible with the products of our competitors. In
addition, industry standards may not be established, or we may not be able to
conform to new standards in a timely fashion to remain competitive. Our failure
to conform to prevailing technology standards in our industry could limit our
ability to compete and adversely affect our business.
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IF THE MARKET IN WHICH WE SELL OUR SOFTWARE AND SERVICES DOES NOT GROW AS WE
ANTICIPATE, WE WILL BE UNABLE TO CONTINUE OUR GROWTH
The market for customer relationship management software, including
software that records and analyzes customer interactions, is still emerging. If
the market for this software does not grow as quickly or become as large as we
anticipate, we may not be able to continue our growth or may grow more slowly
than expected. Continued growth in demand for this software remains uncertain
because our potential customers may:
- not understand the benefits of using customer relationship management
software generally or, more specifically, software which records and
analyzes the interactions between a business and its customers;
- not achieve favorable results using this software;
- experience technical difficulty in implementing this software; or
- use alternative methods to solve the same business problems this software
is intended to address.
In addition, our software is designed to address the needs of contact
centers. If the number of contact centers does not increase as we expect, or if
it grows more slowly than we anticipate, we may not be able to continue our
growth or may grow more slowly than expected.
WE RELY HEAVILY ON SALES OF OUR EQUALITY CALL AND EQUALITY EVALUATION SOFTWARE
Our financial performance has depended, and will continue to depend, on our
ability to develop and maintain market acceptance of our eQuality Call software
and new and enhanced versions of it. Historically, all of our license revenues
have been derived from the sale of our eQuality Call and eQuality Evaluation
software, and we expect revenues from these two products to continue to account
for substantially all of our revenues for the foreseeable future. To date, we
have not recognized revenue from our recently introduced eQuality Analysis and
eQuality Interactive software. As a result, factors which adversely affect the
pricing or demand for our eQuality Call and eQuality Evaluation software, such
as competitive pressures, technological change or evolution in customer
preferences, could materially and adversely affect our business, financial
condition and results of operations. Many of these factors are beyond our
control and difficult to predict.
IF OUR INTERNAL PROFESSIONAL SERVICES EMPLOYEES DO NOT PROVIDE INSTALLATION
SERVICES EFFECTIVELY AND ACCORDING TO SCHEDULE, OUR CUSTOMERS MAY NOT USE OUR
IMPLEMENTATION SERVICES OR MAY STOP USING OUR SOFTWARE
Customers that license our products ordinarily purchase installation,
training and maintenance services, which they typically obtain from our internal
professional services organization. Because our software must be installed to
work with a number of computer and telephone network systems, installation of
our software can be difficult. These systems vary greatly from one customer site
to another, and the versions and integration requirements of these third party
systems change frequently. We believe that the speed and quality of installation
services are competitive factors in our industry. If our installation services
are not satisfactory to our customers, the customers may choose to not use our
implementation services to install software they license from us. In addition,
these customers may determine that they will not license our software and
instead will use the products and services of one of our competitors. If this
happens, we would lose licensing and services revenues from these customers, and
it would likely harm our reputation in the industry in which we compete. This
could materially and adversely affect our business, financial condition and
results of operations.
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IF WE NEED ADDITIONAL FINANCING TO MAINTAIN OR EXPAND OUR BUSINESS, IT MAY NOT
BE AVAILABLE ON FAVORABLE TERMS, OR AT ALL
Although we believe that the net proceeds from this offering, together with
our current cash and borrowing capacity, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months, we expect to incur net losses for the foreseeable future and
may need additional funds to expand or meet all of our operating needs. If we
need additional financing, we cannot be certain that it will be available to us
on favorable terms, or at all. Further, if we raise additional funds by issuing
equity securities, your ownership interest could be significantly diluted, and
any additional equity securities we issue may have rights, preferences or
privileges senior to your rights. Also, the terms of any additional financing we
obtain may significantly limit our future financing and operating activities. If
we need funds and cannot raise them on acceptable terms, we may be forced to
sell assets or seek to refinance our outstanding obligations. We may also be
unable to:
- develop and enhance our software to remain competitive;
- take advantage of future opportunities, such as acquisitions; or
- respond to changing customer needs and our competitors' innovations.
Any of these events could significantly harm our business and financial
condition and limit our growth.
IF WE DO NOT CONTINUE TO EXPAND THE DISTRIBUTION OF OUR PRODUCTS THROUGH DIRECT
AND INDIRECT SALES CHANNELS, WE MAY BE UNABLE TO EXPAND OUR MARKET SHARE OR
INCREASE OUR REVENUES
To expand our market share and revenues, attract new customers and increase
sales to existing customers, we will need to expand our direct and indirect
channels of distribution. Although we have historically received approximately
90% of our revenues from direct sales, we will require an increase in our direct
sales to achieve our growth plans. To accomplish this, we will need to expand
our direct sales force by hiring additional sales personnel and management, and
increase the number of relationships we have with companies that provide us with
customer referrals or leads for new business. Historically, it has taken us up
to six months to train new sales personnel before they reach an acceptable level
of productivity. We have also experienced difficulty in finding new sales
personnel with experience in computer and telephone integration technologies. We
cannot assure you that we will be able to continue to find an adequate number of
new sales personnel meeting our specific needs. If the personnel we hire are
less qualified, it may take us more time to train them and they may take a
longer time to reach an acceptable level of productivity. We cannot assure you
that we will be able to hire the necessary sales personnel and management on
reasonable terms, or at all. Moreover, we will be required to train any new
personnel, and the new personnel may not reach full productivity for a long
period of time.
We also intend to derive revenues from our indirect sales channel through
relationships with companies that resell our software. In particular, we intend
to use resellers to increase our sales internationally and to market our
software to small and medium contact centers.
To date, we have entered into agreements with only a small number of
companies that resell our software and companies that provide us with customer
referrals. For the nine months ended September 30, 1999, approximately 10% of
our revenues were generated through these resellers. When we enter into
agreements with these companies, they are not exclusive and may ordinarily be
terminated by either party. Some of these companies have similar, and often more
established, relationships with our competitors, and may recommend the products
and services of our competitors to customers instead of our software and
services. Maintaining reseller relationships in today's rapidly evolving
marketplace has proven to be difficult. For example, during the nine months
ended September 30, 1998, we incurred a $900,000 charge to terminate a
distributor agreement that we believed had become counterproductive. We cannot
assure you that we will be
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able to maintain productive relationships or that we will be able to establish
similar relationships with additional companies on a timely basis, or at all. In
addition, we cannot be certain that these distribution partners will devote
adequate resources to selling our software and services. If we are unable to
maintain and expand our direct sales force and indirect distribution channels,
we will not be able to increase our revenues and our business will suffer.
OUR FAILURE TO PROPERLY MANAGE OUR RAPID GROWTH COULD STRAIN OUR RESOURCES AND
MAKE IT DIFFICULT TO SUPPORT OUR FUTURE OPERATIONS
Our business could suffer if we fail to effectively manage our growth. Our
revenues increased approximately 66% in the nine month period ended September
30, 1999 from the same period the previous year. From September 30, 1998 to
September 30, 1999, the number of our employees increased from 96 to 159. This
growth in our revenues and number of employees has placed, and will continue to
place, a significant strain on our management, personnel, systems, controls and
other resources. If we are unable to effectively manage our growth, it may be
difficult to support our future operations. To manage growth effectively, we
must:
- accurately predict the growth in demand for our software and expand our
capacity and implementation services to meet that demand;
- expand and improve our operating and financial systems, procedures and
controls;
- attract, train, motivate, manage and retain key personnel;
- expand our facilities;
- successfully integrate the operations and personnel of any businesses we
acquire; and
- respond quickly and effectively to unanticipated changes in our industry.
IF WE FAIL TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS, WE MAY BE UNABLE
TO REACH OR MAINTAIN OUR DESIRED LEVELS OF REVENUE OR PROFITABILITY
Revenues from customers located outside of North America accounted for
approximately 5% of our total revenues for the nine months ended September 30,
1999. Our current goal is to increase our international revenues to
approximately 20% of our total revenues by the end of 2002. In order to achieve
this, we intend to continue to expand our international operations through
internal business expansion and strategic business relationships. Our operations
outside of North America currently consist of fewer than ten dedicated employees
located in the United Kingdom. Most of our international revenues to date have
come from international branches of our customers based in North America. We
have established relationships with a small number of international resellers,
but to date we have not recognized a material amount of revenues from these
relationships. In addition to general risks associated with international
expansion, such as foreign currency fluctuations and political and economic
instability, our plans to expand internationally may be adversely affected by a
number of risks, including:
- limited development of an international market for our software and
services;
- the challenges we face in expanding and training our international sales
force and support operations;
- expenses associated with customizing products for multiple countries;
- longer payment cycles, different accounting procedures and difficulties
in collecting accounts receivable; and
- multiple, conflicting and changing governmental laws and regulations
governing intellectual property, call monitoring and the recording of
employees.
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As we further expand our operations outside the United States, we will face
new competitors and competitive environments. In addition to the risks
associated with our domestic competitors, foreign competitors may pose an even
greater risk, as they may possess a better understanding of their local markets
and better working relationships with local infrastructure providers and others.
In particular, because telephone protocols and standards are unique to each
country, local competitors will have more experience with, and may have a
competitive advantage in, these markets. We may not be able to obtain similar
levels of local knowledge or similar relationships in foreign markets, which
could place us at a significant competitive disadvantage.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY MAY LEAD TO THIRD PARTIES USING
OUR TECHNOLOGY FOR THEIR OWN BENEFIT AND OUR FAILURE TO ACCESS THIRD PARTY
TECHNOLOGY COULD DELAY THE DEVELOPMENT OR SALE OF OUR SOFTWARE
Our success depends to a significant degree upon the legal protection of
our software and other proprietary technology rights. We rely on a combination
of patent, trade secret, copyright and trademark laws and confidentiality and
non-disclosure agreements with employees and third parties to establish and
protect our proprietary rights. These measures may not be sufficient to protect
our proprietary rights, and we cannot be certain that third parties will not
misappropriate our technology and use it for their own benefit. Also, most of
these protections do not preclude our competitors from independently developing
products with functionality or features substantially equivalent or superior to
our software. Any failure to protect our intellectual property could have a
material adverse effect on our business.
We currently have three registered trademarks, one patent generally
relating to our voice and data synchronization technology and data capture
technique and seven pending copyright registrations protecting our software
source code. We cannot assure you that we will file further patent, trademark or
copyright applications, that any future applications will be approved, that any
existing or future patents, trademarks or copyrights will adequately protect our
intellectual property or that any existing or future patents, trademarks or
copyrights will not be challenged by third parties. Furthermore, one or more of
our existing or future patents, trademarks or copyrights may be found to be
invalid or unenforceable. We are currently evaluating whether to revise one
aspect of the patent for our synchronization techniques. If we are unsuccessful,
we may not be able to enforce any aspect of that patent against third parties
who infringe it. We also have two patent applications pending in the United
States Patent and Trademark Office. There is no guarantee that our pending
applications will result in issued patents or, if issued, that they will provide
us with any competitive advantages.
Moreover, the laws of other countries in which we market our products may
afford little or no effective protection of our proprietary technology. If we
resort to litigation to enforce our intellectual property rights, the
proceedings could be burdensome and expensive, would likely divert valuable
management and product development resources and could involve a high degree of
risk, regardless of whether we win or lose the litigation.
We rely on technology licensed from third parties, including databases,
application programming interfaces, developmental tools and software necessary
to integrate our software with third party technology and products. In addition,
third party products are bundled with our software. If we lose access to this
technology, or if it is not available to us on reasonable terms, it could cause
delays in our development and introduction of new and enhanced software until we
can obtain equivalent or replacement technology, if available, or develop this
technology internally, if feasible. If we lost access to technology that is
bundled with our software, this would require us to modify or redesign our
software and could cause a delay in our ability to market and sell our current
software, or a delay in our ability to develop, market and sell new or enhanced
software. This delay or a failure to obtain replacement technology could have a
material adverse effect on our business, financial condition and results of
operations.
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CLAIMS BY OTHER COMPANIES THAT OUR SOFTWARE INFRINGES THEIR INTELLECTUAL
PROPERTY COULD REQUIRE US TO INCUR SUBSTANTIAL EXPENSES OR PREVENT US FROM
SELLING OUR SOFTWARE OR SERVICES
If any of our software violates the intellectual property rights of others,
we may be required to reengineer or redevelop our software, seek to obtain
licenses from third parties to continue offering our software without
substantial reengineering, or conduct studies of such intellectual property
rights so as to evaluate whether such intellectual property rights are valid or
enforceable. Any efforts to reengineer our software or obtain licenses from
third parties may not be successful, could be extremely costly and would likely
divert valuable management and product development resources. Any efforts to
study the intellectual property rights of third parties may not be successful
and could reveal that such intellectual property rights are valid and
enforceable, could be extremely costly and would likely divert valuable
management and product development resources.
In addition, in the rapidly developing technological environment in which
we operate, third parties may have filed a number of patent applications, many
of which are confidential when filed. If our software is found to violate these
patents when they are issued or any other intellectual property of others, we
may become subject to claims for infringement. An infringement claim against us
could result in the loss of our proprietary rights and, whether meritorious or
not, could be time-consuming, result in costly litigation or require us to pay
damages or enter into royalty or licensing agreements on terms that are
unfavorable to us. Royalty or licensing agreements might not be available to us
on reasonable terms or at all. In addition, our customers may become subject to
claims if the software they license from us infringes the intellectual property
of others. Our license agreements with our customers generally provide that we
will indemnify the customers for liability they incur as a result of these
infringement claims. As a result, any infringement claim could materially and
adversely affect our business, financial condition and results of operations.
Approximately two years ago, we were accused of infringing a patent owned
by a third party. We undertook to study the matter, concluded that the asserted
patent was not infringed, and informed the third party of our belief that the
patent was not infringed. Following an exchange of correspondence between
September 1996 and January 1998, nothing further was heard from the patent
owner.
Although we have not exchanged correspondence with this third party since
January 1998, we cannot assure you that a renewed claim of infringement by this
third party, either in connection with the patent referred to above or another
patent or other intellectual property, or a claim of infringement by a different
patent or other intellectual property owner, will not be asserted against us in
the future. Furthermore, we expect that we and other participants in our
industry and related industries will be increasingly subject to infringement
claims as the number of competitors with patent and other intellectual property
portfolios in these industries grows. Although patent and intellectual property
disputes may be settled through licensing or similar arrangements, costs
associated with these arrangements may be substantial and we cannot assure you
that necessary licenses or similar arrangements will be made available to us on
a reasonable basis or at all. Consequently, if we become subject to an adverse
determination in a judicial or administrative proceeding or we fail to obtain
necessary licenses it could prevent us from producing and selling our software.
This would have a material adverse effect on our business, financial condition
and results of operations.
In addition, if we decide to, or are forced to, litigate any of these
claims, the litigation could be expensive and time-consuming, could divert our
management's attention from other matters, and could otherwise materially and
adversely affect our business, financial condition and results of operations,
regardless of the outcome of the litigation. Litigation and intellectual
property claims against us could also disrupt our sale of software.
Additionally, it could lead to claims by third parties against our customers and
others using our software. Our customers and these other users of our software
would likely hold us responsible for these claims and any resulting harm they
suffer.
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GOVERNMENT REGULATION OF TELEPHONE AND INTERNET MONITORING COULD CAUSE A DECLINE
IN THE USE OF OUR SOFTWARE, RESULT IN INCREASED EXPENSES FOR US OR SUBJECT US
AND OUR CUSTOMERS TO LIABILITY
As the telecommunications industry continues to evolve, state, federal and
foreign governments may increasingly regulate the monitoring of
telecommunications and telephone and Internet monitoring and recording products,
such as our software. We believe that increases in regulation could come in the
form of a number of different kinds of laws, including privacy and employment
regulations. The adoption of new laws governing the use of our software or
changes made to existing laws could cause a decline in the use of our software
and could result in increased expenses for us, particularly if we are required
to modify our software to accommodate these new or changing laws. Moreover, new
laws or changes to existing laws could subject us and our customers to
liability. In addition, whether or not these laws are adopted, if we do not
adequately address the privacy concerns of consumers, companies may be hesitant
to use our software. If any of these events occur, it could materially and
adversely affect our business.
OUR PRODUCTS MAY FAIL TO PERFORM PROPERLY, WHICH MAY CAUSE US TO INCUR
ADDITIONAL EXPENSES OR LOSE SALES
Our software is used in a complex operating environment that requires its
integration with computer and telephone networks and other business software
applications. Furthermore, the hardware, software and network systems generally
used in conjunction with our software, particularly telephone standards and
protocols, change rapidly. The evolution of these standards may cause our
products to function slowly or improperly. Poor product performance may
necessitate redevelopment of our product or other costly reengineering measures
which may divert our management and product development resources and funds. Due
to the large number of, and variations in, computer and telephone network
systems and applications, as well as the rapid changes in these products, our
testing process may be unable to duplicate all possible environments in which
our software is expected to perform. Any errors or defects that are discovered
after we release new or enhanced software could cause us to lose revenue, cause
a delay in the market acceptance of our software, damage our customer
relationships and reputation and increase our service and warranty costs.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO
EFFECTIVELY MANAGE AND EXPAND OUR BUSINESS
Our future success will depend in large part on our ability to hire, train,
retain and motivate a sufficient number of qualified personnel, particularly in
sales, marketing, research and development, service and support. In particular,
competition for research and development personnel with computer and telephone
integration skills is intense, and turnover of technical personnel is
particularly high in our industry. If we are unable to attract and retain
qualified personnel or if we experience high personnel turnover, it would
increase our costs of operations and could prevent us from effectively managing
and expanding our business.
Our future success also depends upon the continued service of our executive
officers, particularly our Chairman, President and Chief Executive Officer,
David Gould. We have an employment agreement with Mr. Gould and non-compete
agreements with all of our executive officers. However, any of our executive
officers and other employees could terminate his or her relationship with us at
any time. The loss of the services of our executive officers or other key
personnel could materially and adversely affect our business. In addition, if
one or more of our executive officers or key employees were to join one of our
competitors or otherwise compete with us, it could harm our business.
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WE MAY MAKE ACQUISITIONS OR INVESTMENTS THAT ARE NOT SUCCESSFUL AND THAT
ADVERSELY AFFECT OUR ONGOING OPERATIONS
We may acquire or make investments in companies, products, services and
technologies which complement our software and services. Because of the
proliferation of new customer interaction mediums such as the Internet and
e-mail, we believe that it may be important for us to acquire complementary
technology to quickly bring new products to market. We have very limited
experience in making acquisitions and investments. As a result, our ability to
identify prospects, conduct acquisitions and to properly manage the integration
of acquisitions is unproven. If we fail to properly evaluate and execute
acquisitions or investments, it may seriously harm our business and operating
results. In making or attempting to make acquisitions or investments, we face a
number of risks, including:
- the difficulty of identifying and hiring one or more senior executives
with acquisition experience;
- the difficulty of identifying suitable acquisition or investment
candidates and negotiating acceptable terms for acquisitions and
investments;
- the potential distraction of our management, diversion of our resources
and disruption of our business;
- our retention and motivation of key employees of the acquired companies;
- our entry into geographic markets in which we have little or no prior
experience;
- competition for acquisition opportunities with competitors that are
larger than us or have greater financial and other resources than we
have;
- our inability to accurately forecast the financial impact of an
acquisition or investment; and
- our inability to maintain good relations with the customers and suppliers
of the acquired company.
In addition, if we make acquisitions using convertible debt or equity
securities, our existing stockholders may be diluted, which could cause the
market price of our stock to decline.
YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES AND COSTS
AND AFFECT THE TIMING OF OUR REVENUES
The Year 2000 computer problem refers to the potential for system and
processing failures of date related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This
problem could result in miscalculations, data corruption, system failures or
disruptions of operations. We are subject to potential Year 2000 problems
affecting the systems and technology on which we depend, including:
- the internal systems, software and other technology we use in our
business;
- the products and other technology produced by others which is integrated
with our software;
- the systems of our customers and our vendors; and
- other technology and products employed by our customers which is used in
connection with our software.
Furthermore, we cannot assure you that our software is Year 2000 compliant.
Moreover, because our software is used in connection with other products, Year
2000 problems affecting these products could cause our software to fail. If Year
2000 problems cause the failure of any of the technology, software or systems
described above, we could lose customers, suffer significant
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disruptions in our business, lose revenues and incur substantial liabilities and
expenses. We could also become involved in costly litigation resulting from Year
2000 problems. This could materially and adversely affect our business,
financial condition and results of operations.
During 1999 and 2000, a significant number of companies, including some of
our current customers, have devoted and are expected to devote a substantial
amount of their information technology resources to testing systems for Year
2000 compliance and fixing existing Year 2000 problems. As a result, many of our
existing and potential customers may delay the purchase and installation of our
software. Consequently, we may have lower than expected licensing and services
revenues during 2000.
RISKS RELATED TO THIS OFFERING
THIS IS OUR INITIAL PUBLIC OFFERING, AND WE CANNOT ASSURE YOU THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE OFFERING OR THAT AN ACTIVE PUBLIC MARKET FOR
OUR SHARES WILL DEVELOP
Before this offering, you could not buy or sell our common stock publicly.
If you purchase shares of our common stock in this offering, you will pay a
price that was not established in a competitive market. Rather, you will pay a
price negotiated between us and representatives of the underwriters, which may
not indicate future market price. The price of our common stock that will
prevail in the market after this offering may be lower than the price you pay.
As a result, you may not be able to sell your stock for a price equal to or
greater than the initial offering price. In addition, as this is our initial
public offering, the number of shares available for public sale will be
relatively small, and we cannot predict how liquid the market for our shares
will be. An active public market for our common stock may not develop or be
sustained after the offering.
THE PRICE OF OUR COMMON STOCK AFTER THIS OFFERING MAY BE VOLATILE, AND YOU MAY
EXPERIENCE INVESTMENT LOSSES
The market price of our common stock may fluctuate significantly in
response to the following and other factors, some of which are beyond our
control:
- variations in our quarterly operating results;
- announcements of significant contracts, technological innovations or new
products or services by us or our competitors;
- changes in financial estimates by securities analysts;
- the operating and stock price performance of other companies in our
industry; and
- fluctuations in stock market price and volume, which are particularly
common among securities of software and other technology companies.
Further, the stock markets, and in particular the Nasdaq National Market on
which we intend to list our common stock, have experienced extreme price and
volume fluctuations that have affected the market prices of equity securities of
many technology companies. These fluctuations often have been unrelated or
disproportionate to the operating performance of the companies. Because our
business is technology related, the price of our common stock could fluctuate
widely if the market price of equity securities of other technology companies
becomes volatile. In the past, following periods of downward volatility in the
market price of a company's securities, class action litigation has often been
brought against that company. If such an action is brought against us, it would
be expensive and would divert our management's attention and our other
resources.
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OUR MANAGEMENT AND AFFILIATES CONTROL A LARGE PERCENTAGE OF OUR VOTING STOCK AND
COULD EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING STOCKHOLDER APPROVAL
AFTER THIS OFFERING
After this offering, our executive officers and directors and members of
their families will together control approximately 53% of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
control all matters requiring stockholder approval, including the election of
our directors and the approval of significant corporate transactions involving
us. This control may have the effect of delaying, preventing or deterring a
change in control of Witness Systems and could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of any sale or
acquisition.
FUTURE SALES OF COMMON STOCK AND THE RIGHTS OF SOME OF OUR STOCKHOLDERS TO
REGISTER SALES OF THEIR STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
STOCK
Sales of a substantial number of shares of our common stock after this
offering, or the perception by the market that those sales could occur, could
cause the market price of our common stock to decline or could make it more
difficult for us to raise funds through the sale of equity in the future. The
shares of common stock being sold in this offering will generally be freely
tradable without restriction. The remaining 17,279,647 shares of common stock
outstanding will be restricted securities as defined in Rule 144 under the
Securities Act. Except as described in the next paragraph, the holders of these
shares of common stock may sell them in the future without registration under
the Securities Act if they comply with Rule 144, Rule 701 or any other
applicable exemption under the Securities Act.
We, our directors and executive officers and some of our stockholders have
agreed with the underwriters not to sell any common stock or securities
convertible into or exchangeable or exercisable for common stock for 180 days
after the date of this prospectus, subject to some exceptions. When these
lock-up agreements expire, 16,673,093 shares of common stock will be eligible
for resale in the future without registration under the Securities Act if the
holders of the common stock comply with Rule 144, Rule 701 or any other
applicable exemption under the Securities Act. Hambrecht & Quist LLC or its
successor may agree to release any or all of the shares of common stock from
these lock-up agreements at any time.
Some of our existing stockholders have the right to require us to register
under the Securities Act up to 15,448,251 shares of their common stock at any
time. All of these shares are subject to the lock-up agreements described above.
Once we register these shares, they can be freely sold in the public market,
subject to these lock-up agreements.
Immediately after this offering, we intend to register under the Securities
Act approximately 5,531,617 shares of our common stock issuable upon the
exercise of stock options or reserved for issuance under our amended and
restated stock incentive plan and our employee stock purchase plan. After that
registration, approximately 525,297 shares will be issuable and freely tradable
upon the exercise of vested options. Of the 525,297 shares issuable upon the
exercise of stock options, 316,960 are subject to the lock-up agreements
described above. Once we register these shares, they can be freely sold in the
public market upon issuance, subject to those lock-up agreements. You should
read "Shares Eligible for Future Sale" for a more detailed description of these
risks.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AS WELL AS DELAWARE LAW, MAY
PREVENT OR DELAY A FUTURE TAKEOVER
Our amended and restated certificate of incorporation and bylaws contain
provisions which could make it harder for a third party to acquire us without
consent of our board of directors. For example, if a potential acquiror were to
make a hostile bid for us, the acquiror would not be able to call a special
meeting of stockholders to remove our board of directors or act by written
consent without a meeting. In addition our board of directors has staggered
terms which makes it difficult to
18
<PAGE> 23
remove all our directors at once. The acquiror would also be required to provide
advance notice of its proposal to remove directors at an annual meeting.
Our board of directors has the ability to issue preferred stock which would
significantly dilute the ownership of a hostile acquiror. In addition, Delaware
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.
As a result of these provisions, our board of directors could choose not to
negotiate with an acquiror if it does not believe an acquisition is in our
strategic interests. These provisions may apply even if the acquiror's offer is
considered beneficial to our stockholders. Moreover, if the acquiror is
discouraged from offering to acquire us or prevented from successfully
completing a hostile acquisition, you could lose the opportunity to sell your
shares at a favorable price.
19
<PAGE> 24
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus that are subject
to risks and uncertainties. Many of these forward-looking statements refer to
our plans, objectives, expectations and intentions, as well as our future
financial results. You can identify these forward-looking statements by
forward-looking words such as "expects," "anticipates," "intends," "plans,"
"may," "will," "believes," "seeks," "estimates" and similar expressions. Because
these forward-looking statements involve risks and uncertainties, there are
important factors that could cause our actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors" and other factors identified by cautionary language used
elsewhere in this prospectus. Before you invest in our common stock, you should
be aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could materially and adversely affect our business,
financial condition and results of operations.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $45.0 million from the
sale of 3,800,000 shares of common stock, assuming a public offering price of
$13.00 per share and after deducting underwriting discounts and commissions of
$3.5 million and estimated expenses of approximately $950,000. If the
underwriters exercise their over-allotment option in full, we will receive net
proceeds of approximately $49.4 million. We will not receive any proceeds from
the sale of shares by the selling stockholder.
We intend to use the net proceeds from this offering to:
- Repay outstanding debt of approximately $2.8 million, including accrued
interest, prepayment penalties and any other amounts due to the lender.
The debt bears interest at prime plus 2% and includes a term loan that
was incurred to refinance existing debt and an equipment loan that was
incurred to purchase property and equipment. The term loan matures on
December 31, 2000 and the equipment loan matures on June 31, 2001.
- Fund sales and marketing expenses in the year 2000 of approximately $18.0
million.
- Fund research and development expenses in the year 2000 of approximately
$10.0 million.
We expect to use the remaining net proceeds from this offering to fund our
operating deficits and other working capital needs and for general corporate
purposes, including the development of our product lines through acquisitions of
products, technologies and businesses. Currently, however, we have no
commitments or agreements regarding any acquisitions. The amount of net proceeds
that we actually expend for working capital purposes will vary significantly
depending on a number of factors, including our future revenue growth, if any,
the amount of cash we generate from operations and the progress of our product
development efforts. We will have significant discretion in applying the net
proceeds of this offering and we may use the proceeds in ways with which you
disagree and in ways which may negatively affect our financial condition.
Pending the uses described above, we will invest the net proceeds in short-term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock, and we
do not anticipate declaring or paying any cash dividends for the foreseeable
future. We currently expect to retain all earnings, if any, for investment in
our business. In addition, the terms of our current credit facility prohibit us
from paying cash dividends without our lender's consent.
20
<PAGE> 25
CAPITALIZATION
The following table describes our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis which gives effect to the payment of preferred stock
dividends in the form of additional shares of our preferred stock and the
conversion of each outstanding share of our preferred stock into 1.8
shares of our common stock, which will occur immediately before the
completion of this offering as if the conversion occurred on September
30, 1999; and
- on a pro forma as adjusted basis to further reflect the sale of the
common stock offered by us at an assumed offering price of $13.00 per
share, after deducting underwriting discounts and estimated offering
expenses payable by us, and our receipt and application of the net
proceeds from this offering to repay outstanding debt as if the sale of
common stock and receipt of proceeds occurred on September 30, 1999.
You should read this table together with the consolidated financial
statements and the related notes appearing at the end of this prospectus and the
information under "Management's Discussion and Analysis of Financial Condition
and Resulting Operations" and "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term debt, including current portion................. $ 3,112 $ 3,112 $ --
Convertible preferred stock:
Series A; 4,000,000 shares authorized, 3,184,000 issued
and outstanding, actual; no shares authorized, issued
and outstanding, pro forma and pro forma as
adjusted............................................. 8,319 -- --
Series B; 1,231,954 shares authorized, 1,181,954 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma and pro forma as
adjusted............................................. 5,479 -- --
Series C; 1,500,000 shares authorized, 1,325,028 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma and pro forma as
adjusted............................................. 8,315 -- --
Stockholders' (deficit) equity:
Preferred stock, par value $0.01; no shares authorized,
issued and outstanding, actual; 10,000,000
authorized, pro forma and pro forma as adjusted; no
shares issued or outstanding, pro forma and pro forma
as adjusted.......................................... -- -- --
Common stock, par value $0.01; 50,000,000 shares
authorized; 10,302,163 issued and 6,862,379 shares
outstanding, actual; 20,691,106 shares issued and
17,251,322 shares outstanding, pro forma (unaudited);
24,491,106 shares issued and 21,051,322 shares
outstanding, pro forma as adjusted (unaudited)....... 103 207 245
Additional paid-in capital.............................. 5,062 27,071 72,025
Accumulated deficit..................................... (19,947) (19,947) (20,188)
Stockholders notes receivable........................... (2,594) (2,594) (2,594)
Treasury stock, 3,439,784 common shares at cost......... (6,921) (6,921) (6,921)
-------- -------- --------
Total stockholders' (deficit) equity............ (24,297) (2,184) 42,567
-------- -------- --------
Total capitalization............................ $ 928 $ 928 $ 42,567
======== ======== ========
</TABLE>
The number of shares of common stock outstanding as of September 30, 1999
does not reflect 3,036,106 shares of common stock issuable under options and
warrants outstanding as of January 10, 2000 at a weighted average exercise price
of $2.45 per share, 1,658,511 shares of common stock reserved for issuance under
our amended and restated stock incentive plan and 990,000 shares of common stock
reserved for issuance under our employee stock purchase plan.
21
<PAGE> 26
DILUTION
Our pro forma net tangible book value (deficit) as of September 30, 1999
was $(2.2) million, or $(0.13) per share of common stock. We have calculated
this amount by:
- subtracting our total liabilities from our pro forma total tangible
assets; and
- then dividing the difference by the total pro forma number of shares of
common stock outstanding, after giving effect to the payment of preferred
stock dividends in the form of additional shares of our preferred stock
and the conversion of each outstanding share of our preferred stock into
1.8 shares of our common stock, which will occur immediately before
completion of this offering.
If we give effect to our receipt of the net proceeds from our sale of
3,800,000 shares of common stock at an assumed initial public offering price of
$13.00 per share, our adjusted pro forma net tangible book value as of September
30, 1999 would have been approximately $42.6 million, or $2.02 per share. This
amount represents an immediate increase in pro forma net tangible book value of
$2.15 per share to existing stockholders and an immediate dilution of $10.98 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Pro forma net tangible book value as of September 30,
1999................................................... $(0.13)
Pro forma increase in net tangible book value attributable
to this offering....................................... 2.15
------
Pro forma net tangible book value after the offering...... 2.02
------
Dilution to new investors................................... $10.98
======
</TABLE>
The following table summarizes, on an as adjusted pro forma basis, as of
September 30, 1999, the total number of shares of common stock purchased from
us, the total consideration paid and the average price per share paid by
existing stockholders (net of share repurchases) and to be paid by new investors
in this offering at an assumed initial offering price of $13.00 per share,
before deducting estimated underwriting discounts and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 17,251,322 81.9% $16,698,000 25.3% $ 0.97
New investors........... 3,800,000 18.1 49,400,000 74.7 13.00
---------- ----- ----------- -----
Total......... 21,051,322 100.0% $66,098,000 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters exercise their over-allotment option in full, the
number of shares held by existing stockholders will decrease to 17,041,042, or
79.6% of the total shares outstanding, and the number of shares held by new
investors will increase to 4,370,000, or 20.4% of the total shares outstanding.
The above computations exclude 3,036,106 shares of common stock issuable
upon the exercise of options and warrants outstanding as of January 10, 2000 at
a weighted average exercise price of $2.45 per share, 1,658,511 shares of common
stock reserved for issuance under our amended and restated stock incentive plan
and 990,000 shares of common stock reserved for issuance under our employee
stock purchase plan. From September 30, 1999 through January 10, 2000, options
were exercised to purchase an aggregate of 13,499 shares of common stock. If any
additional options and warrants are exercised, new investors will experience
further dilution. For more information about our stock option plans, see
"Management -- Stock Option Plan and Other Compensation Plan."
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<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the related notes
appearing at the end of this prospectus and the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Use of Proceeds." For an explanation of the determination of the number of
shares used to compute historical and pro forma basic and diluted net loss per
share, see note 1(l) of the notes to our consolidated financial statements.
The statement of operations data for the years ended December 31, 1996,
1997 and 1998 and for the nine months ended September 30, 1999 and the balance
sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived
from, and are qualified by reference to, our consolidated financial statements
included at the end of this prospectus, which have been audited by KPMG LLP. The
statement of operations data for the year ended December 31, 1995 and the
balance sheet data as of December 31, 1996 are derived from, and are qualified
by reference to, our consolidated financial statements which are not included in
this prospectus and which have been audited by KPMG LLP. The statement of
operations data for the year ended December 31, 1994 and the balance sheet data
as of December 31, 1994 and 1995 are derived from our unaudited consolidated
financial statements, which are not included in this prospectus. The statement
of operations data for the nine months ended September 30, 1998 is unaudited and
is included with the consolidated financial statements included in this
prospectus. In the opinion of our management, the unaudited consolidated
financial statements have been prepared on a basis consistent with the annual
audited consolidated financial statements which appear elsewhere in this
prospectus, and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of our financial position and
results of operations for these unaudited periods. Our historical results are
not necessarily indicative of results to be expected in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ----------------------
1994 1995 1996 1997 1998 1998 1999
----------- ------ ------- ------- ------- ----------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License..................................... $ 300 $ 444 $ 764 $ 3,775 $ 8,682 $ 5,726 $11,011
Services.................................... 177 161 425 1,138 2,444 1,657 4,079
Hardware.................................... 246 357 632 1,271 2,171 1,750 46
------ ------ ------- ------- ------- ------- -------
Total revenues.......................... 723 962 1,821 6,184 13,297 9,133 15,136
------ ------ ------- ------- ------- ------- -------
Cost of revenues:
License..................................... 8 10 30 164 310 218 258
Services.................................... 138 130 622 1,204 2,526 1,863 2,596
Hardware.................................... 235 315 920 1,574 2,482 1,995 46
------ ------ ------- ------- ------- ------- -------
Total cost of revenues.................. 381 455 1,572 2,942 5,318 4,076 2,900
------ ------ ------- ------- ------- ------- -------
Gross profit............................ 342 507 249 3,242 7,979 5,057 12,236
Operating expenses:
Sales and marketing......................... 72 93 291 2,016 6,147 4,236 7,409
Research and development.................... 114 264 1,095 1,817 3,529 2,385 4,140
General and administrative.................. 163 401 1,058 1,684 2,141 1,458 2,556
Charge for termination of distribution
agreement................................. -- -- -- -- 900 900 --
Acquired in-process research and
development............................... -- -- -- -- -- -- 3,506
Other personnel costs....................... -- 621 -- -- -- -- 665
------ ------ ------- ------- ------- ------- -------
Operating loss.......................... (7) (872) (2,195) (2,275) (4,738) (3,922) (6,040)
Interest income (expense), net................ 5 9 4 62 (31) (26) (320)
------ ------ ------- ------- ------- ------- -------
Loss before provision for income taxes........ (2) (863) (2,191) (2,213) (4,769) (3,948) (6,360)
Provision for income taxes.................... -- -- -- -- -- -- --
------ ------ ------- ------- ------- ------- -------
Net loss...................................... (2) (863) (2,191) (2,213) (4,769) (3,948) (6,360)
Preferred stock dividends and accretion....... -- -- -- (84) (502) (77) (1,090)
------ ------ ------- ------- ------- ------- -------
Net loss applicable to common stockholders.... $ (2) $ (863) $(2,191) $(2,297) $(5,271) $(4,025) $(7,450)
====== ====== ======= ======= ======= ======= =======
Historical net loss per share -- basic and
diluted..................................... $ -- $(0.10) $ (0.21) $ (0.32) $ (0.76) $ (0.56) $ (1.15)
====== ====== ======= ======= ======= ======= =======
Shares used in computing historical net loss
per share -- basic and diluted.............. 6,179 8,922 10,307 7,238 6,964 7,245 6,469
====== ====== ======= ======= ======= ======= =======
Pro forma net loss per share -- basic and
diluted..................................... $ (0.36) $ (0.42)
======= =======
Shares used in computing pro forma net loss
per share -- basic and diluted.............. 13,399 15,276
======= =======
</TABLE>
23
<PAGE> 28
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
---- ----- ------- ------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................ $ 99 $ 84 $ 69 $ 2,092 $ 912 $ 52
Working capital (deficit).................... 143 (142) (2,399) (2,506) (3,156) (1,873)
Total assets................................. 365 316 1,108 3,966 5,026 8,919
Long-term debt, less current portion......... -- -- -- -- 1,102 2,210
Total convertible preferred stock............ -- -- -- 6,733 12,710 22,113
Total stockholders' equity (deficit)......... 143 (69) (2,260) (8,241) (15,376) (24,297)
</TABLE>
24
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our Consolidated
Financial Statements and Notes.
OVERVIEW
We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions across multiple
communications media. Our software is designed to enable customer contact
centers within a company to record and evaluate complete customer interactions
through one or more communications media, such as telephone and Web chat. We
believe that the key benefits of our products include increased revenues from
improved customer interactions, improved profitability from increased customer
service representative and supervisor productivity and reduced turnover and
enhanced customer retention through greater customer intimacy. Our software is
designed to integrate with a variety of third party software, such as customer
relationship management and enterprise resource planning applications, and with
existing telephony and computer network hardware and software. The majority of
our customers are companies with one or more contact centers that handle voice
and data customer interactions for outbound sales and marketing operations,
inbound service/support lines, or both. We utilize our direct sales organization
and a variety of strategic marketing alliances to reach our target customer
base.
SOURCES OF REVENUES AND REVENUE RECOGNITION POLICY
We generate revenues principally from licensing our software directly to
customers and providing related professional services, including software
installation, training and maintenance. During the nine months ended September
30, 1999, approximately 95% of our revenues were derived from sales within North
America through our direct sales force. Prior to 1999, substantially all of our
revenues were derived from sales within North America. Our license agreements
generally provide that customers pay a software license fee for one or more
software products for a specified number of users. The amount of the license fee
varies based on which software product is licensed, the number of software
products licensed and the number of users licensed. Customers can subsequently
pay additional license fees to allow additional users to use previously licensed
software products or to license additional software products. Each of our
software products contains the same core functionality, allowing for easy
integration of additional software products as they are licensed from us.
Customers that license software products receive the software on compact disc.
We recognize license revenues in accordance with the provisions of American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" and SOP 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2." Following the requirements of SOP 97-2, we recognize
license revenues when all of the following conditions are met:
- we have signed a noncancellable license agreement with the customer;
- we have delivered the software product to the customer;
- the amount of fees to be paid by the customer is fixed or determinable;
and
- we believe that collection of these fees is probable.
Until the first quarter of 1999, we generated revenues from the sale of
computer hardware to our customers. This hardware consisted of standard, readily
available computer servers that we purchased from third parties and resold.
Because of our relatively low volume of sales compared to traditional computer
equipment providers, we were unable to compete on price with those providers and
frequently resorted to selling hardware at very low margins or below our cost.
The losses that we incurred from selling hardware adversely affected our
liquidity and financial position.
25
<PAGE> 30
Because of this, we discontinued hardware sales in the first quarter of 1999
which improved our gross margins during 1999. Our customers currently purchase
their hardware from other suppliers.
Our customers generally purchase installation and training services. They
ordinarily purchase these services directly from us through our internal
professional services organization on either a fixed fee or a time and materials
basis. Revenues on installation and training services are recognized upon
performance of the related services.
Our customers also purchase maintenance contracts that provide software
upgrades and technical support over a stated term, generally twelve months.
Historically, all of our customers have purchased an initial maintenance
contract for each newly licensed site. From January 1997 through September 1999,
on average, over 92% of our customer sites at the beginning of each year renewed
their annual maintenance contracts. Revenues on maintenance are recognized
ratably over the terms of the maintenance contracts, which are usually one year.
COST OF REVENUES AND OPERATING EXPENSES
Our cost of license revenues primarily consists of license fees due to
third parties for royalties and packaging costs. Our cost of services revenues
includes salaries and related expenses for our installation, training and
maintenance personnel and allocations of facilities, communications and
depreciation expenses. Our cost of hardware revenues consisted of purchases of
hardware. We discontinued sales of hardware during the first quarter of 1999.
Our operating expenses are classified into three general categories: sales and
marketing, research and development and general and administrative. We classify
all charges to these operating expense categories based on the nature of the
expenditures. We allocate the costs for overhead and facilities to each of the
functional areas that use the overhead and facilities services. These allocated
charges include facility rent for corporate offices, communication charges and
depreciation expenses for office furniture and equipment. We anticipate that our
operating expenses will increase substantially in future quarters as we increase
sales and marketing operations, develop new distribution channels, fund greater
levels of research and development, broaden professional services and support
and improve operational and financial systems. As a result, we expect to incur
additional losses for the foreseeable future. In addition, our limited operating
history makes it difficult for us to predict future operating results, and,
accordingly, there can be no assurance that we will achieve or sustain revenue
growth or profitability.
Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.
We had 178 full-time employees at December 31, 1999, up from 25, 74 and
111, at December 31, 1996, 1997 and 1998, respectively. This rapid growth places
a significant demand on our management and operational resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. In addition, we expect that
future expansion will continue to challenge our ability to hire, train, motivate
and manage our employees. Competition is intense for highly qualified technical,
sales and marketing and management personnel. If our total revenue does not
increase relative to our operating expenses, our management systems do not
expand to meet increasing demands, we fail to attract, assimilate and retain
qualified personnel or our management otherwise fails to manage our expansion
effectively, there would be a material adverse effect on our business, financial
condition and operating results.
DEFERRED STOCK COMPENSATION CHARGE
During the fourth quarter of 1999, we incurred a deferred stock
compensation charge of $1.0 million for the difference between the exercise
price and the deemed fair value of certain stock
26
<PAGE> 31
options. This charge will be amortized over the vesting period of the underlying
options, generally four years.
RESULTS OF OPERATIONS
The table below shows operating data as a percentage of total revenues for
the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1996 1997 1998 1998 1999
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License.................................. 42.0% 61.0% 65.3% 62.7% 72.7%
Services................................. 23.3 18.4 18.4 18.1 27.0
Hardware................................. 34.7 20.6 16.3 19.2 0.3
------ ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License.................................. 1.6 2.7 2.3 2.4 1.7
Services................................. 34.2 19.4 19.0 20.4 17.2
Hardware................................. 50.5 25.5 18.7 21.8 0.3
------ ----- ----- ----- -----
Total cost of revenues.............. 86.3 47.6 40.0 44.6 19.2
------ ----- ----- ----- -----
Gross profit........................ 13.7 52.4 60.0 55.4 80.8
Operating expenses:
Sales and marketing...................... 16.0 32.6 46.2 46.4 48.9
Research and development................. 60.1 29.4 26.5 26.1 27.4
General and administrative............... 58.1 27.2 16.1 16.0 16.9
Charge for termination of distribution
agreement.............................. -- -- 6.8 9.9 --
Acquired in-process research and
development............................ -- -- -- -- 23.2
Other personnel costs.................... -- -- -- -- 4.4
------ ----- ----- ----- -----
Operating loss...................... (120.5) (36.8) (35.6) (43.0) (40.0)
Interest income (expense), net.............. 0.2 1.0 (0.2) (0.3) (2.1)
------ ----- ----- ----- -----
Loss before provision for income
taxes............................. (120.3) (35.8) (35.8) (43.3) (42.1)
Provision for income taxes.................. -- -- -- -- --
------ ----- ----- ----- -----
Net loss............................ (120.3)% (35.8)% (35.8)% (43.3)% (42.1)%
====== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues
Total revenues increased from $9.1 million in the nine months ended
September 30, 1998 to $15.1 million in the nine months ended September 30, 1999,
representing a 66% increase, principally due to growth in our license revenues.
License revenues increased from $5.7 million in the nine months ended September
30, 1998 to $11.0 million in the nine months ended September 30, 1999,
representing a 92% increase. The increase in license revenues was primarily a
result of a growing market awareness of our products and, to a lesser extent, an
expanded sales force. In addition, during the nine months ended September 30,
1998 and 1999, 35% and 57%, respectively, of our license revenues were
attributable to new customers, while 65% and 43%, respectively, were
attributable to add-on sales associated with our existing customer base. As a
percentage of total
27
<PAGE> 32
revenues, license revenues increased from 62.7% in the nine months ended
September 30, 1998 to 72.7% in the nine months ended September 30, 1999.
Services revenues increased from $1.7 million in the nine months ended
September 30, 1998 to $4.1 million in the nine months ended September 30, 1999,
representing a 146% increase. Installation and training revenues increased
primarily from the increase in license revenues. Maintenance revenues have
increased as our customer base has grown from 168 customer sites as of December
31, 1998 to 302 customer sites as of September 30, 1999. As a percentage of
total revenues, services revenues increased from 18.1% in the nine months ended
September 30, 1998 to 27.0% in the nine months ended September 30, 1999.
Hardware revenues decreased from $1.8 million in the nine months ended
September 30, 1998 to $46,000 in the nine months ended September 30, 1999,
representing a 97% decrease. We discontinued the sale of hardware during the
first quarter of 1999. As a percentage of total revenues, hardware revenues
decreased from 19.2% in the nine months ended September 30, 1998 to 0.3% in the
nine months ended September 30, 1999.
Cost of Revenues
Total cost of revenues decreased from $4.1 million for the nine months
ended September 30, 1998 to $2.9 million for the nine months ended September 30,
1999, primarily due to our discontinuance of hardware sales. Also, we improved
our services margin primarily through improved project management. Cost of
revenues as a percentage of total revenues decreased from 44.6% for the nine
months ended September 30, 1998 to 19.2% for the nine months ended September 30,
1999, primarily due to our discontinuance of hardware sales. We expect, however,
that over time the total cost of revenues as a percentage of total revenues will
increase as the percentage of license revenues as a percentage of total revenues
decreases.
Cost of license revenues increased from $218,000 for the nine months ended
September 30, 1998 to $258,000 for the nine months ended September 30, 1999, due
to increased royalties for third party software caused by an increase in license
revenues. Cost of license revenues decreased from 2.4% of total revenues for the
nine months ended September 30, 1998 to 1.7% of total revenues for the nine
months ended September 30, 1999.
Cost of services revenues increased from $1.9 million in the nine months
ended September 30, 1998 to $2.6 million in the nine months ended September 30,
1999. This increase was a result of an increase in the number of employees
engaged in installation, training and customer maintenance services. Cost of
services revenues as a percentage of total revenues decreased from 20.4% for the
nine months ended September 30, 1998 to 17.2% for the nine months ended
September 30, 1999. Cost of services revenues as a percentage of services
revenues decreased from 112% for the nine months ended September 30, 1998 to 64%
for the nine months ended September 30, 1999. This improvement in services
margin was mainly due to improved project management for installation services
and, to a lesser extent, fewer employees engaged in customer maintenance
services per customer. We expect to continue to hire additional service
personnel, however, and anticipate that cost of services revenues will both
increase in absolute dollars and as a percentage of total revenues.
Hardware cost of revenues decreased from $2.0 million in the nine months
ended September 30, 1998 to $46,000 in the nine months ended September 30, 1999.
This decrease was due to our discontinuance of hardware sales in the first
quarter of 1999. Hardware cost of revenues decreased from 21.8% of total
revenues for the nine months ended September 30, 1998 to 0.3% of total revenues
for the nine months ended September 30, 1999.
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<PAGE> 33
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 75% from $4.2
million in the nine months ended September 30, 1998 to $7.4 million in the nine
months ended September 30, 1999, principally due to an increase in sales
personnel and, to a lesser extent, an increase in marketing program expenses. As
a percentage of total revenues, sales and marketing expenses increased from
46.4% for the nine months ended September 30, 1998 to 48.9% for the nine months
ended September 30, 1999. We expect that the absolute dollar amount of sales and
marketing expenses will continue to increase due to the planned growth of our
sales force, including the establishment of additional sales offices both
domestically and internationally in Europe and Asia. We also expect additional
increases in advertising and marketing programs and other promotional activities
and anticipate that sales and marketing expenses will vary as a percentage of
total revenues from period to period.
Research and Development. Research and development expenses increased 74%
from $2.4 million in the nine months ended September 30, 1998 to $4.1 million in
the nine months ended September 30, 1999, primarily due to an increase in the
number of employees and consultants engaged in research and development
activities. As a percentage of total revenues, research and development expenses
increased from 26.1% for the nine months ended September 30, 1998 to 27.4% for
the nine months ended September 30, 1999. We expect research and development
costs to increase in amount as we continue to commit substantial resources to
enhancing existing product functionality and to developing new products.
General and Administrative. General and administrative expenses increased
75% from $1.5 million in the nine months ended September 30, 1998 to $2.6
million in the nine months ended September 30, 1999, primarily due to increased
salary and related expenses in our executive, finance and administrative
functions. As a percentage of total revenues, general and administrative
expenses increased from 16.0% for the nine months ended September 30, 1998 to
16.9% for the nine months ended September 30, 1999. We expect general and
administrative costs to increase in absolute amount as we continue to add
infrastructure to support a larger organization, continue to invest in our
international expansion and incur costs related to being a publicly-held
company.
During the nine months ended September 30, 1998, we incurred a $900,000
charge to terminate a distributor agreement. We incurred other personnel costs
of $665,000 during the nine months ended September 30, 1999, which related to
severance payments for terminated executives as well as a bonus and relocation
costs in connection with recruiting a new executive.
Acquired In-Process Research and Development. During the nine months ended
September 30, 1999, we acquired technology to store and retrieve substantially
larger volumes of data than our software is currently capable of storing and
retrieving in exchange for shares of our common stock valued at $3.5 million. We
have accounted for the purchase price as acquired in-process research and
development expense because, at the date of the transaction, the in-process
research and development acquired by us related to the development of technology
not possessed by us and the results of this in-process research and development
had not progressed to a stage where they met technological feasibility as
defined by SFAS No. 86, Accounting for the Cost of Computer Software to Be Sold,
Leased or Otherwise Marketed. As this was our first attempt to develop this type
of technology, there existed a significant amount of uncertainty as to our
ability to complete the development of a product which would achieve market
acceptance within a reasonable timeframe. We continue to expect that we will
complete this development project no sooner than the third quarter of 2000.
Additionally, the amount of development required to enable the acquired in-
process research and development to be compatible with our primary product will
continue to be significant, which increased the uncertainty surrounding its
successful development. We estimate it would have cost us more than $3.5 million
to develop the in-process research and development internally and estimate we
will incur an additional $3.3 million to complete our development
29
<PAGE> 34
efforts. The in-process research and development does not have an alternative
future use to us that has reached technological feasibility.
Interest Income (Expense), Net
Net interest expense increased from $26,000 during the nine months ended
September 30, 1998 to $320,000 during the nine months ended September 30, 1999
due to an increase in borrowings under our credit facilities.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues
Total revenues increased 240% from $1.8 million in 1996 to $6.2 million in
1997 and increased 115% to $13.3 million in 1998, primarily due to an increase
in license revenues. License revenues increased 394% from $764,000 in 1996 to
$3.8 million in 1997 and increased 130% to $8.7 million in 1998. The increase in
license revenues was primarily the result of a growing market awareness of our
products and, to a lesser extent, an expanded sales force. Further, during 1996,
1997 and 1998, 71%, 49% and 45%, respectively, of our license revenues were
attributable to new customers, while 29%, 51% and 55%, respectively, were
attributable to add-on sales associated with our existing customer base. As a
percentage of total revenues, license revenues increased from 42.0% in 1996 to
61.0% in 1997 and to 65.3% in 1998.
Services revenues increased 168% from $425,000 in 1996 to $1.1 million in
1997 and increased 115% to $2.4 million in 1998. Installation and training
revenues grew due to an increase in license revenues, and maintenance revenues
grew due to an increase in customers. As a percentage of total revenues,
services revenues decreased from 23.3% in 1996 to 18.4% in 1997 and 1998.
Hardware revenues increased 101% from $632,000 in 1996 to $1.3 million in
1997 and increased 71% to $2.2 million in 1998. The increase in hardware
revenues was a result of the increased number of customer sites licensing our
software over the same period. As a percentage of total revenues, hardware
revenues decreased from 34.7% in 1996 to 20.6% in 1997 and decreased to 16.3% in
1998.
Cost of Revenues
Total cost of revenues increased 87% from $1.6 million in 1996 to $2.9
million in 1997 and increased 81% to $5.3 million in 1998. These increases in
total cost of revenues are related to the increase in total revenues over the
same periods. Total cost of revenues as a percentage of total revenues decreased
from 86.3% in 1996 to 47.6% in 1997 and decreased to 40.0% in 1998, primarily
due to the fact that higher margin license revenues grew at a faster rate than
lower margin hardware revenues.
Cost of license revenues increased from $30,000 in 1996 to $164,000 in 1997
and increased to $310,000 in 1998. These increases were due to increased
royalties for third party software caused by an increase in license revenues.
Cost of license revenues as a percentage of total revenues increased from 1.6%
in 1996 to 2.7% in 1997 and decreased to 2.3% in 1998.
Cost of services revenues increased 94% from $622,000 in 1996 to $1.2
million in 1997 and increased 110% to $2.5 million in 1998. These increases were
a result of increases in the number of employees engaged in installation,
training and customer maintenance services. Cost of services revenues as a
percentage of total revenues decreased from 34.2% in 1996 to 19.4% in 1997 and
decreased to 19.0% in 1998. Cost of services revenue as a percentage of services
revenues was 146% in 1996, 106% in 1997 and 103% in 1998. This improvement in
services margin was mainly due to improved project management for installation
services and, to a lesser extent, fewer employees engaged in maintenance
services per customer.
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<PAGE> 35
Hardware cost of revenues increased from $920,000 in 1996 to $1.6 million
in 1997 and increased 58% to $2.5 million in 1998. These increases in hardware
cost of revenues relate to the increases in hardware revenues in the same
periods. Hardware cost of revenues as a percentage of total revenues decreased
from 50.5% of total revenues in 1996 to 25.5% in 1997 and decreased to 18.7% in
1998. Cost of hardware revenues as a percentage of hardware revenues was 146% in
1996, 124% in 1997 and 114% in 1998. This improvement in hardware margin was a
result of increased pricing for hardware. We discontinued sales of hardware
during the first quarter of 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 593% from
$291,000 in 1996 to $2.0 million in 1997, and then increased 205% to $6.1
million in 1998. The increase in sales and marketing expenses is principally
related to an increase in sales personnel and, to a lesser extent, an increase
in marketing program expenses. As a percentage of total revenues, sales and
marketing expenses were 16.0% in 1996, 32.6% in 1997, and 46.2% in 1998. These
percentage increases were primarily due to an increase in sales personnel.
Research and Development. Research and development expenses increased 66%
from $1.1 million in 1996 to $1.8 million in 1997, and then increased 94% to
$3.5 million in 1998. The increase in absolute dollars was primarily due to an
increase in the number of employees and consultants engaged in research and
development activities. As a percentage of total revenues, research and
development expenses were 60.1% in 1996, 29.4% in 1997, and 26.5% in 1998. These
percentage decreases were due to our revenue growing faster than our research
and development expenses.
General and Administrative. General and administrative expenses increased
59% from $1.1 million in 1996 to $1.7 million in 1997, and then increased 27% to
$2.1 million in 1998. The increase in absolute dollars was primarily
attributable to increased salary and related expenses in the executive, finance
and administrative functions to manage our growth. As a percentage of total
revenues, general and administrative expenses were 58.1% in 1996, 27.2% in 1997,
and 16.1% in 1998. These percentage decreases were due to our revenues growing
faster than our general and administrative expenses. During 1998, we incurred a
$900,000 charge to terminate a distributor agreement.
Interest Income (Expense), Net
Net interest income increased from $4,000 in 1996 to $62,000 in 1997, and
decreased to $31,000 in interest expense in 1998 due to long-term debt we
entered into during the latter portion of 1998.
Provision for Income Taxes
No provision for federal, state or foreign income taxes has been recorded
as we incurred net operating losses for all periods presented. We have recorded
a full valuation allowance against the deferred tax asset generated as a result
of these net operating loss carryforwards, as the future realization of the tax
benefit is not currently considered more likely than not.
As of September 30, 1999, we had net operating loss carryforwards for
federal and state tax purposes of approximately $6.7 million. These federal and
state loss carryforwards may be available to reduce future taxable income and
expire at various dates into the year 2019. Under the provisions of the Internal
Revenue Code, substantial changes in our ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to
offset taxable income.
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<PAGE> 36
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly statements of operations
data for each of our last eight quarters in the period ended September 30, 1999,
as well as the percentage of our total revenues represented by each item. The
information has been derived from our unaudited consolidated financial
statements, which have been prepared on substantially the same basis as the
audited consolidated financial statements contained in this prospectus. Our
unaudited consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, that we consider to be necessary to
present fairly this information when read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
The results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.............. $ 1,007 $ 1,639 $2,130 $ 1,957 $2,956 $ 3,091 $3,484 $ 4,436
Services............. 346 448 466 743 787 1,091 1,294 1,694
Hardware............. 351 614 522 614 421 46 -- --
------- ------- ------ ------- ------ ------- ------ -------
Total
revenues.... 1,704 2,701 3,118 3,314 4,164 4,228 4,778 6,130
Cost of revenues:
License.............. 54 37 101 80 92 102 83 73
Services............. 416 596 592 675 663 730 818 1,048
Hardware............. 416 733 581 681 487 46 -- --
------- ------- ------ ------- ------ ------- ------ -------
Total cost of
revenues.... 886 1,366 1,274 1,436 1,242 878 901 1,121
------- ------- ------ ------- ------ ------- ------ -------
Gross
profit...... 818 1,335 1,844 1,878 2,922 3,350 3,877 5,009
Operating expenses:
Sales and
marketing.......... 900 1,211 1,403 1,622 1,911 2,139 2,502 2,768
Research and
development........ 578 646 833 906 1,144 1,124 1,334 1,682
General and
administrative..... 613 508 438 512 683 785 768 1,003
Charge for
termination of
distribution
agreement.......... -- 900 -- -- -- -- -- --
Acquired in-process
research and
development........ -- -- -- -- -- -- -- 3,506
Other personnel
costs.............. -- -- -- -- -- 350 -- 315
------- ------- ------ ------- ------ ------- ------ -------
Operating
loss........ (1,273) (1,930) (830) (1,162) (816) (1,048) (727) (4,265)
Interest income
(expense), net....... 8 (8) (7) (11) (5) (19) (72) (229)
------- ------- ------ ------- ------ ------- ------ -------
Loss before
provision
for income
taxes....... (1,265) (1,938) (837) (1,173) (821) (1,067) (799) (4,494)
Provision for income
taxes................ -- -- -- -- -- -- -- --
------- ------- ------ ------- ------ ------- ------ -------
Net loss...... $(1,265) $(1,938) $ (837) $(1,173) $ (821) $(1,067) $ (799) $(4,494)
======= ======= ====== ======= ====== ======= ====== =======
</TABLE>
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<PAGE> 37
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.............. 59.1% 60.7% 68.4% 59.1% 71.0% 73.1% 72.9% 72.4%
Services............. 20.3 16.6 14.9 22.4 18.9 25.8 27.1 27.6
Hardware............. 20.6 22.7 16.7 18.5 10.1 1.1 -- --
----- ----- ----- ----- ----- ----- ----- -----
Total
revenues.... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License.............. 3.2 1.4 3.2 2.4 2.2 2.4 1.7 1.2
Services............. 24.4 22.1 19.1 20.4 15.9 17.3 17.2 17.1
Hardware............. 24.4 27.1 18.6 20.5 11.7 1.1 -- --
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues.... 52.0 50.6 40.9 43.3 29.8 20.8 18.9 18.3
----- ----- ----- ----- ----- ----- ----- -----
Gross
profit...... 48.0 49.4 59.1 56.7 70.2 79.2 81.1 81.7
Operating expenses:
Sales and
marketing.......... 52.8 44.9 45.0 49.0 45.9 50.5 52.3 45.2
Research and
development........ 33.9 23.9 26.7 27.4 27.5 26.6 27.9 27.4
General and
administrative..... 36.0 18.8 14.0 15.4 16.4 18.6 16.1 16.4
Charge for
termination of
distribution
agreement.......... -- 33.3 -- -- -- -- -- --
Acquired in-process
research and
development........ -- -- -- -- -- -- -- 57.2
Other personnel
costs.............. -- -- -- -- -- 8.3 -- 5.1
----- ----- ----- ----- ----- ----- ----- -----
Operating
loss........ (74.7) (71.5) (26.6) (35.1) (19.6) (24.8) (15.2) (69.6)
Interest income
(expense), net....... 0.5 (0.3) (0.2) (0.3) (0.1) (0.4) (1.5) (3.7)
----- ----- ----- ----- ----- ----- ----- -----
Loss before provision
for income taxes... (74.2) (71.8) (26.8) (35.4) (19.7) (25.2) (16.7) (73.3)
Provision for income
taxes................ -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net loss...... (74.2)% (71.8)% (26.8)% (35.4)% (19.7)% (25.2)% (16.7)% (73.3)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
License revenues as a percentage of total revenues experienced an upward
trend during 1998 and leveled off in the first three quarters of 1999. Services
revenues as a percentage of total revenues varied from quarter to quarter in
1998 and leveled-off in 1999 due primarily to our discontinuance of hardware
sales and, to a lesser extent, increased services revenues. We expect the
relative amount of license revenues as compared to services revenues, as
experienced during the first three quarters of 1999, to decrease which will
increase our cost of revenues and decrease our gross margin. We discontinued the
sale of hardware during the first quarter of 1999.
Our quarterly revenues increased throughout 1998 and the first three
quarters of 1999 primarily as a result of growing market awareness of our
products and, to a lesser extent, an expanded sales force. Cost of revenues as a
percentage of revenues has trended down due primarily to our discontinuance of
hardware sales and, to a lesser extent, improvements in installation project
management. Operating expenses increased in each quarter primarily as a result
of the increase in the number of employees engaged in sales and marketing and
research and development activities and, to a lesser extent, as a result of the
growth experienced in the executive, finance and administrative functions.
We believe that our quarterly operating results may experience seasonal
fluctuations in the future. For instance, quarterly results may fluctuate based
on client calendar year budgeting cycles,
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<PAGE> 38
slow summer purchasing patterns in Europe and our compensation policies that
tend to compensate sales personnel, typically in the latter half of the year,
for achieving annual quotas.
As a result of the foregoing and other factors, we believe that
quarter-to-quarter comparisons of results are not necessarily meaningful, and
such comparisons should not be relied upon as indications of future performance.
Fluctuations in operating results may also result in volatility in the price of
the shares of our common stock.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through private sales of
convertible preferred stock totaling $20.4 million and, to a lesser extent, from
debt financing. As of September 30, 1999, we had $52,000 in cash and negative
working capital of $2.2 million.
Accounts receivable increased 154% from $2.5 million at December 31, 1998
to $6.3 million at September 30, 1999. This increase was primarily due to
extended payment terms granted to customers during the nine months ended
September 30, 1999 and, to a lesser extent, to our increased revenues. Nearly
half of the total accounts receivable balance as of September 30, 1999 related
to accounts as to which extended payment terms had been negotiated. Although
these extended payment terms are generally less than 90 days, none of the
amounts were due more than six months from September 30, 1999. As of January 15,
2000, approximately 80% of the September 30, 1999 accounts receivable balance
had been collected.
The principal use of cash to date has been to fund our losses from
operations and to purchase furniture and equipment. Also, during 1997, 1998 and
for the nine months ended September 30, 1999, we purchased treasury shares
totaling $3.7 million, $1.9 million and $5.4 million, respectively.
During 1997, we entered into a financing agreement with Silicon Valley Bank
and obtained a $1.0 million working capital line of credit and a $1.0 million
committed equipment line. The working capital line of credit permitted us to
borrow the lesser of $1.0 million or 70% of eligible accounts receivable through
the maturity date of July 1, 1998. At December 31, 1997 there was $1.0 million
outstanding under the working capital line of credit. The committed equipment
line allowed us to obtain advances for all property and equipment purchases made
during the period from May 1, 1997 through December 31, 1997. The aggregate
amount of advances outstanding under the equipment line was $890,000 as of
December 31, 1997, which was converted to a term note as of such date.
During 1998, the financing agreement was amended and the working capital
line of credit was increased to the lesser of $2.5 million or a variable
percentage of eligible accounts receivable, through December 10, 1999. There was
no balance outstanding under the working capital line of credit as of December
31, 1998. In addition, we obtained a new $1.0 million committed equipment line
of credit under the amended financing agreement for the period from December 11,
1998 through June 10, 1999. As of December 31, 1998, the aggregate advances made
under the equipment line of credit were $1.0 million and the balance outstanding
on the term note was $593,000. In connection with the amended financing
agreement, we issued Silicon Valley Bank a warrant to purchase 18,000 shares of
our common stock.
In April 1999, the working capital line of credit was increased to the
lesser of $4.0 million or 75% of net eligible accounts receivable through August
1999. In connection with this increase, the original Silicon Valley Bank
warrants were cancelled, and we issued warrants to Silicon Valley Bank to
purchase 20,000 shares of our series B convertible preferred stock for $4.65 per
share. Upon the completion of this offering, if this warrant has not been
exercised, it will become exercisable for 36,000 shares of common stock at an
exercise price of $2.58 per share.
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<PAGE> 39
In June 1999, we refinanced all of our then existing borrowings with
Greyrock Capital, a division of NationsCredit Commercial Corporation. Under the
terms of the new loan and security agreement, we obtained a $2.0 million secured
term loan, a $1.0 million secured equipment loan and a $4.0 million working
capital line of credit.
- The term loan bears interest at prime plus 2% and matures with a balloon
payment on December 31, 2000. The proceeds were used to pay down the
outstanding credit facilities. The balance outstanding under the term
loan was $2.0 million as of September 30, 1999.
- The equipment loan bears interest at prime plus 2% and has monthly
principal and interest installments through maturity on June 31, 2001.
The proceeds were used to pay for purchases of property and equipment.
The balance outstanding under the equipment loan was $875,000 as of
September 30, 1999.
- The working capital line of credit permits us to borrow the lesser of
$4.0 million or 80% of eligible accounts receivable through the maturity
date of December 31, 2000 and bears interest at prime plus 2%. The line
of credit is used to fund working capital requirements of ours and we are
required to remit our accounts receivable collections to Greyrock Capital
whenever there is a balance outstanding under the line of credit. The
balance outstanding under the line of credit was $402,000 as of September
30, 1999.
In connection with the loan agreement, we issued to Greyrock Capital a
warrant to purchase 117,000 shares of our common stock for $2.58 per share. We
anticipate repaying all of our borrowings from Greyrock Capital using a portion
of the proceeds from this offering. Upon repayment of the outstanding debt we
will record a charge to the statement of operations of approximately $210,000
due to a write-off of the unamortized debt discount and the payment of a
prepayment penalty. Following the offering and repayment of the outstanding
debt, we intend to terminate our loan and security agreement with Greyrock
Capital.
We expect to have capital expenditures of approximately $250,000 and $2.0
million in the fourth quarter of 1999 and the year 2000, respectively. We also
anticipate that our capital expenditures will increase over the next several
years as we expand our facilities and acquire equipment to support expansion of
our sales and marketing and research and development activities.
We believe that the net proceeds from this offering, together with our
current cash and borrowing capacity will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next 12
months. If cash generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or debt securities
or increase the available borrowings under our 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.
YEAR 2000 READINESS
Some computers, software and associated equipment include programming code
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if, for example, 00 is interpreted to mean 1900, rather
than 2000. These problems are commonly referred to as the Year 2000 problem.
Although it was widely expected that the Year 2000 problem would affect most
systems beginning on January 1, 2000, as of the date of this prospectus, neither
we nor, to our knowledge, our customers who use our software have experienced
any material Year 2000 problems. However, it is widely believed that there is a
continued risk of Year 2000 problems which may arise during the first three
months of the calendar year 2000.
State of Readiness of Our Products. Our review of the Year 2000 readiness
of our products is performed as a part of our normal quality assurance program.
This program requires testing of
35
<PAGE> 40
computer processes with the hardware system clock set to dates in the year 2000
and includes testing of dates in the year 2000 as inputs. As of the date of this
prospectus, we have identified no material Year 2000 compliance issues with our
products as currently licensed. However, our products operate in complex network
environments and directly and indirectly interact with a number of other
hardware and software systems. We have not performed extensive tests on all
hardware, software, switches and other devices that may operate in conjunction
with our products, or provide data to or receive data from our products. We also
have not tested custom interfaces written for our products. Some customers using
our products may have Year 2000 problems.
State of Readiness of our Internal Information Technology Systems. We may
be affected by Year 2000 issues related to non-compliant internal systems
developed by us or by third party vendors. We have generally relied upon our own
testing and the public representations of our suppliers of products and services
of their Year 2000 readiness. We believe that we have identified substantially
all major computers, software applications and related equipment used with our
internal operations and we have modified, upgraded or replaced these systems to
minimize the possibility of a material disruption to our business.
Systems Other Than Information Technology Systems. Our internal operations
and businesses are also dependent upon computer-controlled systems of third
parties such as suppliers, customers and service providers. The operation of our
office and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, elevators, other common devices and utilities, may
be affected by the Year 2000 problem. We have completed our assessment of this
equipment and absent a critical failure beyond our control, such as prolonged
loss of electrical or telephone service, we believe that Year 2000 problems
experienced by third parties will not have a material impact upon us.
Cost Assessment. We do not separately track expenditures to achieve Year
2000 readiness. Those expenditures are absorbed within our development
organization. To date, our costs related to Year 2000 readiness have not been
material relative to our overall development expenditures. Furthermore, based on
our experience to date, and our assessment as of the date of this prospectus, we
do not anticipate that costs associated with remediating non-compliant products
or internal systems will be material.
Risks. Any failure of our products to achieve Year 2000 readiness could
result in a decrease of sales of our products, an increase in allocation of
resources to address Year 2000 problems of our customers without additional
revenue commensurate with the dedication of resources, or an increase in
litigation costs relating to losses suffered by our customers due to these Year
2000 problems. Failures of our internal systems could prevent us from processing
orders, issuing invoices, and developing products, and could require us to
devote significant resources to correcting these problems. Due to the general
uncertainty inherent in the Year 2000 computer problem, resulting from the
uncertainty of the Year 2000 readiness of third party suppliers and vendors, we
are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our business, results of operation, and
financial condition.
Contingency Plans. We have developed contingency plans to be implemented
as part of our efforts to identify and correct Year 2000 problems affecting our
internal systems. Depending on the systems affected, these plans include:
- accelerated replacement of affected equipment or software;
- the use of backup equipment and software;
- increased work hours for our employees or use of contract personnel to
correct on an accelerated schedule any Year 2000 problems which arise or
to provide manual workarounds for information systems; and
- other similar approaches.
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If we are required to implement any of these contingency plans, these plans
could have a material adverse effect on our business, financial condition and
operating results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal years beginning after June 15, 1999. Subsequently, the
effective date was deferred until June 15, 2000. We are in the process of
evaluating this pronouncement, will adopt it upon its effective date and have
not currently reached a conclusion concerning its impact, if any, on us.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions. This SOP
amends SOP 97-2 to, among other things, require recognition of revenue using the
"residual method" in circumstances outlined in the SOP. Under the residual
method, revenue is recognized as follows: (1) the total fair value of
undelivered elements, as indicated by vendor-specific objective evidence, is
deferred and subsequently recognized in accordance with the relevant sections of
SOP 97-2, and (2) the difference between the total arrangement fee and the
amount deferred for the undeliverable elements is recognized as revenue related
to the deliverable elements. SOP 98-9 is effective for fiscal years beginning
after March 15, 1999. We do not anticipate any material impact from the
provisions of the new pronouncement on our results of operations.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number or
factors including those described in the risk factors section of this
prospectus.
Foreign Currency Exchange Rate Risk
To date, approximately 95% of our recognized revenues have been denominated
in U.S. dollars and primarily from customers in the United States, and our
exposure to foreign currency exchange rate changes has been immaterial. We
expect, however, that future license and professional services revenues may also
be derived from international markets and may be denominated in the currency of
the applicable market. As a result, our operating results may become subject to
fluctuations based upon changes in the exchange rates of foreign currencies in
relation to the U.S. dollar. Furthermore, to the extent that we engage in
international sales dominated in U.S. dollars, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets. 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.
Interest Rate Risk
As of September 30, 1999, we had cash and cash equivalents of $52,000 which
consist of cash and highly liquid short-term investments. Due to the nature of
our short-term investments, we have concluded that there is no material market
risk exposure.
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As of September 30, 1999, we had total short-term and long-term debt
outstanding of $902,000 and $2.2 million, 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.
Based upon the outstanding indebtedness under these arrangements, an increase in
the prime rate of 0.5% would cause a corresponding increase in our annual
interest expense of approximately $16,000.
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BUSINESS
OVERVIEW
We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions across multiple
communications media. Our software is designed to enable companies to optimize
their customer relationship management. As a result, we believe our customers
are able to generate additional revenue opportunities, improve profitability,
enhance customer retention and achieve greater customer intimacy.
Our eQuality software is designed to enable customer contact centers within
a company to record and evaluate complete customer interactions through multiple
media, such as telephone and Web chat. Our software records a customer service
representative's voice interactions with a customer as well as the customer
service representative's corresponding computer desktop activities, such as data
entry, screen navigation and data retrieval. By capturing both voice and
computer desktop activity and synchronizing them during replay, a company can
observe and analyze complete customer interactions as they actually occurred.
Supporting the need for Web-based customer interactions driven by the growth of
the Internet and eCommerce, our software enables companies to also capture,
evaluate and analyze Web chat sessions. In addition, our software allows
companies to selectively record and analyze customer interactions based on
business criteria which they define, such as key customers, important marketing
campaigns, specific products and selected customer service representatives, or
CSRs.
We currently provide our software to an extensive base of large companies
with multiple contact centers, including American Express, Bank of America, Bell
Atlantic Mobile, Capital One, Chase Manhattan Bank, CheckFree, CompUSA, EDS,
Federal Express, Federated Department Stores, General Motors/Saturn, GTE, MCI
WorldCom, Merck-Medco, Sabre, Southern Company, Travelocity.com, VISA, Wells
Fargo and Xerox. As of January 10, 2000, we had licensed our software to over
135 customers at over 325 sites.
INDUSTRY BACKGROUND
Developing and maintaining long-term customer relationships is critical to
the success of businesses operating in a competitive global marketplace. The
rapid growth of the Internet and eCommerce has increased the importance
companies place on their customer relationships. Because the Internet enables
consumers to easily evaluate products and prices from a wide range of
geographically dispersed vendors and quickly change vendors at relatively low
cost, it is becoming more difficult for businesses to develop long-term
relationships with their customers. As the use of the Internet expands as a
business platform, the need for personal contact is essential to enabling a
higher quality customer experience. The integration and optimization of customer
contacts across all communications media is therefore becoming a strategic and
tactical business requirement.
In response to these trends, companies are adopting customer relationship
management initiatives seeking to increase the longevity and profitability of
their customer relationships. To effect these initiatives, companies have
developed software applications to automate and evaluate key sales, marketing
and customer service processes and improve the effectiveness of their customer
interactions. According to META Group, industry leading enterprises are
responding to the steadily increasing competitive pressures and are focusing on
customer relationship management as their most valuable post-year 2000
technology investment. In a press release, AMR Research predicted that the
market for technology related to customer relationship management will grow at a
compound annual rate of 49% from 1998 to 2003, exceeding $16.8 billion by 2003.
Historically, the focus of customer relationship management applications has
been on improving the companies' internal sales, marketing and customer service
processes.
Competitive pressures resulting from the emergence of the Internet and
eCommerce have required companies to shift the focus of their customer
relationship management initiatives from improving their internal operations to
meeting the needs of their customers. Companies are
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developing a new set of business principles that place a greater value on
improving customer satisfaction and enhancing employee skills to foster customer
relationships and increase customer intimacy. We believe that companies with a
better understanding of the characteristics and preferences of their customers
will be able to more effectively customize product and service offerings that
result in increased customer retention. In addition, these companies will be
able to better identify opportunities to sell complementary or higher-end
products and to more accurately forecast customer demand.
To understand and improve customer relationships, a company must first
improve its specific business processes that involve a high degree of direct
customer interaction. Today, many of a company's direct customer interactions
occur through call centers. These call centers are generally staffed by
telephone operators, often referred to as call center agents, who process a
steady flow of outbound or inbound telephone calls relating to the company's
products and services. Call centers generally consist of supervisor and agent
workstations linked to a central telephone switch and a common computer system.
The PELORUS Group estimates that at the end of 1998, there were approximately
70,000 installed call center systems with 3.3 million call center agent
positions in the United States. It further estimates that by the end of 2003,
the number of installed call center systems will increase to more than 117,000,
with the number of agent positions reaching approximately 5.3 million. As a
result of this widespread market adoption, companies have increased their focus
on developing and improving the efficiency of their call center operations.
Historically, call centers have had the ability to handle only limited
telephone and other voice interactions. These call centers have generally
focused on either conducting outbound calls, for functions such as collections
and product sales, or on managing inbound calls, for purposes such as product
support, order processing or customer service. The growth of the Internet and
the increased focus of businesses on optimizing relationships with their
customers have contributed to the evolution of traditional single-function,
telephone-based call centers into multi-functional, multi-channel customer
interaction centers, or contact centers. The emergence of multi-channel customer
contact centers has generally increased the volume and complexity of tasks that
call center agents are required to perform. As a result, traditional
single-function call center agents must now assume more valuable, multi-function
customer service responsibilities. Companies are now attempting to apply the
best practices from the call center industry to the rapid, electronic,
high-volume customer interactions associated with the Internet.
These customer service representatives are now required to effectively
handle multiple tasks that involve interaction across a growing number of
customer touch points, including telephone, the electronic exchange of text
messages over the Internet, commonly referred to as Web chat, and e-mail. For
example, certain Web-based consumers may have the option to select a "call me
now" button which initiates a Web chat or direct telephone interaction with a
customer service representative. While Web-based customer interactions are
expected to continue to grow rapidly, Jupiter Communications estimates that 90%
of all online customers still prefer human interaction. In addition, companies
have discovered that the success of their marketing initiatives depends on their
ability to rapidly make adjustments to these campaigns as they progress. We
believe these adjustments are best effected at the direct point of customer
contact, which we believe is increasingly occurring through the contact center.
The increasing importance of developing long-term customer relationships, the
growing complexity of the customer service representative's job and the
opportunity to manage marketing initiatives through the customer contact center
have combined to dramatically increase the need for companies to provide an
effective means to record, evaluate and analyze their customer interactions.
A number of applications have emerged to attempt to address the need to
better manage these interactions. However, we believe that most currently
available solutions do not adequately address the importance of optimizing
customer interactions through recording at the point of contact, evaluation of
the customer contact and analysis of customer service representative
performance. For example, current solutions require companies to record every
call center telephone call and
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store these calls on large-scale proprietary hardware systems. These solutions
do not allow a company to selectively record, retrieve, evaluate and analyze
specific customer interactions based on criteria selected by the company.
Consequently, companies who employ these existing solutions have only a limited
ability to actively evaluate and improve their customer interactions which in
turn limits their ability to attract and retain customers. As a result, we
believe that there is a significant opportunity in the marketplace for a
comprehensive, integrated multimedia solution which optimizes a company's
customer interactions.
Our eQuality Solution
We provide business-driven multimedia recording and analysis software that
enables companies to enhance their customer interactions. As a result, we
believe our customers are able to generate additional revenue opportunities,
improve profitability and enhance customer retention. We believe our software
and services provide the following key business benefits:
- Increases revenue opportunities. Our software enables companies to
analyze customer interactions, incorporating data from their existing
databases and systems. As a result, companies are able to customize their
sales and marketing efforts to individual customer preferences or
tendencies, improve the selling techniques of their customer service
representatives and sell additional complementary or higher-end products
and services to their existing customers. Consequently, we believe
companies utilizing our software can generate additional revenue
opportunities.
- Enables improved profitability. Because our solution improves the
overall quality of companies' interactions with their customers, costs
associated with customer turnover are reduced. By providing CSRs with
better training, companies can improve the efficiency of CSRs by reducing
their average "talk time," which results in decreased total telephone
charges and a reduced total number of CSRs needed to handle the same
volume of customer interactions. Because our software enables the
evaluation of individual CSR performance, companies can customize
incentives to reward CSRs. We believe these customized incentives,
together with effective feedback and training, leads to increased CSR job
satisfaction, retention of high quality CSRs and reduced costs related to
CSR turnover. According to the 1999 Purdue University Call Center
Benchmark Report, inbound call center turnover averages 26% and the
average cost to acquire a CSR is $6,398. This data, combined with the
estimates from PELORUS Group, translate into an aggregate CSR turnover
cost of approximately $5.5 billion.
- Enhances customer retention. Using our software, companies can develop
more intimate knowledge of their customers, which should improve the
overall quality of products and services being delivered to customers. We
believe that the growth in Internet-related commerce and services will
increase the importance customers place on high-quality and consistent
customer service. The Yankee Group estimates that the average cost to
acquire a single customer by Amazon.com, eBay and Preview Travel has
risen approximately 45% from the second quarter of 1998 to the second
quarter of 1999. It is imperative that companies retain these costly new
customers to capitalize on their investment. As a result, we believe that
companies who deliver excellent service to their customers will develop
longer-term, more profitable customer relationships.
We believe that we are able to provide these key business benefits through
the innovative features of our software solution, which include the following:
- Enables synchronized replay of voice and computer desktop data. Our
eQuality software records a CSR's voice interaction with a customer as
well as the CSR's corresponding computer desktop activities, such as data
entry, screen navigation and data retrieval. By capturing both voice and
computer desktop activity and synchronizing them during replay, companies
can observe and analyze complete customer interactions as they actually
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occurred. This enables companies to not only evaluate the behavior of
their customer service representatives, but also to determine whether the
necessary technology resources for customer support are readily available
to them and whether they are making effective and efficient use of
available technology resources.
- Captures customer interactions across multiple communications media. Our
software captures customer interactions from a variety of communications
media, including telephone, Web chat and e-mail. This multimedia
capability allows companies to deliver consistent, high quality customer
service regardless of the communication channel.
- Records based on company-selected criteria. Companies using our software
can record customer interactions based on selected criteria, which we
refer to as business-driven recording. This enables companies to define
specific business criteria to trigger recording and analysis of
information, such as key customers, important marketing campaigns,
specific products and selected customer service representatives. Further,
companies can define critical business events to trigger the capture of
the interaction, such as customer problems which have reached a certain
severity level. Companies can then use this information to quickly
evaluate the performance of targeted business initiatives and to adjust
those initiatives for higher market impact.
- Provides performance analysis and feedback. Our eQuality Evaluation
software facilitates the review, evaluation and scoring of customer
service representatives, providing an immediate performance summary.
Using our eQuality Analysis software, a user can combine important data
derived from eQuality Evaluation with data derived from many other
business applications, such as customer relationship management and
enterprise resource planning software and integrated telephony
applications. For instance, a company can evaluate quality scores
obtained from eQuality Evaluation with sales achievement data received
from a sales tracking system to ensure CSRs are not compromising the
quality of their customer interactions to sell new products. The
resulting information, which is presented in easy-to-use formats, such as
reports, graphs and tables, allows companies to provide more meaningful
feedback to CSRs on their performance and better analyze the overall
operation of the contact center.
- Integrates with third party software and hardware. Our eQuality software
is designed to integrate with a variety of third party software, such as
customer relationship management and enterprise resource planning
applications. In addition, our software is designed to integrate or be
compatible with a company's existing telephony and computer network
hardware and software such as telephone switches, automated telephone
dialers and computer-telephony integration systems. This allows companies
to capitalize on their existing infrastructure and gain the benefits of
our software with minimal additional investment.
- Provides an open architecture that scales to support small to large
installations. Our software operates on the Windows NT platform and is
compatible with standard voice cards and databases. Also, our software
can capture and record computer screen activity from customer service
representative workstations that are running any of a variety of
operating systems. By utilizing off-the-shelf hardware and software, our
customers are able to implement and support our products at a relatively
low cost. Because our software is scaleable, it can support the needs of
a small single site as well as large multi-site installations. For
example, our software is currently being used at a customer installation
with approximately 7,000 CSRs. In addition, our software can be expanded
to accommodate an increasing number of CSRs with minimal hardware and
software investment.
- Enables rapid deployment. Because of our software's features, our
extensive third party integration, our open architecture and our
implementation process, we can typically implement our software at a
customer's initial site within 30 to 45 days from the date the software
agreement is signed by a new customer. We ordinarily complete the actual
software
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installation within three to five days. Since the detailed project
planning occurs during installation at the first site, we can implement
our software at additional sites in five to seven days. Most of our
target market consists of large corporations with many customer contact
centers, and we have significant experience with customers purchasing our
software for multiple sites. As a result, our rapid deployment is
important in that it allows those customers to quickly implement and
begin realizing the benefits of our software.
STRATEGY
Our objective is to be the leading provider of software that enables
companies to optimize their customer interactions across multiple communications
media, including telephone, Web chat, eCommerce, Internet self-service and
e-mail. Key elements of our strategy include the following:
- Extend the breadth and depth of our product offerings. We intend to
continue to invest in research and development to enhance our current
software and build new software to address the growing needs of companies
that seek to better manage their customer relationships across multiple
communications media. We also intend to extend our Web-based
capabilities, such as the recording and analyzing of integrated
eCommerce, Internet self-service, e-mail and voice interactions.
Additionally, we plan to expand the number of third party applications
with which our software can integrate.
- Increase sales to existing and new customers. A majority of our existing
customers are large companies that have multiple contact centers. While
we have been successful in penetrating these customers and installing our
software at more than one contact center, we have not yet installed our
software at a majority of their contact centers. We intend to capitalize
on the success of our initial installations, use our direct sales force
and emphasize the scalability and rapid deployment of our software to
increase the number of installations at existing customer sites which
have not yet installed our software. We also plan to continue pursuing
new customer accounts with multiple contact centers through our existing
sales force and our network of strategic relationships.
- Expand our network of application software and Internet infrastructure
business alliances. We intend to expand our network of business
alliances with complementary application software and Internet
infrastructure providers to increase the number of products with which
our software is compatible. We believe the demand for our software will
increase as it becomes compatible with an increasing number of customer
relationship management, enterprise resource planning and Internet
infrastructure applications. In addition, expanding this network of
business alliances will enable us to generate new sales leads as our
business alliances recommend our product to their customers. Currently we
have business alliances with the following application and Internet
infrastructure providers: Siebel Systems, Clarify, Cisco/Geotel, Genesys,
eShare, Kana, eGain, Brightware, Mustang.com and Davox.
- Expand our international presence. We currently maintain a small direct
sales force in the United Kingdom. In the future, we plan to expand our
direct and indirect sales channels in Europe, the Asia Pacific region and
Latin America, with particular attention to areas that are actively
adopting customer relationship management solutions.
PRODUCTS
Our eQuality software initiates recording of customer interactions based on
criteria selected by companies and facilitates retrieval and analysis of the
recorded information. It records a customer service representative's voice
interaction with a customer as well as the CSR's corresponding computer desktop
activities, such as data entry, screen navigation and data retrieval. The voice
and data are captured and stored on a computer disk for synchronized evaluation
and analysis. By capturing both voice and desktop activity and synchronizing
them during replay, a company can observe and analyze complete customer
interactions as they actually occurred. The captured
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interactions can then be selectively retrieved, combined with information from a
company's other business systems, such as customer relationship management and
enterprise resource planning software, analyzed and presented in a number of
summary or detailed formats. Our software thus enables companies to evaluate the
effectiveness of its CSRs, improve contact center performance and profile their
customers' characteristics and preferences to create customized product and
service offerings.
An integral feature of eQuality is business-driven recording, which allows
a company to record specific customer interactions based on criteria that it
selects. Using eQuality, a company can define business rules that trigger
recording of selective customer interactions that are particularly critical to
its operating performance. For example, a company may use eQuality to record
customer interactions based on a number of criteria, including:
- Key customers. Our software can selectively record all calls from
specific classes or groups of customers having common traits or
characteristics. Examples include customers with certain sales or asset
levels or customers having a particular importance to the company.
- Important marketing campaigns. All calls associated with particular
marketing campaigns can be recorded so that the effectiveness of the
campaign can be evaluated while the initiative is in process.
Consequently, adjustments can be made proactively to optimize performance
of the campaign.
- Specific products. Interactions that relate to specific products can be
identified and recorded to allow businesses to evaluate product design,
installation and service issues. Examples include selected calls related
to new products, key revenue-producing products and particularly
profitable products.
- Selected customer service representatives. Calls that are handled by
specific CSRs can be sampled so that supervisors can more effectively
monitor and train CSRs. Examples include newly hired CSRs and CSRs that
are not achieving desired performance levels.
By recording only critical customer interactions based on business rules,
companies have fewer interactions to store and therefore significantly lower
storage requirements. Further, our data capture technique allows companies to
utilize minimal network bandwidth by sending across the network only the changed
areas of a CSR's computer desktop screen. The result is a lower total cost of
ownership.
In addition, our software is designed to integrate or be compatible with a
company's existing telephony and computer network hardware and software. Our
software is designed to run on a server which employs the Windows NT operating
system. In addition, our software can capture and record computer screen
activity from CSR workstations that are running any of a variety of operating
systems, including Windows 3.1, Windows 95/98, Windows NT, OS/2, Sun Solaris,
HP(UX)3270 and AS/400.
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The following diagram provides a graphical depiction of our software
solution:
This graphic is a three level graphic. The top level is five
three-dimensional cubes. Inside the first cube text states: "Voice and Data
Recording". Inside the second cube text states: "Web Chat Recording". Inside
the third cube text states: "Email Recording". Inside the fourth cube text
states: "Contact Evaluation". Inside the fifth cube text states:
"Performance Analysis". To the left of the five cubes, text states: eQuality
Application Components. The text directly above each of the five-dimensional
cubes states: "eQuality Call," "eQuality Interactive," "eQuality Response,"
"eQuality Evaluation" and "eQuality Analysis". The second level is a
three-dimensional rectangle with an oval insert centered within the top of
the three-dimensional rectangle. Inside the first rectangle, text states:
"Core Technology Components." The oval component text states: "eQuality". To
the left of the first rectangle text states: "eQuality Technology Platform."
The third level is one three-dimensional rectangle with an oval insert
centered within the top of the three-demensional rectangle. Inside the
rectangle text states: "Integration Modules". The oval insert text states:
"eQuality Connect". To the left of the rectangle is text stating: "eQuality
Technology Integration".
Our eQuality suite of products is comprised of the following modules:
eQuality Call. eQuality Call records a customer service representative's
voice interaction with a customer and the CSR's corresponding computer desktop
activities, such as data entry, screen navigation and data retrieval. The
captured voice and desktop activity can then be synchronized during replay,
allowing companies to observe and analyze complete customer interactions as they
actually occurred. This enables companies to evaluate the performance of CSRs,
determine whether the necessary technology resources for customer support are
available to the CSRs and ascertain whether the CSRs are making effective and
efficient use of these resources. Supervisors can use this information to train
CSRs, improve company systems and resources which are designed to support CSRs
and enhance the quality of the services being delivered to customers.
eQuality Interactive and eQuality Response. Our eQuality Interactive and
eQuality Response applications allow a company to record Internet interactions,
including Web chat, instant messaging, guided browser sessions and e-mail, based
on user-defined business rules. These applications enable companies to gauge the
effectiveness of their CSRs' Internet skills, refine newly
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implemented Internet processes and optimize the effectiveness of their Web
technology deployments. In combination with eQuality Call, companies are able to
deliver consistently high standards of service regardless of the medium.
eQuality Evaluation. Our eQuality Evaluation application facilitates the
review, evaluation and scoring of CSRs, providing an immediate summary of a
CSR's performance. Using eQuality Evaluation, CSR supervisors can build custom
evaluation forms which are designed to collect information about aspects of a
CSR's performance that are most important to them. Supervisors and others can
input information regarding a CSR's performance into the form, which is then
collected in a database. The collected information can be retrieved, presented
in a summary format, analyzed and ultimately used to measure and improve a CSR's
performance.
eQuality Evaluation can reveal problem areas, issues, trends and
opportunities. Supervisors and others with access to eQuality Evaluation can
review CSRs' performance and determine opportunities to increase their skill
levels through training. Supervisors can compare CSRs' performance to current
goals and provide more realistic future goals.
Historically and at present, eQuality Call was and is licensed together
with our eQuality Evaluation software. To date, we have derived all of our
license revenues from the sale of these two products.
The following diagram presents a sample screen taken from eQuality
Evaluation:
[A screen of the eQuality Evaluation software. The tool bar is located on
the top portion of the page. The remainder of the page contains data entry
pull down menus and multilayered tab menus]
eQuality Analysis. eQuality Analysis provides a more comprehensive
analysis of customer interaction and CSR performance by bridging the disparate
information systems of a company. Using eQuality Analysis, a company can combine
data derived from eQuality Evaluation with data derived from information
obtained from a company's other business systems, such as customer relationship
management and enterprise resource planning software and integrated telephony
applications. Combining multiple sources of data from within the company into a
common analysis
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and reporting system allows for a more thorough evaluation of CSR and overall
contact center performance. Recognizing the importance of multi-channel contact
centers, we have designed eQuality Analysis to integrate with business systems
that collect data from a broad range of communications media. eQuality Analysis
became generally available during the quarter ended September 30, 1999, and we
have not yet recognized any revenues from eQuality Analysis.
eQuality Analysis measures the performance of a company's contact center
based on criteria selected and weighted by the company. This performance index
allows a company to prioritize its key business drivers. For instance, a company
can evaluate quality scores obtained from eQuality Evaluation with sales
achievement data received from a sales tracking system to ensure CSRs are not
compromising the quality of their customer interactions to sell new products.
eQuality Analysis features the flexibility to produce a wide array of
summary and detailed analyses in easy-to-use formats, such as reports, graphs
and tables. Reporting features include Web-publishing capabilities, which allow
contact center managers to create reports in an HTML format, view them online or
print them for distribution. Additionally, CSRs are able to view their scores by
simply accessing the corporate Intranet.
The following diagram presents a sample screen taken from eQuality
Analysis:
[A screen of the eQuality Analysis Software. The tool bar is located on the
top portion of the page. Underneath the tool bar is the text and graphical
display of information relating to the performance of a CSR]
PROFESSIONAL SERVICES
Our professional services group plays an integral role in installing our
software and training and supporting our customers. Specifically, we provide the
expertise, professional consulting staff and technology tools to install our
software and provide ongoing support to our customers. Our experienced
installation professionals work with the customer to build a solid technical
infrastructure that supports our software applications.
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An initial implementation engagement typically lasts 30 to 45 days from the
date the software agreement is signed by a new customer, and involves the
planning, configuration, testing and installation of our software. We ordinarily
complete the actual software installation within three to five days. We believe
these installation projects allow our consultants and systems engineers to gain
industry-specific knowledge that can be used in future projects and products.
In addition to installing our software and supporting our customers, our
professional services team works closely with our internal research and
development organization to help enhance our software solutions. Experience
gained by our professional services group through ongoing installation of our
software is regularly conveyed to our development staff. Our research and
development organization then capitalizes on this experience to design
enhancements to our software. Our services staff also maintains a technical
support hotline.
CUSTOMERS
Our target customers include companies in a number of industries having at
least one contact center. As of January 10, 2000, we had licensed our software
to over 135 customers at over 325 sites. To date, customer installations have
ranged from as small as one contact center having 25 CSRs, to customers with 14
contact centers having an aggregate of approximately 7,000 CSRs. The following
table is a representative list of customers who have licensed our software:
<TABLE>
<CAPTION>
FINANCIAL SERVICES TECHNOLOGY & TELECOM OTHER
------------------ -------------------- -----
<S> <C> <C>
American Express Alltel Communications 7C Ltd
Bank of America Bell Atlantic Mobile ADP
BB&T BellSouth Carlson Wagonlit Travel
Capital One CCH Federal Express
Chase Manhattan Bank CheckFree General Motors/Saturn
Fleet Bank EDS Georgia Pacific
Discover Financial Services, GTE International Paper
formerly Novus MCI WorldCom Maytag
Liberty Health McLeod USA McKesson/HBOC
PNC Bank MediaOne Merck-Medco
VISA MTT Mobility Norcross Teleservices
Wells Fargo TCI PC ServiceSource
Travelocity.com Pepsi
WebLink Wireless Promus Hotels
Xerox Sabre
</TABLE>
<TABLE>
<CAPTION>
UTILITIES RETAIL
--------- ------
<S> <C> <C>
First Energy BMG Direct
Niagra Mohawk CompUSA
Northeast Utilities Federated Department Stores
Southern California Edison Fingerhut
Southern Company Victoria's Secret
Wisconsin Power and Light
</TABLE>
Two customers accounted for 28% of our revenues in 1997. Two other
customers accounted for 27% of our revenues in 1998. In 1999, no customer
accounted for 10% or more of our revenues.
SELECTED CUSTOMER EXAMPLES
GM/SATURN
Saturn is a wholly owned subsidiary corporation of General Motors. The
Saturn customer assistance center is where Saturn customers call upon a skilled
team of customer support consultants and customer assistant managers from both
Saturn and Centrobe, an EDS company and
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<PAGE> 53
a leading provider of enterprise customer management solutions. Recording and
analysis software is an important component of the company's assistance center.
In calculating the number of Team Leaders on staff along with their annual
salaries, Saturn determined that eQuality has already decreased up to 50% of its
workload, measured by call monitoring time, through the automated recording
process and the subsequent evaluation processes.
PNC BANK
PNC Bank Corporation is a diversified financial services organization. To
service the financial needs of regional community banking customers, PNC Bank
operates a nearly 900 person customer contact center -- the National Financial
Services Center. Voted one of the top five call centers in financial services,
this contact center processes more than 2.8 million customer interactions for
PNC Bank each month. In response to the company's need to provide
industry-leading customer service, PNC Bank leverages our recording application
to record a random sample of each financial services consultant's voice and data
interactions with customers every month. This information is used to properly
coach consultant's on customer service skills, trend customer needs and
requests, and ensure quality service in future customer interactions.
COMPUSA
CompUSA is a leading computer retailer in the United States. The company
deployed eQuality in its call center services facility, which is responsible for
all technical support to CompUSA's individual and business customers, customized
help desk services for third party customers, and technical support outsourcing
for computer manufacturers and software publishers. The 120,000-square-foot
facility opened in July 1998 and has the capacity for over 1,000 agents. CompUSA
expects eQuality's business-driven recording capabilities to improve agent
interaction with customers and internal systems by simultaneously monitoring
agents' conversations and on-screen activities for improved coaching and
training sessions that result in better customer service.
7C LTD
7C Ltd is a leading independent outsourced customer relationship management
specialist in the United Kingdom. The company implemented the eQuality solution
as part of 7C's recently announced L10 million, three-year expansion program to
become a major player in the European call center market and the leading
provider of Internet-based customer contact solutions. eQuality helps the
company not only see how well its people are servicing customers but also,
crucially, how well its technology is performing. 7C can determine immediately,
for example, if slow computer response times or screen sequencing are making
calls unnecessarily long and placing undue demand on staff.
PC SERVICESOURCE
PC ServiceSource is a leading provider of complete and integrated service
logistics outsourcing solutions for both OEMs and service providers in the
personal computer industry. Approximately 150 sales services representatives
handle about 10,000 phone calls daily. Asking for the sale and "upselling" is a
skill that PC ServiceSource managers are enhancing through the use of the
eQuality voice and data recording solution. Its new training program places a
greater emphasis on the sales opportunities presented to sales service
representatives when they are interacting with customers. PC ServiceSource has
seen dramatic improvements and plans to continue regular training initiatives
designed to assist sales service representatives in increasing their sales,
while improving their skills with the help of our software.
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<PAGE> 54
PROMUS HOTEL CORPORATION
Promus Hotel Corporation is the franchisor and operator of the Doubletree
Hotels Guest Suites and Resorts, Embassy Suites, Hampton Inn, Hampton Inn &
Suites, Homewood Suites, Club Hotels by Doubletree, Red Lion Hotels, Embassy
Vacation Resorts and Hampton Vacation Resorts brands. The eQuality solution has
enabled them to address specific service delivery and training issues as they
take place. Strengthening its service proactively and developing reservation
sales representatives' skill sets has been greatly enhanced with eQuality at
their central reservations office.
SALES AND MARKETING
We sell our software primarily through a combination of a direct sales
force and resellers. We have 11 sales offices in the United States, one in
Canada and two in the United Kingdom. As of December 31, 1999, our sales and
marketing organization consisted of 59 employees worldwide.
To date, substantially all of our revenues have been generated through our
direct sales force, which consists of 35 sales people in 13 locations. Our
direct sales force consists of sales agents and regional managers. In addition
to qualified leads generated internally, our direct sales force also pursues
qualified leads provided by companies with whom we have formal or informal
referral agreements. These agreements are not exclusive and may be terminated by
either party. Our direct sales force is responsible for the direct sales effort
and manages, negotiates and closes those sales.
To expand the coverage and support of our direct sales force, we also
develop strategic marketing alliances with leading companies in our industry.
These relationships may include joint marketing campaigns and selling
strategies. Separate from our direct sales force, our business development
personnel are responsible for the initiation, negotiation and completion of
these partnerships. We currently have these relationships with Siebel Systems,
Clarify, Cisco/Geotel, Genesys, eShare, Kana, eGain, Brightware, Mustang.com and
Davox.
In addition to our direct sales force, we have agreements with MCI WorldCom
and Rockwell under which they resell our software. To support this indirect
sales channel, our business development personnel provide information and
training to these companies' sales personnel so that they are better able to
educate potential customers about the benefits of our software and services. Our
agreements with our resellers are not exclusive and may be terminated by either
party.
Our direct sales cycle typically begins with the qualification of a sales
lead or the request for a proposal from a prospective customer. The sales lead,
or request for a proposal, is followed by the qualification of the lead or
prospect, an assessment of the customer's requirements, a formal proposal,
presentations and product demonstrations, site visits to an existing customer
using our software and contract negotiation. The sales cycle can vary
substantially from customer to customer but typically lasts three to six months,
and is considered completed with the signing of the contract. Historically, most
of our customers have expanded their use of our solutions to expand the number
of CSRs at existing sites and to license additional contact centers, with a
minimal incremental sales effort on our part. This results from high levels of
customer satisfaction within our installed base. Since a majority of the
detailed project planning occurs during the installation at the first site, our
software can be used in production at additional sites in five to seven days.
We use a variety of marketing programs to build awareness of Witness
Systems, our brand name and our software, as well as to attract potential
customers. These programs include market research, product and strategy updates
with industry analysts, public relations activities, direct mail and
relationship marketing programs, seminars, trade shows, speaking engagements and
Web site marketing. Our marketing organization also produces marketing materials
to support our sales efforts, that include brochures, data sheets and other
technical descriptions, presentations and demonstrations.
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<PAGE> 55
The market for business software has experienced seasonal fluctuations in
demand. The first and third quarters of the year have been typically
characterized by lower levels of revenues. As our revenues grow, seasonal
fluctuations in our revenues may become more evident.
RESEARCH AND DEVELOPMENT
We believe our software development capabilities are essential to our
strategy of enhancing our core technology, developing additional applications
incorporating that technology and maintaining the competitiveness of our
software. We devote a substantial portion of our resources to developing new
software and features, extending and improving our software technology and
researching new technological initiatives in our market. We believe that our
future success depends in part upon our ability to continue to enhance existing
software, respond to changing customer requirements and develop and introduce
new or enhanced software that incorporate new technological developments and
emerging industry standards.
Our research and development expenditures for the years ended December 31,
1996, 1997 and 1998 and for the nine months ended September 30, 1999 were $1.1
million, $1.8 million, $3.5 million and $4.1 million, respectively. We intend to
continue to increase our investment in research and development in the future.
As of December 31, 1999, 51 of our employees were engaged in research and
development and software maintenance activities.
COMPETITION
Our software and services compete in the emerging market for products that
record and analyze customer interactions. This market is intensely competitive
and experiences rapid changes in technology. We believe that we compete
effectively and that we enjoy a competitive advantage based upon (1) the
functionality and quality of our products, (2) the ease of use and ability of
our products to operate with a variety of hardware and software products, (3)
our ability to implement our products quickly, (4) our competitive pricing, and
(5) the responsiveness of our customer support. However, many of our current and
potential competitors may have longer operating histories, more established
business relationships, larger customer bases, a broader range of products and
services, greater name recognition and substantially greater financial,
technical, marketing, personnel, management, service, support and other
resources than we do. This could allow our current and potential competitors to
respond more quickly than we can to new or emerging technologies and changes in
customer requirements, better take advantage of acquisitions and other
opportunities, devote greater resources to the marketing and sale of their
products and services, and adopt more aggressive pricing policies. In addition,
many of our competitors market their products through resellers and companies
that integrate their technology and products with those of the competitor. These
resellers and technology partners of our competitors often have strong business
relationships with our customers and potential customers. Our competitors may
use these business relationships to market and sell their products and compete
for customers with us. We cannot assure you that our competitors will not offer
or develop products and services that are superior to ours, or that achieve
greater market acceptance. Our competitors include:
- quality monitoring suppliers to the call and contact center industry,
which historically have been companies that develop voice-only recording
software;
- traditional call logging vendors that have historically focused on
providing products that record all calls made by or to the user,
including emergency services, such as 911, and verification and liability
users, such as trading floors and stock brokers;
- systems integrators and consulting firms which design and develop custom
systems and perform custom integration; and
- new, larger and more established entities that may acquire, invest in or
form joint ventures with providers of recording or performance enhancing
software solutions, such as vendors of
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<PAGE> 56
customer relationship management products, computer telephony companies
and computer hardware, software and networking companies.
In addition, we have developed, and intend to continue to develop,
relationships with companies that resell our software, companies that integrate
our software with their technology and products and companies that provide us
with customer referrals or leads. Some of these companies have similar, and
often more established, relationships with our competitors, and may recommend
the products and services of our competitors to customers instead of our
software and services. In addition, through their relationships with us, these
companies could learn about our software and the market for our software and
services and could develop and sell competing products and services.
The principal competitive factors in our market include:
- product performance, reliability and features;
- user scalability and open architecture;
- third party integration;
- quality and speed of product implementation;
- ease-of-use for customers;
- analytic capabilities of the product;
- how quickly new products and product enhancements can be brought to
market;
- customer support; and
- pricing of products and services.
Our success will depend on our ability to compete effectively based on
these factors. Further, we expect that competition will increase as other
established and emerging companies enter our market and as new products,
services and technologies are introduced. Increased competition may result in
price reductions, lower gross margins and loss of market share. This could
materially and adversely affect our business, financial condition and results of
operations.
PROPRIETARY RIGHTS
General. Our success depends to a significant degree on the legal
protection of our software and other proprietary technology rights. We rely on a
combination of patent, trade secret, copyright and trademark laws and
confidentiality and non-disclosure agreements with employees and third parties
to establish and protect our proprietary rights. These measures may not be
sufficient to protect our proprietary rights, and we cannot be certain that
third parties will not misappropriate our technology and use it for their own
benefit. Also, most of these protections do not preclude our competitors from
independently developing products with functionality or features substantially
equivalent or superior to our software. Any failure to protect our intellectual
property could have a material adverse effect on our business.
Licenses. Our licenses are designed to prohibit unauthorized use, copying
and disclosure of our software technology. When we license our software to
customers, we require license agreements containing confidentiality terms
customary in the industry in order to protect our proprietary rights in our
software. These agreements generally warrant that our software will materially
comply with our written documentation and is free of viruses and other illicit
code. We also warrant that we own the software we distribute, have not violated
the intellectual property rights of others and that our current software is Year
2000 compliant. We license our products in a format that does not permit the
users to change the software code. In addition, because we treat the source code
for our products as a trade secret, all employees and third parties who require
access to the source code are first required to sign non-disclosure agreements.
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<PAGE> 57
Patents. We have received a patent generally relating to our technology
that enables the recording of a CSR's computer desktop activities and the
synchronization of certain of these activities with the CSR's voice
interactions. Our patent also relates to our data capture technique that records
only particular changed regions of a CSR's computer screen. Our patent was
granted on May 31, 1996 and will expire on May 30, 2016. We are currently
evaluating whether to revise one aspect of the patent for our synchronization
techniques. If we are unsuccessful, we may not be able to enforce any aspect of
that patent against third parties who infringe it. We also have two patent
applications pending with the United States Patent and Trademark Office. There
is no guarantee that our pending applications will result in issued patents or,
if issued, will provide us with any competitive advantages.
Trademarks and service marks. We have United States trademark
registrations on the mark WITNESS, on our logo and on one additional mark, and
we have pending United States trademark applications for our marks eQuality and
Bringing eQuality to eBusiness. We also claim common law protections for other
marks we use in our business. Competitors of ours and others could adopt marks
similar to ours, or try to prevent us from using our marks, consequently
impeding our ability to build brand identity and possibly leading to customer
confusion.
Copyrights. We have seven pending copyright registrations covering the
most recent release of our eQuality software.
EMPLOYEES
As of December 31, 1999, we had 178 full-time employees. Of these
employees, 51 were engaged in research and development and software maintenance,
59 were engaged in sales and marketing, 38 were engaged in professional services
and 30 were engaged in executive, finance, administration and operations.
None of our employees are represented by a labor union or covered by a
collective bargaining agreement. We have not experienced any labor-related work
stoppages and consider our relations with our employees to be good.
FACILITIES
Our principal administrative, sales, marketing, support, and research and
development facility is located in Alpharetta, Georgia. This facility consists
of approximately 31,200 square feet and is leased through July 2002. In
addition, we lease a total of 10 sales offices in the United States, one in
Canada and two in the United Kingdom for our direct sales force. We believe our
facilities are adequate for our current requirements.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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<PAGE> 58
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, the positions held by them, and their
ages as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David B. Gould............................. 40 President, Chief Executive Officer and
Chairman of the Board
Jon W. Ezrine.............................. 32 Chief Financial Officer
Russell E. Brown........................... 41 Vice President, Business Development
Jeffery S. Ford............................ 49 Vice President, Operations
Colin Gallick.............................. 46 Vice President, International Operations
Doug Gisby................................. 39 Chief Technology Officer and Vice
President, Engineering
Alain Livernoche........................... 40 Vice President, North American Sales
Nancy Y. Treaster.......................... 38 Vice President, Marketing
James W. Judson, Jr........................ 41 Director
Thomas J. Crotty........................... 41 Director
John Abraham............................... 44 Director
Joel Katz.................................. 36 Director
</TABLE>
David B. Gould has served as our President and Chief Executive Officer
since February 1999 and as Chairman of our Board since November 1999. From March
1996 to November 1998, Mr. Gould was Chief Executive Officer and Chairman of the
Board of InStream Corporation, a healthcare electronic commerce company. In
1998, InStream filed for liquidation under bankruptcy law. Prior to that, Mr.
Gould served as President of Digital Communications Associates, Inc.'s Remote
Access Division, now Attachmate Corporation, an enterprise information access
and management software vendor, from August 1994 to August 1995. From June 1986
to July 1994, Mr. Gould was employed by Management Science America, a developer
of enterprise solutions, where he held various management and executive level
positions in marketing, development and support, last serving as Vice President
of Financial Systems. Mr. Gould holds a BS in Econometrics from the University
of Pennsylvania and an MBA from Emory University.
Jon W. Ezrine has served as our Chief Financial Officer since April 1997.
From June 1993 to March 1997, Mr. Ezrine served as Controller for SQL
Financials, now Clarus Corporation, a client/server application software vendor.
From April 1992 to June 1993, Mr. Ezrine served as Controller for ITL Interiors,
Inc., distributor of materials to real estate property management companies.
Prior to that, Mr. Ezrine was employed by Arthur Andersen & Co. as a Senior
Staff Accountant. Mr. Ezrine holds a BS in Finance from the University of
Virginia.
Russell E. Brown joined us as Vice President of Business Development in
August 1999. From August 1993 to August 1999, Mr. Brown served in various
management positions with PeopleSoft Inc., a leading provider of client/server
application software products, most recently serving as Vice President of the
Sales/Retail Industry Business Unit. Mr. Brown holds a BS in Industrial
Management from the Georgia Institute of Technology.
Jeffery S. Ford joined us as Vice President of Operations in July 1998.
Prior to that, Mr. Ford worked as an independent consultant from January 1998 to
June 1998. From July 1989 to December 1997, Mr. Ford served in various
management positions at Cyborg Systems, a leading software provider of human
resources applications, most recently serving as Vice President of Global
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<PAGE> 59
Development. Mr. Ford holds a BA in Behavioral Management from the Georgia
Institute of Technology.
Colin Gallick joined us as Vice President of International Operations in
December 1998. From September 1996 to January 1998, Mr. Gallick served as Vice
President of FTP Software Inc., now NetManage, an international leader in the
design, development, marketing, sale, and support of connectivity software
products. From October 1991 to September 1996, Mr. Gallick served as Vice-
President and a director of Utopia Information Systems Inc., a supplier of help
desk applications and software. Mr. Gallick holds a degree in Marketing from
Bristol Polytechnic and an MS in Marketing from the University of Bath.
Doug Gisby joined us as Chief Technology Officer and Vice President of
Engineering in March 1999. Prior to that, Mr. Gisby worked as an independent
consultant from March 1998 to February 1999. From January 1997 to February 1998,
Mr. Gisby served as Director of Engineering for Genesys Telecommunications
Laboratories, a provider of enterprise-wide platform and application software.
From May 1992 to January 1997, Mr. Gisby served in various management positions
at Rockwell International Corporation, a world leader in electronic controls and
communications, most recently serving as Director of Advance Technology within
the Electronic Commerce Division. Prior to that, Mr. Gisby served as Software
Development Manager with Aspect Telecommunications, a leading provider of
customer relationship management solutions, from January 1989 to May 1992. Mr.
Gisby holds a BS Degree in Computer Science from the University of
Staffordshire.
Alain Livernoche has served as our Vice President of North American Sales
since June 1998. From January 1997 to June 1998, Mr. Livernoche served as Vice
President of Sales, Western Region for SQL Financials, now Clarus Corporation, a
client/server application software vendor. Prior to that, Mr. Livernoche served
in various management positions at Dun & Bradstreet Software, now GEAC, a
developer of enterprise solutions, most recently serving as Regional Vice
President. Mr. Livernoche holds a BS in Finance and Marketing from the
University of Montreal.
Nancy Y. Treaster has served as our Vice President of Marketing since April
1997. Prior to that, Ms. Treaster spent thirteen years with Dun & Bradstreet
Software, now GEAC, a developer of enterprise solutions, serving in various
management positions, most recently serving as Director, SmartStream Product
Marketing/Management. Ms. Treaster holds a BS in Management Science from the
Georgia Institute of Technology.
James W. Judson, Jr., our co-founder, is currently a member of our Board
and served as the Chairman of the Board of Directors from March 1997 to November
1999. From February 1998 to February 1999, Mr. Judson served as our Vice
President of Business Development and from September 1995 to February 1998 he
served as our President. Mr. Judson holds a BA in Politics from Wake Forest
University.
Thomas J. Crotty has served as one of our directors since April 1997. Mr.
Crotty has served as General Partner of Battery Ventures, a venture capital
firm, since 1989. Mr. Crotty received a BA in Business from the University of
Notre Dame and a MBA in Finance from the Wharton School.
John Abraham has served as one of our directors since March 1997. Mr.
Abraham has served as President and Chief Executive Officer of Add-Vision, Inc.,
a technology company specializing in electronic display and illumination
systems, since February 1998. From September 1997 to January 1998, he was
Executive Vice President and Chief Operating Officer of Add-Vision, Inc. From
March 1996 to November 1996, Mr. Abraham was a general partner at Geocapital
Partners, a venture capital firm. Mr. Abraham was Executive Vice President of
Compuware Corporation, a computer software developer from January 1995 to June
1995. From January 1994 to December 1994, he was Senior Vice President of
Mergers & Acquisitions of Compuware Corporation. Mr. Abraham was educated at
Columbia University and the University of Illinois.
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<PAGE> 60
Joel Katz has served as one of our directors since July 1999. Mr. Katz
currently serves as Chief Financial Officer for Vignette Corporation, a global
provider of e-business software products and services. Prior to Vignette
Corporation, Mr. Katz served as Chief Financial Officer of Harbinger
Corporation, a leading worldwide provider of business-to-business eCommerce
software, from 1990 to 1999. Mr. Katz received a BBA in Accounting from the
University of Georgia.
BOARD COMMITTEES
The audit committee consists of Mr. Katz, the chairman, and Messrs. Crotty
and Abraham. The audit committee recommends the selection of our independent
auditors and reviews the results and scope of the audit and other services
provided by them. In addition, the audit committee reviews and evaluates our
internal audit and control functions.
The compensation committee consists of Mr. Crotty, the chairman, and
Messrs. Katz and Abraham. The compensation committee reviews the compensation
and benefits of all our officers, reviews general policies relating to
compensation and benefits of our employees and makes recommendations concerning
these matters to the board of directors. The compensation committee also
administers our amended and restated stock incentive plan and employee stock
purchase plan.
The executive committee consists of Messrs. Gould and Crotty. The executive
committee will have the authority to act on behalf of the board of directors in
the management or direction of our business and affairs, to the extent
authorized by resolution of a majority of the board of directors and subject to
any limitations imposed by the laws of the State of Delaware.
DIRECTORS COMPENSATION
Directors do not currently receive compensation for services performed in
their capacity as directors. We reimburse each director for reasonable expenses
they incur in attending meetings of our board of directors and its committees.
In addition, non-employee directors who are not employed by venture capital
firms are eligible to receive options to purchase our common stock under our
amended and restated stock incentive plan. The board of directors determines the
vesting schedule and exercise price for options granted to non-employee
directors.
TERMS OF DIRECTORS AND EXECUTIVE OFFICERS
Immediately after the completion of this offering, our board of directors
will be divided into three classes, each serving for staggered three-year terms.
At each annual meeting of stockholders, a class of directors will be elected for
a three-year term to succeed the directors of the same class whose terms are
then expiring. Our bylaws provide that each class of directors will be elected
by a plurality of all votes cast at the meeting.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been elected and qualified or until
their earlier resignation or removal. There are no family relationships among
any of our directors or executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers 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.
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<PAGE> 61
EXECUTIVE COMPENSATION
The following table sets forth the total compensation we paid during the
year ended December 31, 1999 to our Chief Executive Officer and our next four
most highly compensated executive officers whose salary and bonus for 1999
exceeded $100,000. These executive officers are referred to as the Named
Executive Officers elsewhere in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) FISCAL YEAR SALARY BONUS OPTIONS COMPENSATION
------------------------------ ----------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
David B. Gould................... 1999 $206,235 $30,384 413,226 $110,654(2)
President and Chief
Executive Officer
Alain Livernoche................. 1999 150,000 10,000 -- 77,229(3)
Vice President,
North American Sales
Colin Gallick.................... 1999 148,908 14,850 169,200 65,949(4)
Vice President,
International Operations
Jeffery S. Ford.................. 1999 126,667 45,740 4,320 853(5)
Vice President,
Operations
Nancy Y. Treaster................ 1999 122,500 20,675 16,398 819(5)
Vice President,
Marketing
</TABLE>
- ------------------------------
(1) In February 1999, Mr. Richards resigned as our President and Chief
Executive Officer. In connection with his resignation, we paid Mr.
Richards severance in the amount of $192,500.
(2) Reflects $109,835 for reimbursement of relocation expenses and $819 for
insurance premiums. Mr. Gould became our President and Chief Executive
Officer in February 1999.
(3) Reflects $76,250 paid for commissions earned and $979 for insurance
premiums.
(4) Reflects $48,129 paid for commissions earned and a $17,820 automobile
allowance.
(5) Reflects insurance premiums.
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<PAGE> 62
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all individual grants of stock options
during the year ended December 31, 1999 to each of the Named Executive Officers.
These options were granted with an exercise price equal to the fair market value
of our common stock on the date of grant as determined by our board of directors
based on third-party valuations, third-party transactions and other relevant
factors. All of the options are incentive stock options, except for 121,230 of
Mr. Gould's options and 169,200 of Mr. Gallick's options which are
non-qualified, vest over four years, with 25% of the shares vesting one year
after the grant date and the remaining shares vesting ratably each month
thereafter, and have a term of 10 years. The 5% and 10% assumed annual rates of
compound stock price appreciation are prescribed by the rules and regulations of
the Securities and Exchange Commission and do not represent our estimate of
projection of the future trading prices of our common stock. There can be no
assurance that the actual stock price appreciation over the ten-year option term
will be at the assumed 5% and 10% levels or at any other defined level. Actual
gains, if any, on stock option exercises are dependent on numerous factors,
including our future performance, overall market conditions and the option
holder's continued employment with us throughout the entire vesting period and
option term, none of which are reflected in this table. The potential realizable
value is calculated by multiplying the fair market value per share of the common
stock on the date of grant as determined by the board of directors, which is
equal to the exercise price per share, by the stated annual appreciation rate
compounded annually for the option term, subtracting the exercise price per
share from the product, and multiplying the remainder by the number of shares
underlying the option granted.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM
OPTIONS TO EMPLOYEES IN EXERCISE OR EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR BASE PRICE DATE 5% 10%
---- ------------- ---------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
David B. Gould....... 300,996 14.8% $1.66 2/2/09 $ 313,895 $ 795,984
President and Chief 112,230 5.5 2.97 8/3/09 209,376 530,982
Executive Officer 9,000 0.4 8.05 12/31/09 66,223 167,821
Alain Livernoche..... 9,000 0.4 8.05 12/31/09 66,223 167,821
Vice President,
North American
Sales
Colin Gallick........ 169,200 8.3 1.66 2/2/09 176,757 447,937
Vice President,
International
Operations
Jeffery S. Ford...... 4,320 0.2 2.22 5/24/09 6,046 15,299
Vice President, 9,000 0.4 8.05 12/31/09 66,223 167,821
Operations
Nancy Y. Treaster.... 16,398 0.8 2.22 5/24/09 22,949 58,073
Vice President, 9,000 0.4 8.05 12/31/09 66,223 167,821
Marketing
</TABLE>
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of options exercised during the year ended December 31, 1999 as
well as the number and value of securities underlying unexercised options that
are held by the Named Executive Officers as of December 31, 1999. The value
realized column represents the difference between the estimated fair value of
the purchased shares on the option exercise date, less the exercise price paid
upon the exercise of the options. The value of unexercised in-the-money options
column represents the difference between $13.00 per share, representing the
mid-point of our potential offering price range of $12.00 to $14.00 per share,
less the exercise price payable upon exercise of these options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END
ON VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David B. Gould............... 112,230 $ -- 60,200 249,796 $682,668 $2,775,177
President and Chief
Executive Officer
Alain Livernoche............. 30,600 70,720 49,744 145,340 610,509 1,726,986
Vice President, North
American Sales
Colin Gallick................ -- -- 42,300 126,900 479,682 1,439,046
Vice President,
International Operations
Jeffery S. Ford.............. 30,600 47,430 23,643 114,057 273,786 1,257,654
Vice President, Operations
Nancy Y. Treaster............ 70,022 147,046 14,292 83,987 184,081 975,947
Vice President, Marketing
</TABLE>
STOCK OPTION AND OTHER COMPENSATION PLAN
Amended and Restated Stock Incentive Plan
We have established a stock incentive plan, which has recently been amended
and restated. This plan is intended to promote our interests by providing
employees and key persons, such as non-employee directors and consultants, the
opportunity to purchase shares of common stock and to receive compensation based
upon appreciation in the value of those shares. We have reserved 6,274,800
shares of common stock for issuance under this plan. This plan provides for the
grant of four types of awards:
- incentive stock options that qualify for tax benefits;
- non-qualified stock options;
- restricted stock awards; and
- stock appreciation rights.
Our plan is administered by the compensation committee of our board of
directors. The compensation committee has the authority to determine to whom
awards are granted, the terms of such awards, including the type of awards to be
granted, the exercise price, the number of shares subject to awards and the
vesting and exercisability of the awards. The term of a stock option granted
under the plan generally may not exceed 10 years.
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<PAGE> 64
Beginning on January 1, 2001, and on the first day of each following fiscal
year, this plan authorizes our board of directors to automatically adjust the
number of shares of common stock available for issuance under this plan so that
the total number of shares reserved will equal the sum of:
- the aggregate number of shares previously issued under this plan;
- the aggregate number of shares subject to outstanding options granted
under this plan; and
- 5% of the number of shares outstanding on the last day of the preceding
fiscal year.
The maximum annual increase in the number of shares, however, shall not exceed
1,800,000 in any calendar year. In addition, the board of directors, at its
discretion, may also issue a lower number of shares under this plan.
As of January 10, 2000, there were options outstanding to purchase
2,883,106 shares of our common stock at a weighted average exercise price of
$2.44 per share. 533,775 shares of our common stock have been issued upon
exercise of options granted under our plan. In addition, there were 1,658,511
shares of common stock that could be issued under our amended and restated stock
incentive plan.
Employee Stock Purchase Plan
We have recently established the Witness Systems Employee Stock Purchase
Plan which will become effective upon the completion of this offering. The stock
purchase plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, allows employees to purchase our common stock through payroll
deductions for 85% of the fair market value of the common stock. Participation
in the stock purchase plan is voluntary. Employees may participate in the stock
purchase plan by authorizing payroll deductions of one to fifteen percent of
their base pay for each payroll period. At the end of each six-month offering
period, each participant in the stock purchase plan will receive an amount of
our common stock equal to the sum of that participant's payroll deductions
during the period divided by 85% of the lower of the fair market value of our
common stock at the beginning of the period, or the fair market value of our
common stock at the end of the period. No employee may participate in the stock
purchase plan if such employee owns or would own after the purchase of options
under this plan 5% or more of the voting power of all classes of our stock.
There are currently 990,000 shares of common stock reserved for issuance
under the stock purchase plan. The number of shares of common stock available
for issuance under the stock purchase plan shall automatically increase on the
last trading day of the last month of each fiscal year, beginning with the
fiscal year ending December 31, 2000 by a number of shares equal to 2% of the
total number of shares of common stock outstanding on the last trading day of
the month preceding the final month of each such fiscal year, but in no event
shall any such annual increase exceed 900,000 shares, as adjusted under the
terms of the plan. In addition, the board of directors, at its discretion, may
also issue a lower number of shares under this plan. We are permitted under the
stock purchase plan to purchase shares of common stock on the open market for
the purpose of reselling the shares to participants in the stock purchase plan.
401(k) Plan
We maintain a 401(k) plan to provide eligible employees with a tax
preferential savings and investment program. An employee becomes eligible to
participate in the 401(k) plan in the first month of the month following his or
her date of hire. Eligible employees may contribute a maximum of 20% of his or
her pre-tax salary, commissions and bonuses through payroll deductions, up to
the statutorily prescribed annual limit of $10,000 in calendar year 1999 to the
401(k) plan. The percentage elected by more highly compensated participants may
be required to be lower. In addition, at the discretion of the board of
directors, we may make discretionary profit-sharing contributions into the
401(k) plan for all eligible employees. To date we have made no contributions
into the 401(k) plan.
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<PAGE> 65
EMPLOYMENT AGREEMENTS, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
Generally, we do not enter into employment agreements with our employees.
The employment relationships with each executive officer are "at will". However,
we typically require each employee to enter into an agreement prohibiting the
employee from disclosing or using any of our confidential or proprietary
information without our permission and providing that the employee agrees to
assign to us all inventions developed during the course of employment. In
addition, the employee agrees not to solicit any of our customers or employees
or to work for a competitor in the metropolitan Atlanta area for a period of
time after termination of his or her employment.
However, we entered into a one-year employment agreement with David Gould,
our Chairman, President and Chief Executive Officer, which has particular
confidentiality and noncompetition related provisions that survive longer than
one year. This employment agreement was effective February 2, 1999, and was
amended on August 3, 1999. Upon the expiration of the current term in August
2000, the agreement automatically renews for additional one-year terms until
either party notifies the other of its intent to terminate the agreement. Under
the agreement, Mr. Gould is entitled to receive a base salary of $225,000 per
year and a discretionary bonus in the amount of up to $40,000 for the first year
of employment. In addition to his base salary, Mr. Gould is entitled to receive
supplemental bonuses totaling $360,000 between March 31, 2000 and March 31,
2002, regardless of continued employment. Mr. Gould also received on February 2,
1999, a stock option grant of 300,996 shares of common stock, exercisable at a
price of $1.66 per share, under the terms of our amended and restated stock
incentive plan. The options vest over a four-year period. Vesting accelerates
upon a change of control. In the event Mr. Gould's employment is terminated
without cause, or within six months of a change of control, which as defined in
the agreement includes a sale of our common stock in an underwritten public
offering, or if he resigns for good reason, he is entitled to a severance
payment equal to twelve times his monthly base salary. On August 3, 1999, Mr.
Gould was also granted an option to acquire 112,230 shares of common stock
exercisable at a price of $2.97 per share under our stock incentive plan. These
options vested immediately and Mr. Gould exercised his options with a payment
made by a $334,000 promissory note having terms and arrangements regarding our
reimbursement of Mr. Gould's interest payments that are similar to the terms and
arrangements in the March 31, 1999 note described in the next paragraph.
We have also entered into a restricted stock award agreement with Mr. Gould
effective March 31, 1999. Under the terms of this agreement, Mr. Gould purchased
879,763 shares of our common stock at a price of $1.66 per share and paid for
these shares with a promissory note to us in the principal amount of $1,461,383.
The note has a nine year term with acceleration upon a change of control and
interest accrues at a fixed rate of 6.41% per annum. Mr. Gould's employment
agreement obligates us to reimburse him for all interest payments under the
note. Mr. Gould's note is a recourse obligation as to 25% of the principal and
100% of the interest. Of the purchased shares, 303,111 vested immediately upon
employment and the balance vest over a period ending on February 2, 2003; such
vesting accelerates upon a change of control, which is defined to include an
initial public offering. Upon termination of Mr. Gould's employment with us, any
unvested shares revert to us for the original purchase price.
Addendums to the stock option agreements with Mr. Ezrine, Mr. Brown, Mr.
Ford, Mr. Gallick, Mr. Gisby, Mr. Livernoche and Ms. Treaster, provide that
stock options awarded to the executive officer will automatically vest if the
executive officer's employment is terminated without good cause upon a change of
control of Witness Systems, as those terms are defined in the addendum, that
occurs prior to December 31, 2001. As of January 10, 2000, an aggregate of
1,010,085 unvested common stock options are subject to this change of control
provision.
In February 1999, we entered into separation agreements with Craig Richards
in connection with his resignation as President and Chief Executive Officer and
with Elizabeth Brown in connection with her resignation as Vice President of
Engineering. Our agreement with Mr. Richards entitled him to receive a severance
payment equal to twelve times his monthly base salary. In
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<PAGE> 66
addition, we waived our right to repurchase 280,901 of Mr. Richards' vested
shares of common stock and forgave an outstanding balance under a related
promissory note for $108,486. Mr. Richards delivered to us unvested options for
648,979 shares of common stock. Our agreement with Ms. Brown entitled her to
receive a severance payment in the amount of $43,865.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our amended and restated certificate of incorporation and bylaws provide
that the liability of the directors for monetary damages shall be eliminated to
the fullest extent permissible under Delaware law and that we shall indemnify
our officers, employees and agents to the fullest extent permitted under the
Delaware law.
Our amended and restated certificate of incorporation also provides that
our directors will not be personally liable to Witness Systems or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for:
- any breach of the director's duty of loyalty to Witness Systems 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
- transactions from which the director derived an improper personal
benefit.
Any amendment, modification or repeal of these provisions will not
eliminate or reduce the effect of these provisions for any act or failure to
act, or any cause of action, suit or claim that would arise before the
amendment, modification or repeal. If Delaware law is amended to provide for
further limitations on the personal liability of directors of corporations for
breach of duty of care or other duty as a director, then the personal liability
of the directors will be so further limited to the greatest extent permitted by
Delaware law. This limitation of liability does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
We intend to enter into agreements to indemnify our executive officers and
directors in addition to indemnification provided for in our amended and
restated certificate of incorporation. These agreements, among other things, may
require us to indemnify these individuals against liabilities that arise by
reason of their status or services as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceedings against them for which they
could be indemnified.
Currently, we have purchased a directors and officers liability insurance
policy with a maximum aggregate liability of $10 million.
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<PAGE> 67
RELATED PARTY TRANSACTIONS
SALES OF PREFERRED STOCK
Series A Preferred Stock
In March 1997, we issued and sold 3,184,000 shares of series A preferred
stock at a price of $2.145 per share to Battery Investment Partners IV, LLC,
Battery Ventures IV, L.P. and John Abraham, one of our directors, resulting in
net proceeds of $6.6 million. Thomas Crotty, one of our directors, is associated
with Battery Investment Partners IV, LLC and Battery Ventures IV, L.P.
Immediately before the consummation of this offering, each share of the series A
preferred stock will automatically convert into 1.8 shares of our common stock.
Series B Preferred Stock
In September 1998, we issued and sold 1,181,954 shares of series B
preferred stock at a price of $4.65 per share to Battery Investment Partners IV,
LLC, Battery Ventures IV, L.P. and John Abraham, one of our directors, resulting
in net proceeds of $5.5 million. Thomas Crotty, one of our directors, is
associated with Battery Investment Partners IV, LLC and Battery Ventures IV,
L.P. Immediately before the consummation of this offering, each share of the
series B preferred stock will automatically convert into 1.8 shares of our
common stock.
Series C Preferred Stock
In August 1999, we issued and sold 1,325,028 shares of series C preferred
stock at a price of $6.30 per share, resulting in net proceeds of $8.3 million.
The investors include the following persons who, along with their affiliates,
hold 5% or more of our capital stock:
<TABLE>
<CAPTION>
NAME OF INVESTOR NUMBER OF SHARES PURCHASE PRICE
- ---------------- ---------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Noro-Moseley Partners IV, L.P............................. 317,460 $2,000
Noro-Moseley Partners IV-B, L.P........................... 317,122 1,998
Hambrecht & Quist California.............................. 25,797 163
Hambrecht & Quist Employee Venture Fund, L.P. II.......... 25,797 163
Access Technology Partners, L.P........................... 412,749 2,600
Access Technology Partners Brokers Fund, L.P.............. 7,739 49
H&Q Witness Systems Investors, L.P........................ 43,854 276
</TABLE>
Immediately before the consummation of this offering, each share of the
series C preferred stock will automatically convert into 1.8 shares of our
common stock.
REGISTRATION RIGHTS
Some of our directors and 5% stockholders are entitled to specified rights
related to the registration of their shares under the Securities Act. These
rights are described more fully under the section titled "Description of Capital
Stock" that is contained elsewhere in this prospectus.
COMMON STOCK PURCHASES AND SALES
The following disclosure relating to common stock purchases and sales
reflects the 1.8 for 1 stock split of our shares of common stock that occurred
on December 27, 1999.
On January 15, 1997, we entered into stock repurchase agreements with four
of our officers to repurchase 3,214,845 shares of our common stock for notes
payable totaling $3.7 million. The notes were repaid in March 1997 concurrent
with the sale of series A preferred stock.
On December 16, 1997, we sold 929,880 restricted shares of our common stock
to our former chief executive officer for $108,000 in return for a promissory
note. In February 1999, the officer resigned from our Company and the amount of
the note related to the 280,901 vested shares plus all accrued interest was
forgiven. The remainder of the note was cancelled in connection with our
repurchase at $0.12 per share of the 648,979 unvested shares.
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<PAGE> 68
In March 1999, we issued 879,763 shares of restricted common stock to Mr.
Gould in return for a note receivable of $1.5 million. In August 1999, Mr. Gould
was granted and exercised options to acquire 112,230 shares of our common stock
in exchange for a note receivable of $334,000. The notes effectively bear no
interest and mature on March 30, 2008. Such maturity date is accelerated if we
consummate a merger, consolidation or reorganization, sell substantially all of
our assets, or complete an initial public offering.
On August 2, 1999, we sold 244,800 shares of restricted common stock which
consisted of 30,600 shares to each of the following officers: Mr. Gould, Mr.
Ezrine, Mr. Brown, Mr. Gisby, Mr. Ford, Mr. Gallick, Mr. Livernoche, and Ms.
Treaster. Each officer paid $90,950 for the shares by providing a full recourse
promissory note to us. The principal balance of each promissory note is due in
full on July 31, 2003, with interest of 7% payable in arrears annually. In
addition, on August 2, 1999, we sold 24,395 shares of restricted common stock to
Mr. Abraham for $72,401 in return for a full recourse promissory note. The
principal balance of the promissory note is due in full on July 31, 2003, with
interest of 7% payable in arrears annually.
We entered into stock repurchase agreements with the following persons to
repurchase a total of 3,060,000 shares for $7.3 million in cash.
<TABLE>
<CAPTION>
NAME NO. OF SHARES DOLLAR AMOUNT DATE
---- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Mr. Judson..................................... 1,137,994 $3,382 August 2, 1999
Elizabeth Judson (Mr. Judson's spouse)......... 104,006 309 August 2, 1999
Mr. Abraham.................................... 18,000 54 August 2, 1999
Mr. Knous...................................... 540,000 1,605 August 2, 1999
Mr. Beckett.................................... 1,260,000 1,900 Sept. 10, 1998
</TABLE>
TRANSACTIONS WITH THE CHASE MANHATTAN CORPORATION
Since mid-1997, we have licensed our software and provided software
installation and support services to The Chase Manhattan Bank and Chase
Cardmember Services, Inc., affiliates of The Chase Manhattan Corporation. Since
this time, we entered into contracts with these affiliates of The Chase
Manhattan Corporation for the provision of licensing and services in
consideration for which these affiliates agreed to pay us a total of $616,315 in
1997, $114,550 in 1998 and $1,104,255 in 1999. Under these contracts, these
affiliates did not pay us fees in 1997, and paid us fees of $712,920 in 1998 and
$757,830 in 1999. On December 8, 1999, the indirect parent company of Hambrecht
& Quist LLC merged with a wholly owned subsidiary of The Chase Manhattan
Corporation and, as a result, Hambrecht & Quist LLC became an indirect, wholly
owned subsidiary of The Chase Manhattan Corporation. Hambrecht & Quist LLC is a
subsidiary of Hambrecht & Quist California, which, along with its affiliates,
holds more than 5% of our outstanding capital stock.
INDEMNIFICATION AGREEMENTS
We intend to enter into agreements to indemnify our executive officers and
directors in addition to indemnification provided for in our amended and
restated certificate of incorporation. These agreements, among other things, may
require us to indemnify these individuals against liabilities that arise by
reason of their status or services as officers and directors, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
expenses incurred as a result of any proceedings against them for which they
could be indemnified.
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<PAGE> 69
POLICY ON FUTURE TRANSACTIONS
Our board of directors has adopted a resolution whereby all future
transactions with related parties, including any loans from us to our officers,
directors and principal stockholders or their family members, must be approved
by a majority of the board of directors including a majority of the independent
and disinterested members of the board of directors or a majority of the
disinterested shareholders and must be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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<PAGE> 70
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information about the beneficial ownership of
our common stock as of December 31, 1999 by:
- each person or entity who is known by us to be the beneficial owner of
more than 5% of our outstanding common stock;
- each of our directors;
- each executive officer; and
- all of our directors and executive officers as a group.
Formation, Inc., one of our stockholders, has granted to the underwriters
the option to purchase up to 210,280 shares of common stock to cover
over-allotments. Footnote 14 to the Principal and Selling Stockholders table
below provides information concerning the stock holdings of Formation, Inc.
after the offering if the over-allotment option is exercised in full.
For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding prior to the offering includes
6,875,878 common shares outstanding as of December 31, 1999 and 10,403,769
shares issuable upon the automatic conversion of 3,272,890 shares of series A
preferred stock, including 88,890 shares issued as a dividend on the series A
preferred stock, into 5,891,202 shares of common stock, 1,181,954 shares of
series B preferred stock into 2,127,517 shares of common stock and 1,325,028
shares of series C preferred stock into 2,385,050 shares of common stock
immediately before the completion of this offering. 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 the
securities. The number of shares beneficially owned by a person includes shares
of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1999. The shares
issuable under these options are treated as if outstanding for computing the
percentage ownership of the person holding these options but are not treated as
if outstanding for the purposes of computing the percentage ownership of any
other person.
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<PAGE> 71
Except as noted below, the business address of the named beneficial owner
is c/o Witness Systems, Inc., 1105 Sanctuary Parkway, Suite 210, Alpharetta,
Georgia 30004.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Battery Investment Partners IV, LLC (1).................... 7,812,888 45.2% 37.1%
Battery Ventures IV, L.P. (2).............................. 7,695,695 44.5 36.5
20 William Street
Wellesley, MA 02181
James W. Judson, Jr. (3)................................... 1,713,150 9.9 8.1
Noro-Moseley Partners, IV L.P. (4)......................... 1,142,248 6.6 5.4
9 North Parkway Square
4200 Northside Parkway
Atlanta, GA 30327
David B. Gould (5)......................................... 1,145,422 6.6 5.4
W. Thomas Snyder........................................... 1,020,870 5.9 4.8
Kirk A. Knous.............................................. 991,305 5.7 4.7
Hambrecht & Quist California (6)........................... 928,685 5.4 4.4
One Bush Street
San Francisco, CA 94104
John Abraham (7)........................................... 98,674 * *
Nancy Treaster (8)......................................... 123,488 * *
Alain Livernoche (9)....................................... 119,331 * *
Colin Gallick (10)......................................... 79,668 * *
Jeffery S. Ford (11)....................................... 92,014 * *
Joel G. Katz............................................... -- * *
Thomas C. Crotty (12)...................................... 7,812,888 45.2 37.1
All directors and executive officers as a group (9 persons)
(13)..................................................... 11,184,634 63.6 52.3
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.
(1) Consists of 7,695,695 shares held by Battery Ventures IV, L.P. and 117,193
shares held by Battery Investment Partners IV, LLC. Battery Investment
Partners IV, LLC is the managing partner of Battery Ventures IV, L.P.
Thomas J. Crotty, Robert G. Barrett, Oliver D. Curme, Todd A. Dagres,
Richard D. Frisbie and Kenneth P. Lawler are the general members and
general partners of Battery Investment Partners IV, LLC and Battery
Ventures IV, L.P., respectively.
(2) Battery Investment Partners IV LLC is the managing partner of Battery
Ventures IV, L.P. Thomas J. Crotty, Robert G. Barrett, Oliver D. Curme,
Todd A. Dagres, Richard D. Frisbie and Kenneth P. Lawler are the general
members and general partners of Battery Investment Partners IV, LLC and
Battery Ventures IV, L.P., respectively.
(3) Includes 227,104 shares held by Elizabeth A. Judson, Mr. Judson's spouse,
and 810,000 shares held by the Judson 1998 Trust. Mr. Judson disclaims
beneficial ownership of shares owned by Mrs. Judson and held by the Judson
1998 Trust.
(4) Includes shares held by Noro-Moseley Partners IV-B, L.P., an affiliate of
Noro-Moseley Partners IV, L.P., Charles D. Moseley, Jack R. Kelly, Russell
R. French, Charles A. Johnson, Alan J. Taetle and Allen S. Moseley are the
general partners of Noro-Moseley Partners IV, L.P.
(5) Includes 122,829 shares subject to options which are exercisable within 60
days of January 10, 2000.
(6) Includes 46,435 shares held directly by Hambrecht & Quist California,
46,435 shares held by the Hambrecht & Quist Employee Venture Fund, L.P. II,
13,930 shares held by the Access Technology Partners Brokers Fund, L.P.,
78,937 shares held by H&Q Witness Systems Investors, L.P. and 742,948
shares held by Access Technology Partners, L.P. Hambrecht & Quist
California is the parent company of Hambrecht & Quist, LLC. The limited
partnership interests of Hambrecht & Quist Employee Venture Fund, L.P. II
and Access Technology Partners Brokers Fund, L.P. are held by employees of
Hambrecht & Quist California or Hambrecht & Quist LLC, and the general
partner of both of these funds is H&Q Venture Management LLC, a subsidiary
of Hambrecht & Quist California. Employees of Hambrecht & Quist LLC and
Hambrecht & Quist California also own a 98.1% limited partnership interest
in H&Q Witness Systems Investors, L.P. and a subsidiary of Hambrecht &
Quist California is its administrative general partner. The investment
limited partner of H&Q Witness Systems Investors, L.P. is a limited
liability company in which a group of Hambrecht & Quist LLC employees are
members. Access Technology Partners, L.P. is a fund of outside investors
that is managed by Access Technology Management, LLC, a subsidiary of
Hambrecht & Quist California. The managing member of Access Technology
Management, LLC is H&Q Venture Management, LLC. The managers of H&Q Venture
Management, LLC are Daniel H. Case, III, Charles Walker and Stephen N.
Machtinger. Messrs. Case, Walker and
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<PAGE> 72
Machtinger disclaim beneficial ownership of shares held by Access
Technology Partners, L.P., except to the extent of their pecuniary interest
in these shares. Hambrecht & Quist California and Hambrecht & Quist LLC are
indirect wholly owned subsidiaries of The Chase Manhattan Corporation.
(7) Includes 28,449 shares subject to options which are exercisable within 60
days of January 10, 2000.
(8) Includes 22,866 shares subject to options which are exercisable within 60
days of January 10, 2000.
(9) Includes 58,131 shares subject to options which are exercisable within 60
days of January 10, 2000.
(10) Includes 49,068 shares subject to options which are exercisable within 60
days of January 10, 2000.
(11) Includes 30,814 shares subject to options which are exercisable within 60
days of January 10, 2000.
(12) Includes 7,695,695 shares held by Battery Ventures IV, L.P. and 117,193
shares held by Battery Investment Partners IV, LLC. Mr. Crotty is a General
Member of Battery Investment Partners IV, LLC, the managing partner of
Battery Ventures IV, L.P. and therefore may be considered to share
beneficial ownership of the shares held by Battery Ventures IV, L.P. and by
Battery Investment Partners IV, LLC. Mr. Crotty disclaims beneficial
ownership of these shares
(13) Includes Mr. Crotty's shares, which he disclaims beneficial ownership of,
and 312,157 shares subject to options which are exercisable within 60 days
of January 10, 2000.
(14) If the underwriters exercise their over-allotment option in full,
Formation, Inc. will sell 210,280 shares of common stock in this offering
and would remain the beneficial owner of 630,840 shares of common stock.
The address for Formation, Inc. is 121 Whittendale Drive, Building 1,
Moorestown, New Jersey 08057.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.01 par value per share and 10,000,000 shares of preferred stock, $.01 par
value per share. As of December 31, 1999, we had 69 stockholders of record and
there were 17,279,647 shares of common stock outstanding, assuming the
conversion of all outstanding preferred stock into common stock upon the
completion of this offering and including 160,002 shares issued pursuant to
dividend rights held by our preferred stockholders. The following description of
our capital stock is a summary and is qualified in its entirety by the
provisions of our amended and restated certificate of incorporation and bylaws,
copies of which have been filed as exhibits to the registration statement of
which this prospectus is a part.
COMMON STOCK
The holders of common stock are entitled to one vote per share for the
election of directors and on all other matters to be submitted to a vote of our
stockholders. Subject to the rights of any holders of preferred stock which may
be issued in the future, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the board of directors and
paid out of funds legally available for that purpose. In the event of our
dissolution, liquidation or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of all liabilities, subject
to the 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 our common stock. The outstanding shares of common stock are, and
the shares of common stock to be issued by us in connection with this offering
will be, duly authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Under our amended and restated certificate of incorporation, our board of
directors is authorized, without further stockholder approval, to issue from
time to time up to an aggregate of 10,000,000 shares of preferred stock in one
or more series. The board also has the right to fix or alter the designations,
preferences, rights and any qualifications, limitations or restrictions of any
preferred stock issued, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of preferred stock with greater
rights, privileges and preferences than those applicable to the common stock may
adversely affect the voting power, market price and other rights and privileges
of the common stock, and may have the effect of delaying, deferring or
preventing a change of control of our company.
REGISTRATION RIGHTS
Under the terms of an amended and restated registration rights agreement
dated as of September 30, 1999, as amended, stockholders holding an aggregate of
15,448,149 shares of capital stock, which includes the shares set forth below,
are entitled to registration rights under the Securities Act:
- approximately 5,779,872 shares of series A, B and C preferred stock and
shares of preferred stock resulting from the payment of preferred stock
dividends, which will automatically convert into a total of 10,403,769
shares of common stock upon the consummation of this offering;
- 4,891,480 shares of common stock held by the stockholders who are parties
to the amended and restated registration rights agreement, including our
founding stockholders;
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<PAGE> 74
- 117,000 shares of common stock that may be issued upon the exercise of a
warrant held by Greyrock Capital; and
- 20,000 shares of series B preferred stock that may be issued upon the
exercise of a warrant held by Silicon Valley Bank which, upon the
completion of this offering, if the warrant has not yet been exercised,
will become exercisable for 36,000 shares of common stock.
Beginning 180 days following the date of this prospectus, a majority of the
holders of series A and B preferred stock and a majority of holders of the
series C preferred stock may request us, on up to two occasions, to register
their shares of common stock, outstanding after conversion of the preferred
stock, for public resale. We are obligated to register the common stock of the
series A and series B preferred stockholders only if at least 20% of the total
shares of series A and B preferred stock request registration, or a lesser
percentage if the aggregate public offering price would exceed $5,000,000.
Further, holders of registrable securities may require on two separate occasions
within any twelve month period that we register their shares for public resale
on Form S-3 if the value of the securities to be registered is at least
$500,000. In the event our Board of Directors determines it is advisable to do
so, and as limited by the terms of the Amended and Restated Registration Rights
Agreement, we may defer such registration for up to 90 days.
In the event we elect to register any of our shares of common stock for
purposes of effecting any public offering, the holders of the registrable
securities described above are entitled to include their shares of common stock
in the registration. We may reduce the number of shares requesting registration
in view of adverse market conditions. We have obtained waivers of these
registration rights with respect to this offering. All registration rights will
terminate five years following consummation of this offering.
WARRANTS
As of January 10, 2000 there were outstanding warrants to purchase 117,000
shares of common stock at an exercise price of $2.58 per share. In addition,
there were warrants to purchase 20,000 shares of series B preferred stock at an
exercise price of $4.65 per share. Upon the completion of this offering, if the
warrant for the series B preferred has not yet been exercised, it will become
exercisable for 36,000 shares of common stock at an exercise price of $2.58 per
share.
ANTI-TAKEOVER EFFECTS OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
Anti-takeover provisions
As noted above, our board of directors, without stockholder approval, has
the authority under our amended and restated certificate of incorporation to
issue preferred stock with rights superior to the rights of holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change of control of Witness Systems or
make removal of management more difficult.
Under Delaware law, all stockholder actions must be effected at a properly
called annual or special meeting or by written consent. Our bylaws provide that,
except as otherwise required by law, special meetings of our stockholders can
only be called by the board of directors, the chairman of the board or the chief
executive officer, and stockholder action may not be effected by written
consent. Our amended and restated certificate of incorporation also provides
that the board is divided into three classes, with each director assigned to a
class with a term of three years. In addition, our bylaws establish an advance
notice procedure for stockholder proposals to be brought before an annual
meeting of stockholders, including proposed nominations of persons for election
to the board.
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<PAGE> 75
These provisions of our bylaws are intended to enhance the likelihood of
continuity and stability in the composition of our board of directors and in the
policies formulated by the board of directors and to discourage certain types of
transactions which may involve an actual or threatened change of control. Such
provisions are designed to reduce vulnerability to an unsolicited acquisition
proposal and, accordingly, could discourage potential acquisition proposals and
could delay or prevent a change in control. These provisions may also have the
effect of preventing changes in our management.
Effect of Delaware Antitakeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prevents publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for three years following the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. For purposes of the statute, a "business
combination" includes a merger, consolidation or sale of more than 10% of assets
involving our company, and an "interested stockholder" is any entity or person
beneficially owning 15% or more of the outstanding voting stock of our company
and any entity or person affiliated with or controlling or controlled by such
entity or person.
LISTING
The shares of common stock have been proposed to be listed for quotation on
the Nasdaq Stock Market under the symbol WITS.
TRANSFER AGENT AND REGISTRATION
The transfer agent for our common stock is SunTrust Bank, Atlanta, Georgia.
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<PAGE> 76
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After this offering, 21,078,347 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 3,800,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining 17,279,647 shares
of common stock held by existing stockholders are "restricted securities" as
that term is defined in Rule 144 under the Securities Act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 under the Securities Act,
which rules are summarized below.
The following table indicates approximately when the 17,279,647 shares of
our common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES
FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At effective date........................................... 292,744
180 days after the effective date........................... 16,099,945
Thereafter upon expiration of one year holding periods...... 886,958
</TABLE>
Most of the restricted shares that will become available for sale in the
public market starting 180 days after the effective date will be subject to
volume and other resale restrictions under Rule 144 because the holders are our
affiliates.
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 shares of our
common stock for at least one year, including any affiliate of ours, is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 210,797 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the
sale on Form 144 is filed.
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.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days before a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner other than an affiliate, is entitled to sell
the shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
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<PAGE> 77
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
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, without having to comply with certain
restrictions, including the holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
Our directors, officers and some of our stockholders holding 16,673,093
shares of our common stock after this offering are subject to lock-up agreements
under which they have agreed not to transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus, subject to some exceptions. Transfers or
dispositions can be made sooner with the prior written consent of Hambrecht &
Quist LLC or its successors.
REGISTRATION RIGHTS AND STOCK PLANS
Some of our existing stockholders have the right to require us to register
under the Securities Act up to 15,448,251 shares of their common stock at any
time. All of these shares are subject to the lock-up agreements described above.
Once we register these shares, they can be freely sold in the public market,
subject to these lock-up agreements.
Immediately after this offering, we intend to file registration statements
under the Securities Act covering approximately 5,531,617 shares of our common
stock issuable upon the exercise of stock options or reserved for issuance under
our amended and restated stock incentive plan and our employee stock purchase
plan. These registration statements are expected to be filed and become
effective as soon as practicable after the completion of this offering. Each
year as the number of shares reserved for issuance under these plans increases,
we will file amendments to the registration statements covering the additional
shares. As of January 10, 2000, options to purchase 2,883,106 shares of common
stock were issued and outstanding. When the lock-up agreements described above
expire, there will be vested options outstanding that will be exercisable to
acquire 844,424 shares of common stock, based on options outstanding as of
January 10, 2000. As a result, shares registered under those registration
statements will, subject to vesting provisions and Rule 144 volume limitations
applicable to our affiliates, be available for sale in the open market
immediately after the 180 day lock-up agreements expire.
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<PAGE> 78
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , the underwriters named below, through their
representatives, Hambrecht & Quist LLC, U.S. Bancorp Piper Jaffray Inc. and
SoundView Technology Group, Inc., have severally agreed to purchase from us the
respective numbers of shares of common stock set forth opposite their names
below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Hambrecht & Quist LLC.......................................
U.S. Bancorp Piper Jaffray Inc..............................
SoundView Technology Group, Inc.............................
---------
Total............................................. 3,800,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from us and the selling stockholder, our
counsel, counsel to the selling stockholder and the independent auditors. The
underwriters are obligated to purchase all shares of common stock offered by us
(other than those shares covered by the over-allotment option described below)
if they purchase any shares.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us and the selling
stockholder. These amounts are shown assuming both no exercise and full exercise
of the underwriters' over-allotment option to purchase additional shares.
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY WITNESS SYSTEMS STOCKHOLDER
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per Share.............................
Total.................................
</TABLE>
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $950,000.
The underwriters propose to offer the shares of common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and to certain dealers at that price less a concession not in
excess of $ per share. The underwriters may allow and the dealers may
reallow a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the underwriters. The representatives have
informed us that the underwriters do not intend to confirm discretionary sales
of more than 5% of the shares of common stock offered in this offering.
We and the selling stockholder have granted to the underwriters an option,
exercisable no later than 30 days after the date of this prospectus, to purchase
up to 570,000 additional shares of common stock at the initial public offering
price, less the underwriting discount set forth on the cover page of this
prospectus. To the extent that the underwriters exercise this option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof which the number of shares of common stock to be purchased by
it shown in the above table bears to the total number of shares of common stock
offered hereby. We and the selling stockholder will be obligated, pursuant to
the option, to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with the sale of shares of common
stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
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<PAGE> 79
We and the selling stockholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act and
to contribute to payments the underwriters may be required to make in respect of
these liabilities.
Substantially all of our stockholders, including the selling stockholder,
executive officers and directors who will own in the aggregate 16,673,093 shares
of common stock after the offering, have agreed not to, without the prior
written consent of Hambrecht & Quist LLC, sell, offer, contract to sell,
transfer the economic risk of ownership in, make any short sale, pledge or
otherwise dispose of any shares of common stock or any securities convertible
into or exchangeable or exercisable for shares of common stock for a period of
180 days from the date of this prospectus, subject to some exceptions. We have
agreed that we will not, without the prior written consent of Hambrecht & Quist
LLC, sell, offer, contract to sell, transfer the economic risk of ownership in,
make any short sale, pledge or otherwise dispose of any shares of common stock
or any securities convertible into or exchangeable or exercisable for shares of
common stock for a period of 180 days following the date of this prospectus,
except that we may issue shares upon the exercise of options granted prior to
the date hereof and may grant additional options under our stock option plans.
Without the prior written consent of Hambrecht & Quist LLC, any of these
additional options shall not be exercisable during the 180 day period.
At our request, the underwriters have reserved up to 226,000 shares of
common stock offered hereby for sale at the initial public offering price to our
directors, officers, employees, business associates and related persons. The
number of shares of common stock available for sale to the general public will
be reduced by the number of reserved shares such persons purchase. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered by this prospectus.
Persons who purchase reserved shares will be required to agree that they will
not, without the prior written consent of Hambrecht & Quist LLC, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of common stock or any
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 180 days from the date of this prospectus.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price for the common stock will be determined
by negotiation among us, the selling stockholder and the representatives of the
underwriters. Among the factors considered in determining the initial public
offering price will be prevailing market and economic conditions, our revenues
and operating results, market valuations of other companies engaged in
activities similar to ours, estimates of our business potential and our
prospects, the present state of our business operations, our management and
other factors deemed relevant.
We have applied for quotation of the common stock on the Nasdaq National
Market under the symbol WITS.
In our August 1999 private placement of series C convertible preferred
stock, Hambrecht & Quist California purchased 25,797 shares for $162,521.10,
Hambrecht & Quist Employee Venture Fund, L.P. II purchased 25,797 shares for
$162,521.10, Access Technology Partners Brokers Fund, L.P. purchased 7,739
shares for $48,755.70, 43,854 shares were purchased by H&Q Witness Systems
Investors, L.P. for $276,280.20 and 412,749 shares were purchased by Access
Technology Partners, L.P. for $2,600,318.70. Hambrecht & Quist California is the
parent company of Hambrecht & Quist LLC. The limited partnership interests of
Hambrecht & Quist Employee Venture Fund, L.P. II and Access Technology Brokers
Fund, L.P. are held by employees of Hambrecht & Quist California or Hambrecht &
Quist LLC, and the general partner of both of these funds is H&Q Venture
Management LLC, a subsidiary of Hambrecht & Quist California. Employees of
Hambrecht & Quist LLC and Hambrecht & Quist California also own a 98.1% limited
partnership interest in H&Q Witness Systems Investors, L.P. and a subsidiary of
Hambrecht & Quist California is its administrative general partner. The
investment limited partner of H&Q Witness Systems Investors,
75
<PAGE> 80
L.P. is a limited liability company in which a group of Hambrecht & Quist LLC
employees are members. Access Technology Partners, L.P. is a fund of outside
investors that is managed by Access Technology Management, LLC, a subsidiary of
Hambrecht & Quist California. The managing member of Access Technology
Management, LLC is H&Q Venture Management, LLC. The managers of H&Q Venture
Management, LLC are Daniel H. Case, III, Charles Walker and Stephen N.
Machtinger. The purchases described above were made on the same terms as those
made by other investors in the private placement, including the purchase price
of $6.30 per share. Immediately before the consummation of this offering, each
share of series C preferred stock will automatically convert into 1.8 shares of
common stock.
Persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of common stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. This
stabilizing, if commenced, may be discontinued at any time.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.
Each underwriter has also agreed that it has:
- not offered or sold and prior to the date six months after the date of
issue of the shares of common stock will not offer or sell any shares of
common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995;
- complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom; and
- only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of
the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
is a person to whom the document may otherwise lawfully be issued or
passed on.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Morris, Manning & Martin, L.L.P., Atlanta, Georgia. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Alston & Bird LLP, Atlanta, Georgia.
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<PAGE> 81
EXPERTS
The financial statements of Witness Systems included in this prospectus to
the extent and for the periods indicated in their reports have been audited by
KPMG LLP, independent public accountants and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus is only a part of the registration
statement and does not contain all of the information included in the
registration statement. Further information with respect to Witness Systems and
the common stock offered hereby can be found in the registration statement and
the exhibits and schedules thereto. Statements made in this prospectus as to the
contents of any contract, agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference. The registration
statement and the exhibits and schedules thereto may be inspected without charge
at the public reference facilities maintained by the Commission in Room 1024,
450 Fifth Street, N. W., Washington, D.C. 20549, and at the following regional
offices of the Commission: Seven World Trade Center, Room 1400, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N. W., Washington, D.C.
20549, Room 1024, at prescribed rates. The Public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, we are required to file electronic versions of these documents with
the Commission through the Commission's Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system. The Commission maintains an internet site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. Information concerning Witness Systems is also available for
inspection at the offices of the Nasdaq Stock Market, Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
We intend to furnish to our stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.
77
<PAGE> 82
WITNESS SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1997, 1998
and September 30, 1998 (unaudited) and 1999............ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine
Months Ended September 30, 1998 (unaudited) and 1999... F-4
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1996, 1997 and 1998 and for
the Nine Months Ended September 30, 1998 (unaudited)
and 1999............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine
Months Ended September 30, 1998 (unaudited) and 1999... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 83
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Witness Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Witness
Systems, Inc. and subsidiary as of December 31, 1997 and 1998 and September 30,
1999, and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the three-year period ended
December 31, 1998 and for the nine-month period ended September 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Witness
Systems, Inc. and subsidiary at December 31, 1997 and 1998 and September 30,
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 and for the nine-month
period ended September 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Atlanta, Georgia
November 18, 1999, except for
Note 12, as to which the
date is December 27, 1999
F-2
<PAGE> 84
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
CONVERTIBLE
PREFERRED
STOCK AND
STOCKHOLDERS'
DEFICIT AT
DECEMBER 31, SEPTEMBER 30,
------------------ SEPTEMBER 30, 1999
1997 1998 1999 (NOTE 1(D))
------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,092 $ 912 $ 52
Accounts receivable, net of allowance for doubtful
accounts of $100 in 1997, $300 in 1998 and $438 in
1999.................................................... 276 2,464 6,268
Inventory................................................. 587 -- --
Prepaid and other current assets.......................... 13 58 700
------- -------- --------
Total current assets.................................... 2,968 3,434 7,020
Property and equipment, net................................. 954 1,535 1,738
Other assets................................................ 44 57 161
------- -------- --------
$ 3,966 $ 5,026 $ 8,919
======= ======== ========
LIABILITIES, CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt......................... $ 1,890 $ 491 $ 902
Accounts payable.......................................... 461 697 620
Accrued expenses.......................................... 632 1,939 4,557
Deferred revenue.......................................... 2,491 3,463 2,814
------- -------- --------
Total current liabilities............................... 5,474 6,590 8,893
Long-term debt, net of current portion...................... -- 1,102 2,210
------- -------- --------
Total liabilities....................................... 5,474 7,692 11,103
------- -------- --------
Convertible preferred stock, $.01 par value; redeemable;
authorized 6,731,954 shares; stated at redemption value,
net of unaccreted discount:
Series A, 4,000,000 shares designated, 3,184,000 shares
issued and outstanding; estimated redemption amount of
$25,472 at September 30, 1999........................... 6,733 7,233 8,319 --
Series B, 1,181,954 and 1,231,954 shares designated at
December 31, 1998 and September 30, 1999, respectively;
1,181,954 shares issued and outstanding at December 31,
1998 and September 30, 1999; redemption amount of
$5,496.................................................. -- 5,477 5,479 --
Series C, 1,500,000 shares designated, 1,325,028 shares
issued and outstanding at September 30, 1999; estimated
redemption amount of $10,600 at September 30, 1999...... -- -- 8,315 --
------- -------- -------- --------
Total convertible preferred stock....................... 6,733 12,710 22,113 --
------- -------- -------- --------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value; no shares authorized,
issued or outstanding, actual; 10,000,000 shares
authorized pro forma, no shares issued or outstanding,
pro forma............................................... -- -- -- --
Common stock, $.01 par value; authorized 50,000,000
shares, 8,078,384, 8,206,240, and 10,302,163 shares
issued at December 31, 1997 and 1998 and September 30,
1999, respectively; 8,078,384, 6,946,240, and 6,862,379
shares outstanding at December 31, 1997 and 1998 and
September 30, 1999, respectively; 20,691,106 shares
issued and 17,251,322 shares outstanding pro forma
(unaudited)............................................. 81 82 103 207
Additional paid-in capital................................ 604 137 5,062 27,071
Accumulated deficit....................................... (8,818) (13,587) (19,947) (19,947)
Notes receivable for stock................................ (108) (108) (2,594) (2,594)
Treasury stock, 1,260,000 and 3,439,784 common shares at
December 31, 1998 and September 30, 1999, respectively,
at cost................................................. -- (1,900) (6,921) (6,921)
------- -------- -------- --------
Total stockholders' deficit............................. (8,241) (15,376) (24,297) (2,184)
------- -------- -------- --------
$ 3,966 $ 5,026 $ 8,919
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 85
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License................................. $ 764 $ 3,775 $ 8,682 $ 5,726 $11,011
Services................................ 425 1,138 2,444 1,657 4,079
Hardware................................ 632 1,271 2,171 1,750 46
------- ------- ------- ------- -------
Total revenues....................... 1,821 6,184 13,297 9,133 15,136
------- ------- ------- ------- -------
Cost of revenues:
License................................. 30 164 310 218 258
Services................................ 622 1,204 2,526 1,863 2,596
Hardware................................ 920 1,574 2,482 1,995 46
------- ------- ------- ------- -------
Total cost of revenues............... 1,572 2,942 5,318 4,076 2,900
------- ------- ------- ------- -------
Gross profit......................... 249 3,242 7,979 5,057 12,236
Operating expenses:
Sales and marketing..................... 291 2,016 6,147 4,236 7,409
Research and development................ 1,095 1,817 3,529 2,385 4,140
General and administrative.............. 1,058 1,684 2,141 1,458 2,556
Charge for termination of distribution
agreement............................ -- -- 900 900 --
Acquired in-process research and
development.......................... -- -- -- -- 3,506
Other personnel costs................... -- -- -- -- 665
------- ------- ------- ------- -------
Operating loss....................... (2,195) (2,275) (4,738) (3,922) (6,040)
Interest income........................... 4 82 56 42 31
Interest expense.......................... -- (20) (87) (68) (351)
------- ------- ------- ------- -------
Loss before provision for income
taxes.............................. (2,191) (2,213) (4,769) (3,948) (6,360)
Provision for income taxes................ -- -- -- -- --
------- ------- ------- ------- -------
Net loss............................. (2,191) (2,213) (4,769) (3,948) (6,360)
Preferred stock dividends and accretion... -- (84) (502) (77) (1,090)
------- ------- ------- ------- -------
Net loss applicable to common
stockholders....................... $(2,191) $(2,297) $(5,271) $(4,025) $(7,450)
======= ======= ======= ======= =======
Net loss per share:
Basic and diluted....................... $ (0.21) $ (0.32) $ (0.76) $ (0.56) $ (1.15)
======= ======= ======= ======= =======
Basic and diluted weighted-average
common shares outstanding............ 10,307 7,238 6,964 7,245 6,469
======= ======= ======= ======= =======
Unaudited pro forma net loss per share
(note 1(l)):
Basic and diluted....................... $ (0.36) $ (0.42)
======= =======
Basic and diluted weighted-average
common shares outstanding............ 13,399 15,276
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 86
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- TREASURY STOCK
NUMBER ------------------
OF ADDITIONAL NOTES NUMBER
SHARES PAID-IN ACCUMULATED RECEIVABLE OF AMOUNT
ISSUED AMOUNT CAPITAL DEFICIT FOR STOCK SHARES (AT COST) TOTAL
------ ------ ---------- ----------- ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... 10,307 $103 $ 583 $ (755) $ -- -- $ -- $ (69)
Net loss....................... -- -- -- (2,191) -- -- -- (2,191)
------ ---- ------- -------- ------- ------ ------- --------
Balances at December 31,
1996......................... 10,307 103 583 (2,946) -- -- -- (2,260)
Purchase and retirement of
treasury stock............... (3,215) (32) -- (3,659) -- -- -- (3,691)
Accretion on Series A
convertible preferred
stock........................ -- -- (30) -- -- -- -- (30)
Dividends accrued on Series A
convertible preferred
stock........................ -- -- (54) -- -- -- -- (54)
Exercise of stock options...... 55 1 6 -- -- -- -- 7
Sale of restricted common stock
for notes.................... 931 9 99 -- (108) -- -- --
Net loss....................... -- -- -- (2,213) -- -- -- (2,213)
------ ---- ------- -------- ------- ------ ------- --------
Balances at December 31,
1997......................... 8,078 81 604 (8,818) (108) -- -- (8,241)
Common stock granted for
services..................... 40 -- 25 -- -- -- -- 25
Purchase of treasury stock..... -- -- -- -- -- 1,260 (1,900) (1,900)
Accretion on Series A and
Series B convertible
preferred stock.............. -- -- (434) -- -- -- -- (434)
Dividends accrued on Series A
convertible preferred
stock........................ -- -- (68) -- -- -- -- (68)
Exercise of stock options...... 88 1 10 -- -- -- -- 11
Net loss....................... -- -- -- (4,769) -- -- -- (4,769)
------ ---- ------- -------- ------- ------ ------- --------
Balances at December 31,
1998......................... 8,206 82 137 (13,587) (108) 1,260 (1,900) (15,376)
Accretion on Series A, Series
B, and Series C convertible
preferred stock.............. -- -- (1,039) -- -- -- -- (1,039)
Dividends accrued on Series A
convertible preferred
stock........................ -- -- (51) -- -- -- -- (51)
Exercise of stock options...... 375 4 420 -- (333) -- -- 91
Fair value of common stock
warrants issued.............. -- -- 275 -- -- -- -- 275
Repurchase of common stock..... -- -- -- -- -- 1,800 (5,350) (5,350)
Issuance of common stock for
notes........................ 880 9 1,847 -- (2,261) (270) 405 --
Fair value of shares issued for
acquired in-process research
and development.............. 841 8 3,473 -- -- -- -- 3,481
Forgiveness of note receivable
for stock.................... -- -- -- -- 108 650 (76) 32
Net loss....................... -- -- -- (6,360) -- -- -- (6,360)
------ ---- ------- -------- ------- ------ ------- --------
Balances at September 30,
1999......................... 10,302 103 5,062 (19,947) (2,594) 3,440 (6,921) (24,297)
Pro forma unaudited:
Conversion of Series A, B,
and C preferred stock,
including dividends on
Series A preferred stock... 10,389 104 22,009 -- -- -- -- 22,113
------ ---- ------- -------- ------- ------ ------- --------
Pro forma balances at
September 30, 1999
(unaudited)................ 20,691 $207 $27,071 $(19,947) $(2,594) 3,440 $(6,921) $ (2,184)
====== ==== ======= ======== ======= ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 87
WITNESS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(2,191) $(2,213) $(4,769) $(3,948) $(6,360)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment........................................ 75 258 743 500 934
Stock issued for in-process research and
development...................................... -- -- -- -- 3,481
Other non-cash expenses............................ -- -- 225 25 281
Changes in operating assets and liabilities:
Accounts receivable.............................. (528) 528 (2,388) (1,211) (3,942)
Prepaid expenses and other assets................ 37 (53) (58) (67) (746)
Inventory........................................ (210) (295) 587 473 --
Accounts payable................................. 126 288 236 359 (77)
Accrued expenses................................. 504 (112) 1,307 1,153 2,618
Deferred revenue................................. 2,353 (160) 972 1,043 (649)
------- ------- ------- ------- -------
Net cash flows provided by (used in) operating
activities.................................. 166 (1,759) (3,145) (1,673) (4,460)
------- ------- ------- ------- -------
Cash flows from investing activities -- purchase of
property and equipment............................... (181) (1,073) (1,324) (937) (1,137)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net borrowings on (repayments of) working capital
line of credit..................................... -- 1,000 (1,000) (1,000) 402
Proceeds from long-term debt......................... -- 890 1,000 -- 3,000
Repayments on long-term debt......................... -- -- (297) (223) (1,718)
Purchase of treasury shares.......................... -- (3,691) (1,900) (1,900) (5,350)
Proceeds from exercise of stock options.............. -- 7 11 -- 91
Proceeds from sale of Series A convertible preferred
stock, net......................................... -- 6,649 -- -- --
Proceeds from sale of Series B convertible preferred
stock, net......................................... -- -- 5,475 5,475 --
Proceeds from sale of Series C convertible preferred
stock, net......................................... -- -- -- -- 8,312
------- ------- ------- ------- -------
Net cash flows provided by financing
activities.................................. -- 4,855 3,289 2,352 4,737
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................. (15) 2,023 (1,180) (258) (860)
Cash and cash equivalents at beginning of period....... 84 69 2,092 2,092 912
------- ------- ------- ------- -------
Cash and cash equivalents at end of period............. $ 69 $ 2,092 $ 912 $ 1,834 $ 52
======= ======= ======= ======= =======
Supplemental disclosure of cash paid for interest...... $ -- $ 20 $ 87 $ 65 $ 209
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 88
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 AND SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
Witness Systems, Inc. develops, markets and licenses recording and analysis
software designed to enable customer contact centers to record and evaluate
customer interactions through one or more media, such as telephony and Web chat.
It is headquartered in Alpharetta, Georgia with other offices in the United
States and the United Kingdom.
The Company was originally incorporated as a Georgia corporation ("Witness
Georgia") on May 26, 1988. Witness Systems Delaware, Inc., a Delaware
corporation ("Witness Delaware"), was incorporated on March 13, 1997 to effect a
merger with Witness Georgia. Effective March 14, 1997, the Board of Directors
approved an Agreement and Plan of Merger to merge Witness Georgia with Witness
Delaware. The surviving entity, Witness Systems Delaware, Inc. filed for a
corporate name change to Witness Systems, Inc. on March 18, 1997. These
financial statements reflect the financial position and results of operations
for both entities (the "Company") for all periods presented.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiary, Witness Systems UK Limited. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(C) UNAUDITED INTERIM INFORMATION
The accompanying interim financial statements for the nine months ended
September 30, 1998 have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, such financial statements reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position, results of operations and cash flows.
(D) UNAUDITED PRO FORMA CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
The Board of Directors has authorized the Company to file a registration
statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering. If the offering is
consummated as presently anticipated, each share of the Series A, Series B, and
Series C convertible preferred stock will automatically convert into 1.8 shares
of common stock. In addition, the Series A stockholders would be entitled to
payment of accrued dividends either in cash or in additional shares of Series A
convertible preferred stock. The Company has received a notification from the
Series A stockholders that they will elect to receive payment of all accrued
dividends with additional shares if the offering is consummated as presently
anticipated. The unaudited pro forma convertible preferred stock and
stockholders' deficit reflects the automatic conversion of Series A, Series B
and Series C convertible preferred stock, including the payment of $173,000 in
accrued dividends on the Series A convertible preferred stock with 80,653
additional preferred shares, into common stock as if such conversions had
occurred as of September 30, 1999.
(E) REVENUE RECOGNITION AND DEFERRED REVENUE
The Company recognizes revenue in accordance with Statement of Position
("SOP") 97-2, Software Revenue Recognition, and SOP 98-4, Deferral of the
Effective Date of a Provision of SOP 97-2. Revenue is derived from the sale of
software licenses, hardware, and software services and is
F-7
<PAGE> 89
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
allocated to each element of the arrangement based on the relative fair values
of the elements, which is established by the price charged when the respective
element is sold separately.
Revenue from license fees and hardware is recognized when persuasive
evidence of an agreement exists, delivery of the product has occurred, the fee
is fixed or determinable and collectibility is probable. Because contracts often
contained substantive acceptance criteria, the Company deferred revenue
recognition until written acceptance was obtained or full payment was received
for periods prior to 1998.
Software services include installation, training, and maintenance. Revenues
from installation and training are recognized upon performance of the related
services. Installation and training services are offered and billed as separate
elements of contracts and are not essential to the functionality of the
software.
Maintenance is offered as a separate element and includes the right to
unspecified upgrades on a when-and-if available basis. Maintenance revenue is
deferred and recognized ratably over the term of the related contract, usually
one year. Specified upgrades are not typically offered to customers.
In December 1998, the Accounting Standards Committee of the American
Institute of Certified Public Accountants issued SOP 98-9, Software Revenue
Recognition with Respect to Certain Transactions. SOP 98-9 is effective for
fiscal years beginning after March 15, 1999 and the Company does not expect a
material change to its accounting for revenues as a result of adopting the
provisions of SOP 98-9.
Accounts receivable include amounts due from customers for which revenue
has been recognized. Deferred revenue consists of amounts collected from
customers for license and software services that have not met the criteria for
revenue recognition.
(F) CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(G) INVENTORY
Inventory consists mainly of computer hardware purchased for customers and
is stated at the lower of cost or market. Cost is determined using the specific
identification method. As of December 31, 1998, the Company no longer maintains
inventory for resale.
(H) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization on property and equipment is
calculated using the straight-line method over the shorter of the estimated
useful lives of the assets or the lease term. The estimated useful lives of the
assets are as follows:
<TABLE>
<S> <C>
Equipment and purchased software............................ 2 years
Furniture and fixtures...................................... 5 years
Leasehold improvements...................................... 3 years
</TABLE>
F-8
<PAGE> 90
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
(I) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Costs incurred
subsequent to establishing technological feasibility, in the form of a working
model, are capitalized and amortized over their estimated useful lives. To date,
software development costs incurred after technological feasibility has been
established have not been material.
(J) INCOME TAXES
The Company was taxed as an S Corporation pursuant to the Internal Revenue
Code during 1996. As such, the Company did not record any provisions for federal
or state income taxes since all earnings were passed through to, and the related
income tax liabilities were the responsibility of, the stockholders of the
Company.
On January 1, 1997, the Company terminated its election to operate as an S
Corporation and became taxable as a C Corporation. Since the Company reported
operating losses with no recognizable benefit in 1996, the pro forma provision
for income taxes that would have been provided had the Company operated as a C
Corporation during 1996 would also be $0.
From January 1, 1997 forward, income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(K) STOCK COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"),
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense is
recorded on the date of grant only if the current estimated fair value of the
underlying stock exceeds the exercise price. The Company has also provided pro
forma disclosures as if the fair value-based method of accounting prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock Based Compensation, had been used to account for its fixed plan stock
options (note 6(a)).
(L) COMPUTATION OF HISTORICAL AND UNAUDITED PRO FORMA NET LOSS PER SHARE
The Company has presented historical net loss per share pursuant to SFAS
No. 128, Earnings Per Share, and the Securities and Exchange Commission Staff
Accounting Bulletin ("SAB") No. 98. Pursuant to SFAS No. 128, unvested stock is
excluded from basic earnings per share and included in diluted earnings per
share if dilutive. Pursuant to SAB No. 98, common stock and convertible
preferred stock issued for nominal consideration, prior to the effective date of
the initial public offering, are required to be included in the calculation of
basic and diluted net loss per share, as if they were outstanding for all
periods presented. The Company has not had any such issuances or grants for
nominal consideration.
F-9
<PAGE> 91
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
The unaudited pro forma net loss per share for the year ended December 31,
1998 and the nine months ended September 30, 1999 is calculated using the
historical weighted-average common shares outstanding and reflecting: (1) the
subsequent conversion of Series A, Series B and Series C convertible preferred
stock, assuming conversion of accrued dividends on the Series A convertible
preferred stock, into shares of the Company's common stock, as if such
conversions had occurred on January 1, 1998, or at the date of issuance, if
later; and (2) the vesting of certain restricted common shares held by an
officer of the Company which become fully vested upon the occurrence of an
initial public offering of the Company, as if such vesting became effective on
the date such shares were issued. The calculation excludes preferred stock
dividends and accretion of $502,000 and $1,090,000 for the year ended December
31, 1998 and the nine months ended September 30, 1999, respectively.
Following is a reconciliation of the numerator and denominator used in the
calculation of historical and pro forma basic and diluted net loss per share (in
thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1996 1997 1998 1999
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
Net loss............................................ $(2,191) $(2,213) $(4,769) $(6,360)
Preferred stock dividends and accretion............. -- (84) (502) (1,090)
------- ------- ------- -------
Net loss applicable to common
stockholders.............................. $(2,191) $(2,297) $(5,271) $(7,450)
======= ======= ======= =======
Basic and diluted common shares outstanding......... 10,307 7,238 6,964 6,469
======= ======= ======= =======
Basic and diluted net loss per share................ $ (0.21) $ (0.32) $ (0.76) $ (1.15)
======= ======= ======= =======
</TABLE>
The Company has excluded all convertible preferred stock, warrants for
common and preferred shares, non-vested restricted common shares, and
outstanding stock options from the calculation of historical diluted net loss
per common share because all such securities are anti-dilutive for all periods
presented. The total number of shares excluded from the calculations of diluted
net loss per share were 0, 7,575,386, 10,304,502, and 13,586,061 for the years
ended December 31, 1996, 1997 and 1998, and for the nine months ended September
30, 1999, respectively. See notes 5 and 6 for further information on these
securities.
F-10
<PAGE> 92
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
Unaudited pro forma:
Historical basic and diluted common shares outstanding... 6,964 6,469
Adjustment to reflect the anticipated initial public
offering:
Conversion of Series A preferred stock.............. 5,776 5,776
Conversion of Series B preferred stock.............. 533 2,128
Conversion of Series C preferred stock.............. -- 518
Vesting of restricted common shares................. 126 385
------- -------
Pro forma basic and diluted common shares outstanding.... 13,399 15,276
======= =======
Unaudited pro forma basic and diluted net loss
per share...................................... $ (0.36) $ (0.42)
======= =======
</TABLE>
(M) SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The Company operates
and manages its business in one segment, that being a software and services
provider to the customer interaction recording and analysis market.
(N) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's long-term debt is estimated by discounting
the future cash flows of each instrument at rates estimated to be currently
available to the Company for similar instruments. The carrying value of the
Company's remaining financial instruments approximate fair value due to the
short-term nature of such instruments.
(O) REFERENCE TO PERIODS PRESENTED
References within the notes to consolidated financial statements to 1996,
1997, 1998, and 1999 relate to the years ended December 31, 1996, 1997, and 1998
and to the nine months ended September 30, 1999, respectively.
(P) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(Q) RECLASSIFICATIONS
Certain amounts in the accompanying 1996, 1997 and 1998 financial
statements have been reclassified to conform to the presentation adopted in the
1999 financial statements.
F-11
<PAGE> 93
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Purchased software.......................................... $ 120 $ 453 $ 755
Equipment................................................... 824 1,642 2,345
Furniture and fixtures...................................... 310 451 577
Leasehold improvements...................................... -- 32 38
------ ------ ------
1,254 2,578 3,715
Less accumulated depreciation............................... 300 1,043 1,977
------ ------ ------
$ 954 $1,535 $1,738
====== ====== ======
</TABLE>
3. FINANCING ARRANGEMENTS
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Term loan, interest payable in monthly installments at prime
plus 2% (10.25% at September 30, 1999), principal payable at
earlier of December 31, 2000 or upon an initial public
offering of the Company's equity securities, net of
unamortized discount of $165,500 at September 30, 1999.... $ -- $ -- $1,835
Equipment loan, payable in monthly principal installments of
$41,667, plus interest at prime plus 2% (10.25% at
September 30, 1999) through maturity, June 30, 2001....... -- -- 875
Revolving loan, interest payable in monthly installments at
prime plus 2% (10.25% at September 30, 1999), principal
payable on December 31, 2000.............................. -- -- 402
Working capital line of credit, interest payable monthly at
the prime rate............................................ 1,000 -- --
Term note payable in 36 monthly installments of $24,719 plus
interest at prime plus 1 1/4% (9% at December 31, 1998),
through January 31, 2001.................................. 890 593 --
Outstanding advances convertible to term note payable in 36
monthly installments of $27,798 plus interest at prime
plus 1 1/4% (9% at December 31, 1998), commencing June 30,
1999, through May 31, 2002................................ -- 1,000 --
------ ------ ------
Total long-term debt...................................... 1,890 1,593 3,112
Less current portion (the 1997 balance was classified as
current due to previous covenant violations).............. 1,890 491 902
------ ------ ------
Long-term debt, excluding current portion................. $ -- $1,102 $2,210
====== ====== ======
</TABLE>
During 1997, the Company entered into a loan and security agreement (the
"Agreement") with a commercial bank that made borrowings available to the
Company under working capital and
F-12
<PAGE> 94
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCING ARRANGEMENTS -- (CONTINUED)
equipment lines of credit. The working capital line of credit permitted the
Company to borrow the lesser of $1.0 million or 70% of eligible accounts
receivable, as defined in the Agreement, through July 1, 1998. The equipment
line of credit permitted the Company to obtain advances of up to $1.0 million
for all property and equipment purchases during the period from May 1, 1997
through December 31, 1997. The aggregate amount of advances outstanding under
the equipment line was $0.9 million as of December 31, 1997, which was converted
to a term note as of such date.
In December 1998, the Agreement was amended (the "Amended Agreement") and
permitted the Company to borrow the lesser of $2.5 million or a variable
percentage of eligible accounts receivable through December 10, 1999 under the
working capital line of credit and provided the Company a $1.0 million committed
equipment line of credit for the period from December 11, 1998 through June 10,
1999. In connection with the Amended Agreement, the Company issued the
commercial bank a warrant to purchase 18,000 shares of the Company's common
stock for $2.58 per share (the "Bank Warrant") (see note 5(e)). The fair value
of the warrant was nominal in December 1998. There was no balance outstanding
under the working capital line of credit as of December 31, 1998.
In April 1999, the Company entered into an additional finance loan (the
"Finance Loan") with the commercial bank which replaced the working capital line
of credit and permitted the Company to borrow the lesser of $4.0 million or 75%
of net eligible accounts receivable through the earlier of August 7, 1999 or the
closing of a financing transaction in which the Company received at least $4.0
million. Borrowings under the Finance Loan accrued interest at the prime rate
plus 2.5%. In connection with the Finance Loan, the Company cancelled the Bank
Warrant and issued the commercial bank warrants to purchase 20,000 shares of the
Company's Series B convertible preferred stock for $4.65 per share (see note
5(e)). The fair value of the warrant was estimated at $0.1 million in April 1999
and was recorded as debt discount and amortized over the term of the Finance
Loan.
In June 1999, the Company refinanced all of its then existing borrowings
with another commercial lender (the "Lender"). Under the terms of the new loan
and security agreement (the "Loan Agreement"), the Company obtained a $2.0
million secured term loan (the "Term Loan"), a $1.0 million secured equipment
loan (the "Equipment Loan") and a $4.0 million working capital line of credit
(the "Revolving Loan"). The Revolving Loan permits the Company to borrow the
lesser of $4.0 million or 80% of eligible accounts receivable through the
maturity date of December 31, 2000. The Company remits its accounts receivable
collections for application against any advances, interest and fees on the
Revolving Loan. In connection with the Loan Agreement, the Company issued the
Lender a warrant to purchase 117,000 shares of the Company's common stock for
$2.58 per share (see note 5(e)). The fair value of the warrant was estimated at
$0.2 million in June 1999 and has been recorded as debt discount and is being
amortized over the term of the loans. The Loan Agreement is secured by
substantially all of the Company's assets, including intellectual property.
The Company used the Black-Scholes model to estimate the fair value of the
warrants using the following assumptions: expected dividend yield of 0%;
risk-free interest rate of 6%; 5 year term; and 100% volatility.
The Loan Agreement contains various negative covenants, including, but not
limited to, the prohibition of cash dividend payments to stockholders. At
September 30, 1999, the Company was in compliance with all such requirements.
F-13
<PAGE> 95
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. FINANCING ARRANGEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt, exclusive of the unamortized
discount, for each of the two years subsequent to September 30, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- -------------------------
<S> <C>
2000........................................................ $ 902
2001........................................................ 2,375
------
Total long-term debt...................................... $3,277
======
</TABLE>
4. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
Effective September 30, 1999, the Company obtained certain in-process
research and development efforts ("IPR&D") for 841,120 shares of the Company's
common stock valued at $4.14 per share. As a result, the Company has recorded a
charge of $3.5 million in the accompanying consolidated statement of operations.
The IPR&D relates to the development of technology to store and retrieve
substantially larger volumes of data than the Company's software is currently
capable of storing and retrieving. At the date of the transaction, the results
of the IPR&D had not progressed to a stage where they met technological
feasibility as defined by SFAS No. 86, Accounting for the Cost of Computer
Software to Be Sold, Leased or Otherwise Marketed. As this was the Company's
first attempt to develop the desired technology, there existed a significant
amount of uncertainty as to the Company's ability to complete the development
within a timeframe acceptable to the market. The Company expects to complete the
development during the third quarter of 2000. If the Company is unable to
complete the development in a timely manner, its competitive position in the
market may erode and it may not be able to attract new customers. Additionally,
the amount of development required to enable the acquired IPR&D to be compatible
with the Company's primary product was significant, which increased the
uncertainty surrounding its successful development. Management of the Company
estimated it would have cost the Company more than $3.5 million to develop the
IPR&D internally and estimates it will incur an additional $3.3 million to
complete its development efforts. The IPR&D does not have an alternative future
use to the Company that has reached technological feasibility.
5. STOCKHOLDERS' DEFICIT
(A) STOCKHOLDERS' AGREEMENT
All holders of the Company's preferred stock and certain holders of the
Company's common stock are parties to the Company's Stockholders' Agreement, as
amended in August 1999 to include the holders of Series C convertible preferred
stock. This agreement provides for a right of first refusal to the Company and
then to the preferred stockholders or their qualified transferees, as defined in
the agreement, to purchase any selling stockholders' shares at a price equal to
that determined by a third party. The agreement terminates upon the earlier of
(a) August 2, 2019, (b) completion of a qualified initial public offering, or
(c) the sale of the Company, as defined.
(B) STOCK REPURCHASES
During 1997, the Company entered into Stock Repurchase Agreements with four
officers of the Company, under which the Company repurchased 3,214,845 shares of
the Company's common stock for notes payable totaling $3.7 million. The notes
were repaid in 1997 concurrent with the sale of Series A convertible preferred
stock. All of the treasury stock was retired during 1997.
F-14
<PAGE> 96
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' DEFICIT -- (CONTINUED)
During 1998, the Company entered into a Stock Repurchase Agreement with a
stockholder of the Company, under which the Company repurchased 1,260,000 shares
of the Company's common stock for $1.9 million. These shares are included in
treasury stock as of December 31, 1998 and September 30, 1999.
In February 1999, the Company repurchased 648,979 shares of the Company's
common stock in connection with a forgiveness of a related note receivable (note
5(d)).
In August 1999, the Company entered into Stock Repurchase Agreements with
three directors of the Company, under which the Company repurchased 1,800,000
shares of the Company's common stock for $5.4 million. Such consideration was
paid concurrent with the sale of the Series C convertible preferred stock (note
5(c)). These shares are included in treasury stock as of September 30, 1999.
(C) SALES OF CONVERTIBLE PREFERRED STOCK
During 1997, the Company executed a Series A convertible preferred stock
("Series A") purchase agreement to sell 3,184,000 shares of Series A for $2.145
per share, resulting in net proceeds to the Company of $6.6 million. The Company
records accretion on Series A equal to the difference between the net proceeds
received and the redemption amount based on the greater of $2.145 per share or
the then fair value (estimated as $25.5 million as of September 30, 1999) using
the interest method from the original issuance date through the final redemption
date commencing September 24, 2003. Additionally, the Company is increasing the
value of the Series A by the contractual amount of cumulative preferred
dividends due each year to the Series A stockholders. The holders of Series A
shares are entitled to participation rights and cumulative preferred dividends
(payable at redemption or upon an initial public offering of the Company's
common stock) at $.02145 per share per annum to be paid in Series A shares or
cash.
During 1998, the Company executed a Series B convertible preferred stock
("Series B") purchase agreement to sell 1,181,954 shares of Series B for $4.65
per share, resulting in net proceeds to the Company of $5.5 million. The Company
is recording accretion on Series B equal to the difference between the net
proceeds received and the redemption amount of $5.5 million using the interest
method from the original issuance date through the final redemption date
commencing September 24, 2003.
In August 1999, the Company executed a Series C convertible preferred stock
("Series C") purchase agreement to sell 1,325,028 shares of Series C for $6.30
per share, resulting in net proceeds to the Company of $8.3 million. The Company
records accretion on Series C equal to the difference between the net proceeds
received and the redemption amount based on the greater of $6.30 per share or
the then fair value (estimated as $10.6 million as of September 30, 1999) using
the interest method from the original issuance date through the final redemption
date commencing September 24, 2003.
The holders of the convertible preferred stock are entitled to, among other
substantial rights: (1) voting rights equivalent to the voting rights they would
hold as if their holdings were converted to common stock at 1.8 common shares
for each preferred share converted; (2) the right to name two members of the
Company's Board of Directors; (3) distribution and liquidation preferences; (4)
the option to convert to common stock at any time at 1.8 common shares for each
preferred share converted; (5) automatic conversion upon the effective date of a
qualified initial public offering at 1.8 common shares for each preferred share
converted; (6) certain anti-dilution provisions; (7) certain covenants requiring
convertible preferred stockholder authorization of
F-15
<PAGE> 97
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' DEFICIT -- (CONTINUED)
transactions; and (8) a mandatory redemption provision whereby the majority of
holders of convertible preferred stock may give redemption notice at any time
after September 24, 2003 and cause the Company to redeem 50% of their shares
within 60 days of receipt of the redemption notice and to redeem the remainder
on the first anniversary of the first redemption date, with the redemption price
for: Series A defined as the greater of the then fair market value or the
original cost plus all accrued but unpaid dividends; for Series B, defined as
the original cost plus all declared but unpaid dividends; and for Series C,
defined as the greater of the then fair market value or the original cost plus
all accrued but unpaid dividends. Additionally, the holders of convertible
preferred stock are party to a Registration Rights Agreement which provides them
with certain rights, including but not limited to, demand and incidental
registration rights.
(D) NOTES RECEIVABLE FROM STOCK SALES
During 1997, the Company sold restricted common stock to an officer of the
Company for $0.1 million in return for a note receivable, all of which remained
outstanding as of December 31, 1997 and 1998. In February 1999, the officer
resigned from the Company and the amount of the note related to vested shares
plus all accrued interest was forgiven. The remainder of the note was canceled
in connection with the Company's repurchase of the unvested shares at $0.12 per
share (note 5(b)).
In March 1999, the Company issued 879,763 shares of restricted common stock
to an officer of the Company in return for a note receivable of $1.5 million. In
August 1999, an officer of the Company was granted and exercised options to
acquire 112,230 shares of the Company's common stock in exchange for a note
receivable of $0.3 million. The notes effectively bear no interest and mature on
March 30, 2008. Such maturity date of the note and the vesting of the underlying
restricted stock is accelerated if the Company (1) consummates a merger,
consolidation or reorganization, (2) sells substantially all of its assets, or
(3) completes an initial public offering.
In August 1999, the Company issued 269,195 shares of common stock (from
treasury shares) to certain officers and directors of the Company in return for
individual notes receivable aggregating $0.8 million. The notes accrue interest
at 7% and mature on July 31, 2003. Such maturity date is accelerated if the
Company (1) consummates a merger, consolidation or reorganization, (2) sells
substantially all of its assets, (3) completes an initial public offering, (4)
terminates the employee for cause, or (5) receives the employee's resignation.
(E) WARRANTS
In connection with the Amended Agreement (note 3), the Company granted a
warrant to a commercial bank to purchase 18,000 shares of common stock of the
Company for $2.58 per share. The warrant vested immediately with an initial
expiration date of December 10, 2003. The warrant agreement provided the holder
with a put right at fair market value in case of sale, merger, or consolidation
of the Company, as defined in the warrant agreement. In connection with the
Finance Loan, the warrant to purchase the 18,000 common shares was cancelled and
the Company granted a warrant to purchase 20,000 shares of the Company's Series
B for $4.65 per share. The warrant vested immediately, expires April 22, 2004
and remained outstanding and exercisable as of September 30, 1999. The warrant
agreement provides the holder with a put right at fair market value in case of
sale, merger, or consolidation of the Company, as defined in the warrant
agreement.
F-16
<PAGE> 98
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' DEFICIT -- (CONTINUED)
In connection with the Loan Agreement (note 3), the Company granted a
warrant to purchase 117,000 shares of common stock of the Company for $2.58 per
share. The warrant vested immediately, expires June 24, 2004 and remained
outstanding and exercisable as of September 30, 1999. The warrant agreement
provides the holder with certain rights, including but not limited to, a put
right at fair market value in case of sale, merger, or consolidation of the
Company, as defined in the warrant agreement.
6. EMPLOYEE BENEFIT PLANS
(A) STOCK INCENTIVE PLAN
In 1997, the Company adopted the Witness Systems, Inc. Stock Incentive Plan
(the "Plan") pursuant to which the Company's Board of Directors may grant up to
4,717,440 shares of common stock in the form of stock options, restricted stock
awards, or stock appreciation rights to employees and key persons affiliated
with the Company, as defined in the Plan document. The Plan remains in effect
until the earlier of the tenth anniversary of its effective date or the date on
which all reserved shares have been issued or are no longer available for use
under the Plan. Through September 30, 1999, the Company has issued 1,119,498
shares of restricted common stock. As of September 30, 1999, 530,242 shares
remain available for grant under the Plan. In November 1999, the Company amended
the Plan, authorized an additional 1,557,360 shares subject to grant, and
adopted a provision to increase the number of shares authorized each year.
Options granted under the Plan and approved by the Board of Directors may
be incentive stock options ("ISO"), which qualify for certain tax benefits, or
nonqualified stock options. Only employees are eligible to receive ISOs, which
must be granted at a price not less than the estimated fair value of the stock
on the grant date, or not less than 110% of the estimated fair value if granted
to a participant who is a greater than 10% stockholder of the Company.
Nonqualified stock options may be granted to employees and key persons at a
price which may be greater than, equal to, or less than the estimated fair value
of the stock on the grant date. Option vesting terms are established by the
Board of Directors at the time of grant, and typically range from three to four
years. The expiration date of options granted under the Plan is determined at
the time of grant and may not exceed ten years from the date of the grant for a
non-10% owner of the Company, or five years from the date of the grant in the
case of an ISO granted to a participant who is a greater than 10% owner of the
Company.
At September 30, 1999, 300,996 options were outstanding with an officer
which provide for accelerated vesting in the event that the Company completes an
initial public offering. At September 30, 1999, the Company also had 946,226
options outstanding with certain officers of the Company which provide for
accelerated vesting if the Company undergoes a change in control, as defined,
and if there is a significant reduction in each individual's respective
responsibilities within the Company, as defined.
F-17
<PAGE> 99
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The following summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at January 1, 1997.................................. -- $ --
Granted..................................................... 1,074,739 0.12
Exercised................................................... (56,144) 0.12
Cancelled................................................... (149,668) 0.12
--------- -----
Balance at December 31, 1997................................ 868,927 0.12
Granted..................................................... 919,854 1.18
Exercised................................................... (89,111) 0.12
Cancelled................................................... (149,476) 0.14
--------- -----
Balance at December 31, 1998................................ 1,550,194 0.74
Granted..................................................... 1,555,020 2.17
Exercised................................................... (375,041) 1.12
Cancelled................................................... (262,679) 0.94
--------- -----
Balance at September 30, 1999............................... 2,467,494 $1.54
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED- WEIGHTED- -------------------------
AVERAGE AVERAGE WEIGHTED-
RANGE OF NUMBER REMAINING EXERCISE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE PRICE OF SHARES EXERCISE PRICE
- --------------- ----------- ---------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.21-$2.56 852,084 8.42 years $0.64 205,366 $0.55
$2.57-$2.99 1,109,592 9.34 years 1.66 60,199 1.66
$3.00-$7.45 505,818 9.82 years 2.83 -- --
</TABLE>
The weighted-average remaining contractual life of options outstanding at
September 30, 1999 was 9.12 years.
The Company applies the provisions of APB No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net loss would have been increased to
the pro forma amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
--------------- SEPTEMBER 30,
1997 1998 1999
------ ------ -----------------
<S> <C> <C> <C>
Historical net loss..................................... $2,213 $4,769 $6,360
Pro forma net loss...................................... 2,214 4,830 6,765
Pro forma basic and diluted net loss per share.......... 0.32 0.77 1.21
</TABLE>
The per share weighted-average fair value of stock options granted during
1997, 1998 and 1999 was $0.0125, $0.4167, and $0.75, respectively, on the date
of grant using the Black-Scholes option-
F-18
<PAGE> 100
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
pricing model (excluding a volatility assumption) with the following
weighted-average assumptions: 1997 -- expected dividend yield 0%, risk-free
interest rate of 6%, and an expected life of 7.26 years; 1998 -- expected
dividend yield 0%, risk-free interest rate of 6%, and an expected life of 7.51
years; 1999 -- expected dividend yield 0%, risk-free interest rate of 6%, and an
expected life of 7.20 years.
(B) RETIREMENT PLAN
The Company maintains a tax-qualified defined contribution plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Employees are
eligible to participate the first of the month following their date of hire. The
401(k) Plan allows participants to contribute by salary reduction up to 20% of
eligible compensation, subject to Internal Revenue Service limitations. The
401(k) Plan also provides for discretionary employer matching contributions,
none of which were made during 1996, 1997, 1998, or 1999.
(C) EMPLOYEE STOCK PURCHASE PLAN
In November 1999, the Company established an employee stock purchase plan
pursuant to Section 423 of the Internal Revenue Code. The plan covers 990,000
shares of the Company's common stock and would become effective upon an initial
public offering of the Company's common stock.
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1997 1998 1999
---- ------ -------------
<S> <C> <C> <C>
Accrued wages, salaries, and employee benefits.............. $172 $ 353 $1,503
Sales taxes payable......................................... 300 552 1,468
Reserve for sales returns and allowances.................... -- 225 225
Other....................................................... 160 809 1,361
---- ------ ------
$632 $1,939 $4,557
==== ====== ======
</TABLE>
8. OTHER PERSONNEL COSTS
During 1999, the Company incurred $0.3 million of severance costs for
terminated executives and incurred $0.4 million for a bonus and relocation costs
in connection with recruiting a new executive.
9. INCOME TAXES
The Company did not record any income tax expense during the year ended
December 31, 1996 because it was operating as an S Corporation. Further, the pro
forma provision for income taxes for 1996 is $0 because the Company reported
operating losses with no recognizable benefit.
F-19
<PAGE> 101
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
During 1997, 1998 and 1999, no income taxes were recorded because the
Company reported operating losses with no recognizable benefit. Income tax
expense (benefit) differed from the amounts computed by applying the statutory
U.S. federal income tax rate of 34% to loss before income taxes as a result of
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -----------------
<S> <C> <C> <C>
Computed "expected" tax benefit....................... $(752) $(1,621) $(2,162)
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal income taxes..... (55) (191) (203)
Nondeductible items................................. 12 35 57
Generation of research and experimentation credit
carryforward..................................... (35) (150) (40)
Other, net.......................................... 228 (85) (17)
Increase in valuation allowance..................... 602 2,012 2,365
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
The income tax effects of temporary differences that give rise to
significant portions of the Company's deferred income tax assets and liabilities
are presented below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1997 1998 1999
----- ------- -----------------
<S> <C> <C> <C>
Deferred income tax assets:
Accruals not deducted for tax....................... $ 100 $ 486 $ 613
Property and equipment, principally due to
differences in depreciation...................... 8 114 207
Acquired in-process research and development........ -- -- 1,367
Net operating loss and research and experimentation
credit carryforwards............................. 720 2,164 2,867
----- ------- -------
Total gross deferred tax assets.................. 828 2,764 5,054
Less valuation allowance............................ (602) (2,614) (4,979)
----- ------- -------
Net deferred income tax assets................... 226 150 75
Deferred income tax liabilities -- adjustment to
accrual basis for income taxes...................... (226) (150) (75)
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
The net change in the valuation allowance for deferred income tax assets
for 1997, 1998 and 1999 was an increase of $0.6 million, $2.0 million, and $2.4
million, respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred income tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment.
F-20
<PAGE> 102
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
At September 30, 1999, the Company has net operating loss and research and
experimentation credit carryforwards for federal income tax purposes of
approximately $6.7 million and $0.2 million, respectively, which expire in
varying amounts beginning in the year 2014.
Approximately $0.2 million of the net operating loss carryforwards that the
Company may use to offset taxable income in future years is limited as a result
of an ownership change, as defined under Internal Revenue Code Section 382,
which occurred effective with the Company's sale of preferred stock in March
1997. Further restrictions on the Company's utilization of net operating losses
may result upon an initial public offering of the Company's common stock.
10. COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases certain office space under noncancelable operating lease
agreements which expire at various times through 2002 and provide for minimum
annual rentals as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999........................................................ $ 951
2000........................................................ 750
2001........................................................ 712
2002........................................................ 376
------
$2,789
======
</TABLE>
Rental expense under all lease agreements for 1996, 1997, 1998 and 1999 was
$0.1 million, $0.3 million, $0.5 million, $0.5 million, respectively.
(B) TERMINATION OF DISTRIBUTION AGREEMENT
During 1998, the Company terminated an agreement with a distributor. The
Company agreed to pay $0.9 million in order to terminate the arrangement, all of
which was paid by December 31, 1998. The $0.9 million charge has been included
in the operating expense category of the Company's 1998 statement of operations.
11. BUSINESS AND CREDIT CONCENTRATIONS
Most of the Company's customers are located in the United States.
Two customers accounted for 23% of the Company's revenue in 1996, two
customers accounted for 28% of the Company's revenue in 1997, two customers
accounted for 27% of the Company's revenue in 1998, and two customers accounted
for 16% of the Company's revenue in 1999. Total accounts receivable outstanding
from these major customers were approximately $0.6 million, $0.1 million, and
$1.3 million at December 31, 1997, 1998, and September 30, 1999, respectively.
The Company generally does not require collateral on accounts receivable as
the majority of its customers are large, well established companies. The Company
estimates an allowance for doubtful accounts and sales returns and allowances
based on the creditworthiness of its customers, general economic conditions, and
other factors. Consequently, an adverse change in those factors could affect the
Company's estimate of its bad debts.
F-21
<PAGE> 103
WITNESS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
In November 1999, the Company amended its certificate of incorporation
to increase the number of authorized common shares to a total of
50,000,000.
On December 27, 1999, the Company's Board of Directors approved a
1.8-for-1 stock split which became effective immediately. All common share
information has been adjusted to reflect the stock split as if it had
occurred at the inception of the Company.
13. SUBSEQUENT EVENTS (UNAUDITED)
The estimated redemption value of the Series A and Series C preferred
stock disclosed in the accompanying statements is based on management's
estimate of the fair value of such shares as of September 30, 1999.
The redemption value of the Series A and Series C preferred stock,
assuming a fair value of $13 per common share, is $74.5 million and $31.0
million, respectively. The assumed fair value per common share represents
the midpoint of the expected offering range as filed in the Company's
registration statement with the Securities and Exchange Commission dated
December 30, 1999.
From November 22, 1999 to December 31, 1999, the Company incurred a
deferred stock compensation charge in the amount of $1.0 million
representing the difference between the exercise price of stock option
grants for 244,458 shares of common stock which ranged from $6.36 to $8.05
and the deemed fair value of the Company's common stock at the time of such
grants which was $11.70 per share. Such amount will be amortized over the
vesting period of the underlying options, which is generally four years.
F-22
<PAGE> 104
2. Inside back page portrays the following: In the center of the page is a
circle with the stylized Witness logo inside. Inside the logo and underneath
the logo text states: "WITNESS SYSTEMS INC". A line extends from the top of
the circle to the top of the page at the end of this line is a circle in
which text states: "1". A line extends from the left side of the circle to
the left side of the page. At the end of this line is a circle in which text
states: "2". A line extends from the bottom of the circle to the bottom of
the page. At the end of this line is a circle in which text states: "3". In
the top left hand portion of the page is a column of four bullet points. The
first bullet point states: Comprehensive multimedia contact recording. The
second bullet point states: Synchronized voice and data evaluation. The
third bullet point states: Essential customer interaction recording. The
fourth bullet point states: Mission-critical business-driven recording and
analysis. In the bottom left hand corner of the page is a paragraph of text
stating: "Organizations can also leverage eQuality to optimize multimedia
interactions by recording Web chat/instant messages as in this example in
which eQuality is monitoring a prospective online sale." Underneath the text
is a screen shot of a web-browser screen with an overlaying box of text. The
top right corner of the page has a paragraph of text which states: "eQuality
helps companies optimize customer relationships by letting users establish
"business rules" to initiate recording of customer contacts. These rules
trigger recordings based on the entry of information in selected fields
within customer information systems." Below the text is a screen shot of our
eQuality software. The bottom right corner of the page has a paragraph of
text which states: These multimedia recordings can then be evaluated using
eQuality Analysis which measures contact center performance. This eliminates
manual data collection and facilitates the accurate assessment of
performance against expectations for metrics such as trouble ticket response
time and average Web chat time, as in this example." Below the text is a
screen shot of our eQuality Analysis software.
<PAGE> 105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,800,000 SHARES
WITNESS SYSTEMS INC LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP
-------------------
, 2000
-------------------
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES
OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF
THIS PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND
THE DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SHARES OF COMMON STOCK MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATIONS TO
DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 106
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 19,182
National Association of Securities Dealers, Inc. fee........ 6,618
Nasdaq Stock Market listing fee............................. 95,000
Accountants' fees and expenses.............................. 225,000
Legal fees and expenses..................................... 400,000
Blue Sky fees and expenses.................................. 5,000
Transfer Agent's fees and expenses.......................... 10,000
Printing and engraving expenses............................. 175,000
Miscellaneous............................................... 14,200
--------
Total Expenses.................................... $950,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our amended and restated certificate of incorporation limits personal
liability for breach of the fiduciary duty of our directors to the fullest
extent provided by the Delaware General Corporation Law. Such provisions provide
that no director of Witness Systems shall have personal liability to us or to
our stockholders for monetary damages for breach of fiduciary duty of care or
other duty as a director. However, such provisions shall not eliminate or limit
the liability of a director
- for any breach of the director's duty of loyalty to us or to our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for voting or assenting to unlawful distributions; or
- for any transaction for which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under our bylaws, any
agreement, a vote of our stockholders or otherwise. Our certificate of
incorporation eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law
and provides that the registrant shall fully indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was our director or
officer or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
Section 7 of the underwriting agreement filed as Exhibit 1.1 hereto also
contains provisions pursuant to which certain of our officers, directors and
controlling persons may be entitled to be indemnified by the underwriters named
therein.
II-1
<PAGE> 107
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, Witness Systems has issued and sold the
following securities, which numbers do not reflect the 1.8-for-1 stock split
that occurred on December 27, 1999:
On December 16, 1997, we sold restricted common stock to Mr. Richards for
$108,000 in return for a promissory note. In February 1999, Mr. Richards
resigned from Witness Systems and the amount of the note related to the 280,901
vested shares plus accrued interest was forgiven. The remainder of the note was
cancelled in connection with our repurchase at $0.12 per share of the 648,979
unvested shares.
On March 18, 1997, we issued and sold 3,184,000 shares of series A
preferred stock at a price of $2.145 per share to Battery Investment Partners
IV, LLC, Battery Venture IV, L.P. and John Abraham resulting in net proceeds of
$6.6 million. Immediately before the consummation of this offering, each of the
series A preferred shares will be automatically converted into 1.8 shares of
common stock.
On September 24, 1998, we issued and sold 1,181,954 shares of series B
preferred stock at a price of $4.65 per share to Battery Investment Partners IV,
LLC, Battery Venture IV, L.P. and John Abraham resulting in net proceeds of $5.5
million. Immediately before the consummation of this offering, each of the
series B preferred shares will be automatically converted into 1.8 shares of
common stock.
On August 2, 1999, we issued and sold 1,325,028 shares of series C
preferred stock at a price of $6.30 per share to a group of venture capital
firms and an individual investor resulting in net proceeds of $8.3 million.
Immediately before the consummation of this offering, each of the series C
preferred shares will be automatically converted into 1.8 shares of common
stock.
On September 30, 1999, we purchased certain assets from Advanced Integrated
Recorders, Inc. and issued 841,120 shares of common stock to Advanced Integrated
Recorders, Inc. as consideration for the assets.
In March 1999, we issued 879,763 shares of restricted common stock to Mr.
Gould in return for a note receivable of $1.5 million.
On August 2, 1999, we sold 30,600 shares of restricted common stock to each
of the following officers (for a total of 244,800 shares): Mr. Gould, Mr.
Ezrine, Mr. Brown, Mr. Gisby, Mr. Ford, Mr. Gallick, Mr. Livernoche, and Ms.
Treaster. Each officer paid $90,950 for the shares by providing a promissory
note to the company. The principal balance of each promissory note is due in
full on July 31, 2003, with interest of 7% payable in arrears annually. In
addition, on August 2, 1999, we sold 24,395 shares of restricted common stock to
Mr. Abraham for $72,401 in return for a promissory note. The principal balance
of the promissory note is due in full on July 31, 2006, with interest of 6.41%
payable in arrears annually.
As of January 10, 2000, Witness Systems has sold and issued 533,775 shares
of its common stock to employees, officers and directors pursuant to direct
issuances and exercises of options under its stock incentive plan.
The sale of the above securities was deemed to be exempt from registration
under Section 5 of the Securities Act in reliance upon Section 4(2) of the
Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer not involving any public offering or transactions
pursuant to compensation benefit plans and contracts relating to compensation as
provided under such Rule 701. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with Witness Systems, to information about Witness
Systems.
II-2
<PAGE> 108
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1+ -- Amended and Restated Articles of Incorporation of the
Registrant.
3.2+ -- Amended and Restated Bylaws of the Registrant.
4.1+ -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Common Stock of the Registrant.
4.2 -- Specimen Stock Certificate.
5.1 -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1+ -- Office Lease Agreement between Regency Park West Associates,
L.P. and Witness Systems, Inc., dated April 15, 1997.
10.2+ -- Landlord's Consent to Second Sublease, dated June 2, 1999
and Second Sublease Agreement between Regency Park West
Associates, L.P., as Landlord and Witness Systems, Inc., as
Second Sublessee, dated May 28, 1999.
10.3+ -- Amended and Restated Stock Incentive Plan of the Registrant.
10.4 -- Form of Stock Option Grant Certificate.
10.5+ -- Form of Amendment to Stock Option Grant Certificate between
Registrant and certain of the officers of the Registrant.
10.6+ -- Employee Stock Purchase Plan of the Registrant.
10.7+ -- Employment Agreement entered into between David B. Gould and
the Registrant, effective February 2, 1999.
10.8+ -- Promissory Note, dated March 31, 1999, between the
Registrant and David Gould.
10.9+ -- Restricted Stock Award Agreement, dated March 31, 1999,
between the Registrant and David Gould.
10.10+ -- Form of Promissory Note and Subscription Agreement, dated
August 2, 1999, between the Registrant and certain of the
officers of the Registrant.
10.11+ -- Promissory Note and Subscription Agreement, dated August 2,
1999, between the Registrant and John Abraham.
10.12+ -- Form of Stock Repurchase Agreement between the Registrant
and certain shareholders of the Registrant.
10.13+ -- Loan and Security Agreement, dated June 24, 1999 between
Greyrock Capital and the Registrant.
10.14+ -- Asset Purchase Agreement among Registrant and Advanced
Integrators, Inc. and Formation, Inc. dated September 30,
1999 and related Schedules and Exhibits.
10.15+ -- Warrant to Purchase Stock, dated June 24, 1999 between
Greyrock Capital and the Registrant.
10.16+ -- Warrant to Purchase Stock, dated April 22, 1999 between
Silicon Valley Bank and the Registrant.
10.17+ -- Amended and Restated Registration Rights Agreement, dated as
of August 2, 1999, as amended, among the Registrant and
certain shareholders of the Registrant.
10.18 -- Subsidiary License and Distribution Agreement.
10.19+ -- Form of Indemnification Agreement to be entered into between
Registrant and each of its executive officers and directors.
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.20+ -- Amendment No. 1 to Employment Agreement entered into between
David B. Gould and the Registrant, dated as of August 4,
1999.
21.1+ -- List of Subsidiaries.
23.1 -- Independent Auditors' Consent and Report on Financial
Statement Schedule of KPMG LLP.
23.2 -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
24.1+ -- Powers of Attorney (included on signature page).
27.1+ -- Financial Data Schedule (for SEC use only).
27.2 -- Restated Financial Data Schedule (for SEC use only).
99.1+ -- Written Consent of Jupiter Communications, dated December
22, 1999.
99.2+ -- Written Consent of META Group, Inc., dated December 22,
1999.
99.3+ -- Written Consent of the PELORUS Group, dated December 22,
1999.
99.4+ -- Written Consent of Yankee Group, dated December 28, 1999.
</TABLE>
- ------------------------------
+ Previously filed
ITEM 17. UNDERTAKINGS
(a) 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.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the 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 such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The registrant hereby undertakes that:
(i) 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 the
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 the
registration statement as of the time it was declared effective.
(ii) For purposes 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-4
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Alpharetta, State of
Georgia on the 18th day of January, 2000.
WITNESS SYSTEMS, INC.
By: /s/ DAVID B. GOULD
------------------------------------
David B. Gould
Chairman of the Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David B. Gould and Jon W. Ezrine, and each of
them, his true and lawful attorneys-in-fact and agents, 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 (including post-effective
amendments) to this registration statement, and any subsequent registration
statements pursuant to Rule 462 of the Securities Act 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, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID B. GOULD Chairman of the Board, President January 18, 2000
- --------------------------------------------------- and Chief Executive Officer
David B. Gould (Principal Executive Officer)
/s/ JON W. EZRINE Chief Financial Officer and January 18, 2000
- --------------------------------------------------- Secretary (Principal Financial
Jon W. Ezrine and Accounting Officer)
/s/ JAMES W. JUDSON, JR. Director January 18, 2000
- ---------------------------------------------------
James W. Judson, Jr.
/s/ THOMAS J. CROTTY Director January 18, 2000
- ---------------------------------------------------
Thomas J. Crotty
/s/ JOHN ABRAHAM Director January 18, 2000
- ---------------------------------------------------
John Abraham
/s/ JOEL G. KATZ Director January 18, 2000
- ---------------------------------------------------
Joel G. Katz
</TABLE>
II-5
<PAGE> 111
WITNESS SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND CHARGED TO AT END OF
OF PERIOD EXPENSES REVENUES DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ---------
(IN 000'S)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1996.... $ -- -- -- -- --
Year ended December 31, 1997.... $ -- 100 -- -- 100
Year ended December 31, 1998.... $100 200 -- -- 300
Nine months ended September 30,
1999......................... $300 226 -- (88) 438
Reserve for Sales:
Year ended December 31, 1996.... $ -- -- -- -- --
Year ended December 31, 1997.... $ -- -- -- -- --
Year ended December 31, 1998.... $ -- -- 225 -- 225
Nine months ended September 30,
1999......................... $225 -- 47 (47) 225
Hardware Warranty Reserve:
Year ended December 31, 1996.... $ -- -- -- -- --
Year ended December 31, 1997.... $ -- -- -- -- --
Year ended December 31, 1998.... $ -- 217 -- -- 217
Nine months ended September 30,
1999......................... $217 -- -- (36) 181
</TABLE>
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1+ -- Form of Underwriting Agreement.
3.1+ -- Amended and Restated Articles of Incorporation of the
Registrant.
3.2+ -- Amended and Restated Bylaws of the Registrant.
4.1+ -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of
Common Stock of the Registrant.
4.2 -- Specimen Stock Certificate.
5.1 -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1+ -- Office Lease Agreement between Regency Park West Associates,
L.P. and Witness Systems, Inc., dated April 15, 1997.
10.2+ -- Landlord's Consent to Second Sublease, dated June 2, 1999
and Second Sublease Agreement between Regency Park West
Associates, L.P., as Landlord and Witness Systems, Inc., as
Second Sublessee, dated May 28, 1999.
10.3+ -- Amended and Restated Stock Incentive Plan of the Registrant.
10.4 -- Form of Stock Option Grant Certificate.
10.5+ -- Form of Amendment to Stock Option Grant Certificate between
Registrant and certain of the officers of the Registrant.
10.6+ -- Employee Stock Purchase Plan of the Registrant.
10.7+ -- Employment Agreement entered into between David B. Gould and
the Registrant, effective February 2, 1999.
10.8+ -- Promissory Note, dated March 31, 1999, between the
Registrant and David Gould.
10.9+ -- Restricted Stock Award Agreement, dated March 31, 1999,
between the Registrant and David Gould.
10.10+ -- Form of Promissory Note and Subscription Agreement, dated
August 2, 1999, between the Registrant and certain of the
officers of the Registrant.
10.11+ -- Promissory Note and Subscription Agreement, dated August 2,
1999, between the Registrant and John Abraham.
10.12+ -- Form of Stock Repurchase Agreement between the Registrant
and certain shareholders of the Registrant.
10.13+ -- Loan and Security Agreement, dated June 24, 1999 between
Greyrock Capital and the Registrant.
10.14+ -- Asset Purchase Agreement among Registrant and Advanced
Integrators, Inc. and Formation, Inc. dated September 30,
1999 and related Schedules and Exhibits.
10.15+ -- Warrant to Purchase Stock, dated June 24, 1999 between
Greyrock Capital and the Registrant.
10.16+ -- Warrant to Purchase Stock, dated April 22, 1999 between
Silicon Valley Bank and the Registrant.
10.17+ -- Amended and Restated Registration Rights Agreement, dated as
of August 2, 1999, as amended, among the Registrant and
certain shareholders of the Registrant.
10.18 -- Subsidiary License and Distribution Agreement.
10.19+ -- Form of Indemnification Agreement to be entered into between
Registrant and each of its executive officers and directors.
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.20+ -- Amendment No. 1 to Employment Agreement entered into between
David B. Gould and the Registrant, dated as of August 4,
1999.
21.1+ -- List of Subsidiaries.
23.1 -- Independent Auditors' Consent and Report on Financial
Statement Schedule of KPMG LLP.
23.2 -- Consent of Morris, Manning & Martin, L.L.P. (included in
Exhibit 5.1).
24.1+ -- Powers of Attorney (included on signature page).
27.1+ -- Financial Data Schedule (for SEC use only).
27.2 -- Restated Financial Data Schedule (for SEC use only).
99.1+ -- Written Consent of Jupiter Communications, dated December
22, 1999.
99.2+ -- Written Consent of META Group, Inc., dated December 22,
1999.
99.3+ -- Written Consent of the PELORUS Group, dated December 22,
1999.
99.4+ -- Written Consent of Yankee Group, dated December 28, 1999.
</TABLE>
- ------------------------------
+ Previously Filed
<PAGE> 1
EXHIBIT 4.2
[BLUE BORDER DESIGN]
[FRONT OF CERTIFICATE]
NUMBER [WITNESS SYSTEMS, INC. LOGO] SHARES
WITNESS SYSTEMS, INC.
<TABLE>
<S> <C> <C>
COMMON STOCK SEE REVERSE FOR
$0.01 PAR VALUE INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
</TABLE>
CUSIP 977424-10-D
THIS CERTIFIES THAT___________________________________________________[SPECIMEN]
_____________________
IS THE OWNER OF _______________________________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
WITNESS SYSTEMS, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney, upon the surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
Witness the facsimile signatures of its duly authorized officers and
facsimile of its corporate seal.
Dated:
<TABLE>
<S> <C> <C>
/s/ Jon W. Ezrine [WITNESS SYSTEMS, INC. /s/ David Gould
- --------------------------- CORPORATE SEAL ------------------------------------------
Secretary DELAWARE] Chairman, President and Chief Executive
Officer
</TABLE>
COUNTERSIGNED AND REGISTERED:
SUNTRUST BANK, ATLANTA
TRANSFER AGENT AND REGISTRAR
BY
-------------------------
AUTHORIZED SIGNATURE
<PAGE> 2
[BACK OF CERTIFICATE]
WITNESS SYSTEMS, INC.
The Corporation will furnish without charge to each shareholder who so
requests a statement or summary or summary of the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof which the Corporation is authorized to
issue and of the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the office of the
Secretary of the Corporation or the Transfer Agent named on the face of this
Certificate.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- ___________Custodian
TEN ENT - as tenants by the entireties -
(Cust)
Minor)
JT TEN - as joint tenants with the right under the Uniform Gifts to
of (s) survivorship (s) and (s) not as Minors Act ________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________________________________ hereby sell,
assign and transfer unto ________________ [PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE]
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
the full power of substitution in the premises.
Dated ________________ ____
______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
-2-
<PAGE> 1
EXHIBIT 5.1
[MORRIS, MANNING & MARTIN LETTERHEAD]
A LIMITED LIABILITY PARTNERSHIP
ATTORNEYS AT LAW
1600 ATLANTA FINANCIAL CENTER
3343 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
TELEPHONE (404) 233-7000
FACSIMILE (404) 365-9532
January 18, 2000
Witness Systems, Inc.
1105 Sanctuary Parkway
Alpharetta, GA 30004
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel for Witness Systems, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
S-1 (the "Registration Statement"), of a proposed offering of an aggregate of
4,370,000 shares of the Company's common stock, $0.01 par value per share (the
"Common Stock"), consisting of 3,800,000 shares of the Common Stock being
offered by the Company (the "Company Shares"). In addition, the Company and
a selling stockholder has granted to the underwriters an option to purchase
570,000 shares of Common Stock to cover over-allotments, if any (the
"Over-Allotment Shares").
We have examined such documents, corporate records, and other
instruments as we have considered necessary and advisable for purposes of
rendering this opinion. Based upon and subject to the foregoing, we are of the
opinion that the Company Shares and any Over-Allotment Shares being sold, when
issued, sold and delivered as contemplated in the Registration Statement, will
be duly authorized and validly issued and fully paid and nonassessable.
The opinions set forth herein are limited to the laws of the State of
Delaware and applicable federal laws. We hereby consent to the filing of this
Opinion as an exhibit to the Registration Statement and to the reference to our
firm under the caption "Legal Matters" in the Prospectus contained in the
Registration Statement.
Very truly yours,
MORRIS, MANNING & MARTIN
a Limited Liability Partnership
By: /s/ Jeffrey L. Schulte
---------------------------
Jeffrey L. Schulte, Partner
<PAGE> 1
EXHIBIT 10.4
WITNESS SYSTEMS, INC.
STOCK INCENTIVE PLAN
STOCK OPTION GRANT CERTIFICATE
WITNESS SYSTEMS, INC. LOGO
WITNESS SYSTEMS, INC., a Delaware corporation (the "Company"), hereby
grants to the optionee named below ("Optionee") an option (this "Option") to
purchase the total number of shares shown below of Common Stock of the Company
(the "Shares") at the exercise price per share set forth below (the "Exercise
Price"), subject to all of the terms and conditions on the reverse side of this
Stock Option Grant Certificate and the Witness Systems, Inc. Stock Incentive
Plan (the "Plan"). Unless otherwise defined herein, capitalized terms used
herein shall have the meanings ascribed to them in the Plan. The terms and
conditions set forth on the reverse side hereof and the terms and conditions of
the Plan are incorporated herein by reference.
In Witness Whereof, this Stock Option Grant Certificate has been executed by
the Company by a duly authorized officer as of the date specified hereon.
WITNESS SYSTEMS, INC.
By:____________________________________
Date of Grant: ________________________
Type of Stock Option:
[_______] Incentive
[_______] Non-Qualified
Shares Subject to Option: ______
Exercise Price Per Share: $______
Term of Option: ______
Shares subject to issuance under this Option shall be eligible for exercise
according to the vesting schedule selected below and further described in
Section 10 on the reverse of this Stock Option Grant Certificate.
[X] Four Year Vesting
Optionee hereby acknowledges receipt of a copy of the Plan, represents
that Optionee has read and understands the terms and provisions of the Plan,
and accepts this Option subject to all the terms and conditions of the Plan and
this Stock Option Grant Certificate. Optionee acknowledges that there may be
adverse tax consequences upon exercise of this Option or disposition of the
Shares and that Optionee should consult a tax adviser prior to such exercise or
disposition.
- -------------------------------
Signature of Optionee
- -------------------------------
Print Name of Optionee
<PAGE> 2
1. EXERCISE PERIOD OF OPTION. Subject to the terms and conditions of this
Option and the Plan, and unless otherwise modified by a written modification
signed by the Company and Optionee, this Option may be exercised with respect
to all of the Shares, but only according to the vesting schedule selected on
the reverse of this Stock Option Grant Certificate and as described in Section
10 below, prior to the date which is the last day of the Term set forth on the
face hereof following the date of grant (hereinafter "Expiration Date").
2. RESTRICTIONS ON EXERCISE. This Option may not be exercised, unless such
exercise is in compliance with the Securities Act of 1933 and all applicable
state securities laws, as they are in effect on the date of exercise, and the
requirements of any stock exchange or national market system on which the
Company's Common Stock may be listed at the time of exercise. Optionee
understands that the Company is under no obligation to register, qualify or
list the Shares with the Securities and Exchange Commission ("SEC"), any state
securities commission or any stock exchange to effect such compliance.
3. TERMINATION OF OPTION. Except as provided below in this Section, this
Option may not be exercised after the date which is thirty (30) days after
Optionee ceases to perform services for the Company, or any Parent or
Subsidiary. Optionee shall be considered to perform services for the Company,
or any Parent or Subsidiary, for all purposes under this Section and Section 10
hereof, if Optionee is an officer or full-time employee of the Company, or any
Parent or Subsidiary, or if the Board determines that Optionee is rendering
substantial services as a part-time employee, consultant, contractor or advisor
to the Company, or any Parent or Subsidiary. The Board shall have discretion to
determine whether Optionee has ceased to perform services for the Company, or
any Parent or Subsidiary, and the effective date on which such services cease
(the "Termination Date"). Notwithstanding anything contained herein to the
contrary, if the corporate position of Optionee is, at any time, altered or
revised such that Optionee's responsibilities are materially reduced or
decreased for any reason, as determined by the Board in its sole discretion,
the vesting of Shares under Section 10 shall cease, effective as of the date of
such reduction in Optionee's employment responsibilities; provided, however,
except as otherwise provided in this Option and the Plan, Optionee shall have
the right to exercise this Option with respect to Shares which have vested
under Section 10 as of the date of such reduction of Optionee's
responsibilities.
(a) Termination Generally. If Optionee ceases to perform services for
the Company, or any Parent or Subsidiary, for any reason, except death or
disability (within the meaning of Code Section 22(e)(3)), this Option shall
immediately be forfeited, along with any and all rights or subsequent rights
attached thereto, thirty (30) days following the Termination Date, but in no
event later than the Expiration Date.
(b) Death or Disability. If Optionee ceases to perform services for
the Company, or any Parent or Subsidiary, as a result of the death or
disability of Optionee (as determined by the Board in its sole discretion),
this Option, to the extent (and only to the extent) that it would have been
exercisable by Optionee on the Termination Date, may be exercised by Optionee
(or, in the event of Optionee's death, by Optionee's legal representative)
within ninety (90) days after the Termination Date, but in no event later than
the Expiration Date.
(c) No Right to Employment. Nothing in the Plan or this Stock Option
Grant Certificate shall confer on Optionee any right to continue in the employ
of, or other relationship with, the Company, or any Parent or Subsidiary, or
limit in any way the right of the Company, or any Parent or Subsidiary, to
terminate Optionee's employment or other relationship at any time, with or
without cause.
4. MANNER OF EXERCISE.
(a) Exercise Agreement. This Option shall be exercisable by delivery
to the Company of an executed Exercise and Shareholder Agreement ("Exercise
Agreement") in the form of the Exercise Agreement delivered to Optionee, if
applicable, or in such other form as may be approved or accepted by the
Company, which shall set forth Optionee's election to exercise this Option with
respect to some or all of the Shares, the number of Shares being purchased, any
restrictions imposed on the Shares, and such other representations and
agreements as may be required by the Company to comply with applicable
securities laws.
(b) Exercise Price. Such notice shall be accompanied by full payment
of the Exercise Price for the Shares being purchased. Payment for the Shares
may be made in U.S. dollars in cash (by check) or, where permitted by law and
approved by the Board in its sole discretion: (i) by cancellation of
indebtedness of the Company to Optionee; (ii) by surrender of shares of Common
Stock of the Company that have been owned by
<PAGE> 3
Optionee for more than six (6) months (and which have been paid for within the
meaning of SEC Rule 144, and, if such shares were purchased from the Company by
use of a promissory note, such note has been fully paid with respect to such
shares), or were obtained by Optionee in the open public market, having a Fair
Market Value equal to the Exercise Price of the Shares being purchased; (iii)
by instructing the Company to withhold Shares otherwise issuable pursuant to
the exercise of the Option having a Fair Market Value equal to the Exercise
Price of the Shares being purchased (including the withheld Shares); (iv) by
waiver of compensation accrued by Optionee for services rendered; (v) by
delivery to the Company of a promissory note executed by Optionee which shall
include such terms and conditions as the Board shall approve in accordance with
the terms and conditions of the Plan; or (vi) a combination of the foregoing as
approved by the Board.
(c) Withholding Taxes. Prior to the issuance of Shares upon exercise
of this Option, Optionee must pay, or make adequate provision for, any
applicable federal or state withholding obligations of the Company. Where
approved by the Board, Optionee may provide for payment of withholding taxes
upon exercise of the Option by requesting that the Company retain Shares with a
Fair Market Value equal to the minimum amount of taxes required to be withheld.
In such case, the Company shall issue the net number of Shares to Optionee by
deducting the Shares retained from the Shares exercised.
(d) Issuance of Shares. Provided that such notice and payment are in
form and substance satisfactory to counsel for the Company, the Company shall
cause the Shares to be issued in the name of Optionee or Optionee's legal
representative.
5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If this Option is
an ISO, and if Optionee sells or otherwise disposes of any of the Shares
acquired pursuant to the ISO on or before the later of: (a) the date two (2)
years after the Date of Grant, or (b) the date one (1) year after exercise of
the ISO, with respect to the Shares to be sold or disposed, Optionee shall
immediately notify the Company in writing of such sale or disposition. Optionee
acknowledges and agrees that Optionee may be subject to income tax withholding
by the Company on the compensation income recognized by Optionee from any such
early disposition by payment in cash or out of the current wages or earnings
payable to Optionee.
6. NONTRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner, other than by will or by the laws of descent and distribution, and
may be exercised during Optionee's lifetime only by Optionee. The terms of this
Option shall be binding upon the executor, administrators, successors and
assigns of Optionee.
7. TAX CONSEQUENCES. OPTIONEE UNDERSTANDS THAT THE GRANT AND EXERCISE OF
THIS OPTION, AND THE SALE OF SHARES OBTAINED THROUGH THE EXERCISE OF THIS
OPTION, MAY HAVE TAX IMPLICATIONS THAT COULD RESULT IN ADVERSE TAX CONSEQUENCES
TO OPTIONEE. OPTIONEE REPRESENTS THAT OPTIONEE HAS CONSULTED WITH, OR WILL
CONSULT WITH, HIS OR HER TAX ADVISOR AND OPTIONEE FURTHER ACKNOWLEDGES THAT
OPTIONEE IS NOT RELYING OF THE COMPANY FOR ANY FINANCIAL, TAX OR OTHER ADVICE.
8. INTERPRETATION. Any dispute regarding the interpretation of this Stock
Option Grant Certificate shall be submitted by Optionee or the Company to the
Board, which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Board shall be final and binding on the
Company and Optionee.
9. ENTIRE AGREEMENT. The Plan and the Exercise Agreement are incorporated
herein by this reference. Optionee acknowledges and agrees that the granting of
this Option constitutes a full accord, satisfaction and release of all
obligations or commitments made to Optionee by the Company or any of its
officers, directors, shareholders or affiliates with respect to the issuance of
any securities, or rights to acquire securities, of the Company or any of its
affiliates. This Stock Option Grant Certificate, the Plan and the Exercise
Agreement constitute the entire agreement of the parties hereto, and supersede
all prior undertakings and agreements with respect to the subject matter
hereof.
10. VESTING AND EXERCISE OF SHARES. Subject to the terms of the Plan, this
Option and the Exercise Agreement, the Shares issued pursuant to the exercise
of this Option shall be subject to the vesting restrictions selected on the
reverse side of this Stock Option Grant Certificate and defined below. For
purposes of this Section, "Continuous Service" means a period of continuous
performance of services by Optionee for the Company, a Parent, or a Subsidiary,
as determined by the Board.
<PAGE> 4
Four Year Vesting: Optionee may exercise this Option with respect to the
percentage of Shares set forth below only after Optionee has completed the
following periods of Continuous Service following the date of grant:
(a) After twelve (12) months of Continuous Service, up to twenty-five
percent (25%) of the Shares;
(b) After thirteen (13) months of Continuous Service, and for each
additional month of Continuous Service thereafter through the end of the
forty-seventh (47th) month of Continuous Service, an additional two percent
(2%) of the Shares per month: and
(c) After forty-eight (48) months of Continuous Service, up to one
hundred percent (100%) of the Shares.
<PAGE> 1
EXHIBIT 10.18
SUBSIDIARY LICENSE AND DISTRIBUTION AGREEMENT
<TABLE>
<S> <C> <C>
EFFECTIVE DATE: January 1, 1999
PARTIES: WITNESS SYSTEMS, INC. WITNESS SYSTEMS LTD.
1105 Sanctuary Parkway Eagle House
Alpharetta, Georgia 30004 The Ring
Bracknell
Berkshire, United Kingdom
RG12 1HB
("Witness") ("Limited")
</TABLE>
RECITALS
Witness is engaged worldwide in the business of design, manufacturing,
licensing and distribution of computer software products, including its
flagship software program, Witness(R), and has developed substantial expertise,
know-how and technical information relating to such products, and is engaged in
continuing research and development to improve its products and agrees to make
such future products available to Limited; and
Limited, a wholly owned subsidiary of Witness, has been established to
market, license, distribute maintain and support Witness software products in
the Territory (as defined below), and to provide training for their use (both
directly and through sublicensing distributors); and
The parties have agreed that Witness will appoint Limited as a
distributor, localizer and reproducer of the Witness software products in the
Territory, subject to the terms and conditions of this Agreement with the
objective that Limited achieve an arms length return following a start up
period of operations.
Now, therefore, in consideration of the foregoing recitals and the
representations and covenant set forth in this Agreement, the parties agree as
follows:
SECTION 1
DEFINITIONS
1.1 Documentation means the user manual for a particular Software
Product(s), and any other written materials customarily supplied by
Witness for use with such Software Product(s).
1.2 Effective Date means the first indicated above.
1.3 License means the then current form of license agreement supplied by
Witness with the Software Product(s) setting forth the terms and
conditions under which end user licensees are authorized to use the
Software Product(s).
1.4 Localized Product(s) means, with respect to a particular Product(s),
the version of that Product(s) translated or modified into a language
or language version and/or modified to cause the software to conform
or be more compatible with the rules and requirements of the specified
languages, practices and business of a different business culture.
1.5 Reseller, means a business entity of any kind, contracting directly
with Witness or appointed by Limited, to sell or resell licenses for
Products and provide supplies and services to customers.
1.6 Product(s) means, collectively, the software product(s) (programs and
data which are either proprietary to Witness or for which it has a
license permitting sublicensing, in all cases limited to those items
listed on the then current price list for International sales),
documentation and License Agreement, and as generally used in this
Agreement, includes Localized Product(s).
1
<PAGE> 2
1.7 Revenue means gross value of sales of Product(s) invoiced by Limited,
exclusive of value added or sales taxes, and net of credits for
returns.
1.8 Royalties means all amounts payable to Witness by Limited for the
rights granted by Witness to Limited.
1.9 Territory means the country or countries, or parts thereof, listed on
Exhibit A.
1.10 Trademark means the name "Witness" and such other names and logos that
are used to identify a Product(s), including both those that are
listed on Exhibit A and any others of which Witness informs Limited
from time to time (whether registered or applied to be registered as a
trademark or service mark, or unregistered).
1.11 Confidential Information means any and all trade secrets and
confidential and proprietary information of Witness, and any other
materials of any kind which are designated or marked by Witness as
being confidential and proprietary materials of Witness.
SECTION 2
LICENSE AND ROYALTIES
2.1 Appointment, Exclusivity
Subject to the terms and conditions of this Agreement (including, but
not limited to, the payment by Limited of Royalties described in
section 2.3 below), Witness hereby grants to Limited and Limited
hereby accepts, a non transferable, exclusive license to assemble,
reproduce, market and distribute Product(s) (in object code form only)
in the Territory, and grants Limited the right to enter into
agreements with other responsible persons or entities as provided in
Section 10 to, distribute and supply the Product(s) in the Territory
during the term of this Agreement, subject to the then current Witness
License.
2.2 Localization
2.2.1 Further, with the approval of Witness, subject to its customary
procedures, Limited shall have the right, at its sole cost, to
translate and Product(s) into any languages Witness may authorize that
are applicable to the Territory to create Localized Product(s), which
Localized Product(s) may be reproduced and may be licensed, packaged,
distributed and sublicensed by Limited subject to this Agreement.
2.2.2 All right, title and interest in such Localized Product(s) shall
at all times be retained by Witness and Witness has full rights to
resell Localized Product(s). Limited hereby assigns, transfers, and
grants to Witness any of Limited's right, title, or interest, existing
now or acquired in the future by operation of law, in the copyrights,
trade secrets, trademarks, and other intellectual property rights
relating to the Localized Product(s) (including, without limitation,
all manuals, packaging, and all related materials and Documentation).
2.3 For the rights granted herein, Limited shall pay Royalties to Witness
in the amount of sixty percent (60%) of all Limited Revenues, in
accordance with Section 5 herein. Notwithstanding the foregoing,
following a start up period of operations, the royalty shall be
adjusted not less than annually so the Limited shall achieve an arms
length return, which the parties agree is reasonable compensation in
respect to the risks of the Limited undertaken pursuant to this
Agreement. The determination of the adjustment necessary to royalties
(if any) will be made at the end of the fiscal year (December 31st)
upon review of the final adjusted results of operations of Limited for
the fiscal year then ended.
2.4 Witness Reserved Right
2.4.1 Witness, on its own behalf and on behalf of its distributors,
partners, or other resellers, specifically reserves the right to
effect corporate-wide master agreements with multinational
corporations whose corporate headquarters lie outside the Territory.
In this event, such customers may elect to be supported locally by the
Reseller or remotely by Witness. If remote support by Witness is
requested by the customer, the customer will license with and remit
payment directly to Witness, in which case Witness will not owe the
Reseller any payments as a result of that customer's license.
2
<PAGE> 3
2.4.2 Witness reserves the right to assign the nonexclusive right to
market and license the Product(s) to hardware or software suppliers
("OEMs"). Any right to market and license granted to the OEM shall be
limited to the Product(s) that execute on that OEM hardware or
software. Providing Witness is not under a confidentiality
restriction, Witness will provide Limited notice of such OEM.
2.5 Competing Product(s)
Limited shall not during the term of this Agreement localize,
duplicate, produce or distribute goods in the Territory which compete
with the Product(s)
SECTION 3
OBLIGATIONS OF LIMITED
3.1 Best Efforts
Limited shall use its best and reasonable efforts to vigorously and
aggressively promote the Product(s) in the Territory, and act in
accordance with Witness policies as announced from time to time as
they relate to Limited's obligations herein.
3.2 Marketing and Advertising
3.2.1 Limited shall be required to employ full time at least one
individual charged solely with the responsibility for the commercial
success of the Product(s).
3.2.2 Limited shall indemnify and hold Witness harmless from all
losses, damages, liabilities, costs, and expenses incurred by Witness
as a result of Limited using advertising or promotional materials.
3.3 Support
3.3.1 From and after the Effective Date, Limited shall make reasonable
efforts to support the Product(s). Limited will employ and train an
adequate number of persons to market, distribute, and support the
Products. Limited will follow Witness procedures and policies in
connection with the support services to be provided to Sublicensees,
including telephone support.
3.3.2 Limited shall comply in all respects with Witness's reasonable
directions on all aspects of support of the Product(s) in the
Territory.
3.3.3 In no circumstances will Witness be required to provide support
in relation to the Product(s) in the Territory other than to Limited.
3.4 Warranty Work
Limited shall, at its own cost and expense, provide all warranty
service to end users in the Territory, and honor any rights given to
end users under the standard Witness License Agreement.
3.5 Copying
3.5.1 Except as specifically permitted by this Agreement, Limited
shall not translate, modify, reproduce, copy, reverse engineer,
disassemble or de-compile the Product(s) (or any part of them) without
the express prior written permission of Witness.
3.5.2 All copyrights and intellectual property rights in the
Product(s), Localized Product(s), any derivative Product(s), and any
improvements of the Product(s), shall be the property of Witness.
3.6 Governmental Approvals
Limited, at its sole cost and expense, will take whatever action may
be necessary to obtain any governmental approval or registration of
this Agreement required at any time during this term of this Agreement
(including, without limitation, any approval or registration required
to give legal effect to this Agreement in the Territory or to comply
with exchange regulations or other requirements so as to assure the
right of remittance to Witness abroad of US dollars pursuant to
Section 5 below), and shall keep Witness currently informed of
Limited's efforts in this regard. Witness shall be under no obligation
to ship Product(s) to Limited or to allow localization, or
3
<PAGE> 4
duplication of Product(s) under this Agreement until Limited has
provided Witness with satisfactory evidence that no such approval or
registration is required or Limited has obtained all required
approvals and registrations.
3.7 Inspection Rights
Limited shall allow representatives of Witness on reasonable notice
and during normal working hours, to examine Limited's place(s) of
business, records of Revenue and Royalties for the purpose of
verifying to the satisfaction of Witness that Limited is performing
Limited's obligations under this Agreement. Limited's shall use its
best efforts to procure rights allowing Witness on reasonable notice
and during normal working hours, access to places of business where
Products are licensed, for Witness to perform similar inspections.
3.8 Limited shall:
3.8.1 Conduct business in a manner that reflects favorably at all
times on the Product(s), good name, goodwill, and reputation of
Witness;
3.8.2 Avoid deceptive, misleading, or unethical practices that are or
might be detrimental to Witness, the Product(s), Witness Resellers, or
the public;
3.8.3 Not publish or employ or cooperate in the publication or
employment of any misleading or deceptive advertising materials;
3.8.4 Not make representations, warranties, or guarantees to
customers, the trade or other third parties with respect to the
specifications, features, or capabilities of Product(s) that are
inconsistent with or in addition to the literature distributed or
approved by Witness (including all warranties and disclaimers
contained in such literature);
3.8.5 Comply with each provision of the international license attached
as Exhibit B agreement that accompanies a Product;
3.8.6 Provide each licensed end user with a then current Witness
International License Agreement (current license set forth in Exhibit
B) and a Bill of Sale which shall include: the customer's name,
address, phone number, date of sale, and price of Product(s) sold;
3.8.7 Assure that all of Witness's intellectual property marks are
correctly included in all Witness Product(s) localized or duplicated
by Limited, and in all marketing materials developed by Limited; and
3.8.8 Immediately advise and copy Witness with any legal notices
served on Limited that might affect Witness.
3.8.9 Be responsible for the collection of all accounts receivable to
Limited, and will maintain an adequate level of reserves for bad debts
and returns in accordance with Witness accounting policies relating to
the allowance for bad debts and returns.
3.9 Personnel
Limited shall engage experienced personnel and will maintain adequate
facilities in the performance of its obligations under this Agreement.
4
<PAGE> 5
SECTION 4
ROYALTY PAYMENTS AND REPORTS
4.1 Payments
4.1.1 Within sixty (60) days following the end of the quarter, Limited
shall pay to Witness by wire transfer (see Exhibit A for bank
information) the Section 2 Royalty payment resulting from the previous
quarter.
4.1.2 All Royalty payments shall be in US dollars converted from
British pounds sterling at the exchange rate prevailing at the end of
the quarter for which the Royalty is earned and recognized.
4.1.3 Late payments shall bear interest at the rate of one and one
half percent (1.5%) per month.
4.2 Reports
Limited shall provide to Witness written sales and activity reports on
a monthly basis, on or before the fifteenth day of each month, showing
the Revenue on which the wired Royalty has been based and the
conversion basis, and including a detailed description of: Product
shipments, amounts billed, reports from Limited's distributors and
Resellers, and complete end user information.
SECTION 5
TERM AND TERMINATION
5.1 Term
This Agreement shall commence on the Effective Date, and shall
continue for five (5) years. However, if by the fifth anniversary of
the Effective Date, this agreement has not been terminated, or
extended by the parties, then this Agreement shall continue in effect
until modified in writing by the parties, or terminated in accordance
with this Section 5, or as may be otherwise provided herein. After the
initial five (5) year period, either party may terminate this
Agreement with six (6) months prior written notice.
5.2 Termination for Breach
Witness may, at its option, terminate this Agreement by written notice
to Limited if Limited fails to pay any amounts owed to Witness under
this Agreement within forty-five (45) days of the due date thereof.
5.3 Termination for Breach/Insolvency
5.3.1 Either party shall have the right without liability to the other
to terminate this Agreement immediately upon sending written notice to
the other in the event that the other shall:
5.3.1.1 be in breach of any material obligation on its part to
be performed and shall have failed to remedy such breach within thirty
(30) days from the date of a written notice specifying the breach and
requiring its remedy; or
5.3.1.2 be adjudged insolvent or bankrupt, take or have taken
against it any proceedings or action seeking relief, reorganization,
or arrangement under any laws relating to insolvency, make or suffer
any assignment for the benefit of creditors, suffer the appointment of
any receiver, liquidation, or trustee of any of its property or
assets, or suffer liquidation, dissolution, or winding up of its
business or any analogous action taken on account of its financial
position.
5.4 Termination by Witness
5.4.1 Witness shall have the right without liability to Limited to
terminate this Agreement immediately upon sending written notice to
the Limited in the even that Limited:
5.4.1.1 In the sole opinion of Witness, fails to adequately
market or distribute the Product(s) in the Territory in accordance
with Section 3 of this Agreement, or in the sole opinion of Witness,
to adequately fulfill each and every other obligation imposed by
Section 3 of this Agreement;
5.4.1.2 Limited ceases to be a controlled subsidiary of
Witness.
5
<PAGE> 6
5.4.2 Any election by Witness to terminate this Agreement as provided
for in this Section 5.4, or elsewhere in this Agreement, shall be
deemed to be authorized by this Agreement, effective and enforceable
unless made in bad faith.
5.4.3 Further, and notwithstanding anything to the contrary, any sales
or grant by Witness of rights to distribute Product(s) in the
Territory, after an election to terminate this Agreement by Witness
but before any determination is made as to whether such termination
was made in bad faith, shall not constitute a breach of this Agreement
and/or violations of any rights of Limited to distribute the
Product(s).
5.5 Termination Without Cause
Either party may terminate this Agreement without cause effective
after the first five (5) year term, or thereafter, by sending written
notice to the other at least sixty (60) days in advance of the final
termination date, specifying the date on which this Agreement shall
also terminate.
5.6 Consequences of Termination
5.6.1 Upon termination of this Agreement however arising:
5.6.1.1 All outstanding invoices owed by Limited to Witness
shall become immediately due and payable;
5.6.1.2 Limited shall, within ten (10) days, submit to Witness
a written list of its inventory of the Product(s), and Witness shall
have the right to repurchase from Limited all or such part as Witness
shall stipulate of such inventory;
5.6.1.3 Witness shall have the right by written notice to
cancel all or any part of any unfulfilled order previously accepted by
Witness; and, to the extent that Witness does not cancel any such
order, this Agreement shall continue to apply to such order;
5.6.1.4 Any provision of this Agreement expressly stated to
survive or implied to survive, termination shall remain in full force
and effect;
5.6.1.5 Limited shall, within thirty (30) days of termination,
return to Witness all Witness property in Limited's possession,
(including, without limitation, all Witness business plans and
customer/prospect lists and any Witness Confidential Information) and
Limited shall remove, cancel, and/or cease to use the Trademarks, any
signs, advertising or other materials referring either to Witness, or
to Limited as a distributor of Witness Product(s);
5.6.1.6 No rights of either party accrued as of the date of
termination shall be adversely affected or prejudiced;
5.6.1.7 No License to an end user customer shall be affected.
Any licenses for the Product(s) and the Localized Product(s) purchased
by Limited for internal use shall remain in effect subject to the
terms and conditions of the then current Witness Standard License
Agreement;
5.6.1.8 Limited shall cease to provide sales and maintenance
for the Product(s) and shall fully cooperate with Witness to ensure
efficient hand over of all maintenance, sales and support arrangements
in relation to the Product(s) to such person(s) or entities as Witness
shall designate; and Limited shall terminate all Witness Reseller
agreements with Limited as of termination date and the agreement
between Limited and Resellers shall expressly provide for this;
5.6.1.9 Limited agrees to assign all rights with respect to
agreements in effect at the time to a successor subsidiary or to
Witness, as designated by Witness in its sole discretion. All future
Revenues shall be payable directly to the successor subsidiary or
Witness.
5.7 No Damages for Termination or Expiration
5.7.1 Neither Witness or Limited shall be liable to the other for
damages of any kind, including incidental or consequential damages, on
account of the termination or expiration of this Agreement in
accordance with this Section 5.0. Limited waives any rights Limited
may have to receive any compensation or reparations on termination or
expiration of this Agreement. Limited and Witness acknowledge and
agree that:
5.7.1.1 Limited shall not have or acquire, by virtue of this
Agreement or otherwise, any vested, proprietary, or other right in the
promotion of the Product(s) or in any goodwill created by its efforts
under this Agreement.
6
<PAGE> 7
SECTION 6
PRODUCT ORDERS
6.1 Order Mechanism
For items relating to Product(s) that are not localized or duplicated
or produced by Limited, Limited may submit orders to Witness. All
orders for Product(s) shall be in writing and shall state the
quantities of units ordered, requested delivery date, shipping
instructions, and such other information as Witness shall require. All
orders shall be subject to acceptance in writing by Witness and shall
be subject to and governed by the provisions of this Agreement. In the
event of any conflict between the provisions of this Agreement and the
provisions of any order, this Agreement shall prevail (unless, and
only to the extent that, Witness otherwise specifically agrees in
writing as to a particular order).
6.2 Cancellation
6.2.1 Witness reserves the right to cancel any orders accepted by
Witness, or to refuse or delay shipment thereof, if Limited either:
6.2.1.1 fails to make any payment as provided in this Agreement
or otherwise agreed to by Witness and Limited; or
6.2.1.2 otherwise fails to meet any of its material obligations
under this Agreement.
6.2.2 No such cancellation, refusal, or delay shall be deemed a
termination or breach of this Agreement, except upon Witness's written
election.
6.3 Order changes
6.3.1 Limited is entitled to cancel any order, or any portion thereof,
without penalty so long as the cancellation notice is received by
Witness at least thirty (30) days prior to the requested shipment
date. Limited is not entitled to cancel any order, or portion thereof,
within thirty (30) days of the requested shipment date unless Witness
agrees to such cancellation in writing.
6.3.2 Limited may delay shipment under any order, no more than once
per order, upon written notice to Witness, received by Witness at
least thirty (30) days prior to the requested shipment date, provided
that such delay does not exceed thirty (30) days. Orders under which
shipments have been delayed may not be canceled. Delays not in
accordance with the foregoing will be treated as cancellations.
6.4 Taxes, Imposts, Duties
6.4.1 All payments required under any order (or otherwise under this
Agreement) are exclusive of taxes, assessments, customs, imposts Value
Added Tax and duties of whatever nature and howsoever arising
(collectively "Tax" or "Taxes"), and Limited shall bear and be
responsible for the payment of all such Taxes (excepting only any tax
based solely upon Witness's income).
6.4.2 When any Tax is required to be paid by Witness the full amount
thereof, including any interest and penalties, will be billed to
Limited separately, whether or not this Agreement is then in effect,
and shall be promptly paid by Limited including any interest or
penalties, directly to the appropriate authority.
SECTION 7
MANUFACTURING REQUIREMENTS
7.1 Master Disks and Documentation
7.1.1 For items relating to Product(s) that are localized or
duplicated by Limited, Witness will provide Limited with one (1)
master disk for Witness Software Product(s) and Documentation.
7.1.2 Limited agrees that each Software Product/Localized Product it
duplicates shall be subject to the then current Witness International
License Agreement attached as Exhibit B to this Agreement,
appropriately translated, with a copy provided by Limited to each end
user.
7.1.3 For each Software Product/Localized Product produced, Limited
will order a book box, a package sleeve and the documentation
(collectively referred to as "Production Materials") from
7
<PAGE> 8
Witness. Limited may order Production Materials from Witness in bulk
and at Witness's cost to obtain Production Materials.
7.1.4 At the time of shipment of the Production Materials, Witness
will invoice Limited, for the cost of the Production Materials and
shipping in U.S. dollars. Limited agrees to remit payment to Witness
in U.S. dollars within thirty (30) days of the date of invoice.
7.1.5 Limited will, at its sole cost, assemble the Software
Product(s)/Localized Product(s) to include, but not be limited to, the
software media, a book box, a package sleeve, and the documentation,
and ship to its customers. Witness reserves the right to add
additional information or documents to the Software
Product(s)/Localized Product(s) package at its discretion and its
cost.
7.1.6 Witness may purchase any Localized Product from Limited at cost.
SECTION 8
WARRANTY DISCLAIMER, INDEMNIFICATION AND LIMITATION OF LIABILITY
8.1 DISCLAIMER OF WARRANTY
EXCEPT AS EXPRESSLY SET FORTH IN THE LICENSE, NEITHER WITNESS NOR ANY
OF ITS SUBSIDIARIES NOR ASSOCIATED COMPANIES, MAKE OR GRANT ANY
CONDITIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO ANY
GOODS, PRODUCTS, OR SERVICES PROVIDED UNDER THIS AGREEMENT OR
OTHERWISE, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OR
CONDITIONS OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
LIMITED AGREES AND ACKNOWLEDGES THAT WITNESS IS NOT RESPONSIBLE OR
LIABLE FOR THE QUALITY AND PERFORMANCE OF THE THIRD PARTY SOFTWARE,
AND THAT ANY WARRANTIES OR REPRESENTATIONS RELATING THERETO MAY BE
MADE SOLELY BY THE OWNER OF THE THIRD PARTY SOFTWARE.
8.2 Limited has no authority, express or implied, to make any warranties,
representations or disclosure, nor to authorize any of its customers
or agents to make any warranties, representations, or disclosures,
beyond those provided by Witness in the License.
8.3 Indemnification
Witness agrees to indemnify, defend and/hold harmless at its own
expense any claim or action against Limited for actual or alleged
infringement of any U.S. patent, copyright or similar property right
under enforceable in the U.S. (including, but not limited to,
misappropriation of trade secrets) based upon use of the Witness
Software or any other material furnished hereunder by Witness;
provided (i) Witness shall have the sole right to conduct the defense
of any such claim or action and all negotiations for its settlement or
compromise, and (ii) Limited shall give Witness prompt written notice
of any threat, warning or notice of any such claim or action against
Limited, which could have an adverse impact on Limited.
8.4 LIMITED LIABILITY
WITNESS LIABILITY FOR ANY BREACH OF WARRANTY ON ANY PRODUCT(S) SHALL
BE LIMITED TO ITS OBLIGATIONS UNDER THE LICENSE FOR SUCH PRODUCT(S),
WHICH IN NO EVENT SHALL EXCEED THE ACTUAL AMOUNTS PAID BY LIMITED FOR
SUCH PRODUCT(S) AND SHALL IN NO EVENT INCLUDE INCIDENTAL OR
CONSEQUENTIAL DAMAGES OF ANY KIND.
IN NO EVENT SHALL WITNESS BE LIABLE FOR ANY INCIDENTAL, INDIRECT,
SPECIAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR THE EXISTENCE, FURNISHING, FUNCTIONING, OF LIMITED'S
OR ANY THIRD PARTY'S USE OF PRODUCT(S) LICENSED HEREUNDER. THE
PROVISIONS OF THIS SECTION HAVE BEEN INCLUDED AS A MATERIAL
8
<PAGE> 9
INDUCEMENT FOR WITNESS TO ENTER INTO THIS AGREEMENT, AND WITNESS WOULD
NOT HAVE ENTERED INTO THIS AGREEMENT BUT FOR THE LIMITATIONS ON
LIABILITY SET FORTH.
SECTION 9
TRADEMARKS AND CONFIDENTIAL INFORMATION
9.1 Exclusive Witness Rights
Limited acknowledges the exclusive right of Witness in and to all of
the Trademarks and all of the copyrights, trade secrets, and other
intellectual property and proprietary rights in the Product(s) and all
other material covered by this Agreement. Witness hereby grants
Limited a non-exclusive license to use the Trademarks, subject to the
terms and conditions set forth in this Agreement, solely for the
purpose of the supply and distribution of the Product(s) pursuant to
this Agreement.
9.2 Prior Approval
Limited shall provide to Witness copies of all Limited created
materials containing any Witness intellectual property marks, and will
immediately cease production of any material which, in Witness's sole
opinion, is inappropriate to Witness's image and status.
9.3 Manner of Use
Whenever Limited is permitted to incorporate Witness Trademark in any
written material, Limited shall correctly attribute the Trademark by
use of an asterisk and a footnote reading "Trademark of Witness
Systems, Inc., Alpharetta, Georgia, U.S.A." or, if registered, then
"Registered Trademark" of Witness Systems, Inc., Alpharetta, Georgia,
U.S.A."
9.4 Restriction on Use of Other Marks
Limited may not use any trademarks or service marks on the Product(s)
other than those trademarks and service marks that are designated by
Witness.
9.5 License Limitation
No right or license under any intellectual property or other
proprietary right of Witness is granted by, or is to be inferred from,
any provision in this Agreement except as expressly provided herein.
9.6 Confidentiality
9.6.1 Limited agrees to keep secret and not to disclose any
confidential or proprietary information of Witness (including, without
limitation, the terms of this Agreement) acquired hereunder or in
connection herewith except as authorized in writing by Witness and
shall keep and shall require its officers, directors and employees to
keep confidential such information. The obligation herein to keep such
information confidential shall continue in effect after as well as
before the expiration or termination of this Agreement and unless and
until the information concerned becomes publicly available freely.
9.6.2 Immediately, upon any termination of this Agreement, Limited
shall surrender to Witness, or certify destruction of, all of
Witness's confidential or proprietary material.
SECTION 10
APPOINTMENT OF WITNESS RESELLERS
10.1 Limited may appoint Resellers within the Territory, provided that any
agreement between Limited and a Reseller must contain substantially
the same terms and conditions as the then current Reseller Agreements
as approved by Witness, may not conflict in any manner with this
Agreement, and may not permit appointments of other Resellers.
9
<PAGE> 10
10.2 In all cases, such agreements shall be terminated upon termination of
this Agreement with Witness, except that such Resellers shall have the
option of entering into direct distribution agreements with Witness.
SECTION 11
MISCELLANEOUS PROVISIONS
11.1 Force Majeure
If the performance of any part of this Agreement (excepting only
Limited's obligation to make payments to Witness), or any order issued
under this Agreement, shall be interfered with for any length of time
by governmental restriction, war, civil commotion, riot, strike, lock
out, shortage of labor or materials, acts of God (such as typhoon,
flood or fire), or any other similar cause which is beyond the control
of the parties, then neither party shall be responsible for delay or
failure of performance of this Agreement or any such order for the
length of time occasioned thereby. If such failure shall continue for a
period of more than three (3) months, either party shall have the
right forthwith to terminate this Agreement or any such order on
written notice to the other party.
11.2 Pricing, Licensing of Software and Documentation
Limited shall set the prices charged by Limited for the Product(s)
sublicensed by Limited. Limited shall provide Witness with a copy of
its most current license fee schedules for the Product(s), in the
accepted currency of the Territory at least ninety (90) days prior to
the effective date of the new license-fee schedules.
11.3 Waiver
The failure of either party to enforce any of the provisions of this
Agreement or to exercise any right hereunder shall not constitute a
waiver of the same or prejudice the right of the waiving party to
enforce the same thereafter.
11.4 Notices
All notices required or permitted under this Agreement shall be in
writing and shall be deemed to have been given upon personal delivery
or sending by telex (followed by hard copy), or by registered,
certified or express mail, to the parties at the following addresses
(or, with respect to any party, such other address as may hereafter be
specified by such party by like notice).
<TABLE>
<CAPTION>
If to Witness: If to Limited:
-------------- --------------
<S> <C>
1105 Sanctuary Parkway Eagle House
Alpharetta, Georgia USA 30004 The Ring
FAX: (770-754-1889) Bracknell
Berkshire, United Kingdom
RG12 1HB
FAX:
--------------------
ATTN: CHIEF FINANCIAL OFFICER ATTN: VP, INTERNATIONAL OPERATIONS
</TABLE>
11.5 Governing Law and Jurisdiction
11.5.1 This Agreement is to be performed and construed in all respects
pursuant to the substantive laws of the State of Georgia and of the
United States, as applicable.
11.5.2 The parties hereby submit to the exclusive jurisdiction of any
of the following courts: (i) the United States District court for the
Northern District of Georgia; (ii) Superior Court of Fulton County,
Georgia; and (iii) State Court of Fulton County, Georgia, for the
determination of any controversy arising under or in connection with
this Agreement. The parties agree that the United Nations Convention
on Contracts for the International Sale of Goods shall not apply in
any respect to this Agreement or the parties hereto.
10
<PAGE> 11
11.6 Assignment
Limited shall not assign this Agreement nor any rights hereunder to
any third party without the prior written consent of Witness, which
Witness shall have no obligation to give, and any attempted assignment
of this Agreement in contravention of this provision shall be void and
of no effect. There shall be no prohibition or restriction on
Witness's ability to assign this Agreement or any rights hereunder in
whole or in part. Subject to the foregoing, this Agreement shall bind
and inure to the benefit of Witness and Limited and their respective
successors and assigns.
11.7 Severability
If any portion of this Agreement is held to be invalid, void, or
unenforceable for any reason, the remaining provisions of this
Agreement shall be given full force and effect, as though the invalid,
void or unenforceable provisions had never been contained herein;
provided however, if the invalid portion can be reformed by a court of
competent jurisdiction, it shall be so reformed, and enforced to the
maximum extent permitted by law.
11.8 Headings
The headings in this Agreement are for purposes of convenience only,
and they are not intended to be a material party of the Agreement,
and, in the event of any conflict between headings, the text and any
exhibits attached thereto, the order of preference shall be text,
exhibit and headings.
11.9 All communications with Witness, oral or written, shall be in English.
11.10 Entire Agreement, Modification
This Agreement, including all Exhibits, constitutes the entire
agreement of Witness and Limited with respect to the subject matter
hereof and supersedes all previous agreements, negotiations, and
commitments with respect thereto. This Agreement shall not be changed
or modified in any manner, except by mutual consent in writing of
subsequent date signed by duly authorized representatives of each
party to this Agreement.
11.11 Attachments
The following Exhibits are appended to and incorporated as part of
this Master Agreement.
<TABLE>
<S> <C>
Exhibit A Products, Territory, Trademarks
Exhibit B Witness Systems, Inc. current International License Agreement
</TABLE>
Executed on each party, by its duly authorized representative, with
all necessary approvals, on the dates set forth below, and effective
as of the date first set forth above.
<TABLE>
<S> <C>
WITNESS SYSTEMS, INC. WITNESS SYSTEMS, LIMITED
BY:/s/ Jon Ezrine BY: /s/ Colin Gallick
------------------------ -------------------------
Name:Jon Ezrine Name: Colin Gallick
---------------------- -----------------------
Title:CFO Title: VP
--------------------- ----------------------
Date:12/31/99 Date: 12/31/99
---------------------- -----------------------
</TABLE>
11
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Witness Systems, Inc.:
The audits referred to in our report dated November 18, 1999 included
the related financial statement schedules as of September 30, 1999, and for each
of the years in the three-year period ended December 31, 1998 and for the nine-
month period ended September 30, 1999, included in the registration statement.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the
reference to our firm under the headings "Selected Consolidated Financial Data"
and "Experts" in the registration statement.
/s/ KPMG LLP
Atlanta, Georgia
January 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WITNESS SYSTEMS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 6,706
<ALLOWANCES> 438
<INVENTORY> 0
<CURRENT-ASSETS> 7,020
<PP&E> 3,715
<DEPRECIATION> 1,977
<TOTAL-ASSETS> 8,919
<CURRENT-LIABILITIES> 8,893
<BONDS> 0
22,113
0
<COMMON> 103
<OTHER-SE> (24,400)
<TOTAL-LIABILITY-AND-EQUITY> 8,919
<SALES> 15,136
<TOTAL-REVENUES> 15,136
<CGS> 2,900
<TOTAL-COSTS> 2,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 138
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> (6,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,360)
<EPS-BASIC> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
