<PAGE>
As filed with the Securities and Exchange Commission on August 29, 2000.
Registration No. 333-41330
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Motive Communications, Inc.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7372 74-2834515
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
</TABLE>
9211 Waterford Centre Boulevard, Suite 100
Austin, Texas 78758
(512) 339-8335
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
---------------
SCOTT L. HARMON
President and Chief Executive Officer
Motive Communications, Inc.
9211 Waterford Centre Boulevard, Suite 100
Austin, Texas 78758
(512) 339-8335
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
BRIAN K. BEARD ALAN DEAN
ANTHONY M. ALLEN Davis Polk & Wardwell
Gunderson Dettmer Stough 450 Lexington Avenue
Villeneuve Franklin & Hachigian, LLP New York, New York 10017
2700 Via Fortuna, Suite 300 (212) 450-4000
Austin, Texas 78746
(512) 732-8400
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to Offering Price Aggregate Offering Amount Of
Registered be Registered Per Share Price Registration Fee(1)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value.................. 5,750,000 $12.00 69,000,000 $18,216
=========================================================================================================
</TABLE>
(1) $15,180 of such fee has previously been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to such Section 8(a), may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 2000
5,000,000 Shares
[LOGO OF MOTIVE COMMUNICATIONS, INC.]
Powering Online Customer Care
COMMON STOCK
-----------
Motive Communications, Inc. is offering 5,000,000 shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares. We anticipate that the initial public offering price will be
between $10 and $12 per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "MOTV."
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 4.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Price Underwriting
to Discounts and Proceeds to
Public Commissions Company
------ ------------- -----------
<S> <C> <C> <C>
Per Share...................................... $ $ $
Total.......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Motive Communications, Inc. and a selling stockholder have granted the
underwriters the right to purchase up to an additional 750,000 shares of common
stock to cover over-allotments. Morgan Stanley & Co. Incorporated expects to
deliver the shares of common stock to purchasers on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
DAIN RAUSCHER WESSELS
FRIEDMAN BILLINGS RAMSEY
, 2000
<PAGE>
[ART WORK]
[Description of graphic: This graphic depicts "Powering Online Customer Care".
The graphic is a star diagram with a central axis titled "Motive Powered
Service". Circling around the axis are graphics with straight lines connecting
to the central axis. Starting at the top left of the axis is a graphic labeled
"e-Business Sites" depicting an Internet browser window with a pop-up dialogue
window. At the top-right is a graphic labeled "High-touch Service Sites"
depicting an Internet browser window with a pop-up dialogue window. At the
bottom-right is a graphic labeled "IT Service Portals" depicting an Internet
browser window. At the bottom-left is a graphic connected to the central axis
with a dotted line labeled "Internet Appliances (future)" depicting a cellular
phone. At the left is a graphic labeled "High-tech Products" depicting a
personal computer. One line extends straight down from the central axis and
leads to text at the bottom right of the page: "Motive provides products to
automate the delivery of customer service over the internet, or e-service. By
providing superior online service our customers improve value delivery,
customer retention, and sales." The bottom of the page is a framed box with
our logo and the word "Motive" centered in the box.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
Special Note Regarding Forward-Looking Statements........................ 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Preemptive Rights........................................................ 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business................................................................... 31
Management................................................................. 46
Related Party Transactions................................................. 55
Principal Stockholders..................................................... 57
Description of Capital Stock............................................... 59
Shares Eligible for Future Sale............................................ 62
Underwriters............................................................... 64
Legal Matters.............................................................. 67
Experts.................................................................... 67
Change in Independent Auditors............................................. 67
Where You Can Find Additional Information.................................. 67
Index to Consolidated Financial Statements................................. F-1
</TABLE>
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
Our principal executive offices are located at 9211 Waterford Centre
Boulevard, Suite 100, Austin, Texas 78758 and our telephone number is (512)
339-8335. Our world wide web address is http://www.motive.com. The information
on our web site is not incorporated by reference into this prospectus. Our
world wide web address is not intended to be included as an active hyperlink
in this prospectus and has been included only as an inactive textual
reference.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
<PAGE>
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information and
our consolidated financial statements and notes appearing elsewhere in this
prospectus. Unless otherwise indicated, all information in this prospectus
gives effect to the conversion of all outstanding shares of preferred stock
into shares of common stock effective upon the closing of the offering and
assumes no exercise of the underwriters' over-allotment option. Unless
otherwise indicated, all information in this prospectus relating to the number
of shares of our common stock or options is based upon information as of June
30, 2000.
MOTIVE COMMUNICATIONS, INC.
We are a leading provider of software for the automated delivery of customer
service, or e-service, over the internet. Our software products provide
technology vendors, service providers and large enterprises with the
infrastructure for delivering personalized service over the internet. Unlike
traditional telephone, e-mail or chat-based service models, our products are
used to build individualized "e-service networks" that allow our customers to
deliver superior customer service by interconnecting their customers, partners,
suppliers and employees. By providing superior online service, our customers
improve value delivery, customer retention and sales.
Motive-powered e-service networks provide end users with online or off line
assistance through the use of automated self-service or by connecting them to a
qualified expert for a web-based dialogue. Our technology enables business and
technical experts to collaborate on solving problems and answering questions,
and to capture automated solutions and answers in a reusable knowledge base. As
a result, end users can access an extended network of experts and e-service
content, all designed to be highly relevant to the end user and the particular
service request. We complement our products with an experienced professional
services group that provides turn-key solutions for our customers.
We have significant strategic customer relationships with leading hardware
providers such as Compaq, Dell, Gateway and Hewlett-Packard. We estimate that
these personal computer, or PC, manufacturers currently have installed our
software on more than 3.5 million PCs and servers to provide e-service to their
customers. In addition, these PC manufacturers have acquired licenses to pre-
install our software on an estimated tens of millions of PCs and servers. As of
June 30, 2000 we had approximately 50 customers across a wide variety of
industries, including hardware, software, financial services,
telecommunications, retail, and services outsourcing. In addition to the major
PC manufacturers, our customers include Electronic Data Systems (EDS), GE
Information Services, Intuit, Kmart, LSI Logic, Merrill Lynch, Norwest, Oracle
and Peregrine Systems.
1
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<C> <S>
Common stock offered................................ 5,000,000 shares
Common stock to be outstanding after this offering.. 46,626,303 shares
Use of proceeds..................................... For general corporate
purposes, including
working capital. See "Use
of Proceeds" for
additional information on
how we intend to use the
proceeds from the
offering.
Proposed Nasdaq National Market symbol.............. MOTV
</TABLE>
The foregoing information is based on shares outstanding as of June 30,
2000, and excludes 3,858,138 shares reserved for issuance under our stock plan
or issuable on exercise of outstanding options and warrants to purchase shares.
See "Capitalization."
2
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Period from
Inception
(April 25, Year Ended Six Months Ended
1997) through December 31, June 30,
December 31, ----------------- -----------------
1997 1998 1999 1999 2000
------------- ------- -------- ------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
License fees............. $ -- $ 1,380 $ 4,156 $ 1,603 $ 5,932
Services................. -- 37 2,118 514 3,346
Total revenue.............. -- 1,417 6,274 2,117 9,278
Gross margin............... -- 913 4,064 1,424 4,711
Total operating expenses... 942 4,543 19,424 5,016 20,464
Loss from operations....... (942) (3,630) (15,360) (3,592) (15,753)
Net loss................... $ (819) $(3,318) $(14,675) $(3,421) $(15,096)
Basic and diluted net loss
per share................. $(0.44) $ (0.73) $ (1.49) $ (0.52) $ (1.10)
Shares used in computing
basic and diluted net loss
per share................. 1,858 4,554 9,842 6,545 13,680
Pro forma basic and diluted
net loss per share
(unaudited)............... $ (0.66) $ (0.48)
Shares used in computing
pro forma basic and
diluted net loss per share
(unaudited)............... 22,268 31,306
</TABLE>
The following table presents our summary consolidated balance sheet at June
30, 2000. The pro forma column reflects the conversion of our preferred stock
outstanding as of June 30, 2000 into 18,395,581 shares of common stock on
completion of this offering. The pro forma as adjusted column reflects our sale
of 5,000,000 shares of our common stock in this offering at an assumed initial
public offering price of $11.00 per share and the application of the estimated
net proceeds. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
(unaudited)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $12,728 $12,728 $62,678
Working capital................................. 30,031 30,031 79,981
Total assets.................................... 70,734 70,734 120,684
Long-term debt, net of current portion.......... 792 792 792
Redeemable convertible preferred stock, net..... 53,521 -- --
Total stockholders' equity (deficit)............ (3,567) 49,954 99,904
</TABLE>
Unless otherwise indicated, all information contained in this prospectus:
. assumes that the underwriters' over-allotment option will not be
exercised;
. except as noted in the historical financial statements, gives effect to
the conversion of all outstanding shares of preferred stock into
18,395,581 shares of common stock; and
. excludes 74,984 shares issuable upon exercise of outstanding warrants
with an exercise price of $4.00 per share.
3
<PAGE>
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the
other information in this prospectus, including our consolidated financial
statements and the related notes, before investing in our common stock. Our
business, operating results or financial condition could be seriously harmed
by any of the following risks. The trading price of our common stock could
decline due to any of these risks, and you may lose all or part of your
investment.
Risks Related To Our Business
We are an early stage company, therefore we have only a limited operating
history with which you can evaluate our business and prospects.
We were founded in April 1997 and began operations in May 1997.
Accordingly, we have only a limited operating history with which you can
evaluate our business and our prospects. In addition, our prospects must be
considered in light of the risks encountered by companies in the early stages
of development in the Internet service and support software market. Some of
the risks we face include:
. attracting new customers;
. increasing the usage of our software by our existing customers;
. developing our sales and marketing capabilities; and
. managing our growth effectively.
If we fail to manage these risks successfully, our business could be harmed.
We expect to incur losses in the future and our prospects for profitability
are uncertain.
We have never been profitable. We have incurred net losses in every fiscal
period since we began operations, and as of June 30, 2000, we had an
accumulated deficit of approximately $33.9 million. We will need to generate
significant additional revenue to achieve profitability. Given the uncertainty
of generating significant additional revenue, we are not certain when we will
become profitable. If we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
We have not been able to fund our operations from cash generated by our
business, and we may not be able to do so in the future.
We have principally financed our operations to date through the private
placement of shares of our preferred stock. If we do not generate sufficient
cash from our business to fund operations, our growth could be limited unless
we are able to obtain additional capital through equity or debt financings.
Our inability to grow as planned may reduce our chances of achieving
profitability.
We recently moved to a subscription-based revenue model, which is unproven.
If our customers do not agree to license our software under subscription
licenses, or renew their subscriptions, we would lose a recurring revenue
stream.
During 1999, we moved to a revenue model based on licensing our software on
a subscription basis, requiring periodic renewal for continuing use instead of
relying exclusively on licenses giving our customers a perpetual right to use
our software. In light of our limited operating history, we do not know
whether we will generate sufficient revenue from subscription-based licenses
or whether our subscription customers will renew when their subscriptions end.
If a significant portion of our customers were to elect not to renew their
subscription-based licenses for our software or insist on perpetual licenses
instead of subscription arrangements, we would lose a recurring revenue stream
on which we base our business model. Loss of a subscription-based revenue
stream could cause our revenue to decline and harm our business, operating
results and financial condition.
4
<PAGE>
Our quarterly financial results fluctuate and may be difficult to predict
and, if our future results are below the expectations of the public market
analysts and investors, the price of our common stock may decline.
Our quarterly revenue and results of operations may be difficult to
predict. We have experienced, and expect to continue to experience,
fluctuations in revenue and operating results from quarter to quarter. As a
result, we believe that quarter to quarter comparisons of our revenue and
operating results are not necessarily meaningful, and that such comparisons
may not be accurate indicators of future performance. The reasons for these
fluctuations include, but are not limited to:
. the timing of sales of our software;
. our revenue mix;
. the rate of end user acceptance of our software where our licenses have
fees based on usage;
. the amount and timing of operating costs related to the expansion of our
business, operations and infrastructure;
. demand for our e-service infrastructure and application software;
. our utilization and billing rates for our professional services
personnel;
. changes in our pricing policies or our competitors' pricing policies;
and
. the timing of new hires.
We plan to significantly increase our operating expenses to expand our
sales and marketing operations and fund greater levels of research and
development. Our operating expenses, which include sales and marketing,
research and development and general and administrative expenses, are based on
our expectations of future revenue and are relatively fixed in the short term.
If revenue falls below our expectations in a quarter and we are not able to
quickly reduce our spending in response, our operating results for that
quarter could be harmed. It is likely that in some future quarter our
operating results may be below the expectations of public market analysts and
investors and, as a result, the price of our common stock may fall.
Variations in our sales cycle could impact the timing of our revenue,
causing our quarterly operating results to fluctuate.
The period between our initial contact with a potential customer and the
purchase of our software and services is often long and subject to delays
associated with the budgeting, approval, and competitive evaluation processes
that frequently accompany significant capital expenditures. Our sales cycle
can vary substantially, from one week to nine months or more depending on the
customer and the size of the transaction. A lengthy sales cycle may have an
impact on the timing of our revenue, which in turn could cause our quarterly
operating results to fluctuate. We believe that a customer's decision to
purchase our software and services is discretionary, involves a significant
commitment of resources, and is influenced by customer budgetary cycles. To
successfully sell our software and services, we must educate our potential
customers regarding their use and benefits, which can require significant time
and resources.
Our strategy for developing e-service networks based on our software relies
on our customers reselling our software to their customers and business
partners. If our customers are unsuccessful in reselling our software, we may
lose important sales and marketing opportunities.
We are designing our software so that our customers can link themselves
across the internet to their customers and their business partners through
"service networks" that enable collaborative e-service to the end user. To
establish these networks, we expect some of our customers to resell our
products to their business partners and end user customers, sharing their
revenues with us on these sales, while creating opportunities to sell
additional and upgraded products to these additional customers. In the future,
we plan to derive a significant portion of our revenue from these resale
licenses and "cross selling" opportunities. In particular, the success
5
<PAGE>
of our MotiveNet Server product depends on the marketing efforts of our
technology customers to sell e-service networks implemented using our
software. Our customers are under no obligation to recommend or resell our
products. These companies could recommend or resell the products of other
companies or sell their own products. Our failure to create a market for
service networks, the failure of our customers to successfully market service
networks using our products or a significant shift by our customers toward
favoring competing products could negatively affect our future revenue.
We may not be able to increase market awareness and increase revenue from
software sales if we do not expand our sales and distribution capabilities.
We need to substantially expand our direct and indirect sales and
distribution efforts, both domestically and internationally, in order to
increase market awareness and sales of our software and the related services
we offer. We have recently expanded our direct sales force and plan to hire
additional sales personnel. Competition for qualified sales and marketing
personnel is intense, and we might not be able to hire and retain adequate
numbers of such personnel to maintain our growth. New hires will require
training and take time to achieve full productivity. Our competitors have
attempted to hire our employees away from us and we expect that they will
continue to do so. We also plan to expand our relationships with system
integrators, enterprise software vendors and other third-party resellers to
further develop our indirect sales channel. As we continue to develop our
indirect sales channel, we will need to manage potential conflicts between our
direct sales force and third-party reselling efforts.
Our operating results may decline and our customers may become dissatisfied
if we do not expand our professional services organization.
We cannot be certain that we can attract or retain a sufficient number of
highly qualified professional services personnel and we cannot be certain that
our professional services business will ever achieve profitability. Clients
that license our software typically engage our professional services
organization to assist with support, training, consulting and implementation.
We believe that growth in our software sales depends on our ability to provide
our clients with these services. As a result, we plan to increase the number
of services personnel to meet these needs. New services personnel will require
training and education and take time to reach full productivity. We may not be
able to recruit the services personnel we need since competition for qualified
services personnel is intense. We are in a new market and only a limited
number of individuals have the skills needed to provide the services that our
clients require. To meet our needs for services personnel, we may also need to
use more costly third-party consultants to supplement our own professional
services organization.
We may be unable to attract necessary third-party service providers, which
could affect our ability to provide support, consulting and implementation
services for our products and negatively affect our sales.
There may be a shortage of third-party service providers to assist our
customers with the implementation of our products. We do not believe our
professional services organization will be able to fulfill the expected demand
for support, consulting and implementation services for our products. We are
actively attempting to supplement the capabilities of our professional
services organization by attracting and educating third-party service
providers and consultants to also provide these services. We may not be
successful in attracting these third-party providers or maintaining the
interest of current third-party providers. In addition, these third parties
may not devote enough resources to these activities. A shortfall in service
capabilities may affect our ability to sell our software.
An important component of our license fees depends on end users adopting
our products.
Pricing for our software licenses typically includes a usage component that
increases the price based on the number of end users that are provided support
services through our software. As a result, our revenues depend in part on
expansion of usage. We make considerable effort to educate our customers about
the benefits of our software and to suggest programs to increase the usage of
our software after it has been licensed. Despite our efforts to promote usage
of our software, implementation of programs designed to increase usage and
actual
6
<PAGE>
usage of our software is largely beyond our control. Any failure to increase
usage could limit the revenues that we can realize from our software and could
cause our revenue to fall short of expectations.
We must achieve broad adoption and acceptance of our new products in order
to increase our revenue and market share.
We expect that our future financial performance will depend significantly
on revenue from new products, such as MotiveNet Server, as well as from
enhancements to our existing products. We began shipping MotiveNet Server in
April 2000. There are significant risks inherent in product introductions,
such as MotiveNet Server. Market acceptance of these products will depend on a
market developing for internet-based service and support software,
particularly with respect to the establishment of service networks and
question and answer assistance for web sites. The success of MotiveNet Server
will also depend on the marketing efforts of our customers who will be
marketing MotiveNet to their customers. We cannot be certain that our new
products or future enhancements to existing products will meet customer
performance needs or expectations when shipped or that they will be free of
significant software defects or bugs. If they do not meet customer needs or
expectations, for whatever reason, upgrading or enhancing these products could
be costly and time consuming.
We have experienced significant growth in our business in recent periods
and we may not be able to manage our future growth efficiently or profitably.
Our ability to successfully offer software and related services and
implement our business plan in a rapidly evolving market requires an effective
planning and management process. We have increased, and plan to continue to
increase, the scope of our operations at a rapid rate. The number of people we
employ has grown and will continue to grow substantially. As of June 30, 2000,
we had a total of 246 employees, compared to 117 employees as of December 31,
1999. Future expansion efforts could be expensive and may strain our
managerial and other resources. To manage future growth effectively, we must
maintain and enhance our financial and accounting systems and controls,
integrate new personnel and manage expanded operations. If we do not manage
growth properly, it could harm our business, operating results and financial
condition.
Our customer base is concentrated and loss of a major customer could cause
our revenue to decline.
For the first half of 2000, three of our customers each accounted for more
than 10% of our total revenue in the period. Collectively, these customers
represented 57% of our total revenue for the six months ended June 30, 2000.
Five of our customers in 1998 and two of our customers in 1999 each accounted
for more than 10% of our total revenue in those periods. Collectively, these
customers represented 74% of our total revenue in 1998 and 40% in 1999. We may
continue to derive a significant portion of our revenue from a relatively
small number of customers in the future. If a major customer decided not to
renew its license to use our software, our revenue could decline and our
operating results and financial condition could be harmed.
We may find it difficult to integrate potential future acquisitions, which
could disrupt our business, dilute stockholder value and adversely affect our
operating results.
We may acquire other businesses in the future, which would complicate our
management's tasks. We may need to integrate operations that have different
and unfamiliar corporate cultures. These integration efforts may not succeed
or may distract management's attention from existing business operations. Our
failure to successfully manage future acquisitions could seriously harm our
business. Also, our existing stockholders' ownership would be diluted if we
financed our acquisitions by issuing equity securities. If any acquisition
were to be accounted for using the purchase method, we could be required to
amortize goodwill or incur in-process research and development or other
charges in connection with the acquisition.
The online customer care industry is highly competitive and we may not be
able to compete effectively.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other
market activities of industry participants. Although we do not currently
7
<PAGE>
compete against any one entity with respect to all aspects of our e-service
solutions, our solutions compete against various vendors' software products
designed to accomplish specific elements of e-service. See "Business--
Competition."
Our current and potential competitors may have longer operating histories,
significantly greater financial, technical, and other resources or greater
name recognition than we do. Our competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements.
Competitive pressures could reduce our market share or require us to reduce
the price of our products and services, either of which could harm our
business and operating results.
If our software contains defects, we could lose customers and revenue.
Software as complex as ours often contains known and undetected errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction of new software or enhancements to
existing software. Although we attempt to resolve all errors that we believe
would be considered serious by our customers, our software is not error-free.
Undetected errors or performance problems may be discovered in the future and
known errors considered minor by us may be considered serious by our
customers. This could result in lost revenue or delays in customer acceptance
and would be detrimental to our reputation, which could harm our business,
operating results and financial condition.
If we cannot develop our software in a timely and effective manner, our
operating results could suffer.
Because of the complexity of our software, internal quality assurance
testing and customer testing may reveal product performance issues or
desirable feature enhancements that could lead us to postpone the release of
new versions of our software. In addition, the reallocation of resources
associated with any postponement could cause delays in the development and
release of future enhancements to our currently available software. We may not
be able to successfully complete the development of currently planned or
future enhancements in a timely and efficient manner. Any such failure or
delay could harm our operating results.
Our executive officers and certain key personnel are critical to our
business and these officers and key personnel may not remain with us in the
future.
Our future success depends upon the continued service of our executive
officers and other key personnel and none of our officers or key employees is
bound by an employment agreement for any specific term. If we lose the
services of one or more of our executive officers or key employees, or if one
or more of them decide to join a competitor or otherwise compete directly or
indirectly with us, our business, operating results and financial condition
could be harmed. In particular, Scott Harmon, our President and Chief
Executive Officer, would be particularly difficult to replace. We possess key
man life insurance for Scott Harmon, Mike Maples, Jr., Tom Bereiter and Brian
Vetter.
Failure to manage our international expansion effectively could cause our
domestic and international operating results to suffer.
We intend to expand our international sales efforts in the future. We have
very limited experience in marketing, selling and supporting our software and
services abroad. To date, we have recognized no revenue on sales to customers
outside of North America. Expansion of our international operations will
require a significant amount of attention from our management and substantial
financial resources. If we are unable to grow our international operations
successfully and in a timely manner, our business and operating results could
be harmed. In addition, doing business internationally involves additional
risks, particularly:
. fluctuating currency exchange rates;
. greater difficulty in staffing and managing foreign operations;
. longer payment cycles;
. unexpected changes in regulatory requirements, taxes, trade laws and
tariffs;
8
<PAGE>
. restrictions on repatriation of earnings;
. differing labor regulations;
. changes in a specific country's or region's political or economic
conditions;
. differing intellectual property rights;
. more restrictive privacy regulations in different countries,
particularly in the European Union; and
. restrictions on the export of sensitive U.S. technologies such as data
security and encryption.
We currently have operations in the United Kingdom and Switzerland and
expect to commence operations in Germany and France by the end of the year.
European software customers generally have seasonal purchasing patterns,
particularly in the summer. These seasonal purchasing patterns could harm our
operating results. In the future, we intend to expand our sales efforts into
Asia, a region where certain countries have suffered or are susceptible to
recessions that could lead to increased governmental ownership or regulation
of the economy, higher interest rates and spiraling inflation. Any of these
influences could harm our operating results.
Additional governmental regulation relating to the internet may increase
our costs of doing business or require changes in our business model.
We are subject to regulations applicable to businesses generally and laws
or regulations directly applicable to companies utilizing the internet.
Although there are currently few laws and regulations directly applicable to
the internet, it is possible that a number of laws and regulations may be
adopted with respect to the internet. These laws could cover issues like user
privacy, pricing content, intellectual property, distribution, taxation,
antitrust, legal liability and characteristics and quality of products and
services. The adoption of any additional laws or regulations could decrease
the demand for our products and services and increase our cost of doing
business or otherwise harm our business or prospects.
Moreover, the applicability to the internet of existing laws in various
jurisdictions governing issues like property ownership, sales and other taxes,
libel and personal privacy is uncertain and may take years to resolve. For
example, tax authorities in a number of states are currently reviewing the
appropriate tax treatment of businesses engaged in e-commerce. New state tax
regulations may subject our customers or our services to additional state
sales and income taxes. Any new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the
internet and commercial online services could harm our ability to conduct
business and harm operating results.
If we are unable to protect our intellectual property, we may lose a
valuable asset, experience reduced market share, or incur costly litigation to
protect our rights.
Our success depends, in part, upon our proprietary technology and other
intellectual property rights. To date, we have relied primarily on a
combination of copyright, trade secret, trademark and patent laws, and
nondisclosure and other contractual restrictions on copying and distribution
to protect our proprietary technology. Litigation to enforce our intellectual
property rights or protect our trade secrets could result in substantial costs
and may not be successful. Any inability to protect our intellectual property
rights could seriously harm our business, operating results and financial
condition. In addition, the laws of certain foreign countries may not protect
our intellectual property rights to the same extent as do the laws of the
United States. Our means of protecting our intellectual property rights in the
United States or abroad may not be adequate to fully protect our intellectual
property rights.
Our product shipments could be delayed if third-party software incorporated
in our products is no longer available.
We integrate third-party software from multiple sources as components of
our software. This third-party software may not continue to be available to us
on commercially reasonable terms. For instance, we license
9
<PAGE>
software from Verity to provide search engine capability for our AnswerWeb
product. We also license security and encryption technology from RSA Data
Security. The Verity agreement expires on May 18, 2003, and the RSA agreement
continues indefinitely unless terminated in the event of a material default by
either party, insolvency, or unless we terminate for convenience on 90-days'
written notice. If we cannot maintain licenses to key third-party software,
such as the Verity search engine technology or the RSA security and encryption
technology, shipments of our products could be delayed until equivalent
software could be developed or licensed and integrated into our products,
which could materially adversely affect our business, operating results and
financial condition.
Claims that we infringe upon third parties' intellectual property rights
could be costly to defend or settle.
Litigation regarding intellectual property rights is common in the internet
and software industries. We expect that internet technologies and software
products and services may be increasingly subject to third-party infringement
claims as the number of competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. We may from
time to time encounter disputes over rights and obligations concerning
intellectual property. Although we believe that our intellectual property
rights are sufficient to allow us to market our software without incurring
liability to third parties, third parties may bring claims of infringement
against us. Such claims may be with or without merit. Any litigation to defend
against claims of infringement or invalidity could result in substantial costs
and diversion of resources. Furthermore, a party making such a claim could
secure a judgment that requires us to pay substantial damages. A judgment
could also include an injunction or other court order that could prevent us
from selling our software. Although we possess insurance to cover damages and
costs sustained in an intellectual property infringement suit brought against
us, there is no guarantee that our insurance would be enough to cover the full
amount of any loss we might suffer. Our business, operating results and
financial condition could be harmed if any of these events occurred.
In addition, we have agreed, and may agree in the future, to indemnify
certain of our customers against claims that our software infringes upon the
intellectual property rights of others. We could incur substantial costs in
defending ourselves and our customers against infringement claims. In the
event of a claim of infringement, we and our customers may be required to
obtain one or more licenses from third parties. We, or our customers, may be
unable to obtain necessary licenses from third parties at a reasonable cost,
if at all. Defense of any lawsuit or failure to obtain any such required
licenses could harm our business, operating results and financial condition.
If we become subject to product liability claims, they could be time
consuming and costly to defend.
Since our customers use our software to provide services to their own
customers, errors, defects or other performance problems could result in
financial or other damages to our customers. They could seek damages from us
for losses associated with these errors, defects or other performance
problems. If successful, these claims could have a material adverse effect on
our business, operating results or financial condition. Although we possess
product liability insurance and are in the process of obtaining errors and
omissions insurance, there is no guarantee that our insurance would be enough
to cover the full amount of any loss we might suffer. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, existing or future laws or unfavorable judicial
decisions could negate these limitation of liability provisions. We have not
experienced any product liability claims to date. However, a product liability
claim brought against us, even if unsuccessful, could be time consuming and
costly to defend and could harm our reputation.
Risks Relating To Our Industry
We must successfully respond to evolving developments in the market for
internet-based service and support software or we will lose market share and
our business could fail.
Our market is characterized by rapidly changing technology, evolving
industry standards and frequent new product announcements. To be successful,
we must adapt to our rapidly changing market by continually
10
<PAGE>
improving the performance, features and reliability of our software and
related services. We could incur substantial costs to modify our software,
services or infrastructure in order to adapt to these changes. Our business
could be harmed if we incur significant costs without adequate results, or if
we are unable to adapt rapidly to these changes.
If the new and evolving market for internet-based service and support
software does not continue to develop or potential customers prefer
traditional methods of providing service and support, our business could fail.
The market for internet-based service and support software is new and
rapidly evolving. We expect that we will continue to need intensive marketing
and sales efforts to educate prospective clients about the uses and benefits
of our products and services. Accordingly, we cannot be certain that a viable
market for our products will emerge or be sustainable. Most enterprises have
already invested substantial resources in traditional methods of providing
service and support and may be reluctant or slow to adopt a new approach that
may replace, limit or compete with their existing systems.
Because our software is designed to support businesses operating over the
internet, our success depends on the continued growth and levels of
performance of internet usage.
The market for internet-based service and support software is relatively
new and is evolving rapidly. Our future revenue and any future profits depend
upon the widespread acceptance and use of the internet as an effective medium
for providing service and support. The failure of the internet to continue to
develop as a commercial or business medium could harm our business, operating
results and financial condition. The acceptance and use of the internet for
providing service and support could be limited by a number of factors, such as
the growth and use of the internet in general, the relative ease of conducting
business on the internet, concerns about transaction security and taxation of
transactions on the internet.
Since our products are primarily designed to support PCs and PC-based
networks, a decline in PC growth rates would negatively impact our revenue
growth rates.
We expect that the underlying PC unit growth rate and percentage of new PCs
acquired as replacement units will directly impact our software revenue
growth. Additionally, to the extent that companies are able to develop
limited-use computing devices that take the place of PCs or require less
support and service, these devices may create less demand for our software
than traditional PCs. The PC shipment growth rate may continue to decrease,
the replacement rate may continue to decrease and limited-use PC growth may
increase, reducing future software revenue opportunities.
Because our software uses the internet to support businesses operating over
the internet and utilizes our customers' internal networks, our success
depends on the ability of the internet to support e-commerce transactions on
our customers' internal networks.
The recent growth in internet traffic has caused frequent periods of
decreased performance. If internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance
and reliability may decline. If outages or delays on the internet occur
frequently or increase in frequency, end users may become reluctant to rely on
internet based service and support and business-to-business electronic
commerce, or B2B e-commerce, could grow more slowly or decline, which may
reduce the demand for our software and services. The ability of our products
to satisfy our customers' needs is ultimately limited by and dependent upon
the speed and reliability of both the internet and our customers' internal
networks. Consequently, the emergence and growth of the market for our
software depends upon improvements being made to the internet as well as to
our individual customers' networking infrastructures to alleviate overloading
and congestion. If these improvements are not made, the ability of our
customers to utilize our solution will be hindered, and our business,
operating results and financial condition may suffer.
11
<PAGE>
Increased security risks of online commerce may deter future use of our
software and e-services.
A fundamental requirement to conduct internet-based e-service, particularly
across internet-based service networks, is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments may result in a compromise or breach of the security features
contained in our software or the algorithms used by our customers and their
business partners to protect content and e-service transactions across the
internet or proprietary information in our customers' and their business
partners' databases. Anyone who is able to circumvent security measures could
misappropriate proprietary, confidential customer information or cause
interruptions in our customers' operations or those of their business partners
or end users. Our customers and their business partners and end users may be
required to incur significant costs to protect against security breaches or to
alleviate problems caused by breaches, reducing their demand for our software.
Further, a well-publicized compromise of security could deter end users from
using the internet for e-service that involves transmitting confidential
information. The failure of the security features of our software to prevent
security breaches, or well-publicized security breaches affecting the internet
in general, could significantly harm our business, operating results and
financial condition.
Internet-related laws could limit the market for our software.
Regulation of the internet is largely unsettled. The adoption of laws or
regulations that increase the costs or administrative burdens of doing
business using the internet could cause companies to seek an alternative means
of transacting business. If the adoption of new internet laws or regulations
causes companies to seek alternative methods for conducting business, the
demand for our software could decrease and our business could be adversely
affected.
Risks Relating To This Offering
Because certain existing stockholders own a large percentage of our voting
stock, other stockholders' voting power may be limited.
Following this offering, it is anticipated that our executive officers,
directors and their affiliates will beneficially own or control approximately
43% of our common stock. Together with entities owning 5% or more of our
outstanding shares of common stock, this group controls 26,759,603 shares of
common stock, or approximately 56% of the outstanding shares of our stock. As
a result, if such persons act together, they will have the ability to control
all matters submitted to our stockholders for approval, including the election
and removal of directors and the approval of any merger, consolidation or sale
of all or substantially all of our assets. These stockholders may make
decisions that are adverse to your interests. See our discussion under the
caption "Principal Stockholders" for more information about ownership of our
outstanding shares.
Future sales of our common stock may depress our stock price.
Approximately 35,165,409 shares of our common stock can be sold in the
public market 180 days after the offering. If substantial amounts of our
common stock were to be sold in the public market following this offering, the
market price of our common stock could fall. In addition, such sales could
create the perception to the public of difficulties or problems with our
software and services. As a result, these sales also might make it more
difficult for us to sell equity or equity-related securities in the future at
a time and price that we deem appropriate. For a more detailed discussion of
shares eligible for sale after the offering, see "Shares Eligible for Future
Sale."
We have substantial discretion as to how to use the offering proceeds, and
the investment of these proceeds may not yield a favorable return.
The net proceeds of this offering are not allocated for specific purposes.
Thus, our management has broad discretion over how these proceeds are used and
could spend these proceeds in ways with which our stockholders may not agree.
The proceeds may be invested in ways that do not yield favorable returns.
12
<PAGE>
Our securities have no prior market, and our stock price may decline after
the offering.
Before this offering, there has not been a public market for our common
stock. An active public market for our common stock may not develop or be
sustained after this offering. The initial public offering price has been
determined by negotiations between representatives of the underwriters and us.
The trading market price of our common stock may decline below our initial
public offering price.
Internet-related stock prices are especially volatile and this volatility
may depress our stock price.
The stock market, and specifically the stock prices of internet-related
companies, has been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market and industry
volatility may reduce the price of our common stock, without regard to our
operating performance. Due to this volatility, the market price of our common
stock could significantly decrease.
Fluctuations in our common stock's price may affect our visibility and
credibility in the B2B e-service market. In the event of broad fluctuations in
the market price of our common stock, you may be unable to resell your shares
at or above the offering price.
Securities class action litigation has often been brought against companies
that experience volatility in the market price of their securities. Litigation
brought against us could result in substantial costs to us in defending
against a lawsuit and management's attention could be diverted from our
business.
As a new investor, you will experience immediate and substantial dilution
in the value of the common stock.
The initial public offering price of our common stock will be substantially
higher than the book value per share of the outstanding common stock. As a
result, investors purchasing common stock in this offering will incur
immediate dilution of $9.35 per share, assuming that we sell 5,000,000 shares
at an initial offering price of $11.00 per share. See "Dilution."
We have implemented certain anti-takeover provisions that could make it
more difficult for a third party to acquire us.
Provisions of our certificate of incorporation and our by-laws, as well as
Delaware law, could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. See "Description of
Capital Stock -- Anti-takeover Effects of Provisions of Our Certificate of
Incorporation, By-laws and Delaware Law."
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this Prospectus constitute forward-
looking statements. These statements relate to future events or our future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform such statements to
actual results.
14
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 5,000,000 shares of common stock in
this offering are estimated to be $50 million, assuming an initial public
offering price of $11.00 per share, and after deducting estimated offering
expenses of approximately $1.2 million and estimated underwriting discounts
and commissions. The net proceeds of this offering are estimated to be $56.9
million if the underwriters' over-allotment option is exercised in full. We
will not receive any portion of the net proceeds received by a selling
stockholder if the over-allotment option is exercised.
The primary purposes of this offering are to obtain additional equity
capital, create a public market for our common stock and facilitate future
access to public markets. We expect to use the net proceeds for general
corporate purposes, including working capital. A portion of the net proceeds
may also be used for the acquisition of businesses that are complementary to
ours. However, we have no current plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any such transaction.
Pending such uses, we will invest the net proceeds of this offering in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not intend
to pay any cash dividends in the foreseeable future.
PREEMPTIVE RIGHTS
Certain holders of shares of our preferred stock have a preemptive right to
purchase shares of common stock sold in this offering at the initial offering
price. This right to purchase shares is limited to 7% of the shares offered.
The stockholders with preemptive rights are purchasing 350,000 of the shares
issued in this offering. Shares purchased by these stockholders under their
preemptive rights reduce the number of shares available to new investors in
this offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. The
pro forma information reflects, on completion of this offering, the filing of
an amended and restated certificate of incorporation to provide for authorized
capital stock of 500,000,000 shares of common stock and 10,000,000 shares of
undesignated preferred stock and the conversion of all shares of preferred
stock outstanding as of June 30, 2000 into 18,395,581 shares of common stock.
The pro forma as adjusted information reflects the receipt of the estimated
net proceeds from the sale by us of 5,000,000 shares of common stock in this
offering at an assumed initial offering price of $11.00 per share. The
outstanding share information excludes 3,435,516 shares of common stock
issuable on exercise of outstanding options as of June 30, 2000 with a
weighted average exercise price of $2.93 per share, 347,638 shares of common
stock reserved for issuance under our stock plan as of June 30, 2000 and
74,984 shares of capital stock issuable on exercise of warrants with an
exercise price of $4.00 per share. This table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and accompanying
notes.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, except share
data)
(unaudited)
<S> <C> <C> <C>
Long-term debt, net of current portion.......... $ 792 $ 792 $ 792
------- ------- --------
Redeemable convertible preferred stock, net:
Preferred stock, $0.001 par value, 18,648,111
shares authorized, 18,395,581 issued and
outstanding, actual; none authorized, issued
and outstanding, pro forma and pro forma as
adjusted(1)................................... 53,521 -- --
------- ------- --------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, no shares
authorized, issued and outstanding, actual;
10,000,000 authorized, none issued and
outstanding, pro forma and pro forma as
adjusted...................................... -- -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, 23,230,722 shares issued
and outstanding, actual; 50,000,000 shares
authorized, 41,626,303 shares issued and
outstanding, pro forma; 500,000,000 shares
authorized, 46,626,303 shares issued and
outstanding, pro forma as adjusted............ 23 42 47
Additional paid-in capital..................... 35,171 88,673 138,618
Note receivable from stockholder............... (5) (5) (5)
Deferred stock compensation.................... (4,830) (4,830) (4,830)
Other comprehensive income..................... (18) (18) (18)
Accumulated deficit............................ (33,908) (33,908) (33,908)
------- ------- --------
Total stockholders' equity (deficit)........ (3,567) 49,954 99,904
------- ------- --------
Total capitalization........................ $50,746 $50,746 $100,696
======= ======= ========
</TABLE>
--------
(1) The preferred stock is convertible into common stock upon the closing of a
public offering having a per share price of at least $9.92 and gross
proceeds of at least $25 million or by the written consent of two-thirds
of the Series A preferred holders and 75% of each of the Series B, Series
C and Series D preferred stock holders. At the assumed initial offering
price and aggregate offering size, the preferred stock will convert into
common stock at the closing of this offering.
16
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of June 30,
2000, giving effect to the conversion of all shares of preferred stock
outstanding as of June 30, 2000 into common stock on the closing of this
offering was $27.0 million, or approximately $0.65 per share. Pro forma net
tangible book value per share represents the amount of our stockholders'
equity less intangible assets, divided by 41,626,303 shares of common stock
outstanding after giving effect to the conversion of the preferred stock
outstanding as of June 30, 2000 into shares of common stock.
Net tangible book value dilution per share to new investors represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after completion of this offering. After giving
effect to the sale by us of 5,000,000 shares of common stock in this offering
at an assumed initial offering price of $11.00 per share and after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds from this offering,
our pro forma net tangible book value as of June 30, 2000, would have been
$77.0 million, or $1.65 per share. This represents an immediate increase in
net tangible book value of $1.00 per share to existing stockholders and an
immediate dilution in net tangible book value of $9.35 per share to purchasers
of common stock in this offering. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $ 11.00
-------
Pro forma net tangible book value per share as of June 30,
2000....................................................... $ 0.65
Increase per share attributable to new investors............ 1.00
-------
Pro forma net tangible book value per share after this
offering.................................................... 1.65
-------
Dilution per share to new investors.......................... $ 9.35
=======
</TABLE>
The following table sets forth on a pro forma basis as of June 30, 2000,
after giving effect to the difference between the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price paid by existing stockholders and by new investors, before deduction of
estimated discounts and commissions and estimated offering expenses payable by
us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders......... 41,626,303 89.3% $ 74,916,972 57.7% $ 1.80
New Investors................. 5,000,000 10.7 $ 55,000,000 42.3 $11.00
---------- ---- ------------ ----
Total..................... 46,626,303 100% $129,916,972 100%
========== ==== ============ ====
</TABLE>
Assuming the underwriters' over-allotment is exercised in full, sales by us
and the selling stockholder in this offering will reduce the number of shares
held by existing stockholders to 41,551,303, or 87.8% of the total number of
shares of common stock outstanding after this offering and will increase the
number of shares held by new investors to 5,750,000, or 12.2%.
As of June 30, 2000, there were options outstanding to purchase a total of
3,435,516 shares of common stock at a weighted average exercise price of $2.93
per share and warrants outstanding to purchase a total of 74,984 shares of
capital stock at an exercise price of $4.00 per share. To the extent
outstanding options or warrants are exercised, there will be further dilution
to new investors.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The selected consolidated
statement of operations data for the period from inception (April 25, 1997)
through December 31, 1997 and the years ended December 31, 1998 and 1999 and
the selected consolidated balance sheet data at December 31, 1998 and 1999,
are derived from the audited consolidated financial statements included
elsewhere in this prospectus. The selected consolidated balance sheet data at
December 31, 1997, are derived from the audited consolidated financial
statements not included in this prospectus. The selected consolidated balance
sheet data as of June 30, 2000 and the selected consolidated statement of
operations data for the six months ended June 30, 1999 and 2000 are derived
from unaudited consolidated financial statements which, in management's
opinion, include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of our financial position and
results of operations for those periods. The historical results are not
necessarily indicative of results to be expected in any future period.
<TABLE>
<CAPTION>
Period from
Inception Year Ended Six Months Ended
(April 25, 1997) December 31, June 30,
through December ----------------- -----------------
31, 1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
License fees........... $ -- $ 1,380 $ 4,156 $ 1,603 $ 5,932
Services............... -- 37 2,118 514 3,346
------ ------- -------- ------- --------
Total revenue....... -- 1,417 6,274 2,117 9,278
Cost of revenue:
License fees........... -- 82 244 90 311
Services............... -- 422 1,966 603 4,256
------ ------- -------- ------- --------
Total cost of
revenue............ -- 504 2,210 693 4,567
------ ------- -------- ------- --------
Gross margin............ -- 913 4,064 1,424 4,711
------ ------- -------- ------- --------
Operating expenses:
Sales and marketing.... 178 1,947 6,339 2,434 8,532
Research and
development........... 471 1,859 3,713 1,647 3,102
General and
administrative........ 286 732 1,946 771 2,512
Amortization of
goodwill and
intangibles........... -- -- -- -- 3,989
Amortization of
deferred stock
compensation(1)....... 7 5 743 41 2,329
Costs associated with
spin-off.............. -- -- 6,683 123 --
------ ------- -------- ------- --------
Total operating
expenses........... 942 4,543 19,424 5,016 20,464
------ ------- -------- ------- --------
Loss from operations.... (942) (3,630) (15,360) (3,592) (15,753)
Interest income, net.... 123 312 685 171 657
------ ------- -------- ------- --------
Net loss................ $ (819) $(3,318) $(14,675) $(3,421) $(15,096)
====== ======= ======== ======= ========
Basic and diluted net
loss per share......... $(0.44) $ (0.73) $ (1.49) $ (0.52) $ (1.10)
====== ======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per share......... 1,858 4,554 9,842 6,545 13,680
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.66) $ (0.48)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 22,268 31,306
</TABLE>
18
<PAGE>
--------
(1)Amortization of deferred stock compensation relates to the following:
<TABLE>
<CAPTION>
Period from Six Months
Inception Year Ended Ended
(April 25, 1997) December 31, June 30,
through December ------------- -----------
31, 1997 1998 1999 1999 2000
---------------- ------ ------ ---- ------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cost of services revenue............ $-- $ -- $ 166 $-- $ 404
Sales and marketing................. -- -- 181 2 1,405
Research and development............ -- -- 70 3 229
General and administrative.......... 7 5 326 36 291
--- ----- ------ --- ------
$ 7 $ 5 $ 743 $41 $2,329
=== ===== ====== === ======
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------- As of June 30,
1997 1998 1999 2000
------ ------- -------- --------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........... $3,843 $ 8,589 $ 6,409 $12,728
Working capital..................... 3,813 10,143 20,525 30,031
Total assets........................ 4,006 11,965 28,954 70,734
Long-term debt, net of current
portion............................ -- 298 713 792
Redeemable convertible preferred
stock, net......................... 4,733 14,750 31,155 53,521
Total stockholders' deficit......... (764) (3,908) (10,602) (3,567)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Motive Communications, Inc. should be read in
conjunction with "Selected Financial Data" and Motive's consolidated financial
statements and related notes appearing elsewhere in this prospectus. This
discussion contains forward-looking statements. These statements reflect our
current views with respect to future events and financial performance and are
subject to risks, uncertainties and assumptions, including those discussed in
"Risk Factors." Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated in the forward-looking statements.
Overview
We are a leading provider of e-service software for online customer care.
Our software products provide technology vendors, service providers and large
enterprises with the infrastructure for delivering personalized service over
the internet.
We were incorporated in April 1997. During the period from inception
through December 31, 1997, we were a development-stage company and had no
revenue. Our operating activities during this period related primarily to
developing products, building corporate infrastructure and raising capital. In
July 1998, we released the first version of our software, called the Motive
System. Initially, we licensed the Motive System to enterprises primarily for
pilot programs that involved limited deployments. In 1998, we grew our
organization by hiring personnel in key areas, particularly sales, research
and development and marketing. In January 1999, we shipped version 2.0 of our
software and sold the system as a suite of three products: Motive Duet, Motive
Solo and Motive Studio. We shipped version 3.0 of these products in September
1999 and during 1999 we increased our base of customers to approximately 20.
During the first half of 2000, we added approximately 30 new customers. To
complement our product offerings, we accelerated our investment in
professional services in the second half of 1999 and the first half of 2000.
In January 2000, we acquired Ventix Systems in exchange for a combination
of our preferred and common stock that will represent 6,165,333 shares of our
common stock after the closing of this offering. We acquired Ventix, a
provider of internet-based service solutions for e-business applications, to
accelerate our entry into the e-business market. We accounted for the Ventix
acquisition using the purchase method of accounting and Ventix has been
included in our results of operations from the date of the acquisition. We
recorded approximately $26.6 million in goodwill and intangibles in connection
with the acquisition. Approximately $270,000 of the purchase price was
allocated to in-process research and development and was expensed in the first
quarter of 2000.
To date, we have derived substantially all of our revenue from the license
of the Motive product suite and related services. We have a tiered pricing
model for our software licenses that typically varies depending on the
software provided and the number of end users serviced. During 1999, we
migrated from a perpetual licensing model to a subscription-based licensing
model, which we are currently promoting. A customer purchasing a subscription
license has the right to use the Motive product for a specified period of
time, as well as the right to receive customer support and product updates at
no additional charge during the term of the license. These licenses are
generally renewable on an annual basis. We also continue to license the Motive
product suite on a perpetual basis.
We believe a subscription-based licensing model has several advantages over
a perpetual licensing model. Subscription-based licenses have lower initial
price points than perpetual licenses, thereby reducing selling issues
associated with price. Also, we expect sales cycles for subscriptions to be
shorter than those for perpetual license sales as perpetual license sales can
be constrained by a customers' capital budgeting process. Typically, pricing
for the first year of a term license is one-third of the cost of purchasing a
perpetual license for an equivalent number of users with an equivalent level
of services. Prices charged for services rendered to subscription and
perpetual license customers do not differ significantly. Additionally, over
time as customers renew subscriptions, we believe revenue in the aggregate per
customer will be higher and selling costs lower in a subscription-based model
than in a perpetual licensing model. Finally, we believe our ability to
forecast near-term quarterly revenue will be improved by using a subscription-
based model.
20
<PAGE>
License fees revenue includes revenue generated by subscription and
perpetual licenses. Some of our subscription licenses are sold for a single
fee with maintenance. In these cases, we do not have vendor specific objective
evidence to determine the fair value of the maintenance component as we do not
price or offer maintenance separately in these subscription arrangements. Our
license fees revenue includes the fees attributable to the subscription and
maintenance component of these single fee subscription licenses. Generally, we
recognize subscription license revenue ratably over the period of the
agreement. We recognize perpetual license fees when persuasive evidence of an
agreement exists, delivery of the product has occurred, no obligations remain,
the fee is fixed and determinable and collectibility is probable. If a
perpetual license agreement includes a right of acceptance or a right to
cancel, revenue is recognized when acceptance is received or the right to
cancel has expired.
Services revenue includes revenue from professional services and from
maintenance provided in connection with our perpetual licenses. We also
provide consulting and training services either on a fixed-price or on a time-
and-materials basis. We recognize consulting and training revenue on fixed-
price service arrangements on the completion of specific contractual milestone
events, or based on an estimated percentage of completion as work progresses.
We recognize consulting and training revenue on time-and-materials service
arrangements as the services are performed. We recognize revenue on stand-
alone maintenance contracts ratably over the term of the related maintenance
agreement.
Cost of license fees revenue includes third-party software royalties,
product packaging, documentation, production and shipping costs related to
software used by our customers. Cost of services revenue includes salaries and
related expenses for our customer support, consulting and training
organizations, other costs of providing services to customers, third-party
contractor expenses and an allocation of our facilities, communications and
depreciation expenses.
If we continue to add new customers at increasing rates, we will need to
continue growing our professional services organization. In that case, our
gross margins could be impacted as we incur the costs associated with growing
and training our professional services organization prior to recognizing
revenue on new licenses or services. However, we expect that subscriptions
license renewals will have considerably lower professional services costs than
new licenses. As a result, to the extent that renewals increase as a
percentage of revenue, we expect a corresponding increase in our gross
margins.
Despite our revenue growth, we have incurred significant losses since
inception and, as of June 30, 2000, had an accumulated deficit of
approximately $33.9 million. We believe our success depends on further
increasing our customer base and on growth in the emerging e-service market.
Accordingly, we intend to continue to invest heavily in sales, marketing,
services and research and development. Further, we expect to continue to incur
substantial operating losses at least through 2001, and our expected increase
in operating expenses will require significant increases in revenue in order
for us to become profitable.
We had 246 employees as of June 30, 2000 and intend to hire a significant
number of employees in the future. This expansion places significant demands
on our management and operational resources. To manage this rapid growth and
increased demand, we must invest in and implement scalable operational
systems, procedures and controls. We must also be able to recruit qualified
candidates to manage our expanding operations. We expect future expansion to
continue to challenge our ability to hire, train, manage and retain our
employees. Competition is intense for highly qualified technical, sales and
marketing and managerial 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.
21
<PAGE>
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. For example, we have recently
transitioned to a subscriptions-based licensing model and we cannot be certain
that this model will be successful in generating new licenses or recurring
revenues from renewals. Our prospects must be considered in light of the
risks, expenses and difficulties encountered by companies at an early stage of
development, particularly companies in new and rapidly evolving markets.
Additionally, despite our sequential quarterly revenue growth during 1999 and
the first half of 2000, we do not believe that historical growth rates are
necessarily sustainable or indicative of future growth.
Results of Operations
The following table sets forth for the periods indicated our consolidated
statements of operations as a percentage of total revenue. During the period
from inception to December 31, 1997, no revenue was generated as we were in
the development stage; therefore, percentages are not presented for this
period.
<TABLE>
<CAPTION>
Year Ended Six Moths
December 31, Ended June 30,
--------------- -------------
1998 1999 1999 2000
------ ------ ----- -----
(unaudited)
<S> <C> <C> <C> <C>
Revenue:
License fees.......................... 97 % 66 % 76 % 64 %
Services.............................. 3 34 24 36
------ ------ ----- -----
Total revenue...................... 100 100 100 100
Cost of revenue:
License fees.......................... 6 4 4 3
Services.............................. 30 31 29 46
------ ------ ----- -----
Total cost of revenue.............. 36 35 33 49
------ ------ ----- -----
Gross margin........................... 64 65 67 51
Operating expenses:
Sales and marketing................... 137 101 115 92
Research and development.............. 131 59 78 34
General and administrative............ 52 31 36 27
Amortization of goodwill and
intangibles.......................... -- -- -- 43
Amortization of deferred stock
compensation......................... -- 12 2 25
Costs associated with spin-off........ -- 107 6 --
------ ------ ----- -----
Total operating expenses........... 320 310 237 221
------ ------ ----- -----
Loss from operations................... (256) (245) (170) (170)
Interest income, net................... 22 11 8 7
------ ------ ----- -----
Net loss........................... (234)% (234)% (162)% (163)%
====== ====== ===== =====
</TABLE>
22
<PAGE>
Six Months Ended June 30, 1999 and 2000
Revenue
Total revenue increased by $7.2 million from $2.1 million for the six
months ended June 30, 1999 to $9.3 million for the six months ended June 30,
2000. This increase is attributable to an increase in our customer base.
License fee and services arrangements entered into with three customers during
the last half of 1999 accounted for 74% of this increase. Four customers
accounted for 68% of our total revenue for the six months ended June 30, 1999
and three customers accounted for 57% of our total revenue for the six months
ended June 30, 2000. Each of these customers individually accounted for more
than 10% of our total revenue in the applicable period.
License Fees. Revenue from license fees increased by approximately $4.3
million from $1.6 million for the six months ended June 30, 1999 to $5.9
million for the six months ended June 30, 2000, representing 76% and 64% of
our total revenue in the applicable period. The increase in license fees
revenue for the six months ended June 30, 2000 was due primarily to
significant license fee arrangements with three customers that were executed
in the last half of 1999.
Services. Our revenue from services increased by $2.8 million from $514,000
for the six months ended June 30, 1999 to $3.3 million for the six months
ended June 30, 2000, representing 24% and 36% of our total revenue in the
applicable period. The increase in services revenue was attributable to an
increase in the number of contracts to perform consulting and training
services and growth in the number and size of existing maintenance contracts.
Cost of Revenue
Cost of License Fees Revenue. Cost of license fees revenue increased by
$221,000 from $90,000 for the six months ended June 30, 1999 to $311,000 for
the six months ended June 30, 2000, representing 6% and 5% of our license fees
revenue in the applicable period. We expect the cost of license fees revenue
to increase in absolute dollars as we continue to license third-party software
in our products. We have expensed all costs as they have been incurred in the
research and development of our software products and enhancements to existing
products, and, as a result, cost of license fees revenue includes no
amortization of capitalized software development costs.
Cost of Services Revenue. Cost of services revenue increased by $3.7
million from $603,000 for the six months ended June 30, 1999 to $4.3 million
for the six months ended June 30, 2000, representing 117% and 127% of our
services revenue in the applicable period. The increase in services costs was
primarily due to costs incurred in connection with expanding our professional
services organization from ten professionals in June 1999 to 57 in June 2000.
We expect the cost of services to increase in absolute dollars for the
foreseeable future as we continue to expand our professional services
organization and as we invest in hiring and training those new personnel. Our
gross margin on services was negatively impacted by these up front hiring and
training costs and we expect this trend to continue in the near-term.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related costs of our sales and marketing organizations, sales
commissions, travel and entertainment expenses, costs of our marketing
programs, including public relations and collateral materials, and rent and
facilities costs associated with our regional sales offices. Sales and
marketing expenses increased by $6.1 million from $2.4 million for the six
months ended June 30, 1999 to $8.5 million for the six months ended June 30,
2000, representing 115% and 92% of our total revenue in the applicable period.
The increase in absolute dollars was due to growth in our sales and marketing
organizations from 25 employees in June 1999 to 79 in June 2000, an increase
in sales commissions as sales increased, an increase in the number of regional
sales offices as well as the addition of two foreign sales offices during the
first quarter of 2000 and an increase of $454,000 in marketing programs.
23
<PAGE>
We expect to continue to invest heavily in sales and marketing in order to
grow revenue. Consequently, we expect to continue to increase the absolute
dollar amount of sales and marketing expenses. We also anticipate that sales
and marketing expenses may fluctuate as a percentage of total revenue from
period to period as new sales personnel are hired and begin to achieve
productivity.
Research and Development. Research and development expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities, and consist primarily of
employee salaries, benefits, consulting costs and the cost of software
development tools. Research and development expenses increased by $1.5 million
from $1.6 million for the six months ended June 30, 1999 to $3.1 million for
the six months ended June 30, 2000, representing 78% and 34% of our total
revenue in the applicable period. The increase in absolute dollars was
primarily attributable to costs of additional personnel in the research and
development organization as headcount increased from 28 at June 30, 1999 to 66
at June 30, 2000.
We consider technological feasibility of our products to have been reached
upon completion of a working model that has met certain performance criteria.
The period between achievement of technological feasibility and general
release of a product is typically very short, and development costs incurred
during that period have not been material. Accordingly, all software
development costs have been expensed in the period incurred and we have not
capitalized any software development costs to date. We believe that continued
investment in research and development is critical to attaining our strategic
objectives, and, as a result, we expect research and development expenses to
increase significantly in absolute dollars in future periods.
General and Administrative. General and administrative expenses consist
primarily of salaries and occupancy costs for administrative, executive,
business development, recruiting and finance personnel, legal and accounting
services and certain facilities-related expenses. General and administrative
expenses increased by $1.7 million from $771,000 for the six months ended June
30, 1999 to $2.5 million for the six months ended June 30, 2000, representing
36% and 27% of our total revenue in the applicable period. The increase in
absolute dollars was due to increased personnel in the administrative,
business development, recruiting and finance organizations necessary to
support our expanding operations. Total headcount in these departments
increased from 14 at June 30, 1999 to 44 at June 30, 2000. We believe general
and administrative expenses will continue to grow in absolute dollars as we
expect to add personnel to support our expanding operations. However, we
expect that, to the extent we continue to achieve revenue growth, general and
administrative expenses should continue to decrease as a percentage of our
total revenue.
Amortization of Goodwill and Intangibles. In January 2000, we acquired
Ventix Systems in exchange for 6,165,333 shares of our capital stock. We
accounted for the Ventix acquisition using the purchase method of accounting
and Ventix has been included in our results of operations from the date of the
acquisition. We recorded approximately $26.6 million in goodwill and
intangibles in connection with the acquisition. Approximately $270,000 of the
purchase price was allocated to acquired in-process research and development
and was expensed in the first quarter of 2000. Total amortization expense,
including the write-off of acquired in-process research and development, for
the six months ended June 30, 2000 was $4.0 million, representing 43% of our
total revenue for the period. We plan to amortize substantially all of the
balance of the goodwill and intangibles over a three year period.
Amortization of Deferred Stock Compensation. We recorded total deferred
stock compensation of $163,000 and $5.1 million during the six months ended
June 30, 1999 and 2000, respectively, in connection with stock options granted
to employees and consultants. These amounts represent the difference between
the exercise price of certain stock option grants or modifications and the
deemed fair value of our common stock at the time of such grants or
modifications. We are amortizing these amounts over the vesting periods of the
applicable options, resulting in amortization expense of $41,000 and $2.3
million for the six months ended June 30, 1999 and 2000, respectively.
24
<PAGE>
Interest Income, Net
Interest income, net consists primarily of interest income earned on our
cash and cash equivalents and short-term investments. Interest income, net
increased from $171,000 for the six months ended June 30, 1999 to $657,000 for
the six months ended June 30, 2000. The increase in interest income, net
during this period was primarily due to increased cash and cash equivalents
and short-term investment balances as a result of additional preferred stock
financings.
Fiscal Years Ended December 31, 1997, 1998 and 1999
Revenue
We had no revenue during 1997, as we were in the development stage. Total
revenue increased by $4.9 million from $1.4 million in 1998 to $6.3 million in
1999. The increase in 1999 is attributable to an increase in our customer base
resulting in substantial growth in both license fees and services revenue.
Five customers accounted for 74% of our total revenue during 1998 and two
customers accounted for 40% of our total revenue during 1999. Each of these
customers individually accounted for more than 10% of our total revenue in the
applicable period.
License Fees. Revenue from license fees increased by approximately $2.8
million from $1.4 million in 1998 to $4.2 million in 1999, representing 97%
and 66% of our total revenue for 1998 and 1999, respectively. The increase in
license fees in 1999 was due primarily to significant license fee arrangements
with three customers.
Services. Our revenue from services increased by $2.1 million from $37,000
in 1998 to $2.1 million in 1999, representing 3% and 34% of our total revenue
for 1998 and 1999, respectively. The increase in services revenue was
primarily due to an increase in the number of customers which generally
include or lead to contracts to perform consulting and training services as
well as growth in the number and size of existing maintenance contracts. As a
result, the percentage of revenue attributable to consulting and training
services increased substantially during the period.
Cost of Revenue
Cost of License Fees Revenue. We had no cost of license fees revenue in
1997, as we were in the development stage and had no license fees revenue.
Cost of license fees revenue increased by $162,000 from $82,000 in 1998 to
$244,000 in 1999, representing 6% of license fees revenue in both 1998 and
1999. We have expensed all costs as they have been incurred in the research
and development of our software products and enhancements to existing
products, and, as a result, cost of license fees revenue includes no
amortization of capitalized software development costs.
Cost of Services Revenue. Services costs increased from zero in 1997 to
$422,000 in 1998 and by $1.5 million to $2.0 million in 1999, representing
1,141% and 93% of services revenue, in 1998 and 1999, respectively. The
increase in services costs was primarily due to costs incurred in connection
with expanding our professional services organization from eight professionals
in 1998 to 20 in 1999.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased by $1.7 million
from $178,000 in 1997 to $1.9 million in 1998 and by $4.4 million to $6.3
million in 1999, representing 137% and 101% of total revenue for 1998 and
1999, respectively. The increase in absolute dollars was due to growth in our
sales and marketing organizations from 2 employees in 1997 to 15 in 1998 and
38 in 1999, an increase in sales commissions as sales increased, an increase
in the number of regional sales offices and an increase of $625,000 in
marketing programs.
Research and Development. Research and development expenses increased by
$1.4 million from $471,000 in 1997 to $1.9 million in 1998 and by $1.8 million
to $3.7 million in 1999, representing 131% and 59% of total
25
<PAGE>
revenue for 1998 and 1999, respectively. The increase in absolute dollars was
primarily attributable to costs of additional personnel in the research and
development organization as headcount increased from 11 in 1997 to 21 in 1998
and 38 in 1999.
General and Administrative. General and administrative expenses increased
by $446,000 from $286,000 in 1997 to $732,000 in 1998 and by $1.2 million to
$1.9 million in 1999, representing 52% and 31% of total revenue for 1998 and
1999, respectively. The increase in absolute dollars for these periods was due
to an increase in personnel in the administrative, recruiting and finance
organizations from four professionals in 1997 to eight in 1998 and 21 in 1999.
Amortization of Deferred Stock Compensation. We recorded total deferred
stock compensation of $14,000 in 1997, $38,000 in 1998 and $2.8 million in
1999 in connection with stock options granted to employees and consultants.
These amounts represent the difference between the exercise price of certain
stock option grants and the deemed fair value of our common stock at the time
of such grants. We are amortizing these amounts over the vesting periods of
the applicable options, resulting in amortization expense of $7,000 in 1997,
$5,000 in 1998 and $743,000 in 1999.
Costs Associated with Spin-Off. In October 1999, we contributed certain
assets of an internal initiative to a newly formed company, All.com, Inc., in
exchange for 8,000,000 shares of preferred stock of All.com. All.com provides
technical support over the internet directly to small and medium businesses.
The stock was subsequently distributed to our stockholders and optionholders
of record on October 29, 1999. We contributed these assets to All.com because
we believed that there was an independent market opportunity, supporting the
end user directly, best addressed through an independent company and that the
divestiture of the assets eliminated potential conflicts with our customers,
some of whom also provide technical support directly to the end user. As we
own only a nominal amount of shares of All.com and do not have any control
over its affairs, we believe there are no real or perceived conflicts of
interest. In addition, by contributing certain assets to All.com, we were able
to focus our efforts on implementing our e-service solutions for technology
vendors, service providers and large enterprises. As a result of this
transaction, including the partial acceleration of options for our employees
who joined All.com, we incurred stock compensation charges of approximately
$6.1 million, transaction charges of $73,000 and other costs associated with
the spin-off of $461,000. These other costs consisted primarily of salary and
direct expenses incurred with respect to the internal initiative prior to
spin-off.
Interest Income, Net
Interest income, net increased from $123,000 in 1997 to $312,000 in 1998
and to $685,000 in 1999. The increase in interest income, net during these
periods was primarily due to increased cash and cash equivalents and short-
term investment balances as a result of additional preferred stock financings.
26
<PAGE>
Quarterly Results of Operations
The following tables set forth our consolidated statement of operations
data for the six quarters ended June 30, 2000, as well as these data expressed
as a percentage of our total revenue represented by each item. We believe this
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this prospectus and believe that
all necessary adjustments (consisting only of normal recurring adjustments)
have been included in the amounts stated below and present fairly the results
of such periods when read in conjunction with the audited consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
License fees........... $ 656 $ 947 $ 831 $ 1,722 $ 2,735 $ 3,197
Services............... 186 328 718 886 1,309 2,037
------- ------- ------- ------- ------- -------
Total revenue....... 842 1,275 1,549 2,608 4,044 5,234
Cost of revenue:
License fees........... 36 54 71 83 159 152
Services............... 292 311 381 982 1,666 2,590
------- ------- ------- ------- ------- -------
Total cost of
revenue............ 328 365 452 1,065 1,825 2,742
------- ------- ------- ------- ------- -------
Gross margin............ 514 910 1,097 1,543 2,219 2,492
Operating expenses:
Sales and marketing.... 1,143 1,291 1,817 2,088 3,556 4,976
Research and
development........... 811 836 962 1,104 1,331 1,771
General and
administrative........ 345 426 513 662 1,134 1,378
Amortization of
goodwill and
intangibles........... -- -- -- -- 1,743 2,246
Amortization of
deferred stock
compensation(1)....... 22 19 127 575 928 1,401
Costs associated with
spin-off.............. 15 108 316 6,244 -- --
------- ------- ------- ------- ------- -------
Total operating
expenses........... 2,336 2,680 3,735 10,673 8,692 11,772
------- ------- ------- ------- ------- -------
Loss from operations.... (1,822) (1,770) (2,638) (9,130) (6,473) (9,280)
Interest income, net.... 85 86 257 257 258 399
------- ------- ------- ------- ------- -------
Net loss................ $(1,737) $(1,684) $(2,381) $(8,873) $(6,215) $(8,881)
======= ======= ======= ======= ======= =======
As a Percentage of
Revenue:
Revenue:
License fees........... 78% 74% 54% 66% 68% 61%
Services............... 22 26 46 34 32 39
------- ------- ------- ------- ------- -------
Total revenue....... 100 100 100 100 100 100
Cost of revenue:
License fees........... 4 4 4 3 4 3
Services............... 35 25 25 38 41 49
------- ------- ------- ------- ------- -------
Total cost of
revenue............ 39 29 29 41 45 52
------- ------- ------- ------- ------- -------
Gross margin............ 61 71 71 59 55 48
Operating expenses:
Sales and marketing.... 136 101 117 80 88 95
Research and
development........... 96 66 62 42 33 34
General and
administrative........ 41 33 33 25 28 26
Amortization of
goodwill and
intangibles........... -- -- -- -- 43 43
Amortization of
deferred stock
compensation.......... 2 2 8 22 23 27
Costs associated with
spin-off.............. 2 8 21 240 -- --
------- ------- ------- ------- ------- -------
Total operating
expenses........... 277 210 241 409 215 225
------- ------- ------- ------- ------- -------
Loss from operations.... (216) (139) (170) (350) (160) (177)
Interest income, net.... 10 7 16 10 6 7
------- ------- ------- ------- ------- -------
Net loss................ (206)% (132)% (154)% (340)% (154)% (170)%
======= ======= ======= ======= ======= =======
</TABLE>
27
<PAGE>
--------
(1) Amortization of deferred stock compensation relates to the following:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 1999 1999 2000 2000
-------- -------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cost of services
revenue................ $-- $-- $ 16 $150 $223 $ 181
Sales and marketing..... 1 1 40 139 410 995
Research and
development............ 2 1 33 34 126 103
General and
administrative......... 19 17 38 252 169 122
--- --- ---- ---- ---- ------
$22 $19 $127 $575 $928 $1,401
=== === ==== ==== ==== ======
</TABLE>
Our total revenue has increased in each quarter since the quarter ended
March 31, 1999 due to an increase in our customer base resulting from the
growing market acceptance of the Motive product suite, the release of our
version 2.0 product in January 1999 and the release of our version 3.0 product
in September 1999.
Our total cost of revenue has increased each quarter in conjunction with
our increases in total revenue and the growth in our professional services
organization. Cost of perpetual licenses and services increased for the
quarters ended December 31, 1999 through June 30, 2000 primarily due to an
increase in the size of our services organization in order to provide a more
comprehensive e-service solution to our customers in 2000 and to hire and
train service personnel in advance of anticipated growth.
Our total operating expenses have generally increased in absolute dollars
each quarter due to increased staffing in sales and marketing, research and
development and general and administrative functions. In addition, sales and
marketing expenses have increased due to increases in marketing programs,
sales commissions, and remote sales office expenses.
Liquidity and Capital Resources
Since inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity securities,
resulting in net proceeds of $42.2 million through June 30, 2000. Cash used in
operating activities was $771,000, $4.2 million and $7.1 million in 1997, 1998
and 1999, respectively. For the six months ended June 30, 2000, cash provided
by operating activities was $3.8 million.
To date, our investing activities have consisted primarily of capital
expenditures totaling $167,000, $658,000, and $1.7 million in 1997, 1998 and
1999, respectively, and $1.6 million for the six months ended June 30, 2000 to
acquire property and equipment, mainly computer hardware and software, for our
growing employee base. We expect that our capital expenditures will increase
as our employee base grows.
At June 30, 2000, we had cash and cash equivalents and short-term
investments on hand of $38.7 million and working capital of $30 million. Net
cash provided by financing activities in 1997, 1998 and 1999 was $4.8 million,
$10.3 million, and $18.4 million, respectively, and $13.5 million for the six
months ended June 30, 2000. We have a term loan with Imperial Bank which bears
interest at the bank's prime rate of 9.5% at June 30, 2000. At June 30, 2000,
$1.5 million was outstanding under the term loan and we had incurred $66,000
in interest expense for the six months ended June 30, 2000. This loan is
secured by substantially all of our assets, excluding intellectual property.
We are currently in compliance with all the related financial covenants and
restrictions.
We have experienced significant increases in deferred revenue since our
inception. Deferred revenue was $240,000 at December 31, 1998, $5.7 million at
December 31, 1999 and $16.5 million at June 30, 2000. We record deferred
revenue to the extent contractual billings and amounts collected exceed
revenue recognized. Deferred revenue was $5.7 million at December 31, 1999 as
a result of $1.4 million of collections from customers and $4.3 million of
billings to customers in excess of revenue recognized. Deferred revenue was
$16.5 million at June 30, 2000 as a result of $14.1 million of collections
from customers and $2.4 million of billings to customers in excess of revenue
recognized.
28
<PAGE>
In January 2000, we acquired Ventix in exchange for a combination of our
preferred and common stock that will represent 6,165,333 shares of our common
stock after the closing of this offering. We accounted for the Ventix
acquisition using the purchase method of accounting and Ventix has been
included in our results of operations from the date of the acquisition.
In April 2000, we sold 1,666,667 shares of our common stock at a price of
$6.61 per share to Peregrine Systems. The aggregate proceeds of the private
placement were $11.0 million.
We believe that the net proceeds of this offering, together with cash on
hand, cash equivalents, short-term investments and commercial credit
facilities will be sufficient to meet our working capital requirements for at
least the next 12 months. Thereafter, we may require additional funds to
support our working capital requirements or for other purposes and may seek to
raise such additional funds through public or private equity financings or
from other sources. There can be no assurance that additional financing will
be available at all or that, if available, such financing will be obtainable
on terms favorable to us or our stockholders. The sale of additional equity or
convertible debt securities could dilute the per share value of our common
stock. Additionally, we could be forced to engage in debt financing on terms
that could restrict our ability to make capital expenditures or incur
additional indebtedness, which could impede our ability to achieve our
business plan.
Quantitative and Qualitative Disclosures About Market Risk
We develop our products in the United States and market them in North
America and Europe. As a result, our future financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. As all of our sales are currently made
in U.S. dollars, a strengthening of the dollar could make our products less
competitive in foreign markets.
Through June 30, 2000, we have not derived revenue from our foreign
operations and have not engaged in hedging activity. However, we intend to
further expand our European operations and enter the Asia/Pacific market in
2001. To the extent our foreign operations expenses increase or to the extent
we may begin to denominate foreign sales in local currencies, we will become
subject to foreign currency fluctuations. We do not currently anticipate using
hedging activities to offset these fluctuations.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the short-term nature of our investments, we
believe that there is no material risk exposure.
Provision for Income Taxes and Net Operating Losses
We have incurred operating losses for all periods from inception through
June 30, 2000, and therefore have not recorded a provision for income taxes.
We have recorded a valuation allowance for the full amount of our net deferred
tax assets, which include net operating loss and research and development
credit carryforwards, because of the uncertainty regarding their realization.
Our accounting for deferred taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," involves the evaluation of a
number of factors concerning the realizability of our deferred tax assets. In
concluding that a full valuation allowance was required, management primarily
considered such factors as our history of operating losses and expected future
losses and the nature of our deferred tax assets. See Note 6 of Notes to
Consolidated Financial Statements.
As of December 31, 1999, we had net operating loss and research and
development credit carryforwards of approximately $8.2 million and $281,000,
respectively. These carryforwards will expire at various dates, beginning in
2012, if not utilized. Under the provisions of the Internal Revenue Code,
certain substantial changes in our ownership may limit the amount of net
operating loss and tax credit carryforwards that could be utilized annually in
the future to offset taxable income.
29
<PAGE>
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Deferral of
the Effective Date of FASB Statement No. 133", which is effective for fiscal
years beginning after June 15, 2000. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
our financial statements for the year ending December 31, 2001. We do not
believe that this statement will have a material impact on our financial
position or results of operations.
The FASB recently issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation". This interpretation provides
guidance related to the implementation of APB 25, "Accounting for Stock Issued
to Employees". This interpretation is to be applied prospectively to all new
awards, modifications to outstanding awards and changes in employee status on
or after July 1, 2000. For changes made after December 15, 1998 to awards that
affect exercise prices of the awards, we must prospectively account for the
impact of those changes. We do not believe the full adoption of this
interpretation will have a material impact on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. We believe our current revenue
recognition policies and practices are materially consistent with this
statement. However, full implementation guidelines for this standard have not
yet been issued. Once available, our current revenue accounting practices may
need to change and such changes could materially adversely affect our future
revenue and earnings.
In May 2000, the Emerging Issues Task Force released Issue No. 00-2,
"Accounting for Web Site Development Costs" (EITF No. 00-2), which establishes
standards for determining the capitalization or expensing of incurred costs
relating to the development of internet web sites based upon the respective
stage of development. EITF No. 00-2 will be effective for fiscal quarters
beginning after June 30, 2000 (including costs incurred for projects in
process at the beginning of the quarter of adoption). We do not believe that
this issue will have a material impact on our financial position or results of
operations.
30
<PAGE>
BUSINESS
The following description of our business contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Some of the factors that may cause such results to differ include, but are not
limited to, those discussed in "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Overview
We are a leading provider of software for the automated delivery of
customer service, or e-service, over the internet. Our software products
provide our customers with the infrastructure for delivering personalized
service over the internet. Unlike traditional telephone, e-mail or chat-based
service models, our products are used to build individualized "e-service
networks" that allow our customers to deliver superior customer service by
interconnecting their customers, partners, suppliers and employees. By
providing superior online service, our customers improve value delivery,
customer retention and sales. Since our inception in April 1997, we have
developed and successfully implemented our e-service solutions for technology
vendors, service providers, and large enterprises, including corporate
information technology, or IT, departments and companies engaged in business-
to-business, or B2B e-commerce.
Motive-powered e-service networks automatically connect online users to
answers, solutions and experts; enable our customers to provide their online
users with improved self-service and one-to-one assisted service; and allow
our customers' service personnel and experts to collaborate and share
solutions with suppliers and business partners. Unlike traditional approaches,
which require service professionals to gather information about an end user's
question or problem by telephone, e-mail or chat, our e-service software
automates many steps in the process and also enables our customers to provide
highly personalized and scalable service through the most efficient means for
a particular end user's needs. Our software automatically gathers diagnostic
data, verifies service entitlement, opens trouble tickets in one or more of a
customer's call tracking systems, intelligently routes the problem or question
to the appropriate service queue, and displays both system- and application-
context information to the expert before any end user interaction has
occurred. Our front-end technology provides end users with online or off line
assistance through the use of automated self-service products or by connecting
them to a qualified expert for a web-based dialogue. These dialogues are
appropriate to the product or service they are using, and can comprise either
short, single-action, live transactions or long, multi-action, multi-party
diagnostic or assistance sessions across an e-service network. Our technology
enables business and technical experts to collaborate on solving problems and
answering questions, and to capture automated solutions and answers for re-
use. All together, our software enables end users to access an extended
network of experts and e-service content, all designed to be highly relevant
to the end user and the particular service request. We complement our products
with an experienced professional services group that provides turn-key
solutions for our customers.
Initially, we targeted technical e-service opportunities with industry
leading technology vendors, service providers and corporate IT departments. We
have established a strong presence in this target market and plan to leverage
our existing relationships to further penetrate this market both domestically
and internationally. We are extending our expertise in e-service to target new
market opportunities, including B2B e-commerce. In particular, we acquired
Ventix in January 2000 to accelerate our entry into the e-service market to
support B2B e-commerce transactions. We have significant strategic customer
relationships with leading hardware providers such as Compaq, Dell, Gateway
and Hewlett-Packard. We estimate that our PC manufacturer customers currently
have installed our software on more than 3.5 million PCs and servers to
provide e-service to their customers. In addition, these PC manufacturers have
acquired licenses to pre-install our software on an estimated tens of millions
of PCs and servers. We typically license our products with multi-year
subscriptions and have licensed our software to approximately 50 customers
across a wide variety of industries, including hardware, software, financial
services, telecommunications, retail, and services outsourcing. In addition to
the major PC manufacturers, our customers include Electronic Data Systems
(EDS), GE Information Services, Intuit, Kmart, LSI Logic, Merrill Lynch,
Norwest, Oracle and Peregrine Systems. We have received recognition as a
market leader, including the following: 50 Companies to Watch in the Year 2000
(digitalsouth); 100 Emerging Companies to Watch in 2000 (Computerworld); Hot
100 Privately Held Companies (Upside Magazine); Red
31
<PAGE>
Herring 100 (Red Herring); New Economy in the New South-Featured Company (Fast
Company); and 1999-2000 High-Technology Industry Leadership (KPMG).
Industry Background
Since the inception of the personal computing industry, end users of
technology-based products and services have traditionally had to rely on
telephone-based help desks or call centers for customer services. The
traditional approach to service is limited by:
. lack of scalability--the ability to service increasing numbers of end
users is limited by labor constraints including hiring, training, and
attrition;
. inefficiency--the traditional process is slow, expensive and ineffective
due to the limits of telephone, e-mail and chat-based communications; and
. lack of access to experts--customers are treated the same regardless of
their relative importance and are often denied access to the most
knowledgeable experts, whose time is protected by call center personnel.
Compounding these issues, PCs, servers, operating systems, databases and
application software are dramatically more complex and dynamic than they were
a few years ago. Further, the rush to take advantage of internet-based
commerce and supply chain management has driven the introduction of
sophisticated web applications that require service to make them effective.
B2B e-commerce transactions are complex and can fail to reach completion
because of technical and/or business process difficulties. The knowledge
required to service these products and transactions has increased
significantly and become distributed across an increasingly disparate set of
internal departments and external supply and distribution partners. These new
developments are creating service problems that neither the traditional
customer service model or traditional knowledge management systems can
adequately address.
End users of technology-based products have also become more difficult to
service. Early adopters, who were primarily concerned with features and less
concerned with service, no longer represent the bulk of users. Today, the
increasing number of less technically sophisticated end users places greater
emphasis on service quality, speed and simplicity. Equally important, the
absolute number of end users requiring service has increased substantially and
in many cases exceeds the capacity of a traditional call center, which is
constrained by professional staff headcount and cost issues.
The following examples highlight some of the constraints that organizations
are facing due to current service solutions and market dynamics:
. As PCs become mass-market commodities, computer manufacturers face a
service-cost crisis as they realize that three or four service calls can
erode the entire margin on the sale of a $500 computer.
. Large corporations and trading exchanges are spending millions of dollars
to embrace e-commerce and reshape their business practices. In the
process, they are discovering that key customers and suppliers often
cannot obtain simple and correct answers to questions about web-based
applications and that critical business transactions are being abandoned,
interrupted or delayed.
. PC users have long been frustrated by having to pick up the phone,
navigate a vendor's voice response system and endure long waits for
assistance, only to reach a customer service representative who is
frequently unable to diagnose or fix the problem or who advises the end
user that the problem needs to be resolved by another vendor.
As a result of these technology trends and service issues, an increasing
number of organizations across a broad array of industries now face a
significant need to provide internet-based service for end users. This need
spans an ever widening set of core constituencies, including internal back-
office workers, "extended enterprise" knowledge workers, trading, channel or
business partners (particularly in the B2B segment), and customers. Companies
can differentiate their product offerings by their ability to provide
proactive, custom-tailored, real-time internet-based service. E-service can
create a tangible and significant competitive advantage in an environment
marked by increasing commoditization of product and service offerings.
32
<PAGE>
IDC estimates that the amount that organizations will spend on products and
services related to internet-based technical support will grow from $3 billion
in 1999 to over $14 billion in 2003. We believe the growth in the e-service
market will be driven in large part by increases in the volume of B2B
e-commerce transactions. According to the Gartner Group, the volume of B2B
e-commerce is expected to reach $7 trillion, or 7% of total forecasted global
sales transactions, by 2004. We believe that the competitive dynamics of the
B2B e-commerce market will lead companies to seek internet-based e-service
solutions as a competitive advantage to increase customer loyalty, revenue
opportunities, service capacity and market share.
Motive Solution
We are a leading provider of e-service software for online customer care.
Our infrastructure software products enable technology vendors, service
providers and large enterprises, including corporate IT departments and
companies engaged in B2B e-commerce, to provide a full range of personalized
service over the internet. Organizations use our products to develop and
deploy branded service networks that are customized to their products,
services and end users. We believe our products benefit our customers in the
following ways:
Create a Competitive Advantage. By fundamentally changing the traditional
service model, our e-service infrastructure software is designed to help our
customers create a competitive advantage for increasing customer loyalty,
revenue opportunities, service capacity and market share. By reducing customer
frustration and providing faster, more relevant service, our products can
significantly improve the end user's service experience, resulting in
increased satisfaction and greater customer retention.
Provide Superior Service Through Service Networks. Our product suite
enables our customers to syndicate their e-service and seamlessly link their
suppliers and partners, as well as their service personnel, into a service
network. Through Motive-powered service networks, multiple vendors, suppliers
and partners can aggregate self-service content and can collaborate to handle
service requests to offer a single source of service for the end user. We
believe that this fundamentally new approach to customer service will
dramatically improve the quality, speed and efficiency of providing customer
service.
Improve End User Productivity. Our proprietary, intelligent assistance
technology allows our customers to relieve their end users of the need to act
as technology experts in the service process. This patent-pending technology
uses a contextual understanding of the end user's computing, application and
network state to provide a wide range of value-added service on demand.
Traditional telephone, e-mail or chat-based solutions rely on the end user to
properly identify the problem and force the end user to navigate through
numerous potential solutions, many of which are irrelevant or ineffective. Our
automated approach leverages technology to automate service procedures,
gathers system data specific to the end user's configuration and contextual
information specific to the end user's application, and guides the end user
and the service expert to the correct solution. As a result, our software
allows end users to focus on their work, rather than waste time
troubleshooting computer, application or network problems.
Reduce Operating Costs. Because our customers can process and respond to
individual service requests based upon the specific end user's context, our
e-service products allow organizations to satisfy a wider range of service
requests through web-based self-service transactions than other solutions. We
believe that this approach reduces the number of incoming service center calls
and creates opportunities to realize corresponding operational savings. In
addition, our ability to detect user context, direct users to the proper
service expert and provide that expert with contextually relevant information
to help him solve the user's problem reduces average handling times and allows
service experts to handle more service requests.
Enable Highly Differentiated e-Service Offerings. Our end user experience
is entirely internet-based. Our customers can customize the look of their
e-service implementation, brand the service experience and integrate other
internet-based services to differentiate their offerings. In light of
increasing commoditization of their core businesses, e-service differentiation
helps our customers increase revenues by adding more value to their products
and services.
33
<PAGE>
Provide an Integrated, Scalable, Secure Service Solution. Our technology
can be deployed rapidly in even the most complex computing environments. Our
infrastructure software is readily integrated with our customers' existing
systems, including their call tracking systems, knowledge management systems,
call distribution systems, security policies, web servers and databases. It is
also highly scalable, permitting e-service networks to link to thousands of
service experts. Our combination of solution content, tools and professional
services provides our customers with a turnkey solution that can offer
immediate business benefits.
Growth Strategy
Our growth strategy focuses on building leading and defensible positions in
strategic segments of the online customer care market. To achieve this goal,
we are pursuing the following strategies:
Continue to Expand Our e-Service Solutions. We are focused on being a
single-source provider for all of our customers' e-service needs by combining
superior infrastructure technology, a world-class library of solution content
and exceptional professional services. We plan to continue aggressively
developing superior products and to invest in product capabilities that
provide for integration with technologies that are important to our target
customers. To complement our product offerings, we will seek to partner with
leading technology companies and pursue selective acquisition opportunities to
further expand our broad technology base.
Capitalize on New Market Opportunities. To date, we have achieved
significant success in the technical service segment of the online customer
care market by focusing on the needs of technology vendors, service providers
and corporate IT departments. As electronic B2B transactions grow, we believe
that there will be a corresponding increase in the need for e-service to
support those transactions. For example, we believe there is a significant
market opportunity to provide online service to recently formed trading
exchanges, as an increasing number of trading partners join the exchanges and
transaction volume grows. In addition, we intend to focus on new market
opportunities for service networks that will form around emerging
technologies, such as Linux and internet appliances.
Leverage Strategic Relationships. We have established relationships with
industry leading technology companies including Compaq, Dell, Hewlett-Packard,
Peregrine Systems and Vignette. These relationships provide us with sales
leverage through cooperative selling, marketing and distribution arrangements
to create e-service networks with their customers and suppliers. Several of
these companies plan to resell MotiveNet server to expand e-service networks
in their corporate accounts. We also have relationships with our service
provider customers that enable us to participate in the broader market. For
example, PCsupport.com and All.com provide technical services to consumers and
small business. We are actively working to develop additional relationships
that can strategically leverage our efforts in existing and new market
segments such as B2B.
Generate Recurring, Transactional Revenue. We license our products on a
recurring, subscription-based model which we believe will allow us to generate
recurring and predictable revenues based on the extent of use of our e-service
technology. At the end of the subscription term, the license is either renewed
and a new license fee paid, or the license is terminated. We believe that
customers will widely deploy our e-service solutions and increase their use of
our technology, and that renewal rates will be high. We also believe that over
the long term this subscription-based business model has the ability to
generate accelerated market penetration and higher overall revenue and
profitability than models that emphasize perpetual license arrangements.
Expand Foreign Operations. We believe we can accelerate our expansion into
key international markets by taking advantage of our relationships with our
existing technology customers. During the first quarter of 2000, we opened
sales offices in Switzerland and the United Kingdom, and we expect to have a
presence in Germany and in France by the end of the year. Additionally, we
intend to enter the Asia/Pacific market during 2001. Through June 30, 2000, we
have not derived revenue from our foreign operations.
Products
The Motive product suite provides a comprehensive and integrated solution
to the problem of automating and managing complex, distributed service
networks over the internet. Using several patent-pending proprietary
technologies, our integrated product suite is an enterprise-class e-service
platform that provides web-based self-service and assisted-service with
powerful automation capabilities. Internet-based tools allow business experts
34
<PAGE>
and technical experts to analyze service incidents, interact with end users,
and create automated service solutions. The Motive product suite is comprised
of the following e-service products:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Product Features Key Benefits
(Date First Shipped)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Motive Duet Provide e-service platform to host e-service Secure, scalable e-service infrastructure.
(July 1998) applications. End user does not need to manually provide
diagnostic or context information.
Automatically gathers context and diagnostic Preserves customer's investment in
data and intelligently routes incidents. legacy systems.
Integrates with existing computing environment.
-------------------------------------------------------------------------------------------------------------------
Motive Solo Provides automated, self service for servers, Quick, simple resolution of problems
(January 1999) desktops and laptops over the internet. via self-service.
Browser-based end user experience automatically Lowers costs by reducing number of
guides end user to probable solutions and makes requests for assisted service.
repairs.
Integrates with call tracking systems, web Preserves customer's investment in
servers and commercial databases. legacy systems.
-------------------------------------------------------------------------------------------------------------------
Motive Studio Tools to download, create, and customize Allows customers to customize the look
(January 1999) e-service solutions. of their e-service, brand the service
experience and integrate other internet-
Tools to define different service levels based services to differentiate their
for users. offerings.
---------------------------------------------------------------------------------------------------------------------------
Motive AnswerWeb Provides application usage and business End user can get answers without
(December 1999) process self service and assisted service. abandoning e-business transactions.
End user and application context are used to Lowers service costs by eliminating calls
provide highly relevant service within the and reducing handling times.
application.
Can be configured as a general Easily handles simple requests.
question-and-answer service.
--------------------------------------------------------------------------------------------------------------------
MotiveNet Server Allows Motive technical service providers to Improves resolutions and lowers cost
(April 2000) expand e-service networks within their by expanding e-service to experts in the
corporate accounts. corporate account.
--------------------------------------------------------------------------------------------------------------------
Motive Chorus Contextual information is used to present the Fewer abandoned user requests.
(September 2000) user with personalized solutions and experts
relevant to the user's task or problem.
Reduced call volumes due to higher
self service resolutions.
Single source for end user to Greater user satisfaction and retention.
request any type of service, including
technical support, application support Easy for users to request any type of service.
and general questions.
---------------------------------------------------------------------------------------------------------------------------
Motive Insight Allows service experts both inside and outside Faster resolution time.
(September 2000) of the customer to view incident context, to
search for solutions and to deliver solutions
to the user.
Improved first call resolution and lower
incident handling time.
Enables news-group like collaboration between Elimination of clumsy user handoffs
experts including full access to diagnostic and escalations.
and contextual information.
Sharing of knowledge across
organizational boundaries.
</TABLE>
-------------------------------------------------------------------------------
We bundle these products, together with specific content and product
integration modules, into packaged solutions targeted at specific vertical
industries. We currently offer solutions packages for technology vendors,
service providers, and large enterprises, including corporate IT departments
and companies engaged in B2B e-commerce.
35
<PAGE>
We allow our customers to link across the internet to their customers and
their business partners and provide collaborative e-service to the end user.
To establish these service networks, we encourage our customers to resell our
delivery technology, such as MotiveNet Server, to their end user customers.
For example, a computer manufacturer may resell MotiveNet Server to one of its
corporate accounts to improve customer service to that account. We will also
encourage our customers to license our fulfillment technology to their
partners and suppliers, allowing for collaborative e-service among vendors.
For example, the same computer manufacturer could license our technology to a
software vendor to allow collaborative e-service of both the hardware and the
vendor's software. As our customers resell our products to extend e-service to
their customers, suppliers, and partners, we expect to benefit by receiving
additional revenue and by gaining opportunities to sell additional and
upgraded products.
Technology and Architecture
To fully address the e-service market opportunity, we have developed a
comprehensive distributed system architecture that can meet a broad range of
e-service requirements for systems and applications. This architecture enables
us to provide a dramatically improved end user service experience over
traditional approaches. It also provides the security, scalability, and
flexibility required of an enterprise class, business critical system. Our e-
service architecture is broadly organized into the following components that
are implemented by the Motive product suite:
[Graphic]
[Description of graphic: This graphic depicts "Motive e-Service Architecture".
The graphic is a flow diagram. On the left hand side is a box titled "End
Users" with graphics depicting three computer users labeled from top to
bottom, "Mobile", "Desktop", and "Server Administrator", respectively. The
"End Users" box is connected by arrows to a box to the upper right titled
"Delivery Applications". The "Delivery Applications" box has three shaded sub-
boxes within titled from top to bottom, "Service Request (Chorus)", "Technical
Service (Solo and MotiveNet Server)", and "Business Application Service
(AnswerWeb)", respectively. The "End Users" box is also connected by arrows to
a box at the right titled "Fulfillment Applications", and to a box at the
bottom titled "e-Service Platform (Duet)". The "Fulfillment Applications" box
has three shaded sub-boxes within titled from top to bottom, "Collaboration
(Insight)", "Service Tools (Insight)", and "Content (Studio)", respectively.
The "Fulfillment Applications" box is connected by arrows to a box at the
right titled "e-Service Network", and to the box at the bottom titled "e-
Service Platform (Duet)". The box titled "e-Service Network", which runs along
the right hand side of the whole graphic, has graphics depicting three
computer users labeled from top to bottom, "Business Expert", "Technical
Expert", and "Content Author", respectively. The box titled "e-Service
Platform (Duet)", at the bottom of the whole graphic, has a list with text
from top to bottom, "Transaction Services, Integration Services, Queuing
Services, Management Services, Data Management Services".]
Delivery Applications. Our delivery applications manage the end user's e-
service experience, provide content-driven self-service, and allow our
customers to embed service capabilities directly into the products or services
that they deliver to their end users. Motive provides different types of
delivery applications that in combination provide for all types of e-service
requests including technical support, application support, and general service
requests. MotiveNet Server provides expanded capabilities to extend technical
service networks in corporate environments.
Fulfillment Applications. Fulfillment applications handle all of the
aspects of assisted e-service requests as well as the creation, sharing, and
management of domain or product specific service content. Motive Insight
36
<PAGE>
provides tools for business experts and service professionals to view
information about the end user and the incident, search for solutions, perform
repairs or other service actions, and communicate with the end user. Motive
Insight also provides for secure collaboration between experts, enabling
e-service networks to be extended to include partners, suppliers and other
service providers.
e-Service Platform. Both delivery and fulfillment applications rely on a
set of common services to communicate with each other, as well as with other
systems involved in the extended service network. The following common
services are provided by Motive Duet:
. Transaction Services enable service transactions to be continued over an
extended period of time even if the end user's connection is terminated
and the end user dials in from a different location.
. Integration Services allow the system to be integrated (1) into customer
management systems for service entitlement checking; (2) into call
tracking systems to open, close, and complete trouble tickets; (3) into
call distribution systems to coordinate work flow; and (4) into other
customer systems. We currently provide integration adapters for products
developed by Clarify, Peregrine Systems, Remedy, Siebel, Silknet, Tivoli
Systems and Vantive.
. Queuing Services enable routing algorithms to utilize the information
gathered by the system to intelligently route incidents based on the
skill sets in the e-service network, the nature of the incident and the
privileges of the end user.
. Management Services allow the system to be administered, monitored and
controlled during operation.
. Data Management Services provide for persistent storage and querying of
incident and system information.
The architecture implemented by the Motive product suite has several
underlying capabilities that are required for robust, scalable e-service
networks. These capabilities include:
. Security and Privacy. Our privacy framework provides the end user with
full control over which information can be accessed by an e-service
transaction. For example, end users can limit a transaction to read only
(no repairs or updates) and can restrict access to specific files or
directories. In addition, end users can request to review e-service
requests both before they are run and before any information is sent to
a service provider. Our security framework ensures that all e-service
requests come from authorized sources and provides encryption of
e-service data for transport across the internet. Our technology is
designed to permit e-service requests to pass through corporate
firewalls without requiring changes that compromise firewall integrity.
. Simple, Powerful End User Experience. All e-service end user
interactions occur via the end user's browser, allowing end users to
access an e-service portal or use e-service capabilities from their
browsers or within their e-business application. By using Hypertext
Markup Language (HTML) as the basis for the end user interface, our
customers can change the look and feel to deliver a fully branded
e-service experience. In addition, they can integrate other HTML-based
services with our software in a seamless manner to provide a unified
e-service experience to the end user. Architecturally, the system is
designed to integrate with different interaction technologies, such as
Microsoft NetMeeting, to allow customers to use the chat, e-mail, and
Voice-Over IP technologies of their choice.
. High Scalability to Support Large e-Service Networks. We combine our
scalable e-service architecture with the performance, capacity, load
balancing, and management facilities of industry-standard web servers
and databases familiar to our customers. The result is an e-service
server architecture that allows high degrees of scalability and
redundancy.
. Open Architecture to Integrate with Existing Systems. Our architecture
provides a set of interfaces that permit access to events, functions,
and data within the e-service system. This general-purpose interface
allows integration with all types of systems as well as opportunities to
customize e-service functionality. Our architecture makes heavy use of
Java and XML-based technologies for its Integration Services.
37
<PAGE>
. "Submit and Go" Support Model. In addition to providing the ability for
the end user to get immediate assisted e-service, our architecture
enables an entirely new service interaction model. End users may
"submit" an incident and then "go" about other tasks. This even includes
taking a laptop on a trip and later connecting to the internet via a
different internet service provider. The "submit and go" model fits a
large class of service requests that do not require an immediate
response in much the same way that e-mail fits a large class of
communications which do not require an immediate response.
. Different Content Frameworks to Solve the Full Set of e-Service
Requirements. We designed our system to have a flexible, JavaScript-
based core technology for expressing content. We have constructed
content frameworks such as service guides that use system and
application information to provide the end user with a small, targeted
set of possible solutions, all of which are relevant to the context in
which they are working. We also provide profilers that can restore
subsystems and applications to prior known working states. Lastly, we
provide service solutions that can make repairs and updates to
automatically resolve problems.
. Broad Range of Computing Platforms. Our browser plug-ins are designed to
run on Microsoft Windows platforms as well as Solaris, HP/UX, Linux, and
AIX. The architecture is designed to be extendible to internet appliance
devices. Our servers currently run on the Microsoft NT operating system.
Since most of the system is implemented in Java, we believe a port to
other platforms would be readily supported by our architecture.
Professional Services
Our professional services organization assists our customers with the rapid
deployment of Motive powered e-service solutions. Our professional services
organization includes professionals who have considerable
e-service expertise with large, high profile e-service deployments. As of June
30, 2000, we had 57 employees in our professional services organization. Our
consulting services are typically provided on our customers' premises. Our
consultants, all of whom are Motive employees, are located primarily in
Austin, Texas, but also reside in other locations throughout the United States
and Europe.
As of January 2000, we typically include a well-defined set of services in
the pricing of a software subscription license. Our service estimates include
each of the tasks required to bring a successful e-service implementation up
to full production. The entire process from initiation to full production is
typically completed within two months by one or two of our consultants. More
complex implementations can take three to four months and may involve
additional consultants. We offer additional services on a time and materials
basis.
The professional services process begins during the sales cycle.
Professional services consultants typically participate in complex sales to
help define the specific projects and scope of engagement. With expectations
and objectives clearly defined, we help our customers define, design,
implement and operate their e-service system. Given our experience in e-
service, we focus our customers on a relatively small set of choices and
requirements that are needed to make the initial implementation successful.
We currently offer our customers a broad spectrum of services across the
design, implementation and ongoing service stages of an e-service solution
deployment including the following:
. e-service network production architecture and design;
. portal customization;
. content creation and management;
. rollout and deployment planning and implementation;
. custom integration;
. best practices and management;
. end user marketing; and
. training.
38
<PAGE>
Our end user marketing service leverages our experience and marketing
materials to help our customers market e-service to their end users. Our goal
is to help our customers educate their end users so that the full benefits of
the deployment are fully realized by the enterprise.
We have established strategic relationships with several consulting
partners, including Andersen Consulting, CyberPlex, Evergreen Systems,
Perficient, Syntel and SYSTIME. These partners provide us with a network of
expertise, enhanced geographic coverage, the ability to lead large projects,
and the ability to deliver a complete solution. We intend to increase our use
of service partners in the future.
Customers
We have specifically targeted the leading companies in three customer
segments: technology vendors, service providers and large enterprises. Once we
have successfully deployed our solution, we seek to expand that customer's
e-service network to include its own customers and suppliers. To date, we have
licensed our products to approximately 50 customers in a wide variety of
industries, including hardware, software, financial services,
telecommunications, chemical and petrochemical, information services, media
and entertainment, retail, technical service, and services consulting and
outsourcing.
The following is a partial list of customers who have purchased product
licenses as of June 30, 2000. We believe this list is representative of our
overall customer base. In addition to product licenses, these customers
typically purchase professional services.
Large Enterprises Technology Vendors
----------------- ------------------
Applied Materials Adelphia
Baylor Medical Center AOL/Netscape
Dayton-Hudson Compaq Computer
Disney Dell Computer
Elf Atochem Gateway
Equistar Great Plains Software
Fannie Mae Hewlett-Packard
Farmers Group Intuit
GE Information Systems JD Edwards
Hollister Lan Plus
Kmart LSI Logic
MCI/Worldcom Microsoft
Merrill Lynch Oracle
Molex PeopleSoft
Norwest Peregrine Systems
Olin
Sprint Service Providers
Toro -----------------
UPS All.com
Visa CSC
West Publishing EDS
ESM Second Wave
PCsupport.com
Rivus Internet Group
SAIC
In 1998, PeopleSoft accounted for 23% of our total revenue, Dell Computer
accounted for 16% of our total revenue, Merrill Lynch accounted for 12% of our
total revenue, SAIC accounted for 12% of our total revenue, and AOL/Netscape
accounted for 11% of our total revenue. In 1999, Dell Computer accounted for
26% of our total revenue and Gateway accounted for 14% of our total revenue.
For the six months ended June 30, 2000, Compaq Computer accounted for 32% of
our total revenue, Dell Computer accounted for 13% of our total revenue, and
Gateway accounted for 12% of our total revenue.
39
<PAGE>
Case Studies
The following case studies illustrate the customer care issues faced by
three representative customers, and the benefits and value each realized in
developing and deploying a Motive powered e-service network.
PC Manufacturer
A leading manufacturer and distributor of PCs was experiencing sustained
pressure to reduce service costs in the face of decreasing PC prices and
increasing service costs. However, the company believed that superior service
comprised a major part of its competitive advantage and sought to maintain or
even increase service levels. These pressures became more acute as the company
sought to increase its presence in the consumer market with its consumer
internet PC product and to continue to lead the market by introducing new
services and products. While internet technologies were impacting significant
parts of the company's business, its customer service function remained
largely telephone-based. This resulted in higher costs and created
difficulties delivering adequate levels of customer service, thereby reducing
customer satisfaction and loyalty. In the highly competitive computer
marketplace, the company determined that it was critical to quickly develop a
superior, branded customer service, cut operational costs and increase
customer satisfaction and loyalty.
The company selected our technical service solution as the basis for its
consumer internet PC e-service offering. This allowed the company to design an
e-service network that allowed its customers to connect electronically to the
company's service centers and receive more rapid and effective technical
service. In addition, our technical service solution allowed the company to
customize and brand the end user service experience to make it unique. To
accent the importance of e-service, the company pre-installed our software on
all consumer internet PCs and added an e-service button to the keyboard. By
pressing the button, an end user enables our software to diagnose the problem,
access the appropriate destination within the company's service web site and
connect to a technical service specialist who can use our diagnostics, tools
and content to resolve the problem online.
The company began to reap benefits from our technical service solution
almost immediately. Many calls were avoided as a result of the self-service
capabilities provided. Over 50% of all assisted service incidents were
submitted via our software rather than by phone, dramatically reducing call
center volume, increasing technician productivity, reducing operating costs
and permitting faster and more accurate resolution of end user problems. To
date, the company has deployed our technology on three product lines and is in
the process of deploying across additional product lines and geographies. As
the company's e-service network grows, additional benefits are being realized
through product and marketing synergy, additional services offerings, and
greater solution coverage through technician collaboration and content reuse.
Financial Services Firm
A major securities brokerage firm needed to improve operational
efficiencies and customer satisfaction in its core business. The company had
achieved excellent marketplace differentiation based not only on the quality
of its information and financial services but also on the superior delivery of
those services to its corporate and consumer clientele. The company conducted
an analysis of how its global financial consultants received technical service
from internal help desks, especially with respect to critical customer
information and account applications and systems. Based on this analysis, the
company concluded that it needed to automate common service processes, reduce
technology costs, and maximize the productivity of customer-facing, revenue-
generating employees. It needed an online customer care solution that
minimized financial consultant downtime and optimized the responsiveness,
accuracy and overall quality of client service.
The company chose our technical service solution to implement its e-service
capability. These products were deployed to create an internal e-service
network that efficiently connected financial consultants, who interact with
clients, to expert technicians armed with advanced diagnostic, communication,
and problem resolution tools and content. Our professional services were
engaged to work with the company to design, plan, and deploy the
40
<PAGE>
solution with a goal of minimizing disruption to end users. In addition, the
system needed to be integrated with the company's existing call tracking and
system management infrastructure products. After successfully deploying a
trial program with a selected group of financial consultants, the company's
worldwide population of over 35,000 financial consultants was moved en masse
from a telephone-based helpdesk to the new e-service network within a period
of two weeks.
The company reported that after our technical e-service solution was
implemented, its help desk technicians became significantly more productive,
better informed, and more capable of rapidly resolving both technical and non-
technical problems. Call volumes and hold times fell, problem resolution times
shrunk, and financial consultant acceptance of the system continued to grow
rapidly. For the company, this translated into greater productivity and
effectiveness on both sides of the service channel, and ultimately to a better
customer service experience. Perhaps most importantly, it enabled the
company's key customer-facing resource, the brokers, to spend more time with
clients by reducing their time spent fixing computer problems. The success of
this deployment recently resulted in the company's investing in an additional,
large-scale deployment of our products for a new company-wide e-service
network.
Online B2B Marketplace Provider
A global information services company had undergone a significant
transformation to become an early leader in enabling and constructing
internet-based, B2B commercial marketplaces. The company had traditionally
been a participant in the Electronic Data Interchange marketplace,
specifically in providing the network connections, applications, and
information services required for suppliers to interact electronically with
the procurement operations of large companies. The company viewed the advent
of widespread commercial internet adoption by businesses of all sizes and the
development of technology to enable large scale, secure online commerce as
opportunities enabling the company to expand its customer base significantly
and transform its business model. With the internet reaching a much wider base
of less technologically sophisticated customers, the company considers online
customer care to be a key driver of success in all aspects of the business,
from sales through operations, for both internal and external employees. In
fact, the number, complexity, and transactional nature of the new breed of B2B
applications demanded a new approach to online customer care and e-service.
The company purchased our AnswerWeb product to proactively address the
issue of online customer care. AnswerWeb was deployed internally to the
company's sales force, enabling sales representatives to respond more quickly
and effectively to customer concerns and to accelerate the sales process. The
ability of the sales force to obtain specific information via the internet
regarding prospective customers, the products they required, and the
configuration of these products shortened the sales cycle and helped form more
productive customer relationships. In addition, the company used AnswerWeb to
connect sales personnel to subject matter experts inside the company to
provide and capture answers to new questions that arose.
The company is enabling existing and prospective customers to buy and
upgrade access to its B2B exchange directly through the internet. It plans to
deploy AnswerWeb as the online customer care environment that assists the
customer in the sales, configuration and connection processes associated with
the B2B exchange. Ultimately, it will be deployed to provide online customer
care in the operation of the exchange applications themselves. The company
believes e-service will significantly differentiate its total offering, will
result in a higher number of completed transactions and will improve customer
retention.
Strategic Relationships
A key element of our sales and marketing strategy is to establish and
maintain strategic alliances that assist us in selling, marketing, deploying,
and developing complete customer solutions.
41
<PAGE>
Product Partners. Our product partners assist us in delivering a more
complete solution to our customers, one that is integrated into their existing
technology base and future direction. The partner companies have demonstrated
leadership and have driven innovative software and hardware solutions to
market. Complementary products, robust integration capabilities and a
commitment to the development of e-service networks are key to the success of
these alliances. We exchange marketing and sales information, sales leads, and
technology integration practices with our technology partners to more
effectively serve our common customers. Currently, we have partnerships with a
number of leading technology companies, including Calico, Clarify, Compaq,
Courion, Hewlett-Packard, KnowledgeView, Microsoft, PC-Doctor, Peregrine
Systems, Remedy, ServiceWare, Shaman Corporation, Tivoli, Tradeum, Trilogy,
Vignette and webMethods.
Delivery Partners. Our delivery partners help extend the reach of Motive-
powered e-service networks by delivering MotiveNet Server solutions to their
corporate customers, by delivering e-service through portal-based offerings
and by hosting Motive technology as an application service provider. Delivery
partners include All.com, Compaq, Dell, EDS, Hewlett-Packard, PCsupport.com,
Peregrine, SAIC and ESM Second Wave.
Consulting Partners. Our consulting partners assist us in implementing and
deploying our solutions at customer sites. These partners include firms that
offer services that encompass strategy, design, architecture, development,
integration and administration. Consulting partners implement and deploy our
products and often assist us with sales lead generation. Our consulting
partners include: Andersen Consulting, CyberPlex, Evergreen, Perficient,
Syntel and SYSTIME.
Sales and Marketing
Our strategy has been to develop a direct sales model and to target
companies that are leaders in their industry and then to expand our presence
within those industries. In addition, we plan to target new segments as we
grow the company. Currently, we focus on technology vendors, service
providers, and large enterprises, including corporate IT departments and
companies engaged in B2B e-commerce.
We seek to focus our sales efforts on establishing e-service networks.
First, we enable our delivery partners to resell the MotiveNet server product
to their customers to establish deeper e-service networks. We will work with
these customers to provide MotiveNet end users the ability to upgrade to full
e-service solutions. In addition, we will enable our customers to build the
fulfillment side of their e-service network by reselling Motive technology to
their partners, suppliers and service providers. We also expect to gain
leverage from the Motive brand. While we allow our customers to brand their e-
service offerings, all e-service Web pages are served with a "Motive Powered
Service" branding, which enables us to establish significant brand recognition
without substantial additional expense.
We currently sell our products primarily through our worldwide direct sales
force. As of June 30, 2000, our direct sales force consisted of 57 sales
professionals located in 15 domestic locations, as well as the United Kingdom
and Switzerland. We intend to expand our indirect sales through additional
relationships with systems integrators and with our high technology and
service provider customers.
We generate leads from a variety of sources, including marketing programs
and inside sales activities. Initial sales activities typically include a
demonstration of our product capabilities, a customer-specific technical and
financial analysis and information regarding deployment capabilities. This
information is delivered either via inside sales specialists or technical
sales specialists.
As part of our strategic sales process, we typically engage senior
executive management teams, including the chief information officer, chief
financial officer, and chief executive officer of our potential customers. We
utilize sales teams consisting of sales, technical sales and services
professionals who work to create customer-specific proposals that address the
needs of each potential customer.
We seek to establish sales and marketing partnerships with major industry
vendors that will add value to our products and expand distribution
opportunities. These relationships provide collaborative resources to help
extend the reach of our presence in the marketplace. We intend to continue to
pursue these programs in the future.
42
<PAGE>
We create and deliver a variety of marketing programs to build market
awareness of Motive, our products and their value to potential customers.
These programs are designed to attract prospective customers to our company
and products. A broad mix of programs are used to accomplish these goals,
including market research, product and strategy updates with industry
analysts, public relations activities, direct mail and relationship marketing
programs, internet marketing, seminars, trade shows, speaking engagements, and
co-operative marketing with customers and partners. Our marketing organization
also produces marketing materials in support of sales to prospective customers
that include internet marketing web sites, programs and materials, brochures,
data sheets, white papers, presentations, demonstrations, and other sales
tools.
Research and Development
We have made substantial investments in research and development through
both internal development and technology acquisition. The majority of our
research and development activity has been directed towards the expansion of
the Motive product suite. This development consists primarily of adding new
competitive features to established products, as well as the creation of
additional products, content, and tools as we expand into new markets.
As of June 30, 2000, we had 66 employees in our research and development
organization. Our research and development expenditures for fiscal 1997, 1998,
1999 and for the six months ended June 30, 2000 were approximately $471,000,
$1.9 million, $3.7 million and $3.1 million, respectively. We expect that we
will continue to commit significant resources to research and development in
the future. All research and development expenses have been expensed as
incurred. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our markets are characterized by rapid technological change, frequent
product introductions and enhancements, evolving industry standards, and
rapidly changing customer requirements. The introduction of products
incorporating new technologies and the emergence of new industry standards
could render existing products obsolete and unmarketable. Our future success
will depend in part on our ability to anticipate changes, enhance our current
products, develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of our
customers.
Competition
The online customer care market is new, rapidly evolving and intensely
competitive. Our current and potential competitors in the market for online
customer care software vary in size and in the scope of the products and
services that they offer or may offer in the future. Many of our current and
potential competitors have greater financial, marketing and infrastructure
resources than do we. As a result, they may be able to respond more quickly to
changes in customer requirements. They may also be able to devote greater
resources than we can to sales and marketing and research and development.
Competition may also result in changes in pricing policies by us or our
competitors which could materially adversely affect our business, prospects,
future quarterly and annual operating results and financial condition. We may
not be able to compete successfully against current and future competitors.
Companies that individually, or collectively, offer competitive products,
may develop competitive products or may adopt a similar business model to ours
include the following:
. B2B internet infrastructure companies that may add e-service
functionality to their products such as Broadvision and Vignette;
. online customer care vendors, including Ask Jeeves, E.piphany, through
its acquisition of Octane, Kana Communications and Silknet;
. providers of technical support utilities and knowledge management tools
such as McAfee, Primus, ServiceWare, Support.com and Symantec;
. large technology suppliers such as Dell, IBM, Intel, Microsoft and
Oracle;
43
<PAGE>
. an emerging class of online support portals, application service
providers or expert services portals such as MyHelpdesk.com, InfoRocket,
expertcity.com, or NoWonder!; and
. large existing providers of call center automation products and
solutions.
We believe the principal competitive factors in our industry are:
. product features and functionality;
. integration with existing systems;
. customizable, internet-centric solution;
. availability of professional services to develop and deploy a complete
solution;
. ability to handle large volumes of end users and transactions; and
. price.
Intellectual Property and Other Proprietary Rights
Our success heavily depends on our proprietary technology, the Motive brand
name, and the goodwill associated with it. We rely on a combination of
copyright, trade secret, trademark and patent laws, confidentiality
procedures, contractual provisions and other similar measures to protect our
proprietary information and intellectual property rights. As part of our
confidentiality procedures, we enter into proprietary information and
invention agreements with our employees and non-disclosure agreements with
certain of our consultants, customers, prospective customers and service
providers. We also enter into license agreements with respect to our
technology, documentation and other proprietary information.
The unauthorized reproduction or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology without
paying us for it. In addition, the steps we have taken to protect our
proprietary rights and intellectual property may not be adequate to deter
misappropriation. We may not be able to detect unauthorized use of our
proprietary information or take appropriate steps to enforce our intellectual
property rights. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
software or technology that we consider proprietary and third parties may
attempt to develop similar technology independently.
We currently hold a trademark registration in the United States for the
Motive name, our logo and pending applications for marks associated with the
Motive product suite. We also have pending applications for the trademark
registration of the Motive name, our logo and for the marks associated with
the Motive product suite in Canada, the European Union, Norway, Switzerland
and Japan. In addition, we have filed seven patent applications for technology
related to the Motive product suite. It is possible that our patents,
copyrights or registered trademarks could be challenged and invalidated. In
addition, existing patent, copyright and trademark laws afford only limited
protections. Effective protection of intellectual property rights may be
unavailable or limited in certain countries, because the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States. Monitoring unauthorized use of our patents and
trademarks is difficult and expensive, particularly given the global nature
and reach of the internet. Furthermore, it is possible that our competitors
will adopt product or service names similar to ours, impeding our ability to
protect our intellectual property and possibly leading to customer confusion.
Although we are not aware that our products, patents, trademarks, copyrights
or other proprietary rights infringe the proprietary rights of third parties,
any infringement claims, with or without merit, brought by such third parties
could be time-consuming and expensive to defend.
Government Regulation
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to
e-commerce. However, due to the increasing popularity and use of the internet
and other online services, it is
44
<PAGE>
possible that a number of laws and regulations may be adopted with respect to
the internet or other online services covering issues such as user privacy,
security considerations, internet transaction taxation, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. Furthermore, the growth and development of the market for e-commerce
may prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies conducting business online. For example, the
Federal Communications Commission could determine through one of its ongoing
proceedings that the internet is subject to regulation. Among other possible
courses of action, the FCC may determine that internet service providers are
subject to certain access charges or fees for carrying internet traffic over
the public switched telephone network. The adoption of any additional laws or
regulations may decrease the growth of the internet or other online services,
which could, in turn, decrease the demand for our products and services and
increase our cost of doing business, or otherwise have a material adverse
effect on our business, financial condition and results of operations.
Employees
As of June 30, 2000, we had 246 employees. These included 79 in sales and
marketing, 57 in professional services, 66 in research and development and 44
in administration and finance. Our future success will depend on our
continuing ability to attract, train and retain highly qualified technical
sales and managerial personnel. Our employees are not represented by a
collective bargaining agreement and we have never experienced a strike or
similar work stoppage. We consider our relations with our employees to be
good.
Facilities
Our principal administrative, sales and marketing and research and
development facility is located in Austin, Texas and consists of approximately
49,600 square feet of office space held under a lease that expires January
2004. In March 2000, we also leased approximately 117,300 square feet of
building space in Austin, Texas for a period of ten years with occupancy to
begin no earlier than November 2000. This new space is intended to replace our
current Austin headquarters. We also maintain offices for sales and support
personnel in Redwood City, California; Falls Church, Virginia; New York, New
York; Cockeysville, Maryland; Cohasset, Massachusetts; Downers Grove,
Illinois; Minnetonka, Minnesota; Dallas, Texas; Portland, Oregon; Laguna
Niguel, California; Denver, Colorado; and Richmond, United Kingdom.
Legal Proceedings
We are not a party to any material legal proceedings.
45
<PAGE>
MANAGEMENT
Officers and Directors
The executive officers and directors of Motive Communications, Inc., their
ages and their positions as of August 15, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Scott L. Harmon 41 President, Chief Executive Officer and Director
R. Logan Wray 40 Chief Financial Officer and Executive Vice President of Business Operations
Patrick D. Motola 45 Vice President of Business Development
Douglas F. McNary 41 Vice President of Sales
Michael J. Maples, Jr. 32 Vice President of Marketing
John R. Greenfield 36 Vice President of Services
David M. Malcolm 39 Vice President of Engineering
Ross B. Garber 33 Director
Eric L. Jones 65 Director
Michael J. Maples, Sr. 57 Director
David Sikora 38 Director
John D. Thornton 36 Director
</TABLE>
Scott L. Harmon, a co-founder of Motive, has served as President since our
inception in April 1997. Mr. Harmon was appointed Chief Executive Officer in
June 1997. From November 1996 to May 1997, Mr. Harmon was a Venture Partner of
Austin Ventures, a venture capital firm. From March 1992 to November 1996
Mr. Harmon was employed by Tivoli Systems Inc., a systems management software
company, where he held several marketing positions including Vice President of
Marketing Programs and Director of Product Marketing. Mr. Harmon holds a
Bachelor of Science degree in Computer Science from Iowa State University.
R. Logan Wray joined Motive in August 2000 as Chief Financial Officer and
Executive Vice President of Business Operations. From May 1997 to April 2000,
Mr. Wray served as Senior Vice President and Chief Financial Officer of
Sterling Software, a systems management software and services company. From
September 1981 until April of 1997, Mr. Wray held various positions with Ernst
& Young, most recently as a partner in the technology group focused on
software. Mr. Wray holds a Bachelor of Science degree in Commerce from the
University of Virginia. Mr. Wray is also a Certified Public Accountant.
Patrick D. Motola joined Motive in May 1998 as Vice President of Product
Development. In March 1999, Mr. Motola assumed his present position as Vice
President of Business Development. From March 1999 to August 2000, Mr. Motola
also served as Chief Financial Officer. From October 1996 to May 1998, he
served as Senior Vice President of Operations and Chief Financial Officer for
PSW Technologies, a publicly traded software services company. From May 1993
to September 1996, Mr. Motola served as Vice President and General Manager at
PSW Technologies. From January 1992 until May 1993, Mr. Motola was Vice
President of Marketing for Software Publishing Corporation, a publicly traded
PC software company. Mr. Motola holds a Masters Degree in Management Science
from Stanford University, a Masters Degree in Computer Science from the
University of Texas at Austin, and a Bachelor of Science degree in Electrical
Engineering and Computer Science from the University of California at
Berkeley.
Douglas F. McNary joined Motive in May 1998 as Vice President of Sales.
From January 1997 to April of 1998, he served as Vice President of Sales of
Trellix Corporation, a web authoring tool software company. From August 1991
to January 1997, he was employed by Tivoli Systems where he held several sales
management positions including Vice President of Sales and Director of
European Sales. Mr. McNary holds a Bachelor of Science degree in Mechanical
Engineering from Worcester Polytechnic Institute.
Michael J. Maples, Jr., a co-founder of Motive, has served as Vice
President of Marketing since our inception in April 1997. From July 1994 to
April 1997, Mr. Maples, Jr. served as Director of Product Marketing at Tivoli
Systems. Mr. Maples, Jr. holds a Bachelor of Science degree in Industrial
Engineering from Stanford University and a Masters in Business Administration
from Harvard Graduate School of Business Administration.
46
<PAGE>
John R. Greenfield joined Motive in October 1999 as Vice President of
Professional Services. From June 1997 to October 1999, he served as Senior
Director of Consulting Services at Oracle Corporation. From April 1991 until
joining Oracle, he served as Director of Consulting at Coopers & Lybrand LLP.
Prior to joining Coopers & Lybrand, he held consulting positions in Andersen
Consulting's Systems Integration business. Mr. Greenfield holds a Bachelor of
Science degree in Accounting from the University of Arkansas.
David M. Malcolm joined Motive in March 1999 as Vice President of Product
Development. He was employed by Tivoli Systems from July 1992 to March 1999,
where he served most recently as Vice President of the Internet Business
Solutions Division following a number of other management positions in product
development. From 1990 to 1992, he served as Manager of Austin Operations for
Locus Computing Corporation, a software product and consulting firm. Mr.
Malcolm holds a Bachelor of Science degree in Computer Science from the
University of Oklahoma.
Ross B. Garber has served as director of Motive since September 1999.
Mr. Garber is co-founder of Vignette Corporation, a provider of internet
relationship management software products and services. He served as a
director of Vignette from December 1995 to July 1999 and from December 1995 to
June 1998 he served as Chief Executive Officer and President. From July 1994
to December 1995, Mr. Garber served as Director of Worldwide Channel Sales
with DAZEL Corporation, a client/server software company. Mr. Garber received
a Bachelor of Arts degree in Finance from the University of Massachusetts,
Amherst.
Eric L. Jones has served as a director of Motive since June 1997. Mr. Jones
is a General Partner of SSM Venture Partners, L.P., a venture capital firm
where he has been employed since May 1994. Mr. Jones served as interim
President and Chief Executive Officer of Tivoli from January 1991 to April
1991 and as a director and chairman of the board of Tivoli from January 1991
until the company was acquired by IBM in March 1996. Prior to joining Tivoli,
Mr. Jones also served as Corporate Vice President and Group President during a
25 year career at Texas Instruments. He currently serves as a director of
Active Power, Inc., a manufacturer of electric power products, and several
privately held companies. Mr. Jones holds a Bachelor of Science degree in
Mechanical Engineering and a Ph.D in Mechanical Engineering from the
University of Texas.
Michael J. Maples, Sr. has served as a director of Motive since June 1997.
Mr. Maples, Sr. currently manages private investments. From July 1988 to April
1995, Mr. Maples, Sr. held various management positions at Microsoft
Corporation, the most recent of which was Executive Vice President of the
Worldwide Products Group and a member of the office of the president. He also
serves as director of NetIQ Corporation, a provider of software for managing
e-business infrastructures, JD Edwards and Company, an enterprise software
company, Lexmark International, Inc., a laser and inkjet printer company, and
Concero, Inc., a software company. Mr. Maples, Sr. is also a member of the
Board of Visitors of the Engineering School at the University of Oklahoma and
the College of Engineering Foundation Advisory Council at the University of
Texas at Austin. Mr. Maples, Sr. holds a Bachelor of Science degree in
Electrical Engineering from the University of Oklahoma and a Masters in
Business Administration from Oklahoma City University.
David Sikora has served as a director of Motive since February 2000. In
January 2000, Mr. Sikora co-founded Question.com, Inc., an internet
relationship management software company. From July 1998 to January 2000, he
served as President and Chief Executive Officer of Ventix. From October 1994
to May 1998, Mr. Sikora served as President and Chief Executive Officer of
ForeFront Group, Inc. a computer-based training software company. Mr. Sikora
holds a Bachelor of Science degree in Technology from the University of
Houston and a Masters in Business Administration from Harvard Graduate School
of Business Administration.
John D. Thornton has served as a director of Motive since March 2000.
Mr. Thornton is a General Partner of Austin Ventures where he has been
employed since 1991. Mr. Thornton has served as a director of Vignette
Corporation since February 1996. Mr. Thornton also serves as a director of
Active Power, Garden.com, Inc., an e-commerce gardening company and MetaSolv
Software, Inc., a telecommunications software company, as well as several
privately held companies. He joined Austin Ventures from McKinsey & Co., where
he served clients in the United States and Europe. He received a Bachelor of
Arts degree with honors from Trinity University and a Masters of Business
Administration from the Stanford Graduate School of Business.
47
<PAGE>
Following this offering, our board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. The
board will consist of two class I directors, Mr. Sikora and Mr. Thornton, two
class II directors, Mr. Maples, Sr. and Mr. Garber and two class III
directors, Mr. Harmon and
Mr. Jones. 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. The terms of the class I directors, class II
directors and class III directors expire upon the election and qualification
of successor directors at the annual meeting of stockholders held during
calendar years 2001, 2002 and 2003, respectively.
Each officer serves at the discretion of the board of directors and holds
office until his successor is elected and qualified or until his resignation
or removal. Other than Mr. Maples, Sr. and Mr. Maples, Jr., who are father and
son, there are no family relationships among any of our directors, executive
officers or key employees.
Board Committees
The board of directors has an audit committee and a compensation committee.
Audit Committee. The audit committee makes recommendations to the board of
directors regarding the selection of independent accountants, reviews the
results and scope of audit and other services provided by our independent
accountants and reviews and evaluates the audit and control functions. The
audit committee currently consists of Mr. Garber, Mr. Jones and Mr. Thornton.
Compensation Committee. The compensation committee reviews and makes
recommendations regarding our stock plans and makes decisions concerning
salaries and incentive compensation for our management. The compensation
committee currently consists of Mr. Maples, Sr. and Mr. Sikora.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serve as a member of the board of directors
or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
Director Compensation
Except for grants of stock options, our directors generally do not receive
compensation for services provided as a director. We also do not pay
compensation for committee participation or special assignments of the board
of directors.
Non-employee board members are eligible for option grants under the
automatic option grant program for non-employee board members under our 2000
Equity Incentive Plan. Under our 2000 Equity Incentive Plan, each non-employee
director who first becomes a non-employee board member after the date of this
offering will be granted an option to purchase 25,000 shares of our common
stock on the date such individual joins the board, provided such individual
has not been in our prior employment. This option will become vested as
follows: 25% of the option shares becomes vested upon the completion of 12
months of service and an additional 6.25% of the option shares becomes vested
upon the completion of each quarter of service thereafter. In addition, at
each annual meeting of stockholders, each individual who will continue to be a
director after such annual meeting will receive an additional option to
purchase 5,000 shares of common stock. This option becomes fully vested upon
the completion of 12 months of service from the grant date. Each director who
received an initial option for 25,000 shares under the automatic option grant
program will first be eligible to receive an annual option for 5,000 shares
under the automatic option grant program in the calendar year following the
year in which he or she received the initial option for 25,000 shares. The
exercise price for each option grant will be equal to the fair market value
per share of our common stock on the option grant date. Upon a change in
control of Motive or a termination of the director's service as a result of
death, disability or retirement at or after age 65, the options granted under
this automatic option grant program become fully vested.
The following option grants have been made to our non-employee board
members: Mr. Sikora received an option for 55,000 shares of our common stock
at an exercise price of $6.61; Mr. Garber received an option for 69,000 shares
of our common stock at an exercise price of $1.50 per share; Mr. Jones
received an
48
<PAGE>
option for 407,147 shares of our common stock at an exercise price of $0.06
per share. Mr. Maples, Sr. received an option for 135,716 shares of our common
stock at an exercise price of $0.06 per share.
Non-employee directors are also eligible to receive options and be issued
shares of common stock under our 2000 Equity Incentive Plan, outside of the
automatic option grant program. Directors who are also our employees are
eligible to receive options and be issued shares of common stock directly
under our 2000 Equity Incentive Plan and are also eligible to participate in
our 2000 Employee Stock Purchase Plan.
We have an oral arrangement with Mr. Jones pursuant to which we pay him
$6,250 each month in exchange for one to two days per week of executive
management consulting services.
Indemnification
Our certificate of incorporation limits the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the Delaware General Corporation
Law. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our by-laws provide that we shall indemnify our directors and officers to
the fullest extent permitted by Delaware law, including any circumstances in
which indemnification is otherwise discretionary under Delaware law. We have
also entered into indemnification agreements with our officers and directors
containing provisions that may require us, among other things, to indemnify
such officers and directors against certain liabilities that may arise by
reason of status or service as directors or officers, other than liabilities
arising from willful misconduct of a culpable nature, to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the board of directors, including a majority of the independent
and disinterested outside directors on the board of directors, and will
continue to be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
Executive Compensation
The following table sets forth information with respect to compensation
earned during 1999 by our chief executive officer and our four other highest-
paid executive officers whose total salary and bonus for 1999 exceeded
$100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards
------------
Number of
Annual Compensation Securities
------------------------- Underlying
Name and Principal Position Salary ($) Bonus ($)(1) Options (#)
--------------------------- ---------- ------------ ------------
<S> <C> <C> <C>
Scott L. Harmon........................ $166,167 $34,934 --
President, Chief Executive Officer and
Director
Patrick D. Motola...................... 156,250 -- --
Vice President of Business Development
Douglas F. McNary...................... 220,000(2) 1,035 120,000
Vice President of Sales
Scott R. Abel (3)...................... 147,458 21,349 --
Vice President of Online Services
Michael J. Maples, Jr.................. 138,083 21,349 --
Vice President of Marketing
</TABLE>
49
<PAGE>
--------
(1) Consists of bonuses equal to the value of All.com stock that we
distributed to each officer, less each officer's investment in our stock.
(2) Mr. McNary's salary also consisted of $80,000 of sales commissions earned
in 1999. For 1999, Mr. McNary was paid the commissions when we determined
that he had satisfied his target commission objectives, which were based
on revenues.
(3) Mr. Abel left us on December 31, 1999 to become chief operating officer of
All.com.
The following table sets forth each grant of stock options in 1999 to our
chief executive officer and our four other highest-paid executive officers. No
stock appreciation rights were granted during such period.
The figures representing percentages of total options granted to employees
in the last fiscal year are based on a total of 3,397,291 option shares
granted to our employees during fiscal year 1999.
Each of the options listed in the table is immediately exercisable. The
shares purchased under the options may be repurchased by us at the original
exercise price per share if the optionee ceases service with the Company
before vesting in the shares. With respect to Mr. McNary's option for 22,500
shares, the right of repurchase shall lapse with respect to the first 20% of
the shares subject to this option upon his completion of the first 12 months
of service from the vesting commencement date, and an additional 5% of the
shares upon the completion of each three-month period of service thereafter.
With respect to the option for 30,000 shares and the option for 67,500 shares,
the right of repurchase shall lapse with respect to the first 25% of the
shares subject to each option upon the optionee's completion of the first 12
months of service from the vesting commencement date, and an additional 6.25%
of the shares upon the completion of each three-month period of service
thereafter. The option shares will fully vest if we are acquired in a merger
or asset sale, unless our repurchase right with respect to the unvested option
shares is transferred to the acquiring entity. If Mr. McNary remains in
service with us until December 31, 2001, he will become fully vested in all of
his option shares.
The amounts listed in the following table under the heading "Exercise
price" were valued by our board of directors on the date of grant. In
determining this fair market value, the board of directors took into account
the purchase price paid by the investors for shares of our preferred stock
(taking into account the liquidation preferences and other rights, privileges
and preferences associated with such preferred stock) and an evaluation by the
board of directors of our revenues, operating history and prospects. The
exercise price may be paid in cash, in shares of our common stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. We may also
finance the option exercise by lending the optionee sufficient funds to pay
the exercise price for the purchased shares.
We calculated the amounts listed in the following table under the heading
"Potential Realizable Value at Assumed Annual Rates of Stock Price
Appreciation for Option Term" based on the ten-year term of the option at the
time of grant. For purposes of these columns, we assumed stock price
appreciation of 5% and 10% over an assumed initial public offering price of
$11.00 per share (the mid-point of the filing range). These rates do not
represent our prediction of our stock price performance.
On March 1, 2000, we granted Mr. McNary an option for 30,000 shares of our
common stock at an exercise price per share of $3.00.
50
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------
Potential
Realizable Value at
Assumed Annual
Number of Rates of Stock
Securities Percent of Total Price Appreciation
Underlying Options Granted for Option Term
Options to Employees in Exercise Price Expiration -------------------
Name Granted (#) Fiscal Year (%) ($/share) Date 5% ($) 10% ($)
---- ----------- ---------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott L. Harmon......... -- -- -- -- -- --
Patrick D. Motola....... -- -- -- -- -- --
Douglas F. McNary....... 22,500 0.7% $0.4333 01/17/09 $145,902 $ 384,702
30,000 0.9 0.9333 07/08/09 179,536 497,936
67,500 2.0 1.7500 10/28/09 348,829 1,065,229
Scott R. Abel........... -- -- -- -- -- --
Michael J. Maples, Jr... -- -- -- -- -- --
</TABLE>
The following table sets forth for our chief executive officer and our four
other highest-paid executive officers the number and value of securities
underlying unexercised options that are held by such executive officers as of
December 31, 1999. No options or stock appreciation rights were exercised by
such executive officers in 1999, and no stock appreciation rights were
outstanding at the end of that year.
These stock options are immediately exercisable. We have the right to
repurchase all unvested option shares at the original exercise price if the
optionee's service terminates. The heading "Vested" refers to shares no longer
subject to our right of repurchase; the heading "Unvested" refers to shares
subject to our right of repurchase as of December 31, 1999.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year End (#) at Fiscal Year End ($)(1)
------------------------- ----------------------------
Name Vested Unvested Vested Unvested
---- ---------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Scott L. Harmon.......... -- -- -- --
Patrick D. Motola........ -- -- -- --
Douglas F. McNary........ -- 120,000 -- $ 1,164,127
Scott R. Abel............ -- -- -- --
Michael J. Maples, Jr.... -- -- -- --
</TABLE>
--------
(1) Based on an assumed initial public offering price of $11.00 per share (the
mid-point of the filing range), less the exercise price payable for such
shares.
Change of Control Arrangements and Employment Agreements
If we experience a change in control, an option or other award granted
under our 1997 Stock Option/Stock Issuance Plan or 2000 Equity Incentive Plan
will become fully exercisable and fully vested if the option or award is not
assumed by the surviving corporation or its parent or if the surviving
corporation or its parent does not substitute comparable awards for the awards
granted under such plans. In addition, under the 2000 Equity Incentive Plan,
if an award recipient is involuntarily terminated within 12 months following a
change in control, then such recipient will receive an additional 12 months of
vesting in his or her award. Under our 1997 Stock Option/Stock Issuance Plan,
if an optionee or a purchaser is involuntarily terminated within 12 months
after we experience a change in control, then all of such optionee's or
purchaser's unvested shares acquired from the initial option granted to each
such person under our 1997 Stock Option/Stock Issuance Plan will become
vested.
We do not have written employment agreements with our chief executive
officer or our four other highest-paid executive officers. We have offer
letters with Messrs. Motola and McNary. The offer letter for Mr. Motola was
entered into on August 22, 1998 and provided for an initial annual base salary
of $150,000 ($165,000 as of
51
<PAGE>
December 31, 1999) and an option grant for 814,276 shares of our common stock.
The offer letter for Mr. McNary was entered into on February 13, 1998 and
provided for an initial annual base salary of $110,000 ($140,000 as of
December 31, 1999) and an option grant for 814,275 shares of our common stock.
Employee Stock Plans
2000 Equity Incentive Plan
Our 2000 Equity Incentive Plan was adopted by our board of directors on
April 20, 2000. We will also seek stockholder approval of this plan. We have
reserved 7,500,000 shares of our common stock for issuance under the 2000
Equity Incentive Plan. Any shares not yet issued under our 1997 Stock
Option/Stock Issuance Plan on the date of this offering will also be available
under the 2000 Equity Incentive Plan. On January 1 of each year, starting with
the year 2001, the number of shares in the reserve will automatically increase
by 5% of the total number of shares of common stock that are then outstanding
or by 5,000,000 shares, whichever is less. In general, if options or shares
awarded under the 2000 Equity Incentive Plan or options awarded under the 1997
Stock Option/Stock Issuance Plan are forfeited, then those options or shares
will again become available for awards under the 2000 Equity Incentive Plan.
No options have yet been granted under the 2000 Equity Incentive Plan.
Under the 2000 Equity Incentive Plan, the eligible individuals are:
. employees,
. non-employee members of the board of directors and
. consultants.
The types of awards that may be made under the 2000 Equity Incentive Plan
are:
. options to purchase shares of common stock,
. stock appreciation rights,
. restricted shares and
. stock units.
Options may be incentive stock options that qualify for favorable tax
treatment for the optionee under Section 422 of the Internal Revenue Code of
1986 or nonstatutory stock options not designed to qualify for such favorable
tax treatment. With limited restrictions, if shares awarded under the 2000
Equity Incentive Plan are forfeited, then those shares will again become
available for new awards under the 2000 Equity Incentive Plan.
The compensation committee of our board of directors administers the 2000
Equity Incentive Plan. Except with respect to the automatic option grant
program for non-employee board members, the committee has the complete
discretion to make all decisions relating to the interpretation and operation
of our 2000 Equity Incentive Plan. The committee has the discretion to
determine which eligible individuals are to receive any award, and to
determine the type, number, vesting requirements and other features and
conditions of each award.
The exercise price for incentive stock options granted under the 2000
Equity Incentive Plan may not be less than 100% of the fair market value of
our common stock on the option grant date. The exercise price for non-
statutory options granted under the 2000 Equity Incentive Plan may not be less
than 85% of the fair market value of our common stock on the option grant
date.
The exercise price may be paid by using:
. cash,
. outstanding shares of common stock,
. cashless exercise method with a designated broker,
52
<PAGE>
. pledge of shares to a broker or
. promissory note.
The purchase price for newly issued restricted shares awarded under the
2000 Equity Incentive Plan may be paid by using:
. cash,
. promissory note or
. rendering of past services.
The committee may reprice options and may modify, extend or assume
outstanding options and stock appreciation rights. The committee may accept
the cancellation of outstanding options or stock appreciation rights in return
for the grant of new options or stock appreciation rights. The new option or
right may have the same or a different number of shares and the same or a
different exercise price.
The maximum number of option shares that a person may receive in a fiscal
year is 500,000, except that in the first year of employment, the maximum
number of option shares that a person may receive is 3,000,000.
If we experience a change in control, an option or other award under the
2000 Equity Incentive Plan will become fully exercisable and fully vested if
the option or award is not assumed by the surviving corporation or its parent
or if the surviving corporation or its parent does not substitute comparable
awards for the awards granted under the 2000 Equity Incentive Plan. In
addition, if an optionee or award recipient is involuntarily terminated within
12 months following a change in control, then the optionee or award recipient
will receive an additional 12 months of vesting.
A change in control includes:
. a merger or consolidation of us after which our then current stockholders
own less than 50% of the surviving corporation,
. sale of all or substantially all of our assets,
. a proxy contest that results in replacement of more than one-half of our
directors over a 24-month period or
. an acquisition of 50% or more of our outstanding stock by a person other
than a person related to us, such as a corporation owned by our
stockholders.
If a merger or other reorganization occurs, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
2000 Equity Incentive Plan shall be assumed by the surviving corporation or
its parent, shall be continued by us if we are the surviving corporation,
shall have accelerated vesting and then expire early, or shall be cancelled
for a cash payment.
Non-employee board members are eligible for option grants under the
automatic option grant program for non-employee board members under our 2000
Equity Incentive Plan. Under our 2000 Equity Incentive Plan, each non-employee
director who first becomes a non-employee board member after the date of this
offering will be granted an option to purchase 25,000 shares of our common
stock on the date such individual joins the board, provided such individual
has not been in our prior employ. This option will become vested as follows:
25% of the option shares becomes vested upon the completion of 12 months of
service and an additional 6.25% of the option shares becomes vested upon the
completion of each quarter of service thereafter. In addition, at each annual
meeting of stockholders, each individual who will continue to be a director
after such annual meeting will receive an additional option to purchase 5,000
shares of common stock. This option becomes fully vested upon the completion
of 12 months of service from the grant date. Each director who received an
initial option for 25,000 shares under the automatic option grant program will
first be eligible to receive an annual option for 5,000 shares under the
automatic option grant program in the calendar year following the year in
which he or
53
<PAGE>
she received the initial option for 25,000 shares. The exercise price for each
option grant will be equal to the fair market value per share of our common
stock on the option grant date. Upon a change in control of us or a
termination of the director's service as a result of death, disability or
retirement at or after age 65, the options granted under this automatic option
grant program become fully vested.
Our board may amend or terminate the 2000 Equity Incentive Plan at any
time. If our board amends the plan, stockholder approval of the amendment will
be sought only if required by an applicable law. The 2000 Equity Incentive
Plan will continue in effect indefinitely unless the board decides to
terminate the plan earlier.
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 Employee Stock Purchase Plan on
April 20, 2000. We will also seek stockholder approval of this plan. We have
reserved 1,000,000 shares of our common stock for issuance under our 2000
Employee Stock Purchase Plan. As of January 1 each year, starting in 2001, the
number of shares reserved for issuance under our 2000 Employee Stock Purchase
Plan will be increased automatically by 2% of the total number of shares of
common stock then outstanding or, if less, 1,000,000 shares. Our 2000 Employee
Stock Purchase Plan is intended to qualify under Section 423 of the Internal
Revenue Code.
Eligible employees may begin participating in the 2000 Employee Stock
Purchase Plan at the start of an offering period. Each offering period lasts
24 months. Two overlapping offering periods will start on May 1 and November 1
of each calendar year. However, the first offering period will start on the
effective date of this offering and end on October 31, 2002. Purchases of our
common stock will occur on approximately every April 30 and October 31 of each
calendar year during an offering period.
Our 2000 Employee Stock Purchase Plan will be administered by the
compensation committee of our board of directors. Each of our employees is
eligible to participate if he or she is employed by us for more than 20 hours
per week and for more than five months per year.
Our 2000 Employee Stock Purchase Plan permits each eligible employee to
purchase common stock through payroll deductions. Each employee's payroll
deductions may not exceed 15% of the employee's cash compensation. The initial
period during which payroll deductions may be contributed will begin on the
effective date of this offering and end on April 30, 2001. Each participant
may purchase up to 750 shares on any purchase date.
The price of each share of common stock purchased under our 2000 Employee
Stock Purchase Plan will be 85% of the lower of:
(A) the fair market value per share of common stock on the date immediately
before the first date of the applicable offering period or
(B) the fair market value per share of common stock on the purchase date.
In the case of the first offering period, the price per share under the
plan will be 85% of the lower of:
(A) the price offered to the public in this offering or
(B) the fair market value per share of common stock on the purchase date.
Employees may end their participation in the 2000 Employee Stock Purchase
Plan at any time. Participation ends automatically upon termination of
employment with us.
If we experience a change in control, our 2000 Employee Stock Purchase Plan
will end and shares will be purchased with the payroll deductions accumulated
to date by participating employees, unless this plan is assumed by the
surviving corporation or its parent. Our board of directors may amend or
terminate the 2000 Employee Stock Purchase Plan at any time. If our board
increases the number of shares of common stock reserved for issuance under the
2000 Employee Stock Purchase Plan, it must seek the approval of our
stockholders.
54
<PAGE>
RELATED PARTY TRANSACTIONS
Transactions with Directors and Officers
Equity Financings
Members of our board of directors have purchased the following shares of
our common stock and preferred stock:
<TABLE>
<CAPTION>
Preferred Stock
Common -------------------------------------
Stock Series A Series B Series C Series D
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Scott L. Harmon................. 4,387,676 -- -- -- --
Eric L. Jones (1)............... 407,147 1,668,521 196,184 59,058 --
John D. Thornton (2) (3)
with Austin Ventures........... -- 4,588,430 539,507 163,922 1,785,991
Ross B. Garber.................. 69,000 -- -- -- --
David Sikora (4)................ 382,420 -- -- -- --
Michael J. Maples, Sr........... 135,716 -- -- -- --
</TABLE>
--------
(1) Includes holdings of SSM Venture Partners L.P.
(2) Includes holdings of entities affiliated with Austin Ventures.
(3) Includes 1,785,991 shares of Series D Preferred Stock converted from
Ventix preferred stock in conjunction with the Ventix acquisition.
(4) Includes 372,420 shares of common stock converted from Ventix common stock
in conjunction with the Ventix acquisition.
In connection with their respective purchases of common stock, Mr. Harmon
paid $0.0007 per share in May 1997, Mr. Jones and Mr. Maples, Sr. each paid
$0.06 per share in August 1997 and April 1998, respectively, and Mr. Garber
paid $1.50 per share in October 1999. Mr. Sikora holds 372,420 shares of our
common stock as a result of the conversion of his Ventix common stock in the
Ventix acquisition. Mr. Sikora originally paid $.1611 per share for his Ventix
common stock on a post-conversion basis. Mr. Sikora paid $2.00 per share for
10,000 shares of our common stock in February 2000 and has been granted 55,000
options to purchase common stock at a price of $6.61 per share. In connection
with the purchase of preferred stock, Mr. Jones and Mr. Thornton paid $0.599
per share for the Series A Preferred Stock, $3.13 per share for the Series B
Preferred Stock and $6.61 per share for the Series C Preferred Stock. In
connection with the Ventix acquisition, Mr. Thornton received shares of Series
D-1 Preferred Stock valued at $4.627 per share.
In connection with the purchase by Austin Ventures V, L.P. and SSM Venture
Partners, L.P. of our Series A preferred stock, Austin Ventures and SSM became
entitled to appoint a director to our board of directors. See "Principal
Stockholders."
Other Transactions
We loaned Mr. Motola $48,314 in connection with the exercise of his options
to purchase 814,276 shares of common stock. Mr. Motola issued a full recourse
promissory note to us bearing interest at the rate of 5.77% per annum that is
secured by a pledge of the shares acquired and is payable in full by June 12,
2003. Mr. Motola has subsequently retired $43,482 of this loan resulting in a
balance outstanding of $4,832 at June 30, 2000. We also loaned Mr. Motola
$281,940 per his employment arrangement in connection with Mr. Motola's
purchase of Series B preferred stock. Mr. Motola issued a full recourse
promissory note to us bearing interest at the rate of 5.56% per annum that is
secured by a pledge of the shares acquired and is payable in full by July 15,
2003. Mr. Motola has subsequently retired $150,368 of this loan resulting in a
balance of $131,572 at June 30, 2000.
55
<PAGE>
In October 1999, we contributed certain assets to a newly formed company,
All.com, Inc., in exchange for 8,000,000 shares of All.com preferred stock.
All.com provides technical support services over the internet to small and
medium-sized businesses. We subsequently distributed all of this stock to our
stockholders and optionholders of record as of October 29, 1999, pro rata
based on their fully diluted ownership of our capital stock. Our executive
officers and directors as of that date received their pro rata portion of the
All.com shares in the distribution.
As a result of our acquisition of Ventix in January 2000, David Sikora,
President and Chief Executive Officer of Ventix, joined our Board of
Directors.
Indemnification and Limitation of Director and Officer Liability
Our certificate of incorporation limits the liability of our directors and
officers for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. This limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our by-laws provide that we shall indemnify our directors and officers to
the fullest extent permitted by Delaware law. We have also entered into
indemnification agreements with our directors and officers containing
provisions that may require us to, among other things:
. indemnify our directors and officers against liabilities that may arise
by reason of their status or service as directors or officers, other
than liabilities arising from willful misconduct of a culpable nature;
. advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified; and
. obtain directors' and officers' insurance if available on reasonable
terms.
We believe that all of these transactions were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
All future transactions, including loans, between us and our officers,
directors, principal stockholders and their affiliates will be approved by a
majority of our board of directors, including a majority of the independent
and disinterested outside directors, and will continue to be on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 21, 2000 by the following
individuals or groups:
(1) each person or entity who we know own beneficially more than five
percent (5%) of our common stock;
(2) each of the Named Officers;
(3) each of our directors; and
(4) all directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options that are exercisable within
sixty (60) days of August 21, 2000. Shares issuable under stock options are
deemed outstanding for computing the percentage of the person holding options
but are not outstanding for computing the percentage of any other person. The
number of shares of common stock outstanding after this offering includes
5,000,000 shares of common stock being offered for sale by us in this
offering. The percentage of beneficial ownership for the following table is
based upon 41,658,913 shares of common stock outstanding as of August 21, 2000
(after giving effect to the conversion of all of our outstanding preferred
stock to common stock), and 46,658,913 shares of common stock outstanding
after the completion of this offering assuming no exercise of the
underwriters' over-allotment option.
Unless otherwise indicated, the address for each listed stockholder is: c/o
Motive Communications, Inc., 9211 Waterford Centre Boulevard, Suite 100,
Austin, Texas 78758. To our knowledge, except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to all
shares of common stock.
<TABLE>
<CAPTION>
Percent of Shares
Outstanding
Shares Beneficially --------------------
Owned Before the Before the After the
Name and Address of Beneficial Owner Offering Offering Offering
------------------------------------ ------------------- ---------- ---------
<S> <C> <C> <C>
5% Stockholders
Funds Affiliated with Accel
Partners(1)......................... 3,270,910 7.85% 7.01%
428 University Avenue
Palo Alto, CA 94301
Funds Affiliated with Austin
Ventures(2)......................... 7,077,850 16.99 15.17
114 West Seventh Street
1300 Norwood Tower
Austin, TX 78701
Scott Abel(3)........................ 2,679,358 6.43 5.74
8701 North Mopac Blvd., Suite 165
Austin, TX 78759
Officers and Directors
Scott L. Harmon(4)................... 4,387,676 10.53 9.40
Michael J. Maples, Jr.(5)............ 2,681,358 6.44 5.75
Patrick D. Motola(6)................. 856,276 2.06 1.84
Douglas F. McNary(7)................. 992,688 2.37 2.12
Michael J. Maples, Sr................ 135,716 * *
Ross B. Garber....................... 69,000 * *
John D. Thornton(2).................. 7,077,850 16.99 15.17
Eric L. Jones(8)..................... 2,330,910 5.60 5.00
David Sikora(9)...................... 437,420 1.05 *
Executive officers and directors as a
group
(12 persons)(10).................... 20,809,335 48.35% 43.32%
</TABLE>
57
<PAGE>
--------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock
(1) Includes 340,175 shares held by Accel Internet/Strategic Technology Fund
L.P., 157,004 shares held by Accel Investors '97 L.P., 134,106 shares held
by Accel Keiretsu V L.P., 2,567,663 shares held by Accel V L.P. and 71,962
shares held by Ellmore C. Patterson Partners. Accel V Associates L.L.C. is
the general partner of Accel V L.P. and has the sole voting and investment
power over its shares. Accel Internet/Strategic Technology Fund Associates
L.L.C. is the general partner of Accel Internet/Strategic Technology Fund
L.P. and has the sole voting and investment power over its shares. Accel
Keiretsu V Assocites L.L.C. is the general partner of Accel Keiretsu V
L.P. and has the sole voting and investment power over its shares. Arthur
C. Patterson, James R. Swartz, James W. Breyer, Luke B. Evnin, Eugene D.
Hill, J. Peter Wagner, and G. Carter Sednaoui are the general partners of
Accel Investors '97 L.P. and therefore share the voting and investment
powers over the shares held by Accel Investors '97 L.P. Arthur C.
Patterson is the sole general partner of Ellmore C. Patterson Partners,
and therefore has sole voting and investment power over its shares.
(2) Includes 6,341,706 shares held by Austin Ventures V, L.P., 317,503 shares
held by Austin Ventures V Affiliates Fund, L.P., 417,129 shares held by
Silverton Partners and 1,512 shares held by Brian Goffman. Mr. Thornton,
one of our directors, is a general partner of AV Partners IV, L.P., which
is the general partner of Austin Ventures IV-A L.P. and Austin Ventures IV-
B, L.P., and is a general partner of AV Partners V, L.P., which is the
general partner of Austin Ventures V, L.P. and Austin Ventures V
Affiliates Fund, L.P. Mr. Thornton disclaims beneficial ownership of the
shares held by Austin Ventures V, L.P. and Austin Ventures V Affiliates
Fund, L.P., except to the extent of his pecuniary interest therein arising
from his partnership interest in AV Partners V, L.P.
(3) Mr. Abel has granted the underwriters a 30-day option to purchase up to
75,000 shares to cover over-allotments, if any. If such option is
exercised in full, after the offering Mr. Abel will beneficially own
2,604,358 shares or 5.58% of our common stock.
(4) Includes 4,387,676 shares held by SLH Holdings, Ltd.
(5) Includes 1,474,746 shares held by MJMJR, Ltd.
(6) Includes 142,498 shares held by Nancy Elizabeth Motola 1999 Exempt Trust,
142,498 shares held by Patrick D. Motola 1999 Exempt Trust and 529,280
shares held by Patrick D. Motola and Nancy Motola, as community property.
(7) Includes (a) 842,688 shares held by Douglas McNary and (b) options
immediately exercisable for 150,000 shares.
(8) Includes 1,923,763 shares held by SSM Ventures Partners, L.P. Mr. Jones,
one of our directors, is a general partner of SSM Venture Partners L.P.
Mr. Jones disclaims beneficial ownership of the shares held by SSM
Ventures Partners, L.P., except to the extent of his pecuniary interest
therein.
(9) Includes 350,079 shares held by EMODL Partnership, Ltd., 7,447 shares held
by The Elizabeth A. Sikora 1998 Trust, 7,447 shares held by The Madeline
B. Sikora 1998 Trust and 7,447 shares held by The Olivia P. Sikora 1998
Trust and options immediately exercisable for 55,000 shares.
(10) Includes options immediately exercisable for 1,377,000 shares.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, our authorized capital stock will consist
of 500,000,000 shares of common stock, $0.001 par value, and 10,000,000 shares
of preferred stock, $0.001 par value.
Common Stock
As of June 30, 2000 and assuming the conversion of all of our outstanding
preferred stock into common stock, there were 41,626,303 shares of common
stock outstanding that were held of record by approximately 285 stockholders.
There will be 46,626,303 shares of common stock outstanding (assuming no
exercise of the underwriters' over-allotment option and assuming no exercise
after June 30, 2000, of outstanding options or warrants) after giving effect
to the sale of the shares of common stock to the public in this offering and
the conversion of our preferred stock into common stock on completion of this
offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratable dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for the payment
of dividends. In the event of our liquidation, dissolution, or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of
preferred stock, if any, then outstanding. The common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued on completion of this offering will be fully paid and
nonassessable.
Preferred Stock
On the closing of this offering, 10,000,000 shares of preferred stock will
be authorized and no shares will be outstanding. The board of directors has
the authority to issue the preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The board of directors may issue
preferred stock that may have the effect of delaying, deferring or preventing
a change in control of us without further action by the stockholders and may
adversely affect the voting and other rights of the holders of common stock.
The issuance of preferred stock with voting and conversion rights may
adversely affect the voting power of the holders of common stock, including
the loss of voting control to others. We currently have no plans to issue any
of the preferred stock.
Warrant
In conjunction with the Ventix acquisition, we assumed a warrant held by
Intel Corporation for the issuance of up to 74,984 shares of Series D-2
preferred stock with an exercise price of $4.00 per share. Intel may exercise
its warrant if we request certain services to be performed by Intel. We have
not assigned a value to this warrant as we do not intend to request the
services that will make the warrant exercisable.
Anti-takeover Effects of Provisions of Our Certificate of Incorporation,
By-laws and Delaware Law
Amended and Restated Certificate of Incorporation and Restated By-laws
Our amended and restated certificate of incorporation to be effective on
the closing of this offering provides for the division of our board of
directors into three classes of directors, with each class serving a staggered
three-
59
<PAGE>
year term. Any vacancy on the board of directors, regardless of the reason for
the vacancy, may only be filled by vote of the majority of the directors then
in office. The classification system of electing directors may tend to
discourage a third-party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the incumbency of the board of
directors, as the classification of the board of directors generally increases
the difficulty of replacing a majority of the directors.
The amended and restated certificate of incorporation also provides that,
effective on the closing of this offering, all stockholder actions must be
effected at a duly called meeting and not by action in lieu of a meeting. All
stockholder action must be properly brought before any stockholder meeting,
which according to our restated by-laws means that a stockholder must comply
with provisions requiring that we receive advance notice. Further, provisions
of the restated by-laws and the amended and restated certificate of
incorporation provide that the stockholders may amend the by-laws or certain
provisions of the amended and restated certificate of incorporation only with
the affirmative vote of two-thirds of our capital stock. These provisions of
the amended and restated certificate of incorporation and by-laws could
discourage potential acquisition proposals and could delay or prevent a change
in control of us. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors and in
the policies formulated by the Board of Directors and to discourage certain
types of transactions that may involve an actual or threatened change in
control of us. These provisions are designed to reduce our vulnerability to an
unsolicited acquisition proposal. The provisions also are intended to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for our shares and, as a consequence, they also may inhibit
fluctuations in the market price of our shares that could result from actual
or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in our management.
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, or
DGCL Section 203, which regulates corporate acquisitions. DGCL Section 203
prevents certain Delaware corporations, including those whose securities are
listed on the Nasdaq National Market, from engaging, under certain
circumstances in a "business combination" with any "interested stockholder"
for three years following the date that such stockholder became an interested
stockholder. For purposes of DGCL Section 203, a "business combination"
includes, among other things, a merger or consolidation and the sale of 10% or
more of our assets resulting in a financial benefit to the interested
stockholder. In general, DGCL Section 203 defines an "interested stockholder"
as any entity or person beneficially owning 15% or more of our outstanding
voting stock and any entity or person affiliated with or controlling or
controlled by such entity or person. A Delaware corporation may "opt out" of
DGCL Section 203 with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
by-laws resulting from amendments approved by the holders of at least a
majority of the corporation's outstanding voting shares. We have not "opted
out" of the provisions of DGCL Section 203. This provision could discourage
anti-takeover attempts not approved by our Board of Directors, including
attempts that might result in a premium over the market price for shares of
common stock by our stockholders.
Registration Rights
As of June 30, 2000, the holders of approximately 18,395,581 shares of
common stock or rights to acquire such shares will be entitled to rights with
respect to the registration of such shares under the Securities Act. The
holders of registration rights are related to our mandatorily redeemable,
convertible Series A, Series B, Series C, Series D-1, Series D-2 and Series D-
3 preferred stock. Under the terms of the agreement between us and the holders
of such registrable securities, if we propose to register any of our
securities under the Securities Act, either for our own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such registrable securities in the registration. Additionally, such holders
of at least two-thirds of the registrable securities are also entitled to
demand registration rights, pursuant to which they may require us on up to two
occasions to file a registration statement under the Securities Act at our
expense with respect to their registrable securities, and we are required to
use all reasonable efforts to effect such registration. Further, holders of
25% or more of the registrable
60
<PAGE>
securities may require us to file three additional registration statements on
Form S-3 at our expense. All of these registration rights terminate after four
(4) years following the consummation of our initial public offering and are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration and our right not to effect a requested registration within 180
days following the effective date of an offering of our securities pursuant to
Form S-1, including the offering made by this prospectus.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C., and its telephone number is (214) 965-2235.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
On completion of this offering, we will have 46,626,303 shares of common
stock outstanding. Of the 5,000,000 shares which will be sold to the public in
this offering, up to 4,650,000 shares will be available for immediate sale in
the public market as of the date of this prospectus. Approximately 41,626,303
additional shares will be available for sale in the public market from time to
time following the expiration of 180-day lockup agreements with
representatives of the underwriters, subject in some cases to vesting
restrictions on shares held by employees and to compliance with the volume and
other limitations of Rule 144. The table below sets forth the approximate
number of shares eligible for future sale after giving effect to the lock-up
and the holding requirements under Rule 144.
<TABLE>
<CAPTION>
Approximate
Shares
Eligible
Days after Date of for Future
this Prospectus Sale Comment
------------------ ----------- -------
<C> <C> <S>
On Effectiveness.. 4,650,000 Freely tradable shares sold in offering
90 Days........... None Shares salable under Rule 144
Lock-up released; shares salable under Rule
180 Days.......... 35,165,409 144, 144(k) or 701
Thereafter........ 6,460,894 Restricted securities held for one year or less
</TABLE>
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least
one year is entitled to sell within any three-month period commencing 90 days
after the date of this prospectus a number of shares that does not exceed the
greater of (a) 1% of the then outstanding shares of common stock which will be
approximately 466,263 shares immediately after the offering, or (b) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to manner of sale requirements, and depending on the amount
sold, the filing of a Form 144 with respect to such sale. A person or persons
whose shares are aggregated who is not deemed to have been an affiliate of
Motive Communications, Inc. at any time during the 90 days immediately
preceding the sale who has beneficially owned his or her shares for at least
two years is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations described above. Persons deemed to be affiliates
must always sell pursuant to Rule 144, even after the applicable holding
periods have been satisfied.
We are unable to estimate the number of shares that will be sold under Rule
144, since this will depend on the market price for our common stock, the
personal circumstances of the sellers and other factors. Prior to this
offering, there has been no public market for the common stock, and there can
be no assurance that a significant public market for the common stock will
develop or be sustained after the offering. Any future sale of substantial
amounts of the common stock in the open market may adversely affect the market
price of the common stock in this offering.
We, our directors, executive officers and other stockholders, holding an
aggregate of approximately common shares or rights to acquire the
shares, have agreed pursuant to the Underwriting Agreement and other
agreements that we and they will not sell any common stock without the prior
consent of Morgan Stanley & Co. Incorporated for a period of 180 days from the
date of this prospectus, except that we may, without such consent, grant
options and sell shares pursuant to our stock plans.
Any of our employees or consultants who purchased shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of the date of this prospectus, the holders of options
exercisable into approximately shares of common stock will be
eligible to sell their shares on the expiration of the 180-day lockup period,
or subject in certain cases to vesting of such options.
62
<PAGE>
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock issued or reserved for issuance under
our stock plans within 180 days after the date of this prospectus, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act. We intend to register these
shares on Form S-8, along with options that have not been issued under our
stock plans as of the date of this prospectus.
In addition, after this offering, the holders of approximately 41,626,303
shares of common stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares, except for shares
purchased by our affiliates, becoming freely tradable without restriction
under the Securities Act immediately on the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
63
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc., Dain
Rauscher Incorporated and Friedman, Billings, Ramsey & Co., Inc. are acting as
representatives, have severally agreed to purchase, and we have agreed to sell
to them, severally, the number of shares indicated below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated.................................
Deutsche Bank Securities Inc. ....................................
Dain Rauscher Incorporated........................................
Friedman, Billings, Ramsey & Co., Inc. ...........................
----------
Total...........................................................
==========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock in this offering are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock in this offering, other than those covered by the over-
allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $. a share under the public offering price. Any
underwriters may allow, and such dealers may reallow, a concession not in
excess of $. a share to other underwriters or to certain other dealers.
After the initial offering of the shares of common stock, the offering price
and other selling terms may from time to time be varied by the representatives
of the underwriters.
Pursuant to the underwriting agreement, Motive and a selling stockholder
have granted to the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to an aggregate of 750,000 additional
shares of common stock at the public offering price set forth on the cover
page hereof, less underwriting discounts and commissions. The underwriters may
exercise such option solely for the purpose of covering over-allotments, if
any, made in connection with this offering. To the extent such option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of common stock as the number set forth next to such underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all underwriters in the preceding table. If the
underwriter's over-allotment option is exercised in full, assuming the intial
offering price is $11.00 per share the total price to the public would be
$63,250,000, the total underwriters' discounts and commissions would be
$4,427,500 and the total proceeds to us would be $58,055,250 before deducting
estimated offering expenses of $1,200,000.
At our request, the underwriters have reserved up to shares of
common stock to be sold in this offering, at the 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 to the extent such individuals purchase such reserved shares. 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.
We, the directors, officers and certain other of our stockholders have each
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, during the period ending 180 days
after the date of this prospectus, we will not, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
64
<PAGE>
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock (whether
such shares or any such securities are then owned by such person or are
thereafter acquired directly from us); or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
. the sale to the underwriters of the shares of common stock under the
underwriting agreement;
. the issuance of shares of common stock upon the exercise of an option or
a warrant or the conversion of a security outstanding on the date of this
prospectus which is described in the prospectus;
. transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares of common stock; or
. issuances of shares of common stock or options to purchase shares of
common stock pursuant to our employee benefit plans as in existence on
the date of the prospectus and consistent with past practices.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have submitted an application to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "MOTV."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may sell more shares
than they are obligated to purchase under the underwriting agreement, creating
a short position. A short sale is covered if the short position is no greater
than the number of shares available for purchase by the underwriters under the
over allotment option. The underwriters can close out a covered short sale by
exercising the over allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of
shares compared to the price available under the over allotment option. The
underwriters may also sell shares in excess of the over allotment option,
creating a naked short position. The underwriters must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there may
be downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering. As
an additional means of facilitating the offering, the underwriters may bid
for, and purchase, shares of common stock in the open market to stabilize the
price of the common stock. The underwriting syndicate may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock to cover syndicate short positions or to stabilize the price of
the common stock. These activities may raise or maintain the market price of
the common stock above independent market levels or prevent or retard a
decline in the market price of the common stock. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
65
<PAGE>
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the public offering price for the shares of common
stock will be determined by negotiations between us and the representatives of
the underwriters. Among the factors that will be considered in determining the
public offering price are our record of operations, our current financial
position and future prospects, the experience of our management, our sales,
earnings and other financial and operating information in recent periods, the
price-earnings ratios, price-sales ratios, market prices of securities and
financial and operating information of companies engaged in activities similar
to ours. The estimated initial public offering price range set forth on the
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
66
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock issued in this offering
will be passed upon for us by Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Austin, Texas and for the underwriters by Davis Polk &
Wardwell, New York, New York. As of the date of this prospectus, a partnership
associated with Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
beneficially owned an aggregate of 10,000 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1999, and for the years then
ended and the period from inception (April 25, 1997) through December 31,
1997, as set forth in their report. We have included our consolidated
financial statements in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of Ventix Systems Inc. as of December 31, 1998 and
1999 and for the years then ended included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
CHANGE IN INDEPENDENT AUDITORS
At a meeting held on March 16, 2000, our board of directors approved the
engagement of Ernst & Young LLP as our independent auditors for the fiscal
year ending December 31, 1999 to replace the firm of PricewaterhouseCoopers
LLP, who were dismissed as our auditors effective March 16, 2000.
The reports of PricewaterhouseCoopers LLP on our financial statements for
the year ended December 31, 1998 and the period from April 25, 1997
(inception) to December 31, 1997 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles.
Through March 16, 2000 and in connection with the audits of our financial
statements for the year ended December 31, 1998 and the period from April 25,
1997 (inception) to December 31, 1997, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which disagreements, if not resolved to the satisfaction of
PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to
make reference to the matter in their report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the
registration statement or the exhibits and schedules which are part of the
registration statement. For further information with respect to us and our
common stock, see the registration statement and the exhibits and schedules
thereto. Any document we file may be read and copied at the Commission's
public reference room at 450 Fifth Street, N.W., in Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference room. Our filings with the Commission are available to the
public from the Commission's web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file annual reports containing consolidated financial
statements audited by an independent public accounting firm, quarterly reports
containing unaudited consolidated financial data, current reports, proxy
statements and other information with the Commission. You will be able to
inspect and copy such periodic reports, proxy statements and other information
at the Commission's public reference room, and the web site of the Commission
referred to above.
67
<PAGE>
MOTIVE COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Motive Communications, Inc.
Annual Consolidated Financial Statements
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets at December 31, 1998, 1999 and June 30,
2000................................................................... F-3
Consolidated Statements of Operations for the period from inception
(April 25, 1997) through December 31, 1997, the years ended December
31, 1998 and 1999 and the six months ended June 30, 1999 and 2000...... F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the period from inception
(April 25, 1997) through December 31, 1997, the years ended December
31, 1998 and 1999 and the six months ended June 30, 1999 and 2000...... F-5
Consolidated Statements of Cash Flows for the period from inception
(April 25, 1997) through December 31, 1997, the years ended December
31, 1998 and 1999 and the six months ended June 30, 1999 and 2000...... F-6
Notes to Consolidated Financial Statements.............................. F-7
Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1999....................................... F-24
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the six months ended June 30, 2000..................................... F-25
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................................. F-26
Ventix Systems Inc. (An Acquired Business of Motive Communications, Inc.)
Annual Financial Statements
Report of Independent Accountants....................................... F-27
Balance Sheets at December 31, 1998 and 1999............................ F-28
Statements of Operations for the years ended December 31, 1998 and
1999................................................................... F-29
Statements of Changes in Stockholders' Deficit for the years ended
December 31, 1998 and 1999............................................. F-30
Statements of Cash Flows for the years ended December 31, 1998 and
1999................................................................... F-31
Notes to Financial Statements........................................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Motive Communications, Inc.
We have audited the accompanying consolidated balance sheets of Motive
Communications, Inc. (the "Company") as of December 31, 1998 and 1999, and the
related consolidated statements of operations, changes in redeemable
convertible preferred stock and stockholders' equity (deficit), and cash flows
for the period from inception (April 25, 1997) through December 31, 1997 and
for each of the two years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Motive Communications,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for the period from inception (April 25, 1997) through December 31,
1997, and for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst and Young LLP
Austin, Texas
April 24, 2000
F-2
<PAGE>
MOTIVE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, June 30, 2000
---------------- --------------------
1998 1999 Historical Pro Forma
------- ------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 8,589 $ 6,409 $12,728
Short-term investments................ 669 12,674 25,935
Accounts receivable, less allowance of
$0, $0 and $200, respectively........ 1,500 6,588 4,432
Prepaid expenses and other current
assets............................... 210 1,395 1,497
------- ------- -------
Total current assets................ 10,968 27,066 44,592
------- ------- -------
Property and equipment, net............. 672 1,708 3,021
Goodwill and other intangibles, net..... -- -- 22,910
Other assets............................ 325 180 211
------- ------- -------
Total assets........................ $11,965 $28,954 $70,734
======= ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 402 $ 1,158 $ 2,505
Accrued liabilities................... 92 425 317
Deferred revenue...................... 240 4,597 11,039
Current portion of long-term debt..... 91 361 700
------- ------- -------
Total current liabilities........... 825 6,541 14,561
Deferred revenue........................ -- 1,147 5,427
Long-term debt, net of current portion.. 298 713 792
------- ------- -------
Total liabilities................... 1,123 8,401 20,780
------- ------- -------
Commitments and contingencies
Redeemable convertible preferred stock,
net
Preferred Stock: $0.001 par value;
13,500,000 and 15,000,000 shares
authorized, 11,131,965 and 13,618,604
shares issued and outstanding at
December 31, 1998 and 1999,
respectively; 18,648,111 shares
authorized, 18,395,581 shares issued
and outstanding at June 30, 2000;
zero shares authorized, issued and
outstanding on a pro forma basis..... 14,750 31,155 53,521 $ --
------- ------- ------- -------
Stockholders' equity (deficit):
Common stock: $0.001 par value;
37,500,000 shares authorized,
16,575,083 and 18,685,767 shares
issued and outstanding at December
31, 1998 and 1999, respectively;
50,000,000 shares authorized,
23,230,722 shares issued and
outstanding at June 30, 2000;
50,000,000 shares authorized,
41,626,303 shares issued and
outstanding on a pro forma basis..... 17 19 23 42
Additional paid-in capital............ 300 10,300 35,171 88,673
Note receivable from stockholder...... (48) (34) (5) (5)
Deferred stock compensation........... (40) (2,075) (4,830) (4,830)
Other comprehensive income............ -- -- (18) (18)
Accumulated deficit................... (4,137) (18,812) (33,908) (33,908)
------- ------- ------- -------
Total stockholders' equity
(deficit).......................... (3,908) (10,602) (3,567) $49,954
------- ------- ------- =======
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit)..... $11,965 $28,954 $70,734
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
MOTIVE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
Period From
Inception Year Ended Six Months Ended
(April 25, 1997) December 31, June 30,
through December ----------------- -----------------
31, 1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License fees.......... $ -- $ 1,380 $ 4,156 $ 1,603 $ 5,932
Services.............. -- 37 2,118 514 3,346
------ ------- -------- ------- --------
Total revenue....... -- 1,417 6,274 2,117 9,278
------ ------- -------- ------- --------
Cost of revenue:
License fees.......... -- 82 244 90 311
Services.............. -- 422 1,966 603 4,256
------ ------- -------- ------- --------
Total cost of
revenue............ -- 504 2,210 693 4,567
------ ------- -------- ------- --------
Gross margin............ -- 913 4,064 1,424 4,711
------ ------- -------- ------- --------
Operating expenses:
Sales and marketing... 178 1,947 6,339 2,434 8,532
Research and
development.......... 471 1,859 3,713 1,647 3,102
General and
administrative....... 286 732 1,946 771 2,512
Amortization of
goodwill and
intangibles.......... -- -- -- -- 3,989
Amortization of
deferred stock
compensation(1)...... 7 5 743 41 2,329
Costs associated with
spin-off............. -- -- 6,683 123 --
------ ------- -------- ------- --------
Total operating
expenses........... 942 4,543 19,424 5,016 20,464
------ ------- -------- ------- --------
Loss from operations.... (942) (3,630) (15,360) (3,592) (15,753)
Interest income, net.... 123 312 685 171 657
------ ------- -------- ------- --------
Net loss................ $ (819) $(3,318) $(14,675) $(3,421) $(15,096)
====== ======= ======== ======= ========
Basic and diluted net
loss per share......... $(0.44) $ (0.73) $ (1.49) $ (0.52) $ (1.10)
====== ======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per share......... 1,858 4,554 9,842 6,545 13,680
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (0.66) $ (0.48)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 22,268 31,306
</TABLE>
--------
(1) Amortization of deferred stock compensation relates to the following:
<TABLE>
<CAPTION>
Period From
Inception Year Ended Six Months Ended
(April 25, 1997) December 31, June 30,
through December ------------- ----------------
31, 1997 1998 1999 1999 2000
---------------- ------ ------ ----------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cost of services revenue... $ -- $ -- $ 166 $ -- $ 404
Sales and marketing........ -- -- 181 2 1,405
Research and development... -- -- 70 3 229
General and
administrative............ 7 5 326 36 291
----- ------ ------ ------- --------
$ 7 $ 5 $ 743 $ 41 $ 2,329
===== ====== ====== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MOTIVE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands except share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible
Preferred Stock
---------------
Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C>
Issuance of
stock upon
exercise of
options to
employees....... -- $ --
Issuance of
Preferred Stock,
Series A, net... 7,925,472 4,733
Deferred stock
compensation
related to grant
of options to
non-employees... -- --
Amortization of
deferred stock
compensation.... -- --
Net loss........ -- --
---------- -------
Balance at
December 31,
1997............ 7,925,472 4,733
Issuance of
stock upon
exercise of
options for cash
and promissory
note to
employees....... -- --
Issuance of
stock to
vendor.......... -- --
Repurchase and
retirement of
common stock.... -- --
Deferred stock
compensation
related to grant
of options to
non-employees... -- --
Amortization of
deferred stock
compensation.... -- --
Issuance of
Preferred Stock,
Series B, net... 3,206,493 10,017
Net loss........ -- --
---------- -------
Balance at
December 31,
1998............ 11,131,965 14,750
Issuance of
stock upon
exercise of
options to
employees....... -- --
Repurchase and
retirement of
common stock.... -- --
Distribution
associated with
spin-off........ -- --
Payment on note
receivable from
stockholder..... -- --
Stock
compensation
charge resulting
from
acceleration of
stock option
vesting in
connection with
spin-off........ -- --
Deferred stock
compensation
related to grant
of options to
employees....... -- --
Deferred stock
compensation
related to grant
of options to
non-employees... -- --
Amortization of
deferred stock
compensation.... -- --
Issuance of
Preferred Stock,
Series C, net... 2,486,639 16,405
Net loss........ -- --
---------- -------
Balance at
December 31,
1999............ 13,618,604 31,155
Issuance of
Preferred Stock,
Series D, in
connection with
Ventix
acquisition..... 4,776,977 22,366
Issuance of
common stock in
connection with
Ventix
acquisition..... -- --
Issuance of
common stock to
non-employees... -- --
Issuance of
stock upon
exercise of
options to
employees....... -- --
Repurchase and
retirement of
common stock.... -- --
Payment on note
receivable from
stockholder..... -- --
Deferred stock
compensation.... -- --
Deferred stock
compensation
related to
acceleration of
options to
employee........ -- --
Amortization of
deferred stock
compensation.... -- --
Comprehensive
loss:
Net loss........ -- --
Foreign currency
translation
adjustment...... -- --
Total
comprehensive
loss............
---------- -------
Balance at June
30, 2000
(unaudited)..... 18,395,581 $53,521
========== =======
Unaudited pro
forma redeemable
convertible
preferred stock
and
stockholders'
equity at
June 30, 2000... -- $ --
========== =======
<CAPTION>
Stockholders' Equity (Deficit)
----------------------------------------------------------------------------------------------
Note Total
Common Stock Additional Receivable Deferred Other Stockholders'
------------------ Paid-In from Stock Comprehensive Accumulated Equity
Shares Amount Capital Stockholder Compensation Income Deficit (Deficit)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
stock upon
exercise of
options to
employees....... 13,092,271 $ 13 $ 35 $-- $ -- $ -- $ -- $ 48
Issuance of
Preferred Stock,
Series A, net... -- -- -- -- -- -- -- --
Deferred stock
compensation
related to grant
of options to
non-employees... -- -- 14 -- (14) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- 7 -- -- 7
Net loss........ -- -- -- -- -- -- (819) (819)
----------- ------ ---------- ----------- ------------ ------------- ----------- -------------
Balance at
December 31,
1997............ 13,092,271 13 49 -- (7) -- (819) (764)
Issuance of
stock upon
exercise of
options for cash
and promissory
note to
employees....... 3,504,862 4 214 (48) -- -- -- 170
Issuance of
stock to
vendor.......... 55,500 -- 3 -- -- -- -- 3
Repurchase and
retirement of
common stock.... (77,550) -- (4) -- -- -- -- (4)
Deferred stock
compensation
related to grant
of options to
non-employees... -- -- 38 -- (38) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- 5 -- -- 5
Issuance of
Preferred Stock,
Series B, net... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- (3,318) (3,318)
----------- ------ ---------- ----------- ------------ ------------- ----------- -------------
Balance at
December 31,
1998............ 16,575,083 17 300 (48) (40) -- (4,137) (3,908)
Issuance of
stock upon
exercise of
options to
employees....... 2,216,772 2 1,285 -- -- -- -- 1,287
Repurchase and
retirement of
common stock.... (106,088) -- (36) -- -- -- -- (36)
Distribution
associated with
spin-off........ -- -- (176) -- -- -- -- (176)
Payment on note
receivable from
stockholder..... -- -- -- 14 -- -- -- 14
Stock
compensation
charge resulting
from
acceleration of
stock option
vesting in
connection with
spin-off........ -- -- 6,149 -- -- -- -- 6,149
Deferred stock
compensation
related to grant
of options to
employees....... -- -- 2,564 -- (2,564) -- -- --
Deferred stock
compensation
related to grant
of options to
non-employees... -- -- 214 -- (214) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- 743 -- -- 743
Issuance of
Preferred Stock,
Series C, net... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- (14,675) (14,675)
----------- ------ ---------- ----------- ------------ ------------- ----------- -------------
Balance at
December 31,
1999............ 18,685,767 19 10,300 (34) (2,075) -- (18,812) (10,602)
Issuance of
Preferred Stock,
Series D, in
connection with
Ventix
acquisition..... -- -- -- -- -- -- -- --
Issuance of
common stock in
connection with
Ventix
acquisition..... 1,388,356 1 6,422 -- -- -- -- 6,423
Issuance of
common stock to
non-employees... 1,676,667 1 11,082 -- -- -- -- 11,083
Issuance of
stock upon
exercise of
options to
employees....... 1,561,036 2 2,453 -- -- -- -- 2,455
Repurchase and
retirement of
common stock.... (81,104) -- (170) -- -- -- -- (170)
Payment on note
receivable from
stockholder..... -- -- -- 29 -- -- -- 29
Deferred stock
compensation.... -- -- 3,398 -- (3,398) -- -- --
Deferred stock
compensation
related to
acceleration of
options to
employee........ -- -- 1,686 -- (1,686) -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- 2,329 -- -- 2,329
Comprehensive
loss: --
Net loss........ -- -- -- -- -- -- (15,096) (15,096)
Foreign currency
translation
adjustment...... -- -- -- -- -- (18) -- (18)
-------------
Total
comprehensive
loss............ (15,114)
----------- ------ ---------- ----------- ------------ ------------- ----------- -------------
Balance at June
30, 2000
(unaudited)..... 23,230,722 $ 23 $35,171 $(5) $(4,830) $(18) $(33,908) $(3,567)
=========== ====== ========== =========== ============ ============= =========== =============
Unaudited pro
forma redeemable
convertible
preferred stock
and
stockholders'
equity at
June 30, 2000... 41,626,303 $ 42 $88,673 $(5) $(4,830) $(18) $(33,908) $49,954
=========== ====== ========== =========== ============ ============= =========== =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
MOTIVE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period From
Inception
(April 25, 1997) Year Ended Six Months
through December 31, Ended June 30,
December 31, ----------------- -----------------
1997 1998 1999 1999 2000
---------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net loss.............. $ (819) $(3,318) $(14,675) $(3,421) $(15,096)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization....... 21 131 515 175 647
Amortization of
deferred stock
compensation....... 7 5 743 41 2,329
Amortization of
goodwill and
intangibles........ -- -- -- -- 3,989
Other noncash
items.............. -- 3 (43) -- (18)
Stock compensation
charge resulting
from acceleration
of stock option
vesting in
connection with
spin-off........... -- -- 6,149 -- --
Accretion of
discount on short-
term investments... -- -- (222) (8) (464)
Changes in operating
assets and
liabilities net of
Ventix acquisition
effect:
Accounts
receivable....... -- (1,500) (5,088) (1,399) 2,639
Prepaid expenses
and other
assets........... (18) (234) (1,040) 34 (127)
Accounts payable.. 6 396 756 208 412
Accrued
liabilities...... 32 60 333 225 (982)
Deferred revenue.. -- 240 5,504 1,641 10,426
------ ------- -------- ------- --------
Net cash provided by
(used in) operating
activities........... (771) (4,217) (7,068) (2,504) 3,755
------ ------- -------- ------- --------
Cash flows from
investing activities
Purchase of short-term
investments.......... -- (669) (15,687) (2,391) (25,206)
Proceeds from
maturities of short-
term investments..... -- -- 3,903 485 15,288
Cash acquired in
Ventix acquisition... -- -- -- -- 511
Purchase of property
and equipment........ (167) (658) (1,683) (711) (1,553)
------ ------- -------- ------- --------
Net cash used in
investing
activities........... (167) (1,327) (13,467) (2,617) (10,960)
------ ------- -------- ------- --------
Cash flows from
financing activities
Proceeds from issuance
of long-term debt.... -- 389 802 328 559
Payments made on long-
term debt............ -- -- (117) -- (141)
Payments made on line
of credit............ -- -- -- -- (291)
Proceeds from issuance
of redeemable
convertible preferred
stock, net........... 4,733 9,736 16,405 16,405 --
Proceeds from issuance
of common stock...... 48 169 1,301 717 13,567
Repurchase of common
stock................ -- (4) (36) (1) (170)
------ ------- -------- ------- --------
Net cash provided by
financing
activities........... 4,781 10,290 18,355 17,449 13,524
------ ------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ 3,843 4,746 (2,180) 12,328 6,319
Cash and cash
equivalents at
beginning of period.... -- 3,843 8,589 8,589 6,409
------ ------- -------- ------- --------
Cash and cash
equivalents at end of
period................. $3,843 $ 8,589 $ 6,409 $20,917 $ 12,728
====== ======= ======== ======= ========
Supplemental cash flow
disclosure:
Interest paid........... $ -- $ 17 $ 54 $ 20 $ 59
====== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
1. The Company
Motive Communications, Inc. (the "Company" or "Motive"), formerly Motive
Software, Inc., was incorporated in Delaware on April 25, 1997 ("Inception").
The Company provides e-service software for online customer care. The
Company's software products provide its customers with the infrastructure for
delivering personalized service over the Internet.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries located in Switzerland and the United
Kingdom. All significant intercompany transactions and balances have been
eliminated.
Interim Financial Information
The financial information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited but includes all adjustments, consisting
of only normal recurring adjustments, that in the opinion of management is
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows for such periods. Operating results for the six
months ended June 30, 2000 are not necessarily indicative of results to be
expected for the full fiscal year of 2000 or any future period.
Foreign Currency Transactions
For the Company's foreign subsidiaries, the functional currency has been
determined to be the local currency, and therefore, assets and liabilities are
translated at period end exchange rates, and income statement items are
translated at average exchange rates prevailing during the period. Such
translation adjustments are recorded in aggregate as a component of
stockholders' equity. Gains and losses from foreign currency denominated
transactions are included in other income (expense) and are not material. No
foreign operations existed for the years ended December 31, 1998 and 1999.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual amounts and results could differ
from those estimates, and such differences could be material to the financial
statements.
Cash Equivalents
Cash equivalents consist of cash deposits and investments with original
maturities of three months or less when purchased.
Short-Term Investments
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company's short-term investments are classified as
F-7
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
held-to-maturity as the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at
amortized cost, adjusted for accretion of premiums or discounts to maturity.
Such accretion is included in interest income. Interest on securities
classified as held-to-maturity is also included in interest income. Short-term
investments consist primarily of high grade commercial paper, government
securities and certificates of deposits.
For the years ended December 31, 1998 and 1999 and for the six months ended
June 30, 2000, gross unrealized gains and losses on held-to-maturity
securities were insignificant. Following is a summary of our short-term
investments at December 31, 1998 and 1999 and at June 30, 2000 at amortized
cost, which approximates fair value (in thousands):
<TABLE>
<CAPTION>
December 31,
------------ June 30,
1998 1999 2000
---- ------- --------
<S> <C> <C> <C>
Certificates of Deposit................................. $669 $ 2,977 $ 2,078
Corporate Issues........................................ -- 991 --
Government Issues....................................... -- 3,743 20,755
Commercial Paper........................................ -- 4,963 3,102
---- ------- -------
$669 $12,674 $25,935
---- ------- -------
</TABLE>
All of the Company's short-term investments mature within one year of the
applicable reporting period for all periods presented.
Concentration of Credit Risks and Significant Customers
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash and cash equivalents, short-
term investments and trade receivables. The Company's cash and cash
equivalents and short-term investments are placed with high credit quality
financial institutions and issuers. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral. As of December 31, 1999, the Company has not recorded any
allowances for doubtful accounts or incurred any credit losses relating to its
accounts receivable.
Sales to individual customers constituting 10% or more of total revenue for
each period were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer No. 1................................................ --% 16% 26%
Customer No. 2................................................ -- 23 --
Customer No. 3................................................ -- 12 --
Customer No. 4................................................ -- 12 --
Customer No. 5................................................ -- 11 --
Customer No. 6................................................ -- -- 14
</TABLE>
For the first half of 2000, three of our customers each accounted for more
than 10% of our total revenue in the period. Collectively, these customers
represented 57% of our total revenue for the six months ended June 30, 2000.
F-8
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, short-term investments, trade receivables and payables,
accrued expenses and notes payable, approximate fair values.
Property and Equipment
Property and equipment are stated at cost. Property and equipment are
depreciated on a straight-line basis over the useful lives of the assets,
which are generally three to five years. Leasehold improvements are amortized
on a straight-line basis over the shorter of the remaining term of the lease
or its estimated useful life.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets to be Disposed of, if indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through
undiscounted future cash flows. If impairment is indicated, the Company will
measure the amount of such impairment by comparing the carrying value of the
asset to the present value of the expected future cash flows associated with
the use of the asset. To date, no such indicators of impairment have been
identified.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
were not significant for all periods presented.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, prescribes
accounting and reporting standards for all stock-based compensation plans,
including employee stock options. As allowed by SFAS 123, the Company has
elected to continue to account for its employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
Revenue Recognition
License fees revenue is comprised of fees for term and perpetual licenses
of the Company's software. Term licenses and certain perpetual licenses are
sold with maintenance for which the Company does not have vendor specific
objective evidence (VSOE) to determine fair value. As a result, license fees
revenue also includes maintenance for term licenses and certain perpetual
licenses. If the fee for the license has any payment terms that are due in
excess of twelve months from the date of the agreement the fee is considered
to not be fixed and determinable and revenue is recognized commencing in the
period in which the payment becomes due from the customer and is limited to
the amount which has become due. License fees revenue is recognized when
persuasive evidence of an agreement exists, delivery of the product has
occurred, no obligations remain, the fee is fixed and determinable and
collectibility is probable. If an arrangement includes a right of acceptance
or a right to cancel, revenue is recognized when acceptance is received or the
right to cancel has expired. License fees revenue from arrangements with
resellers is recognized upon delivery, limited by guaranteed minimum amounts
due under the arrangement and sell through activity. Through June 30, 2000, no
revenue has been recognized from reseller arrangements.
F-9
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Services revenue is primarily comprised of revenue from professional
services, such as consulting services, maintenance and support. Services
revenue also includes revenue from the prepackaged technical support services
available only on a subscription basis via a website hosted by the Company.
Consulting services include a range of services including installation,
implementation and building of non-complex interfaces for the customer's
specific application. Maintenance agreements provide for technical support and
include the right to unspecified upgrades on an if-and-when-available basis.
In all cases, the Company assesses whether the service element of an
arrangement is essential to the functionality of the other elements of the
arrangement. In this determination, the Company focuses on whether the
software is off-the-shelf software, whether the services include significant
alterations to the features and functionality of the software, whether the
services involve the building of complex interfaces, the timing of payments
and the existence of milestones. Judgment is required in the determination of
whether the building of interfaces to the customer's existing applications
constitute complex interfaces. In making this determination, the Company
considers the following: (1) the relative fair value of the services compared
to the software, (2) the amount of time and effort subsequent to the delivery
of the software until the interfaces or other modifications are completed, (3)
the degree of technical difficulty in building of the interface, (4) whether
the services are available from other vendors or could be performed by the
customer, (5) the degree of involvement of customer personnel and (6) any
contractual cancellation, acceptance, or termination provisions for failure to
complete the interfaces.
In those instances where the Company determines that the service elements
are essential to the other elements of the arrangement, the Company accounts
for the entire arrangement in accordance with ARB No. 45, Long-Term
Construction-Type Contracts, using the relevant guidance in SOP 97-2, Software
Revenue Recognition, and in SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
For those arrangements for which the Company has concluded that the service
element is not essential to the other elements of the arrangement, the Company
determines whether the services are available from other vendors, do not
involve a significant degree of risk or unique acceptance criteria and whether
the Company has sufficient experience in providing the service to be able to
separately account for the service. When the service qualifies for separate
accounting and the Company has VSOE of fair value of the service, the Company
(1) recognizes revenue for the fees associated with a perpetual license using
the residual method in accordance with SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions, regardless
of any separate prices stated within the contract for each element, (2)
recognizes revenue for the fees associated with a perpetual license when VSOE
of fair value does not exist for maintenance ratably over the term of the
agreement, (3) recognizes revenue for the fees associated with a term license
ratably over the term of the agreement, or (4) recognizes revenue for the fees
associated with multiple perpetual licenses with no fixed or determinable fee
as the fees are reported by the customer. VSOE of fair value of services in
multiple element arrangements is based upon rates for consulting and training
services and annual subscription fees for prepackaged technical support
services which the Company has charged in stand alone contracts for services.
For perpetual licensing arrangements, in accordance with paragraph 57 of
SOP 97-2, VSOE of fair value for maintenance is determined by reference to the
price the customer will be required to pay when it is sold separately, that
is, the renewal rate which is the price established by management having
relevant authority. VSOE of fair value for maintenance contracts under
perpetual license arrangements is based upon the Company's
F-10
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
pricing practice that maintenance renewal rates are based upon a percentage of
the quoted license fees in the related contract. Each contract typically
offers additional renewal periods at a stated price or rate. Maintenance
revenue is deferred and recognized on a straight-line basis as services
revenue over the life of the related agreement, which is typically one year.
To date, the Company has not entered into an arrangement solely for license
of products and, therefore, the Company has not demonstrated VSOE of fair
value for the license element. In those instances where perpetual licenses are
bundled with other elements, the Company has used the residual method
following the guidance in SOP 98-9. The Company generally accounts for such
license fees when VSOE exists for all undelivered elements in the arrangement
and when the fair value of all the undelivered elements is less than the
arrangement fee. The Company defers the total fair value of the undelivered
elements, until such time as they are delivered, and recognizes as revenue the
difference between the total arrangement and the amount deferred for the
undelivered elements.
Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
The Company adopted SOP 97-2 and SOP 98-4, Deferral of the Effective Date
of a Provision of SOP 97-2, Software Revenue Recognition, as of January 1,
1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on
software transactions and supercede SOP 91-1, Software Revenue Recognition.
Full implementation guidelines for these standards have not yet been issued.
Once available, the current revenue accounting practices may need to change
and such changes could affect the Company's future revenues and results of
operations. In December 1998, the American Institute of Certified Public
Accountants issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2
provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. The Company does not
expect the final adoption of SOP 98-9 to have a material impact in its future
revenues or results of operations.
Research and Development
Research and development costs are expensed in the period incurred. SFAS
No. 86, Accounting for the Costs of Software to be Sold, Leased or Otherwise
Marketed, requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is
established upon completion of a working model. Costs related to software
development incurred between completion of the working model and the point at
which the product is ready for general release have been insignificant.
Through June 30, 2000, all software development costs have been expensed as
incurred.
F-11
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This statement prescribes the use of the
liability method whereby deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.
Net Loss Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic net income
(loss) per share is computed by dividing the net income (loss) for the period
by the weighted average number of common shares outstanding during the period
less common shares subject to repurchase. Diluted net income (loss) per share
is computed by dividing the net income (loss) for the period by the weighted
average number of common and common equivalent shares outstanding during the
period. The Company has excluded all convertible preferred stock, outstanding
stock options, outstanding warrants to purchase common stock and common stock
subject to repurchase from the calculation of diluted loss per common share
because all such securities are antidilutive for all applicable periods
presented. The total number of shares excluded from the calculations of
diluted net loss per share, prior to application of the treasury stock method
for options, was 15,621,865, 23,114,450, and 23,856,278 for the periods ended
December 31, 1997, 1998 and 1999, respectively.
Under the provision of Staff Accounting Bulletin No. 98, common shares
issued for nominal consideration, if any, would be included in the per share
calculations as if they were outstanding for all periods presented. No common
shares have been issued for nominal consideration.
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that
will automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance).
F-12
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period From Year Ended Six Months Ended
Inception December 31, June 30,
(April 25, 1997) to ----------------- -----------------
December 31, 1997 1998 1999 1999 2000
------------------- ------- -------- ------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Basic and diluted:
Net loss.............. $ (819) $(3,318) $(14,675) $(3,421) $(15,096)
======= ======= ======== ======= ========
Weighted-average
shares of common
stock outstanding.... 8,508 15,235 17,748 17,267 21,748
Weighted-average
shares of common
stock subject to
repurchase........... (6,650) (10,681) (7,906) (10,722) (8,068)
------- ------- -------- ------- --------
Shares used in
computing basic and
diluted net loss per
share................ 1,858 4,554 9,842 6,545 13,680
======= ======= ======== ======= ========
Basic and diluted net
loss per share......... $ (0.44) $ (0.73) $ (1.49) $ (0.52) $ (1.10)
======= ======= ======== ======= ========
Pro forma (unaudited):
Basic and diluted:
Shares used above... 9,842 13,680
Pro forma adjustment
to reflect weighted
average effect of
assumed conversion
of preferred
stock.............. 12,426 17,626
-------- --------
Shares used in
computing pro forma
basic and diluted
net loss per
share.............. 22,268 31,306
======== ========
Pro forma basic and
diluted net loss per
share.................. $ (0.66) $ (0.48)
======== ========
</TABLE>
Unaudited Pro Forma Redeemable Convertible Preferred Stock and Stockholders'
Equity
The unaudited pro forma redeemable convertible preferred stock and
stockholders' equity information at June 30, 2000 reflects the conversion of
the convertible preferred stock into common stock.
Segments
Effective January 1, 1998, the Company adopted the FASB's SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
adoption of SFAS 131 did not have a significant effect on the disclosure of
segment information as the Company continues to consider its business
activities as a single segment.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137, Deferral of
the Effective Date of FASB Statement No. 133, which is effective for fiscal
years beginning after June 15, 2000. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
the Company's financial statements for the year ending December 31, 2001.
Management believes that this statement will not have a material impact on the
Company's financial position or results of operations.
F-13
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
The FASB recently issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, (the "Interpretation"). The
Interpretation provides guidance related to the implementation of APB 25,
Accounting for Stock Issued to Employees. The Interpretation is to be applied
prospectively to all new awards, modifications to outstanding awards and
changes in employee status on or after July 1, 2000. For changes made after
December 15, 1998 to awards that affect exercise prices of the awards, the
Company must prospectively account for the impact of those changes. Management
does not believe the full adoption of the Interpretation will have a material
impact on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements.We believe the Company's current
revenue recognition policies and practices are materially consistent with this
statement. However, full implementation guidelines for this standard have not
yet been issued. Once available, the current revenue accounting practices may
need to change and such changes could affect the Company's future revenue and
earnings.
In May 2000, the Emerging Issues Task Force released Issue No. 00-2,
Accounting for Web Site Development Costs (EITF No. 00-2), which establishes
standards for determining the capitalization or expensing of incurred costs
relating to the development of Internet web sites based upon the respective
stage of development. EITF No. 00-2 will be effective for fiscal quarters
beginning after June 30, 2000 (including costs incurred for projects in
process at the beginning of the quarter of adoption). Management believes that
this issue will not have a material impact on our financial position or
results of operations.
3. Property and Equipment
Property and equipment, which includes purchased software for internal use,
comprises the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- June 30,
1998 1999 2000
----- ------ --------
<S> <C> <C> <C>
Computer software................................... $ 234 $ 492 $ 968
Computer equipment.................................. 430 1,182 2,481
Furniture and fixtures.............................. 131 546 731
Leasehold improvements.............................. 29 132 132
----- ------ ------
824 2,352 4,312
Less: Accumulated depreciation and amortization..... (152) (644) (1,291)
----- ------ ------
$ 672 $1,708 $3,021
===== ====== ======
4. Accrued Liabilities
Accrued liabilities comprises the following (in thousands):
<CAPTION>
December 31,
-------------
1998 1999
----- ------
<S> <C> <C> <C>
Accrued commissions................................. $ 82 $ 268
Other............................................... 10 157
----- ------
$ 92 $ 425
===== ======
</TABLE>
5. Long-term Debt
During 1998, the Company entered into a credit arrangement with a bank
whereby up to $500,000 could be borrowed in the form of a term loan to finance
the acquisition of property and equipment and up to $2.5 million could be
borrowed under a revolving line of credit. The outstanding principal balance
on the term loan is payable monthly in 30 equal installments beginning June
1999. The revolving line of credit arrangement was extended to
F-14
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
May 2000. Borrowings on the line of credit are subject to a borrowing base
limitation of 80% of eligible accounts receivable. During 1999, the Company
entered into an additional credit arrangement with the same bank whereby up to
$1.25 million can be borrowed in the form of a term loan to fund equipment
purchases. Borrowings on the equipment term facility are subject to a
borrowing base limit of 100% of all furniture, fixtures and equipment aged 120
days or less with a cap of $100,000 for software purchases. Upon expiration of
the twelve month interest-only period of the equipment line of credit in May
2000, the outstanding balance of the facility is payable monthly in 30 equal
installments. Borrowings are secured by substantially all of the Company's
assets. The lines of credit contain certain financial covenants and
restrictions as to various matters including the Company's ability to pay
dividends and effect mergers or acquisitions without the bank's prior
approval. At December 31, 1999, the Company was in compliance with such
covenants and restrictions. All facilities bear interest at the bank's prime
lending rate (8.5% and 9.5% at December 31, 1999 and June 30, 2000,
respectively). Amounts outstanding under the term loans at December 31, 1998
and 1999 and June 30, 2000 were $388,915, $1,074,202 and $1,491,667,
respectively. No amounts were outstanding under the revolving line of credit.
Total interest expense incurred during the years ended December 31, 1998 and
1999 was approximately $18,000 and $58,000, respectively. Interest expense for
the six months ended June 30, 2000 was approximately $66,000.
The aggregate maturities of long-term debt at December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $ 361
2001............................................................... 460
2002............................................................... 253
------
$1,074
======
</TABLE>
6. Income Taxes
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $8,192,000 and research and development credit
carryforwards of approximately $281,000. The net operating loss and credit
carryforwards will expire beginning in 2012, if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of
net operating losses before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred taxes as of December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciable assets............................... $ -- $ (8) $ --
----- ------- -------
-- (8) --
Deferred tax assets:
Net operating loss carryforwards................. 298 1,506 3,031
Research and development credit carryforwards.... 20 105 281
Deferred revenue................................. -- -- 1,308
Accrued expenses................................. -- 13 --
Depreciable assets............................... -- -- 17
----- ------- -------
Total deferred tax assets.......................... 318 1,624 4,637
Valuation allowance for net deferred tax asset..... (318) (1,616) (4,637)
----- ------- -------
Net deferred tax assets............................ -- 8 --
----- ------- -------
Net deferred taxes................................. $ -- $ -- $ --
===== ======= =======
</TABLE>
F-15
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
The Company has established a valuation allowance equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the Company's lack of earnings history. The valuation
allowance increased by approximately $1,298,000 and $3,021,000 during 1998 and
1999, respectively.
The Company's provision for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 34% to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate.. (34.0)% (34.0)% (34.0)%
State taxes, net of
federal benefit........ (3.0) (3.0) (1.6)
Permanent items......... .6 .4 .2
Stock compensation...... -- -- 16.0
Research and development
credit................. (2.4) (2.6) (1.2)
Change in valuation
allowance.............. 38.8 39.2 20.6
------ ------ ------
--% --% --%
====== ====== ======
</TABLE>
7. Commitments and Contingencies
The Company leases its facilities and sales offices under various operating
lease agreements which expire through 2004. Rental expense was approximately
$18,000, $46,000 and $627,000, for the periods ended December 31, 1997, 1998
and 1999, respectively. Rent expense for the six months ended June 30, 2000
was approximately $647,000.
Future minimum lease payments under all leases as of December 31, 1999 are
as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $1,020
2001............................................................... 1,000
2002............................................................... 1,005
2003............................................................... 1,005
2004............................................................... 84
------
$4,114
======
</TABLE>
Subsequent to December 31, 1999, the Company leased approximately 117,000
square feet of building space in Austin, Texas for a period of ten years with
occupancy to begin no earlier than November 2000. This building space is
intended to replace the Company's current headquarters.
The Company has entered into an agreement with a vendor to utilize third
party software as a component of the Company's software. This agreement
requires the Company to pay minimum royalties of $50,000 per quarter in fiscal
2001, $250,000 per quarter in fiscal 2002 and $300,000 per quarter in fiscal
2003. No minimum royalties were required in years prior to 2001.
8. Stockholders' Equity
Series A, B, C, D-1, D-2 and D-3 Redeemable Convertible Preferred Stock
The Company has authorized classes of Preferred Stock up to a maximum of
20,000,000 shares. As of June 30, 2000, the Company had authorized 7,925,472
shares of Series A Redeemable Convertible Preferred
F-16
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
Stock ("Series A"), 3,225,639 shares of Series B Redeemable Convertible
Preferred Stock ("Series B"), 2,550,000 shares of Series C Redeemable
Convertible Preferred Stock ("Series C"), 2,067,000 shares of Series D-1
Redeemable Convertible Preferred Stock ("Series D-1"), 2,600,000 shares of
Series D-2 Redeemable Convertible Preferred Stock ("Series D-2"), and 280,000
shares of Series D-3 Redeemable Convertible Preferred Stock ("Series D-3").
On June 6, 1997, the Company issued 7,925,472 shares of Series A, $.001 par
value, to fund its initial operations. The stock was issued for $4,749,999
cash and is presented in the accompanying balance sheets, net of related
offering expenses of $17,410. On July 15, 1998, the Company issued 3,206,493
shares of Series B, $.001 par value, to fund continued research and
development. The stock was issued for $10,047,002 cash and is presented in the
accompanying balance sheets, net of related offering expenses of $29,501. On
June 24, 1999, the Company issued 2,486,639 shares of Series C, $.001 par
value, to fund expansion of the Company's sales and marketing efforts. The
stock was issued for $16,444,950 cash and is presented in the accompanying
balance sheets, net of related offering expenses of $40,000. On January 28,
2000, the Company issued 2,066,309 shares of Series D-1, $.001 par value,
2,524,458 shares of Series D-2, $.001 par value, and 186,210 shares of Series
D-3, $.001 par value, in conjunction with the acquisition of Ventix Systems
Inc. The acquisition was accounted for using the purchase method of
accounting. The Series D-1 and D-2 shares were valued at $4.627 per share and
the Series D-3 shares were valued at $6.04 per share, a total value of
$22,366,187.
Each share of Series A, B, C, D-1, D-2 and D-3 is convertible upon
issuance, at the option of the holder, based on a one for one conversation
ratio equal to the original Series A, B, C, D-1, D-2 and D-3 issue price,
respectively, subject to adjustment for dilution. Each share of Series A, B,
C, D-1, D-2 and D-3 automatically converts into the number of shares of Common
Stock into which such shares are convertible at the then effective conversion
ratio upon: (i) the closing of a public offering of Common Stock at a per
share price of at least $9.92 per share with gross proceeds of at least
$25,000,000, or (ii) the date specified by written consent or agreement of
two-thirds of the then outstanding stockholders of Series A, with respect to
conversion of Series A, and the date specified by written consent or agreement
of seventy-five percent of the then outstanding stockholders of Series B,
Series C, Series D-1, Series D-2 and Series D-3 with respect to conversion of
Series B, Series C, Series D-1, Series D-2 and Series D-3. Accordingly, the
Company has reserved 18,648,111 shares of Common Stock for the conversion of
Series A, B, C, D-1, D-2 and D-3.
Series A, B, C, D-1, D-2 and D-3 are redeemable any time after June 24,
2004 (the "Redemption Commencement Date"), after the receipt by the Company of
a written request from the holders of not less than two-thirds of the then
outstanding shares of Series A or seventy-five percent of the Series B, Series
C, Series D-1, Series D-2 and Series D-3, as the case may be. Shares are
redeemable in three (3) annual installments at a rate of $.599 per share,
$3.13 per share, $6.61 per share, $1.61 per share, $4.00 per share and $6.04
per share for Series A, B, C, D-1, D-2 and D-3, respectively, plus an imputed
dividend of 7% per annum. Imputed dividends accrue from the Redemption
Commencement Date to the applicable redemption date. Declared but unpaid
dividends are due upon redemption.
The holders of the Series A, B, C, D-1, D-2 and D-3 will be entitled to
participate in dividends on Common Stock, when and if declared by the Board of
Directors, based on the greater of the per annum rate of $.042, $.219, $.529,
$.113, $.28 and $.423 for Series A, B, C, D-1, D-2 and D-3, respectively, or
the amount equal to dividends paid on any other outstanding shares of the
Company. The dividends are noncumulative. As of March 31, 2000, no dividends
have been declared by the Board.
F-17
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, Series A, B, C, D-1, D-2 and D-3 holders are
entitled to receive an amount of $.599, $3.13, $6.61, $1.61, $4.00 and $6.04,
respectively, per share, plus any declared but unpaid dividends prior to and
in preference to any distribution to the holders of Common Stock. In addition
to the events above, if consideration other than cash is received by the
Company, the value of such consideration will be deemed its fair market value
on a pro-rata basis. If the Company's legally available assets are
insufficient to satisfy the liquidation preferences, the funds will be
distributed ratably in proportion to the liquidation preference of the Series
A, B, C, D-1, D-2 and D-3.
Warrant
In conjunction with the Ventix acquisition, the Company assumed a warrant
to issue up to 74,984 shares of Series D-2 Redeemable Convertible Preferred
Stock to an investor for an exercise price of $4.00 per share. The warrant
will be earned upon the completion of certain performance milestones that are
connected to a collaboration agreement. The commencement of the collaboration
agreement is at the option of the Company and the Company has no intentions of
requesting the warrant holder to perform the services outlined in the
collaboration agreement. Therefore, the Company asserts that the agreement,
related services and warrant have no value.
Common Stock
At June 30, 2000, there were 23,230,722 shares of Common Stock issued and
outstanding. Of those, 20,172,348 shares were issued out of the Company's 1997
Stock Option/Stock Issuance Plan (the "Plan"), 1,666,667 shares were issued to
Peregrine Systems, 1,388,356 shares were issued in conjunction with the Ventix
acquisition and 3,351 shares issued in connection with the exercise of
outstanding options assumed in conjunction with the Ventix acquisition. Under
the Plan, options to purchase up to 24,217,638 shares of the Company's Common
Stock may be granted. The Plan provides for grants of incentive stock options
or nonqualified options to employees, officers and directors, and consultants
of the Company. Options under the Plan may be granted at prices less than,
equal to, or greater than the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided that the exercise
price of any incentive stock options granted to a participant who owns more
than 10% of the voting power of all classes of the Company's outstanding
capital stock must be equal to at least 110% of the fair market value of the
Common Stock on the date of grant. The maximum term of options granted under
the Plan is ten years from the date of grant (five years in the case of a
participant who owns more than 10% of the voting power of all classes of the
Company's outstanding capital stock). Options under the Plan generally vest
20% on the first anniversary date from the date of grant and 5% quarterly
thereafter. Options under the Plan are exercisable immediately and subject to
repurchase at the original exercise price, until fully vested. The Plan allows
for full recourse loans to certain employees of the Company for purposes of
exercising stock options. The interest rate and terms of repayment are
determined by the Plan Administrator. At June 30, 2000, the Company had $4,832
outstanding from an officer of the Company under such loans. See Note 9.
At December 31, 1999 and June 30, 2000, the Company had 5,348,233 and
3,783,154 shares of Common Stock reserved for issuance upon exercise of stock
options, respectively.
Deferred Stock Compensation
In 1999, the Company recorded total deferred stock compensation of
$2,526,000 in connection with stock options granted to employees and directors
of the Company. This amount represents the difference between the
F-18
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
exercise price of stock option grants for 3,466,291 shares of common stock and
the deemed fair value of the Company's common stock at the time of such grants
which ranged from $0.3333 to $2.00 per share and $0.50 to $3.50 per share,
respectively. During the first half of 2000, the Company recorded deferred
stock compensation of $3,398,000 in connection with grants of stock options to
employees and directors of the Company. This amount represents the difference
between the exercise price of stock option grants for 1,395,814 shares of
common stock and the deemed fair value of the Company's common stock at the
time of such grants which ranged from $2.00 to $5.00 per share and $4.627 to
$5.949 per share, respectively. In addition, the Company recorded deferred
stock compensation of $1,686,000 in connection with the acceleration of
vesting periods for stock options granted to an employee. This amount
represents the difference between the deemed fair value of stock option grants
for 289,833 shares of common stock on the date of grant which ranged from
$0.06 to $5.949 per share and the deemed fair value of the Company's common
stock on the date of modification, $6.61 per share. These amounts are being
amortized over the vesting periods of the applicable options, resulting in
amortization of $489,000 in 1999 and $2.3 million in the first half of 2000.
In 1997, 1998 and 1999, the Company recorded total deferred stock
compensation of $14,000, $38,000 and $214,000, respectively, in connection
with stock options granted to consultants. This amount represents the fair
value of the stock determined using the Black-Scholes method. In applying the
Black-Scholes model, the Company used an expected dividend yield of zero, a
risk-free interest rate of 5.98%, a volatility factor of 0.7 and the deemed
fair value of the Company's common stock on the date such options became
vested. During the first half of 2000, the Company recorded deferred stock
compensation of $9,000 in connection with stock options granted to
consultants.
Pro forma information regarding net loss is required by Statement 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The minimum value for
these options was estimated at the date of grant using a minimum value option
pricing model with the following assumptions for 1997, 1998 and 1999:
volatility of near zero, risk free interest rate of 6%, expected life of the
options of 5 years and an expected dividend yield of 0%.
For the purpose of pro forma disclosures, the estimated fair value of the
options is expensed over the options' vesting periods. The Company's pro forma
information is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------- --------
<S> <C> <C> <C>
Net loss as reported.............................. $(819) $(3,318) $(14,675)
Pro forma net loss................................ (819) (3,321) (14,699)
Diluted net loss per share as reported............ (0.44) (0.73) (1.49)
Pro forma diluted net loss per share.............. (0.44) (0.73) (1.49)
</TABLE>
F-19
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
A summary of the changes in Common Stock options is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Range of Exercise Exercise
Shares Prices Price
----------- ----------------- --------
<S> <C> <C> <C>
Options outstanding, at inception
(April 25, 1997)................. -- $ -- $ --
Granted......................... 13,994,779 0.0007-0.0600 0.007
Exercised....................... (13,092,271) 0.0007-0.0600 0.004
Surrendered..................... -- 0.0007-0.0600 --
----------- -------------- ------
Options outstanding, December 31,
1997............................. 902,508 0.0007-0.0600 0.060
Granted......................... 4,516,144 0.0600-0.3333 0.152
Exercised....................... (3,560,362) 0.0600-0.3333 0.062
Surrendered..................... (143,550) 0.0600-0.3333 0.288
----------- -------------- ------
Options outstanding, December 31,
1998............................. 1,714,740 0.0600-0.3333 0.278
Granted......................... 3,573,791 0.3333-2.0000 1.140
Exercised....................... (2,216,772) 0.3333-2.0000 0.581
Surrendered..................... (347,270) 0.3333-1.7500 0.611
----------- -------------- ------
Options outstanding, December 31,
1999............................. 2,724,489 0.0600-2.0000 1.120
Granted......................... 2,405,844 2.0000-6.6100 4.114
Exercised....................... (1,567,685) 0.0600-6.6100 1.608
Surrendered..................... (129,738) 0.3333-6.6100 2.840
----------- -------------- ------
Options outstanding, June 30,
2000............................. 3,432,910 $0.0600-6.6100 $2.930
=========== ============== ======
</TABLE>
In conjunction with the Ventix acquisition, the Company assumed outstanding
options to purchase up to 13,778 shares of common stock with exercise prices
ranging from $0.6713 to $1.3426 per share. As of June 30, 2000, options to
purchase 3,351 shares of common stock with exercise prices ranging from
$0.6713 to $1.3426 per share have been exercised, options to purchase 7,821
shares of common stock with exercise prices ranging from $0.5102 to $1.3426
per share have been surrendered and options to purchase 2,606 shares of common
stock with exercise prices ranging from $0.5102 to $1.3426 per share remain
outstanding.
The following table summarized information about options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Weighted Average Average Number Average
Exercise Number Remaining Exercise Exercisable Exercise
Price Outstanding Contractual Life Price and Vested Price
-------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.06 272,857 7.21 $0.060 272,857 $0.060
$0.333-$0.433 138,550 8.39 0.356 28,057 0.353
$0.600-$0.733 203,523 8.86 0.691 9,450 0.702
$0.933 83,805 9.02 0.933 1,500 0.933
$1.50-$2.000 1,634,344 9.43 1.859 50,499 1.874
$3.00 128,900 9.67 3.000 -- --
$5.000-$6.610 970,931 9.83 6.540 17,480 5,689
------------- --------- ---- ------ ------- ------
$0.060-$6.610 3,432,910 9.29 $2.930 379,843 $0.601
============= ========= ==== ====== ======= ======
</TABLE>
F-20
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
----------------------- Ended
1997 1998 1999 June 30, 2000
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Weighted-average deemed fair value
of stock options granted during the
year:
Exercise price equal to fair value
of stock on date of grant........ $0.01 $0.04 $ 0.16 $1.06
Exercise price less than fair
value of stock on date of grant.. -- -- $0.56 --
</TABLE>
Stock Split
On July 27, 1999, the Company's Board of Directors authorized a three-for-
two forward stock split payable in the form of a dividend of one additional
share of the Company's capital stock for every two shares owned by
stockholders of record on July 27, 1999. All share information in the
accompanying financial statements has been restated to give retroactive
recognition to the stock split for all periods presented.
9. Related Party Note Receivable
The Company has two full recourse notes receivable from an officer for the
exercise of 814,276 shares of common stock and purchase of 90,000 shares of
Series B Redeemable Convertible Preferred Stock in the amount of $48,314 and
$281,940 at December 31, 1998, in the amount of $33,820 and $131,572 at
December 31, 1999 and in the amount of $4,832 and $131,572 at June 30, 2000,
respectively. A payment in the amount of $28,988 on the first note was
received subsequent to year-end. The notes accrue interest at 5.77% and 5.56%,
respectively, which is due in quarterly installments. The principal balance is
due in July 2003.
10. Employee Benefit Plan
During fiscal 1998, the Company established the Motive Communications, Inc.
401(k) Plan ("the 401(k) Plan") for the benefit of substantially all
employees. The Company is the administrator of the 401(k) Plan. To be eligible
for the 401(k) Plan, employees must have reached the age of 21. Participants
may elect to contribute up to 15% of their compensation to the 401(k) Plan.
The Company may make discretionary matching contributions of a participant's
compensation as well as discretionary profit-sharing contributions to the
401(k) Plan. The Company has not contributed to the 401(k) Plan to date.
11. Spin-off and Distribution of Preferred Stock
On October 18, 1999, the Company contributed certain assets of an internal
initiative valued at $300,000 to a newly formed company, All.com, Inc.
("All.com"), in exchange for 8,000,000 shares of preferred stock of All.com.
In connection with the transition of certain employees from employment with
the Company to employment with All.com, the Company accelerated 1,816,696
employee stock options with an average exercise price of $0.12 per share and a
deemed fair value of $3.50 per share. The Company recorded a stock
compensation charge of $6,148,631. At December 31, 1999, All.com owed the
Company $1,034,077 for reimbursement of personnel costs and other expenditures
made on behalf of All.com through December 31, 1999. Such amount was collected
in full subsequent to December 31, 1999. For the six months ended June 30,
2000, the Company made expenditures of $14,300 on behalf of All.com and that
amount has been reimbursed in full.
On October 29, 1999, the Company distributed its investment in All.com to
its stockholders and stock optionholders via a pro-rata distribution.
Distributions to its stockholders were recorded as a return of capital in the
amount of $176,108 and distributions to its optionholders were recorded as
bonus expense of $123,892.
F-21
<PAGE>
MOTIVE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 is unaudited)
12. Subsequent Events (Unaudited)
In January 2000, the Company acquired Ventix Systems, Inc. in exchange for
6,165,333 shares of capital stock. The following table presents the capital
stock by class of security issued (in thousands except share information):
<TABLE>
<CAPTION>
Class of security Shares Amount
----------------- --------- -------
<S> <C> <C>
Common Stock 1,388,356 $ 6,423
Series D-1 Redeemable Convertible Preferred Stock 2,066,309 9,561
Series D-2 Redeemable Convertible Preferred Stock 2,524,458 11,681
Series D-3 Redeemable Convertible Preferred Stock 186,210 1,125
--------- -------
6,165,333 $28,790
========= =======
</TABLE>
The Company accounted for the Ventix acquisition using the purchase method
of accounting and Ventix has been included in the results of operations from
the date of the acquisition. The following table presents the allocation of
the purchase price (in thousands):
<TABLE>
<S> <C>
In-process research and development $ 270
Acquired technology 300
Workforce 1,840
Goodwill 24,489
Net fair value of tangible assets acquired and liabilities
assumed 2,064
-------
$28,963
=======
</TABLE>
The allocation of in-process research and development, acquired technology
and workforce was based upon an independent valuation. Goodwill and
intangibles are being amortized over their estimated useful lives of two to
three years. In-process research and development was expensed in the first
quarter of 2000. Total amortized expense, including the write-off of acquired
in-process research and development, for the six months ended June 30, 2000
was $4.0 million.
During February 2000, Motive Communications GmbH and Motive Communications
(UK) Ltd. were formed as wholly owned subsidiaries of Motive Communications,
Inc. Motive Communications GmbH is located in Oberrieden, Switzerland and
Motive Communications (UK) Ltd. is located in Richmond, UK.
In March 2000, the Company leased approximately 117,300 square feet of
building space in Austin, Texas for a period of ten years with occupancy to
begin no earlier than November 2000. This new space is intended to replace our
current Austin headquarters. In connection with this lease, the Company issued
a stand-by letter of credit to the lessor in the amount of $1.8 million. The
lessor may draw on this credit should the Company fail to remit its monthly
rent payment or should the Company fail to provide a renewal letter of credit
prior to the expiration of the lease. The letter of credit amount is reduced
to $900,000 upon the closing of an initial public offering with proceeds of at
least $40 million; $450,000 upon the closing of an initial public offering
with proceeds of at least $60 million; and is released in full upon the
closing of an initial public offering with proceeds of at least $80 million.
This letter of credit is secured by a certificate of deposit.
In April 2000, the Company sold 1,666,667 shares of common stock to
Peregrine Systems for $6.61 per share, or approximately $11 million in cash.
F-22
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Effective January 28, 2000, Motive Communications, Inc. ("Motive" or the
"Company") acquired 100 percent of the outstanding stock and assumed all
outstanding stock options of Ventix Systems, Inc. ("Ventix"), a provider of
Internet-based service solutions for e-business applications, in exchange for
6,165,333 shares of Motive capital stock. The total purchase price, including
transaction costs, was approximately $29 million. The acquisition was
accounted for as a purchase business combination.
The accompanying unaudited pro forma condensed consolidated financial
statements are presented in accordance with Article 11 of Regulation S-X.
The unaudited pro forma combined condensed consolidated statements of
operations is based on the audited historical consolidated statement of
operations of Motive and Ventix for the year ended December 31, 1999 and the
six months ended June 30, 2000. This statement, including the weighted average
number of shares used in the calculation of the pro forma per share data,
assumes the acquisition had been consummated on January 1, 1999.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the merger and the acquisition had been
consummated at the beginning of the earliest period presented, nor is it
necessarily indicative of future operating results or financial position. The
pro forma information should be read in conjunction with the accompanying
notes thereto and with Motive's historical consolidated financial statements
and related notes thereto, and Ventix's historical financial statements and
related notes thereto included elsewhere in this prospectus.
F-23
<PAGE>
MOTIVE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Motive Ventix Adjustments Pro Forma
Historical Historical (Note 2) Combined
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
License fees................. $ 4,156 $ 823 $ -- $ 4,979
Services..................... 2,118 108 -- 2,226
-------- ------- -------- ---------
Total revenue.................. 6,274 931 -- 7,205
-------- ------- -------- ---------
Cost of revenue:
License fees................. 244 750 -- 994
Services..................... 1,966 472 -- 2,438
-------- ------- -------- ---------
Total cost of revenue.......... 2,210 1,222 -- 3,432
-------- ------- -------- ---------
Gross margin................... 4,064 (291) -- 3,773
-------- ------- -------- ---------
Operating expenses:
Sales and marketing.......... 6,339 3,740 -- 10,079
Research and development..... 3,713 2,282 -- 5,995
General and administrative... 1,946 1,052 -- 2,998
Amortization of deferred
stock compensation.......... 743 -- -- 743
Costs associated with spin-
off......................... 6,683 -- -- 6,683
Amortization of goodwill and
intangibles................. -- -- 8,926(a) 8,926
-------- ------- -------- ---------
Total operating expenses..... 19,424 7,074 8,926 35,424
-------- ------- -------- ---------
Loss from operations........... (15,360) (7,365) (8,926) (31,651)
Gain on sale of investments.... -- 229 -- 229
Interest income, net........... 685 91 -- 776
-------- ------- -------- ---------
Net loss....................... $(14,675) $(7,045) $ (8,926) $ (30,646)
======== ======= ======== =========
Basic and diluted net loss per
share......................... $ (1.49) $ (2.73)
======== =========
Shares used in computing basic
and diluted net loss per
share......................... 9,842 11,230
Pro forma basic and diluted net
loss per share................ $ (0.66) $ (1.08)
======== =========
Shares used in computing pro
forma basic and diluted net
loss per share................ 22,268 28,433
</TABLE>
F-24
<PAGE>
MOTIVE COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Ventix
Period from Pro Forma Pro
Motive January 1, 2000 to Adjustments Forma
Historical January 31, 2000 (Note 2) Combined
---------- ------------------ ----------- --------
<S> <C> <C> <C> <C>
Revenue:
License fees.......... $ 5,932 $ 75 $ -- $ 6,007
Services.............. 3,346 -- -- 3,346
-------- ----- ----- --------
Total revenue........... 9,278 75 -- 9,353
-------- ----- ----- --------
Cost of revenue:
License fees.......... 311 2 -- 313
Services.............. 4,256 10 -- 4,266
-------- ----- ----- --------
Total cost of revenue... 4,567 12 -- 4,579
-------- ----- ----- --------
Gross margin............ 4,711 63 -- 4,774
-------- ----- ----- --------
Operating expenses:
Sales and marketing... 8,532 309 -- 8,841
Research and
development.......... 3,102 69 -- 3,171
General and
administrative....... 2,512 290 -- 2,802
Amortization of
goodwill and
intangibles.......... 3,989 -- 474(a)(b) 4,463
Amortization of
deferred stock
compensation......... 2,329 -- -- 2,329
-------- ----- ----- --------
Total operating
expenses............. 20,464 668 474 21,606
-------- ----- ----- --------
Loss from operations.... (15,753) (605) (474) (16,832)
Interest income, net.... 657 20 -- 677
-------- ----- ----- --------
Net loss................ $(15,096) $(585) $(474) $(16,155)
======== ===== ===== ========
Basic and diluted net
loss per share......... $ (1.10) $ (1.16)
======== ========
Shares used in computing
basic and diluted net
loss per share......... 13,680 13,893
Pro forma basic and
diluted net loss per
share.................. $ (0.48) $ (0.51)
======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 31,306 31,519
</TABLE>
F-25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. General
The Company accounted for the acquisition of Ventix Systems, Inc. as a
purchase business combination. The accompanying unaudited pro forma condensed
financial statements reflect an aggregate purchase price of approximately $29
million, consisting of the fair value of capital stock issued of approximately
($28.8 million) as well as transaction costs of approximately $173,000. The
following table presents the allocation of the purchase price (in thousands):
<TABLE>
<S> <C>
In-process research and development $ 270
Acquired technology 300
Workforce 1,840
Goodwill 24,489
Net fair value of tangible assets acquired and liabilities assumed 2,064
-------
$28,963
=======
</TABLE>
The allocation of in-process research and development, acquired technology
and workforce was based upon an independent valuation.
2. Unaudited Pro Forma Condensed Consolidated Statement of Operations
The accompanying unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1999 and the six months ended June
30, 2000 have been prepared as if the acquisition was consummated as of
January 1, 1999. Pro forma adjustments were made to reflect the following:
(a) amortization of acquired intangibles, with amortization periods of
two years for amounts allocated to acquired technology and three years for
amounts allocated to workforce and goodwill.
(b) exclusion of the one-time impact for the write-off of acquired in-
process research and development cost recorded by the Company in connection
with the acquisition.
F-26
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Motive Communications, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and cash flows present fairly,
in all material respects, the financial position of Ventix Systems Inc. (the
"Company") at December 31, 1998 and 1999, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Notes 1 and 11, in January 2000, the Company was purchased
by Motive Communications, Inc. The purchaser's basis in the net assets will
differ from that reflected in the accompanying historical financial
statements. No adjustments have been made in the accompanying historical
financial statements to reflect this transaction.
PricewaterhouseCoopers LLP
Austin, Texas
April 14, 2000
F-27
<PAGE>
VENTIX SYSTEMS INC.
BALANCE SHEETS
(in thousands except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 445 $ 862
Short-term investments..................................... -- 2,779
Accounts receivable, net................................... 33 1,183
Prepaid expenses and other current assets.................. 7 224
------- -------
Total current assets..................................... 485 5,048
Property and equipment, net.................................. 359 1,035
Other assets................................................. 6 256
------- -------
Total assets............................................. $ 850 $ 6,339
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................................... $ 73 $ 228
Accrued liabilities........................................ 136 941
Current portion of long-term debt.......................... -- 73
Deferred revenue........................................... -- 296
------- -------
Total current liabilities................................ 209 1,538
Long-term debt, less current portion......................... 375 218
------- -------
Total liabilities........................................ 584 1,756
------- -------
Commitments and contingencies
Redeemable convertible preferred stock, net.................. 2,744 13,739
Warrants to purchase redeemable convertible preferred stock.. 279 630
Stockholders' deficit:
Common stock: $0.001 par value; 34,500,000 shares
authorized; 2,604,900 and 3,181,692 shares issued and
outstanding at December 31, 1998 and 1999,
respectively.............................................. 3 3
Additional paid-in capital................................. 65 482
Treasury stock, at cost; 0 and 15,625 shares,
respectively.............................................. -- (1)
Deferred charge............................................ -- (98)
Deferred compensation...................................... -- (291)
Accumulated other comprehensive loss....................... -- (11)
Accumulated deficit........................................ (2,825) (9,870)
------- -------
Total stockholders' deficit.............................. (2,757) (9,786)
------- -------
Total liabilities, redeemable convertible preferred stock
and stockholders' deficit............................... $ 850 $ 6,339
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
VENTIX SYSTEMS INC.
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Revenue:
Product................................................ $ -- $ 823
Service................................................ 40 108
--------- ---------
Total revenue........................................ 40 931
--------- ---------
Cost of revenue:
Product................................................ -- 750
Service................................................ 17 472
--------- ---------
Total cost of revenue................................ 17 1,222
--------- ---------
Gross margin........................................... 23 (291)
--------- ---------
Operating expenses:
Sales and marketing.................................... 682 3,740
Research and development............................... 1,195 2,282
General and administrative............................. 798 1,052
--------- ---------
Total operating expenses............................. 2,675 7,074
--------- ---------
Loss from operations..................................... (2,652) (7,365)
--------- ---------
Other income (expense):
Gain on sale of investments............................ -- 229
Interest income........................................ 80 102
Interest expense....................................... (2) (11)
--------- ---------
Total other income (expense), net.................... 78 320
--------- ---------
Net loss................................................. $ (2,574) $ (7,045)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
VENTIX SYSTEMS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(in thousands except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
---------------- Paid-In Treasury Deferred Deferred Accumulated Comprehensive Stockholders'
Shares Amount Capital Stock Charge Compensation Deficit Loss Deficit
--------- ------ ---------- -------- -------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1998............ 500,000 $ 1 $ -- $-- $ -- $ -- $ (251) $ -- $ (250)
Comprehensive loss:
Net loss........... -- -- -- -- -- -- (2,574) -- (2,574)
-------
Comprehensive
loss.............. (2,574)
-------
Issuance of common
stock.............. 2,104,900 2 65 -- -- -- -- -- 67
--------- --- ---- --- ---- ----- ------- ---- -------
Balance at December
31, 1998........... 2,604,900 3 65 -- -- -- (2,825) -- (2,757)
Comprehensive loss:
Net loss........... -- -- -- -- -- -- (7,045) -- (7,045)
Other comprehensive
loss on
investments in
available-for-sale
securities........ -- -- -- -- -- -- -- (11) (11)
-------
Comprehensive
loss.............. (7,056)
-------
Issuance of common
stock.............. 576,792 -- 97 -- -- -- -- -- 97
Purchase of treasury
stock.............. -- -- -- (1) -- -- -- -- (1)
Deferred stock
compensation....... -- -- 299 -- -- (299) -- -- --
Issuance of warrants
(Note 9)........... -- -- -- -- (98) -- -- -- (98)
Amortization of
deferred stock
compensation....... -- -- -- -- -- 8 -- -- 8
Issuance of options
for services....... -- -- 21 -- -- -- -- -- 21
--------- --- ---- --- ---- ----- ------- ---- -------
Balance at December
31, 1999........... 3,181,692 $ 3 $482 $(1) $(98) $(291) $(9,870) $(11) $(9,786)
========= === ==== === ==== ===== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
VENTIX SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(2,574) $(7,045)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 112 287
Issuance of stock options for services.................... -- 21
Bad debt expense.......................................... 7 --
Loss on disposition of equipment.......................... -- 5
Amortization of deferred stock compensation............... -- 8
Amortization of bond premiums............................. -- 40
Deferred charge........................................... -- (98)
Changes in operating assets and liabilities:
Accounts receivable....................................... (40) (1,150)
Prepaid expenses and other current assets................. (2) (165)
Accounts payable.......................................... 73 155
Deferred revenue.......................................... -- 296
Accrued liabilities....................................... 80 804
Other..................................................... 1 5
------- -------
Net cash used in operating activities................... (2,343) (6,837)
------- -------
Cash flows from investing activities:
Issuance of employee notes receivable....................... -- (131)
Purchase of intangible asset................................ -- (175)
Purchases of property and equipment......................... (418) (969)
Purchases of short-term investments......................... -- (2,830)
------- -------
Net cash used in investing activities................... (418) (4,105)
------- -------
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred
stock and warrants, net.................................... 13 11,346
Borrowing under line of credit.............................. -- 291
Proceeds from issuance of common stock...................... 67 98
Purchase of treasury stock.................................. -- (1)
Proceeds from note payable.................................. 375 225
Payments on note payable.................................... -- (600)
------- -------
Net cash provided by financing activities............... 455 11,359
------- -------
Net increase (decrease) in cash and cash equivalents........ (2,306) 417
Cash and cash equivalents at beginning of year.............. 2,751 445
------- -------
Cash and cash equivalents at end of year.................... $ 445 $ 862
======= =======
Supplemental disclosure:
Cash paid for interest...................................... $ 2 $ 11
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands except share and per share amounts)
1. The Company
Ventix Systems Inc. (formerly LearningSTATE, Inc.) (the "Company") was
incorporated in Delaware on June 13, 1997 ("Inception") and has developed a
knowledge management software product. Prior to January 1, 1999, the Company
was in the development stage.
As discussed in Note 11, in January 2000, Motive Communications, Inc.
("Motive") acquired all of the outstanding stock of the Company in exchange
for approximately 6,165,000 shares of Motive capital stock. The purchaser's
basis in the net assets will differ from that reflected in the accompanying
historical financial statements. No adjustments have been made in the
accompanying historical financial statements to reflect this transaction.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Product Development Costs
Research and development costs are incurred for the development of new
products or bringing about significant improvements to existing products.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No.
86"), requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then
amortized on a straight-line basis over the estimated product life, or based
on the ratio of current revenues to total projected product revenues,
whichever is greater. Technological feasibility does not occur for the
Company's products until all testing has been performed. To date, the Company
has not capitalized any software development costs.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
deposits cash and cash equivalents with high credit quality financial
institutions.
Short-Term Investments
The Company accounts for short-term investments under Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires
investment securities to be classified as held-to-maturity, trading or
available-for-sale based on the characteristics of the securities and the
activity in the investment portfolio. At December 31, 1999, all short-term
investments are classified as available-for-sale and are carried at market
value. Unrealized losses have been recorded as a separate component of equity
for the current period. Short-term investments consist of funds invested in
commercial paper, corporate bonds, foreign debt securities and debt securities
issued by United States government agencies. At December 31, 1999, all of the
Company's short-term investment securities mature within one year.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, short-term receivables and payables and the line of
credit approximate fair value at December 31, 1998 and 1999.
F-32
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Expenses for repairs and maintenance are
charged to expense as incurred.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25 ("APB
No. 25"), "Accounting for Stock Issued to Employees", and complies with the
disclosure requirements of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation". Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock, amortized over the vesting period.
Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes". Under this method, deferred tax liabilities and
assets are recognized for the expected future tax consequences of temporary
differences between the carrying amounts and the tax bases of assets and
liabilities.
Revenue Recognition
The Company derives revenues from licensing its software and providing
software related services, which include maintenance, training and consulting.
Consulting services include providing implementation, customization and
integration services.
Revenue from license fees is recognized upon delivery as long as persuasive
evidence of an arrangement exists, the fee is fixed or determinable and
collectibility of the fee is probable, in accordance with Statement of
Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". Revenue related to
maintenance is recognized ratably over the service period. Consulting and
training services are recognized when earned.
For multiple element arrangements that include maintenance, the fee is
allocated to each of the elements by applying the residual method as described
in Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition". Vendor specific objective evidence of fair value ("VSOE") is
established for the maintenance obligation by reference to contractual renewal
rates. For multiple element arrangements that include training and/or
consulting services which are not considered essential to the functionality of
the software nor represent significant production, customization or
modification of the software, the amount allocated to such services are
recognized as the services are performed. VSOE of the services is established
by reference to standard rates charged separately for similar services. For
multiple element arrangements that include training and/or consulting services
that are considered either essential to the functionality of the software or
represent significant production, customization or modification of the
software; the entire arrangement fee is recognized on a contract accounting
basis in accordance with the appropriate principles of Statement of Position
81-1, "Accounting for Performance of Construction-Type and Certain Production-
Type Contracts" as required by SOP 97-2.
Deferred Revenues
To the extent the Company has billed customers for the obligation to
deliver licenses or perform future services, such obligations are recorded as
deferred revenue until delivery of the license or services have been
performed. Post-contract customer support revenue is deferred and recognized
over the term of the agreement.
F-33
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Redeemable Convertible Preferred Stock
Redeemable convertible preferred stock is presented net of issuance costs.
Concentration of Credit Risks and Significant Customers
The Company sells its products to various companies across several
industries and geographies. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses.
The Company had customers which accounted for significant percentages of
revenue for the year ended December 31:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Customer A.............................................................. 19%
Customer B.............................................................. 61%
</TABLE>
These customers accounted for significant percentages of net accounts
receivable as follows at December 31:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Customer B.............................................................. 49%
Customer C.............................................................. 22%
Customer D.............................................................. 15%
</TABLE>
3. Property and equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ------
<S> <C> <C>
Computer equipment and software................................ $343 $1,157
Furniture and office equipment................................. 96 223
Tenant improvements............................................ 34 55
---- ------
473 1,435
Less: Accumulated depreciation................................. (114) (400)
---- ------
$359 $1,035
==== ======
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1999 was $112
and $287, respectively.
4. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Compensation and benefits....................................... $101 $320
Commissions..................................................... -- 159
Professional fees............................................... 4 289
Royalties....................................................... -- 57
Other........................................................... 31 116
---- ----
$136 $941
==== ====
</TABLE>
F-34
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
5. Long-Term Debt
At December 31, 1998 the Company had a revolving line of credit with a bank
in the amount of $1 million of which $375 was outstanding at December 31,
1998. The balance of this line of credit was paid in full in May 1999 and the
agreement expired.
During the year ended December 31, 1999, the Company entered into a line of
credit agreement with a bank which allows for total maximum borrowings of $2.3
million. Of the total allowed borrowings, $1.3 million may be used to finance
equipment purchases with the remainder being used to fund working capital
requirements. There was $291 outstanding under this agreement at December 31,
1999. The line bears interest at the bank's prime lending rate plus 0.5% (9%
at December 31, 1999). The line of credit contains certain restrictive
covenants related to liquidity and operating results and is collateralized by
corporate assets. The working capital portion of the line of credit matures in
September 2000 while the equipment portion expires in September 2002.
Advances under the equipment line are available through April 26, 2000.
Through April 26, 2000, the Company is required to make interest only payments
on advances. The principal balance outstanding at April 26, 2000 shall be
payable based on a 36-month amortization, with all outstanding principal due
September 30, 2002.
6. Income Taxes
The difference between the tax benefit derived by applying the Federal
statutory income tax rate to the Company's net losses and the benefit
recognized in the financial statements is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1998 1999
----- -------
<S> <C> <C>
Benefit derived by applying the Federal statutory income tax
rate to net loss
before income taxes........................................ $(875) $(2,408)
Research and development credit carryforwards............... (68) (192)
Expense attributable to change in valuation allowance....... 940 2,586
Permanent differences and other............................. 3 14
----- -------
$ -- $ --
===== =======
</TABLE>
Under the provisions of SFAS No. 109, the components of the net deferred
tax amount recognized in the accompanying balance sheet are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 964 $3,339
Research and development credit carryforwards............. 68 260
Allowanced for doubtful accounts and other................ 3 40
------- ------
Gross deferred tax asset................................ 1,035 3,639
Deferred tax liability:
Depreciation and other.................................... (9) (27)
------- ------
Gross deferred tax liability.............................. (9) (27)
Valuation allowance......................................... (1,026) (3,612)
------- ------
Net deferred tax asset.................................. $ -- $ --
======= ======
</TABLE>
F-35
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against all of its otherwise recognizable net deferred tax
asset.
The Company's net operating loss carryforwards totaling $9,859 at December
31, 1999 expire in varying amounts through 2017. Under section 382 of the
Internal Revenue Code, changes in ownership exceeding certain levels result in
an annual limitation on losses and tax credit carryforwards. Such limitation
may limit the Company's ability to fully utilize its carryforwards prior to
expiration.
7. Commitments and Contingencies
Leases
The Company leases space under an operating lease which expired in December
1999. Rent expense for the year ended December 31, 1998 and 1999 was $71 and
$165, respectively.
Subsequent to December 31, 1999, the Company renewed the existing lease
through March 31, 2000. Payments due under the lease total $48.
8. Redeemable Convertible Preferred Stock
Following is a summary of redeemable convertible preferred stock
("preferred stock") issued by the Company at December 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
Shares Issued and Total Carrying
Series Date Issued Designated Outstanding Proceeds Amount
------ ---------------------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
A November 1997 5,548,333 5,083,333 $ 3,050 $ 2,744
B January 1999 6,979,864 6,778,522 10,100 10,042
September and December
C 1999 971,803 500,000 1,000 953
---------- ---------- ------- -------
13,500,000 12,361,855 $14,150 $13,739
========== ========== ======= =======
</TABLE>
The Company currently has authorization for the issuance of 13,500,000
shares of $.001 par value preferred stock of which 12,361,855 shares were
issued and outstanding at December 31, 1999. The Series A, B, and C preferred
stock are stated net of related offering costs of $27, $58, and $47,
respectively. The Series A preferred stock is also presented net of $279
related to a Series A warrant that was issued in conjunction with the Series A
financing.
All preferred stock may be converted into common stock of the Company at
the stockholders' option or in the event of an initial public offering, at a
rate of one share of common stock per share of preferred stock, as adjusted
for certain events. Accordingly, the Company has reserved 13,278,278 shares of
common stock for issuance upon conversion of the Series A, Series B and Series
C preferred stock, including the exercise of outstanding preferred stock
warrants (Note 9). The preferred stockholders have the right to vote on all
matters and are entitled to the number of votes equal to the number of shares
of common stock into which their respective preferred stock shares are
convertible.
The Series A, Series B and Series C preferred stock have a cumulative
dividend rate of $.042, $.1043, and seven percent of the initial Series C
purchase price (initial purchase price of $2.00 per share after exercise of
Series C warrant), respectively, per share per annum. These dividends will be
earned when and if declared by
F-36
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
the Board of Directors prior to January 1, 2003. After this date the dividends
will begin accruing whether declared or undeclared by the board of directors.
The dividends shall be paid either in cash or in stock upon the event of any
conversion. As of December 31, 1999, no dividends had been declared by the
board of directors.
In the event of liquidation, dissolution or winding up of the Company, the
Series A, Series B and Series C preferred stockholders are entitled to receive
$.60, $1.49 and $2.00 per share plus any accrued and unpaid dividends
(beginning January 1, 2003) as of the liquidation date whether declared or
undeclared. Should the assets of the Company exceed these initial liquidation
preferences, the holders of the common and preferred stock are entitled to
ratable distributions of the remaining assets of the Company. The Series A,
Series B and Series C preferred stock rank equally with each other, and are
senior to all common stock, with respect to all liquidation and dividend
preferences.
Commencing on January 21, 2006, the Company may be required to redeem, at
the preferred stockholders' option, 33 1/3% of the outstanding shares of
preferred stock, and an additional 33 1/3% on January 21, 2007 and 2008, at a
redemption price of $.60, $1.49 and $2.00 per share plus any accrued and
unpaid dividends, for Series A, Series B and Series C preferred stock,
respectively.
9. Warrants
During the year ended December 31, 1999, the Company issued a warrant to
one of its investors to purchase 201,423 shares of Series B preferred stock at
$1.49 per share in connection with a collaboration agreement. The warrant will
be earned upon the completion of certain performance milestones that are
connected to the collaboration agreement. The commencement of the
collaboration agreement is at the option of the Company and the Company has no
intention of requesting the warrant holder to perform the services outlined in
the collaboration agreement. Therefore, the Company asserts that the
agreement, related services and warrant have no value.
The Company issued a warrant to purchase 55,556 shares of Series C
preferred stock at $.001 per share to an investor during the year ended
December 31, 1999. Vesting of this warrant occurred upon the signing of a
contract between the Company and the investor for a specified amount of
revenue. This agreement was signed during 1999, and the warrants vested and
were subsequently exercised. The Company calculated the fair value of this
warrant using the Black-Scholes method on the measurement date and recorded
the fair value of $125 as an offset to revenue earned from that customer. In
applying the Black-Scholes model, the Company used an expected dividend yield
of zero, a risk-free interest rate of 4.88%, a volatility factor of 0.5 and
the deemed fair value ($2.25 per share) of the Company's Series C preferred
stock on the date such warrant became vested.
The Company issued a warrant for the purchase of 250,000 shares of Series C
preferred stock at $2.89 per share to the same investor during 1999. The
vesting requirements of this warrant are tied to the attainment of certain
revenue levels between the Company and the investor. As of December 31, 1999,
these revenue levels had not been attained. The Company computed the fair
value of this warrant at December 31, 1999 using the Black-Scholes method and
recorded the value of $226. In applying the Black-Scholes model, the Company
used an expected dividend yield of zero, a risk-free interest rate of 4.88%, a
volatility factor of 0.5 and the deemed fair value ($2.89 per share) of the
Company's Series C preferred stock on the measurement date. The fair value of
this warrant was recorded as an offset to revenue to the extent that revenue
was recorded from this customer, or $128. The remaining $98 was recorded as a
deferred charge in stockholders' deficit. This charge will reduce future
revenue, if any, from this customer. Due to the effect of the value of the
warrants, there was no revenue recognized related to this customer for the
year ended December 31, 1999.
F-37
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
In conjunction with the issuance of the Series A preferred stock, the
Company issued 465,000 warrants exercisable for Series A shares through
November 24, 2002 at $.001. Such warrants were exercisable beginning November
24, 1997. The Company computed the fair value of this warrant at date of
issuance using the Black-Scholes method. In applying this model, the Company
used an expected dividend yield of zero, a risk-free interest rate of 5.81%, a
volatility factor of 0.5 and the deemed fair value ($0.60 per share) of the
Company's Series A preferred stock on the date such warrant became vested. The
total fair value of these warrants approximates $279. At December 31, 1998,
proceeds from the Series A preferred stock are presented net of the $279 and
$27 of other issuance costs.
10. Stock Options
The Company has reserved an aggregate of 5,000,000 shares of common stock
for issuance under its 1997 Stock Option Plan (the "Plan"). The Plan provides
for grants of incentive stock options or nonqualified options to employees,
officers and directors, and consultants of the Company. Options under the Plan
are granted at the estimated fair value of the shares on the date of grant as
determined by the board of directors. The maximum term of options granted
under the Plan is ten years from the date of grant. Options under the Plan
generally vest over four years. Options under the Plan are exercisable
immediately and the shares are subject to repurchase at the original exercise
price, until fully vested. As such, all outstanding options are exercisable.
In 1999, the Company recorded total deferred stock compensation of $299 in
connection with stock options granted to employees of the Company. This amount
represents the difference between the exercise price of stock option grants
for 639,050 shares of common stock and the deemed fair value of the Company's
common stock at the time of such grants, which ranged from $0.19 to $0.50 per
share and $0.25 to $2.25 per share, respectively. These amounts are being
amortized over the vesting periods of the applicable options, resulting in
amortization expense of $8 in 1999.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Had compensation cost for the Company's
stock option plans been determined based on the fair market value at the grant
dates for awards under the Plan consistent with the method provided by SFAS
No. 123, the Company's net loss would have been increased to the following pro
forma amounts for the years ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Net loss:
As reported.............................................. $(2,574) $(7,045)
Pro forma................................................ $(2,577) $(7,067)
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the minimum value pricing method with the following assumptions:
<TABLE>
<CAPTION>
December 31,
---------------
1998 1999
------- -------
<S> <C> <C>
Dividend yield............................................... -- --
Expected volatility.......................................... -- --
Risk-free rate of return..................................... 4.43% 6.50%
Expected life................................................ 4 years 4 years
</TABLE>
F-38
<PAGE>
VENTIX SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share amounts)
The following table summarizes activity under the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Stock Exercise
Options Price
---------- --------
<S> <C> <C>
Outstanding at January 1, 1998.......................... 1,112,500 $0.007
Granted............................................... 1,368,900 0.060
Exercised............................................. (2,104,900) 0.032
---------- ------
Outstanding at December 31, 1998........................ 376,500 0.060
Granted............................................... 1,214,550 0.230
Exercised............................................. (576,792) 0.170
Canceled.............................................. (46,458) 0.060
---------- ------
Outstanding at December 31, 1999........................ 967,800 $0.210
========== ======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in Years) Price Outstanding Price
--------------- ----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 0.060 180,750 8.27 $ 0.060 180,750 $ 0.060
0.190 600,500 9.15 0.190 600,500 0.190
0.250 42,550 9.54 0.250 42,550 0.250
0.500 144,000 9.78 0.500 144,000 0.500
------------- ------- ------------- ------- -------------
$0.060-$0.500 967,800 $0.060-$0.500 967,800 $0.060-$0.500
============= ======= ============= ======= =============
</TABLE>
The weighted average fair value of options granted during 1998 and 1999 was
$0.06 and $0.23, respectively.
11. Subsequent Events
During January 2000, Motive acquired all of the outstanding stock of the
Company for approximately 6,165,000 shares of Motive capital stock. Prior to
the purchase by Motive, $1 million in cash and certain of the Company's assets
with a net book value of $562 were transferred into a new wholly-owned
subsidiary of the Company, Question.com (the "Transfer"). These assets were
comprised primarily of computer equipment and software and other furniture and
office equipment. The Company then distributed the outstanding shares of
Question.com stock to its shareholders (the "Distribution"). The Transfer and
Distribution were accounted for on a historical cost basis due to the common
control nature of the entities.
* * *
F-39
<PAGE>
[INSIDE BACK COVER]
[Description of graphic: Three-dimensional logo of Motive Communications, Inc.
The bottom of the page centered is our logo and the word "Motive".]
<PAGE>
[LOGO OF MOTIVE COMMUNICATIONS, INC.]
Powering Online Customer Care
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee.............................................. $ 18,216
NASD fee.......................................................... 5,500
Nasdaq National Market initial listing fee........................ 5,000
Printing and engraving............................................ 175,000
Legal fees and expenses of the Company............................ 500,000
Accounting fees and expenses...................................... 450,000
Blue sky fees and expenses........................................ 25,000
Transfer agent fees............................................... 3,500
Miscellaneous..................................................... 17,784
----------
Total $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). Article 7.6 of the Company's by-laws provides for mandatory
indemnification of its directors and officers and permissible indemnification
of agents to the maximum extent permitted by the Delaware General Corporation
Law. The Company's amended and restated certificate of incorporation provides
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to the
Company and its stockholders. This provision in the amended and restated
certificate of incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to the Company for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Company has entered into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit 10.1 hereto and incorporated herein by reference. The
Indemnification Agreements provide the Company's officers and directors with
further indemnification to the maximum extent permitted by the Delaware
General Corporation Law. The Company maintains liability insurance for its
directors and officers. Reference is also made to Section 9 of the
underwriting agreement contained in Exhibit 1.1 to be filed by amendment,
indemnifying officers and directors of the Company against certain
liabilities, and Section 1.10 of the Third Amended and Restated Investors'
Rights Agreement contained in Exhibit 4.1 hereto, indemnifying certain of our
stockholders, including controlling stockholders, against certain liabilities.
Item 15. Recent Sales of Unregistered Securities
Since inception, we have issued and sold the following securities:
1. From inception through June 30, 2000, the Company granted stock options
to purchase 24,490,558 shares of Common Stock at exercise prices ranging
from $0.0007 to $6.61 per share to employees, consultants and directors
pursuant to its 1997 Stock Option/Stock Issuance Plan. In addition, the
Company assumed 13,778 outstanding options at exercise prices ranging
from $0.5102 to $1.3426 per share in conjunction with the Ventix
acquisition.
II-1
<PAGE>
2. From inception through June 30, 2000, the Company issued and sold an
aggregate of 20,437,090 shares of its Common Stock to employees,
consultants and directors for an aggregate cash consideration of
approximately $4,079,407 pursuant to exercises of options granted under
its 1997 Stock Option/Stock Issuance Plan. In addition, the Company
issued and sold an aggregate of 3,351 shares of its Common Stock to
employees for an aggregate cash consideration of approximately $2,500
pursuant to exercises of options assumed in conjunction with the Ventix
acquisition.
3. In June 1997, the Company issued and sold 7,925,472 (post-split) shares
of its Series A Preferred Stock to a total of 8 accredited investors for
an aggregate purchase price of $4,749,999.
4. In July 1998, the Company issued and sold 3,206,493 (post-split) shares
of its Series B Preferred Stock to a total of 14 accredited investors
for an aggregate purchase price of approximately $10,047,002.
5. In June 1999, the Company issued and sold 2,486,639 (post-split) shares
of its Series C Preferred Stock to a total of 11 accredited investors
for an aggregate purchase price of approximately $16,444,949.
6. In January 2000, the Company issued 1,388,356 shares of Common Stock and
2,066,309 shares of Series D-1 Preferred Stock, 2,524,458 shares of
Series D-2 Preferred Stock and 186,210 shares of Series D-3 Preferred
Stock pursuant to the Agreement and Plan of Reorganization by and
between the Registrant, Merger Sub and Ventix, dated January 28, 2000
for an aggregate value of approximately $28,700,000.
7. In April 2000, the Company issued and sold 1,666,667 shares of its
Common Stock to one accredited investor for an aggregate purchase price
of approximately $11,016,669.
Two of the Company's directors, Eric L. Jones and John D. Thornton, each
purchased shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock. In connection with the Ventix acquisition, Mr.
Thornton was issued shares of Series D-1 Preferred Stock. Two of our officers,
Patrick D. Motola and Douglas F. McNary, purchased shares of Series B
Preferred Stock.
The issuances described in Items 15(1) and (2) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
under the Securities Act or Section 4(2) of the Securities Act. The issuances
of the securities described in Items 15(3)-(5) and (7) were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of such Act and Regulation D promulgated thereunder. The issuance of
securities described in Item 15(6) were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of such Act as a
transaction by an issuer not involving a public offering. In the transaction
described in Item 15(6), there was no general solicitation and the issuance
was limited to the holders of Ventix shares. In addition, the recipients of
securities in each such transaction above 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 the Company, to
information about the Company.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant, as amended to date.
3.2* Form of Amended and Restated Certificate of Incorporation of the
Registrant to be filed after the closing of the offering made
pursuant to this Registration Statement.
3.3* Amended and Restated By-laws of the Registrant, as amended to date.
3.4* Form of Amended and Restated By-laws of the Registrant to be
effective upon the closing of the offering made pursuant to their
Registration Statement.
4.1 Third Amended and Restated Investors' Rights Agreement, dated
January 28, 2000, among the Registrant and the stockholders named
therein, as amended.
4.2* Common Stock Purchase Agreement, dated April 7, 2000, between the
Registrant and Peregrine Systems, Inc.
4.3** Specimen Certificate of the Registrant's common stock.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant.
10.1* Form of Indemnification Agreement entered into between the
Registrant and its directors and executive officers.
10.2* 1997 Stock Option/Stock Issuance Plan.
10.3* 2000 Equity Incentive Plan.
10.4* 2000 Employee Stock Purchase Plan.
10.5* Security and Loan Agreement between the Registrant and Imperial
Bank, dated May 19, 1999.
10.6* Lease Agreement between the Registrant and Huskers-Research, Ltd.,
dated March 22, 2000.
10.7* Lease Agreement between the Registrant and Waterford IV HP, Ltd.,
dated October 22, 1999.
+10.8 Distribution Agreement between the Registrant and Peregrine
Systems, Inc. dated April 13, 2000.
+10.9 Software License Agreement between the Registrant and Dell
Products, L.P., dated December 2, 1998.
+10.10 Software License Agreement between the Registrant and Compaq
Computer Corporation, dated April 30, 1999.
+10.11 License Agreement for OEM Customers between the Registrant and
Gateway Companies, Inc. dated September 13, 1999.
16.1* Letter Regarding Change in Independent Auditors.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, counsel to the Registrant. Reference is made to
Exhibit 5.1.
23.3 Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney. Reference is made to page II-5.
27.1* Financial Data Schedule.
99.1 Consent of International Data Corporation.
</TABLE>
--------
* Previously filed.
** To be supplied by amendment.
+ Confidential treatment requested as to certain portions of this exhibit.
II-3
<PAGE>
Item 17. Undertakings
The Registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Amended and Restated
Certificate of Incorporation or the By-laws of the Registrant, Indemnification
Agreements entered into between the Registrant and its officers and directors,
the underwriting agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the 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>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Austin, State of Texas, on this 29th day of August, 2000.
MOTIVE COMMUNICATIONS, INC.
By:
/s/ Scott L. Harmon
__________________________________
Scott L. Harmon
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Scott L. Harmon President, Chief Executive Officer August 29, 2000
_____________________________________ and Director (Principal Executive
Scott L. Harmon Officer)
/s/ R. Logan Wray* Chief Financial Officer (Principal August 29, 2000
_____________________________________ Financial and Accounting Officer)
R. Logan Wray
/s/ Eric L. Jones* Director August 29, 2000
_____________________________________
Eric L. Jones
/s/ Michael J. Maples, Sr.* Director August 29, 2000
_____________________________________
Michael J. Maples, Sr.
/s/ Ross B. Garber* Director August 29, 2000
_____________________________________
Ross B. Garber
/s/ John D. Thornton* Director August 29, 2000
_____________________________________
John D. Thornton
/s/ David Sikora* Director August 29, 2000
_____________________________________
David Sikora
</TABLE>
*By: /s/ Scott L. Harmon
______________________________
Scott L. Harmon
Attorney-in-Fact
Pursuant to Power of Attorney
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Exhibit Page
----------- --------------------------------------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation
of the Registrant, as amended to date.
3.2* Form of Amended and Restated Certificate of
Incorporation of the Registrant to be filed after
the closing of the offering made pursuant to this
Registration Statement.
3.3* Amended and Restated By-laws of the Registrant, as
amended to date.
3.4* Form of Amended and Restated By-laws of the
Registrant to be effective upon the closing of the
offering made pursuant to their Registration
Statement.
4.1 Third Amended and Restated Investors' Rights
Agreement, dated January 28, 2000, among the
Registrant and the stockholders named therein, as
amended.
4.2* Common Stock Purchase Agreement, dated April 7,
2000, between the Registrant and
Peregrine Systems, Inc.
4.3** Specimen Certificate of the Registrant's common
stock.
5.1** Opinion of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel to the
Registrant.
10.1* Form of Indemnification Agreement entered into
between the Registrant and its directors and
executive officers.
10.2* 1997 Stock Option/Stock Issuance Plan.
10.3* 2000 Equity Incentive Plan.
10.4* 2000 Employee Stock Purchase Plan.
10.5* Security and Loan Agreement between the Registrant
and Imperial Bank, dated May 19, 1999.
10.6* Lease Agreement between the Registrant and Huskers-
Research, Ltd., dated March 22, 2000.
10.7* Lease Agreement between the Registrant and
Waterford IV HP, Ltd., dated October 22, 1999.
+10.8 Distribution Agreement between the Registrant and
Peregrine Systems, Inc. dated April 13, 2000.
+10.9 Software License Agreement between the Registrant
and Dell Products, L.P., dated December 2, 1998.
+10.10 Software License Agreement between the Registrant
and Compaq Computer Corporation, dated April 30,
1999.
+10.11 License Agreement for OEM Customers between the
Registrant and Gateway Companies, Inc. dated
September 13, 1999.
16.1* Letter Regarding Change in Independent Auditors.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, counsel to the
Registrant. Reference is made to Exhibit 5.1.
23.3 Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney. Reference is made to page II-5.
27.1* Financial Data Schedule.
99.1 Consent of International Data Corporation.
</TABLE>
--------
* Previously filed.
** To be supplied by amendment.
+ Confidential treatment requested as to certain portions of this exhibit.
