As filed with the Securities and Exchange Commission on March 9,31, 2000
Registration No. 333-30674
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 12
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
SUPPORT.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 7389 94-3282005
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
575 Broadway
Redwood City, CA 94063
(650) 556-9440
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
RADHA RAMASWAMI BASU
Chief Executive Officer
SUPPORT.COM, INC.
575 Broadway
Redwood City, CA 94063
(650) 556-9440
(Name, address, including zip code and telephone number, including area code,
of agent for service of process)
----------------
Copies to:
Jorge del Calvo, Esq. Mark A. Bertelsen, Esq.
Allison Leopold Tilley, Esq. Jose F. Macias, Esq.
Davina K. Kaile, Esq. Betsey Sue, Esq.
Pillsbury Madison & Sutro LLP Wilson Sonsini Goodrich & Rosati
2550 Hanover Street 650 Page Mill Road
Palo Alto, CA 94304 Palo Alto, CA 94304
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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 numbers of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to 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 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EXPLANATORY++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration filed with the Securities +
+and Exchange Commission is effective. This prospectus is not an offer to sell +
+securities, and we are not soliciting offers to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH , 2000
Shares
(logo)
Common Stock
-----------
Before this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$ and $ per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol SPRT.
The underwriters have an option to purchase a maximum of
additional shares to cover over-allotments of shares.
At our request, the underwriters have reserved up to shares of common
stock for sale at the initial public offering price to employees, directors and
other persons associated with us. These shares are part of the shares that
will be issued through the underwriters.
Investing in our common stock involves risks. See Risk Factors on page 7.
Underwriting
Price to Discounts and Proceeds to
Public Commissions Support.com
-------- ------------- -----------
Per Share.................................... $ $ $
Total........................................ $ $ $
Delivery of the shares of common stock will be made on or about .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Chase H&Q
Bear, Stearns & Co. Inc.
Wit SoundView
The date of this prospectus is .
Graphic depicting Support.com's business:
Support.com Logo
eBusiness infrastructure software that increases the strategic
value of support by automating, personalizing and enhancing
user support over the Internet
Corporate information technology [GRAPHIC OF PERSON WEARING HEADSET] Internet [SUPPORT.COM LOGO]
departments use our software to Corporate Customers [GRAPHIC OF PERSON
provide support for the systems Information Technology Departments FACING A COMPUTER
and applications used by their TERMINAL]
employees, partners and customers.
Support outsourcers use our [GRAPHIC OF PERSON WEARING HEADSET]
software to meet customer service Support outsourcers
requirements for the complex
environments they support.
Internet service providers use our [GRAPHIC OF PERSON WEARING HEADSET] [SUPPORT.COM LOGO]
software to address Internet Internet Service [SUPPORT.COM LOGO] Extranet Partners
connectivity, email, browser and Providers Clients
other subscriber issues. Suppliers
Application service providers use [GRAPHIC OF PERSON WEARING HEADSET] Intranet [SUPPORT.COM LOGO]
our technology to enhance their Application Service Employees
web-based software delivery with Providers
automated, web-based support.
------------
TABLE OF CONTENTS
Page
----
Summary............................. 3
Risk Factors........................ 7
Special Note About Forward-Looking
Statements......................... 19
Use of Proceeds..................... 20
Dividend policy..................... 20
Capitalization...................... 21
Dilution............................ 22
Selected Financial Data............. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 24
Business............................ 32
Page
----
Management....................... 51
Certain Transactions............. 63
Principal Stockholders........... 65
Description of Capital Stock..... 67
Recission Offer.................. 71
Shares Eligible for Future Sale.. 72
Underwriting..................... 74
Notice to Canadian Residents..... 77
Legal Matters.................... 78
Experts.......................... 78
Where You Can Find More
Information..................... 78
Index To Financial Statements.... F-1
------------
Dealer Prospectus Delivery Obligation
Until (25 days after the commencement of this offering, all dealers that
participate in transactions with these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealer's obligation to deliver a prospectus when acting as an
underwriter and unsold allotments or subscriptions.
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully before making a decision
whether to purchase our common stock.
Support.com
We are a leading provider of eBusiness infrastructure software that
automates, personalizes and enhances user support. Our eSupport software is
designed to accelerate eBusiness growth by increasing the strategic value of
support organizations that would otherwise constrain expanding Internet
initiatives. eBusiness refers to business conducted with customers and partners
over the Internet, and eSupport is the automated delivery of user support over
the Internet. Our suite of eSupport products allows customers to automate
problem avoidance through system self-healing, promote call avoidance through
user self-service portals and improve problem resolution through intelligent
online assisted support. We sell our products and services to corporate
information technology departments, Internet service providers, application
service providers and support outsourcers. Our customers include Bear Stearns,
Compaq Professional Services, Computer Sciences Corp., everdream, Excite@Home,
Globo Cabo, JCPenney and micronpc.com.
Businesses are rapidly implementing Internet technologies to automate and
improve interactions between employees, customers, and members of their network
of suppliers, distributors and business partners. As businesses increasingly
conduct operations in this environment, high-quality user support can become a
competitive asset that enables them to differentiate their products and
services. Organizations can deploy eSupport solutions to transform support
operations from inefficient cost centers to highly productive and scalable
competitive assets that increase customer loyalty, improve operational
efficiencies and generate incremental revenue. IDC estimates that the market
for these eSupport solutions will grow to over $14 billion in 2003.
We believe technical support has become the most critical form of user
support, as businesses and users increasingly rely upon complex information
technology and the Internet to conduct business. The growing complexity of
information systems, the proliferation of electronic devices, and the
escalation in the number of users has made technical support increasingly
difficult to deliver. Also, many organizations lack an adequate support
infrastructure to meet the demands imposed by the increasing volume of Internet
commerce transactions. These complexities and demands require a highly
personalized, automated and web-based approach to support that intelligently
identifies and resolves user problems.
Our eSupport solution is an integrated suite of web-based software
products--Healing Agent, Support Center, Support Portal, and Foundry--that help
customers automate online information collection, enhance communication between
support analysts and users and enable self-healing and automated problem
resolution. We believe our products deliver the following benefits:
. Reduced costs through the automation and personalization of the support
process.
. Increased customer satisfaction through rapid problem resolution.
. Accelerated eBusiness growth by converting the traditional call center
into a business services desk that increases the efficiency in the
support process and generates revenues.
3
We believe that our leadership in providing eSupport infrastructure software
gives us a competitive advantage as we develop solutions to address broader
customer support opportunities.
We were incorporated in Delaware in December 1997 under the name Replicase,
Inc. We changed our name to Tioga Systems, Inc. in October 1998 and to
Support.com in December 1999. Our principal executive offices are located at
575 Broadway, Redwood City, California 94063, and our telephone number at that
address is (650) 556-9440. Our web site is located at www.support.com. The
information on our web site is not part of this prospectus.
Our trademarks include Support.com, the Support.com logo, ContextResponse
Technology, Self-Healing, SupportAction and TierZero. This prospectus also
includes trade names, trademarks and service marks of other companies and
organizations.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
4
The Offering
Common stock offered by Support.com................ shares
Common stock to be outstanding after the offering.. shares
Use of proceeds.................................... For repayment of debt and
general corporate
purposes, including
working capital.
Proposed Nasdaq National Market symbol............. SPRT
----------------
Unless otherwise indicated, the number of shares of our common stock to be
outstanding after this offering is based on the number of shares outstanding on
December 31, 1999 and assumes:
. no exercise of the underwriters' over-allotment option,
. the exercise of warrants to purchase 38,461 shares of our preferred stock
that will expire if not exercised before completion of this offering and
. conversion of all outstanding shares of preferred stock into common
stock,
and excludes:
. 3,944,895 shares issuable upon exercise of options outstanding at a
weighted average exercise price of $0.47 per share,
. 245,189 shares issuable upon exercise of warrants outstanding and
. 7,307,545 additional shares available for future issuance under our stock
plans.
5
Summary Financial Data
(in thousands, except per share data)
Period from
incorporation on
December 3, 1997 Year Ended
to December 31, December 31,
1998 1999
---------------- ------------
Statement of Operations Data:
Total revenue................................... $ 18 $ 3,315
Loss from operations............................ (2,804) (14,464)
Net loss........................................ (2,750) (14,294)
Accretion on redeemable convertible preferred
stock.......................................... (214) (1,072)
Net loss attributable to common stockholders.... (2,964) (15,366)
Net loss per share:
Basic and diluted............................. (0.57) (2.31)
Weighted average shares--basic and diluted.... 5,227 6,643
Pro forma net loss per share:
Basic and diluted............................. (0.71)
Weighted average shares--basic and diluted.... 20,137
December 31, 1999
---------------------
Pro Forma
Actual as Adjusted
-------- -----------
Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $ 12,489 $
Working capital........................................... 9,698
Total assets.............................................. 17,525
Long-term obligations, net of current portion............. 2,277
Redeemable convertible preferred stock.................... 21,449
Stockholders' equity (deficit)............................ (13,253)
----------------
The statement of operations for the year ended December 31, 1998 is
presented for the period from our incorporation on December 3, 1997. Operating
expenses totaled approximately $9,000 for the period from our incorporation on
December 3, 1997 to December 31, 1997.
Please see note 1 of the notes to the financial statements for an
explanation of the determination of the number of shares used in computing per
share data.
The pro forma as adjusted balance sheet data gives effect to the sale of the
shares of common stock that we are offering under this prospectus at an
assumed initial public offering price of $ per share and after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses payable by us.
6
RISK FACTORS
You should carefully consider the risks described below and the other
information in this prospectus before deciding to invest in shares of our
common stock. If any of the following risks actually occur, our business,
results of operations and financial condition would likely suffer. In these
circumstances, the market price of our common stock could decline, and you may
lose all or part of your investment.
Risks Related to Support.com
We expect continuing losses and may never achieve profitability, which may
cause the market price of our stock to decline.
We incurred net losses of approximately $17.0 million for the period from
December 3, 1997, through December 31, 1999. We expect to continue to incur
substantial net losses in the future. If we do not become profitable within the
timeframe expected by securities analysts or investors, the market price of our
stock will likely decline. If we continue to incur net losses, we may not be
able to increase our number of employees or our investment in capital
equipment, sales, marketing and research and development programs. We do not
know when or if we will become profitable. If we do achieve profitability, we
may not sustain or increase profitability in the future and may not be able to
continue to operate.
Our quarterly results fluctuate and if we do not meet quarterly financial
expectations, our stock price could decline.
We were incorporated in December 1997. Because of our limited operating
history and other factors, our quarterly revenue and operating results are
difficult to predict. Our quarterly revenue and operating results may fluctuate
from quarter to quarter. It is possible that our operating results in some
quarters may fall below the expectations of securities analysts or investors,
which would likely cause the market price of our common stock to decline.
Several factors are likely to cause fluctuations in our operating results,
including:
. demand for our eSupport infrastructure software;
. the price and mix of products and services we or our competitors offer;
. our ability to retain customers; and
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure.
We expect to continue to spend substantial financial and other resources on
developing and introducing new products and services, and expanding our sales
and marketing organization and operating infrastructure. We expect that our
operating expenses will continue to increase in absolute dollars and may
increase as a percentage of revenue. If our revenue does not correspondingly
increase, our business and operating results could suffer. We base our expense
levels in part on our expectations regarding future revenue levels. If our
revenue for a particular quarter is lower than we expect, we may be unable to
proportionately reduce our operating expenses for that quarter.
7
Our quarterly results depend on the size of a small number of orders, so the
delay or loss of any single large order during a quarterly period, and
especially an order for a perpetual license rather than a subscription license,
could harm that quarter's results and cause our stock price to decline.
Our operating results could suffer if any large orders are delayed or
cancelled in any future period. Each quarter, we derive a significant portion
of our license revenue from a small number of relatively large orders for the
licensing of our eSupport infrastructure software. We also license our eSupport
infrastructure software under perpetual and subscription licenses. Perpetual
licenses typically result in our recognition of a larger amount of revenue in
the quarter in which the license is granted as compared with subscription
licenses. Revenue from a perpetual license is generally recognized upon
delivery of a product. Revenue from a subscription license is recognized on a
monthly basis over the term of the subscription, which is typically three
years. In 1999, though 18% of our licenses were perpetual, these licenses
accounted for 67% of our revenue. We expect that we will continue to depend
upon a small number of large orders for a significant portion of our license
revenue.
Because a small number of customers has accounted for and may continue to
account for substantial portions of our revenue, our revenue could decline due
to the delay of customer orders or the failure of existing customers to renew
licenses.
In 1999, Bear Stearns accounted for 53% of our total revenue and Compu.com
accounted for 10% of our total revenue. No other single customer accounted for
10% or more of our total revenue in 1999, although our top four customers
together accounted for approximately 81% of our total revenue in 1999. Because
we have a small number of customers and a few customers are likely to continue
to account for a significant portion of our revenue, our revenue could decline
due to the loss or delay of a single customer order or the failure of an
existing customer to renew its subscription license. We may not obtain
additional customers. The failure to obtain additional customers, the loss or
delay of customer orders and the failure of existing customers to renew
licenses will harm our business and operating results.
We face competitive price pressures which may reduce our gross margin and could
harm our operating results.
If competitive price pressures cause prices to fall faster than we expect or
if we must reduce our prices for any reason, we may experience pressure on our
gross margin. Our gross margin will also depend in part on the following:
. our costs related to third-party technologies in our product offerings;
. increased services-related costs associated with increased services
orders; and
. increased licenses and sales through indirect channels which typically
carry lower gross margins.
We must achieve broad adoption and acceptance of our eSupport products and
services or our business will suffer.
We must achieve broad market acceptance and adoption of our products and
services or our business and operating results will suffer. Specifically, we
must encourage our customers to transition from using traditional support
methods. To accomplish this, we must:
. continually improve the performance, features and reliability of our
products and services to address changing industry standards and customer
needs; and
8
. develop integration with other support-related technologies.
We may have little or no control over the factors that might influence
market acceptance of our solution. These factors include:
. the willingness of enterprises to transition to automated support and
eSupport;
. the willingness of businesses to manage high volumes of customer
communications over the Internet;
. acceptance of competitors' automated support or eSupport solutions; and
. changes in security and reliability of online transactions and
communications.
We must attract and retain qualified personnel, which is particularly difficult
for us because we are headquartered in the San Francisco Bay Area, where
competition for personnel is extremely intense.
Our future success will also depend on our ability to attract, retain and
motivate highly skilled personnel. If we fail to retain and recruit the
necessary personnel, our ability to develop new products and services and to
provide acceptable levels of customer service could suffer. We currently plan
to substantially increase our number of employees over the next 12 months.
Competition for these personnel is intense, especially in the San Francisco Bay
Area. We have had difficulty hiring qualified personnel as quickly as we have
desired. In particular, we may be unable to hire a sufficient number of
qualified support, training and engineering professionals. If we hire employees
from our competitors, these competitors may claim that we have engaged in
unfair hiring practices. We could incur substantial costs in defending
ourselves against any of these claims, regardless of their merits.
Failure of our sales and marketing activities to extend our brand recognition
would prevent us from achieving broad acceptance of our eSupport software.
If we do not successfully expand our sales and marketing activities, we
cannot expand our business and our stock price could decline. We believe that
continued expansion of our brand recognition will be critical to achieve
widespread acceptance of our eSupport infrastructure software. Favorable public
perception of our brand will depend largely on our ability to continue
providing our customers with effective eSupport infrastructure software and the
success of our marketing efforts. Our brand promotion activities may not yield
increased revenue and, even if they do, any increased revenue may not offset
the expenses we incur in building our brand.
We must develop and introduce new versions of eSupport infrastructure software
to meet changing customer demands or technological standards or our business
will suffer.
If we fail to develop, in a timely manner, new or enhanced versions of our
eSupport infrastructure software or to provide new products and services that
achieve rapid and broad market acceptance, our business will suffer. We may
fail to identify new product and service opportunities successfully. Our
existing products will become obsolete if we fail to introduce new products or
product enhancements that meet new customer demands, support new standards or
integrate with new or upgraded versions of packaged applications. Product
innovations may not achieve the market penetration or price stability necessary
for profitability.
9
Our eSupport software may not operate with the hardware and software platforms
that are used by our customers now or in the future, and as a result our
business and operating results may suffer.
We currently serve a customer base with a wide variety of constantly
changing hardware, packaged software applications and networking platforms.
With the exception of our Support Portal, our eSupport infrastructure software
is currently available only on Microsoft Windows operating systems. If there is
widespread adoption of other operating system environments, or if we fail to
release versions of our eSupport infrastructure software that are compatible
with these other operating systems, our business and operating results will
suffer. Our future success also depends on the following:
. our ability to integrate our product with multiple platforms and to
modify our product as new versions of packaged applications are
introduced;
. the number of different operating systems and databases that our product
can work with; and
. our management of software being developed by third parties for our
customers or for use with our product.
We do not know if our business model will sustain revenue growth or be
profitable. We may have to change our business model in order to become
profitable and we may not be able to do so successfully.
Our business depends on our ability to generate revenue streams from
multiple sources, including direct and indirect sales of software products and
sales of our services. We do not know if our business model will succeed or be
sustainable as our business grows. Therefore, we may change our business model
to attempt to take advantage of new business opportunities, including business
areas in which we do not have extensive experience. Furthermore, we may revise
our business model as consumer preferences change and new competitors emerge.
If we make these changes to our business model and are not successful, it will
harm our business and reputation.
Our products and services rely on third-party programming tools and
applications, and if we lose access to these tools and applications or are
unable to modify our product in response to changes in these tools and
applications, our revenue could decline.
We depend upon access to third-party programming tools and application
program interfaces, known as APIs, used for integration of external software
products and our software. If the provider of applications we rely on denies or
delays our access to their APIs, our business may be harmed. Some application
providers may become competitors or establish alliances with our competitors,
increasing the likelihood that we would not be granted access to their APIs.
Loss of the ability to use these technologies, delays in upgrades or failure of
these third parties to support these technologies could cause our revenue to
decline.
We rely on third-party technologies and our inability to use or integrate
third-party technologies could harm our business.
We intend to continue to license technologies from third parties including
applications used in our research and development activities and technologies,
which are integrated into our products and services. These technologies may not
continue to be available to us on commercially reasonable terms or at all. We
may fail to successfully integrate any licensed technology into our products or
services. Third-party licenses expose us to increased risks. These risks
include, but are not limited to:
. risks of product malfunction after the integration of new technology;
10
. the diversion of resources from the development of our own proprietary
technology; and
. our inability to generate revenue from new technology sufficient to
offset associated acquisition and maintenance costs.
Our inability to obtain any of these licenses could delay product and
service development until equivalent technology can be identified, licensed and
integrated. This would harm our business and operating results.
We may engage in future acquisitions or investments that could dilute our
existing stockholders, or cause us to incur significant expenses which could
harm our business.
We may acquire or invest in complementary businesses, technologies or
products. We recently entered into an agreement to evaluate technology that
relates to problem identification, and as part of the agreement, we have an
option to purchase this technology for up to $11,350,000, which we may or may
not exercise. If we are unable to use or integrate any newly acquired entities
or technologies effectively, our operating results could suffer. Future
acquisitions by us could also result in large and immediate write-offs,
incurrence of debt and contingent liabilities or amortization of expenses
related to goodwill and other intangibles, which could harm our operating
results. Additional funds to finance any acquisitions may not be available on
terms that are favorable to us, or at all, and, in the case of equity
financings, may dilute our stockholders. Even if completed, we may be unable to
operate any acquired businesses profitably.
Our recent growth has placed a strain on our management systems and resources
and if we fail to integrate new employees or manage our future growth, our
business could suffer.
We are currently experiencing a period of rapid expansion in our personnel,
facilities, systems and infrastructure. For example, substantially all of our
employees were hired in 1999. Our expansion has placed, and we expect that it
will continue to place, a significant strain on our management controls and
operational and financial resources. Our failure to manage growth could harm
our ability to provide adequate levels of service to our customers, disrupt our
operations, delay execution of our business plan and harm our business. We
expect further significant expansion, including expansion outside the San
Francisco Bay Area. We will need to obtain additional office space prior to the
end of 2000, and if we fail to obtain sufficient space, our business could
suffer.
We have recently hired a number of new senior management personnel and their
failure to integrate effectively may interfere with our operations.
Over the last 12 months, we have hired a number of new officers, including
our chief executive officer, Radha R. Basu, our chief financial officer, Brian
M. Beattie, and our senior vice president of sales and business development,
Jim R. Hilbert. These individuals, who have worked together for only a short
period of time, must spend a significant amount of time learning our business
model and management system while performing their regular duties. The
integration of new personnel could disrupt our ongoing operations. If our
senior management are unable to work effectively as a team, our business
operations could be harmed.
Because we do not have long-term employment agreements with most of our key
personnel, we may lose their services, which in turn would harm our business.
Our success will depend on the skills, experience and performance of our
senior management, engineering, sales, marketing and other key personnel. We do
not have long-term employment
11
agreements with many of our key employees. The loss of the services of any of
our senior management or other key personnel, including our chief executive
officer, Radha R. Basu, our chief financial officer, Brian Beattie, our chief
technology officer, Scott W. Dale, and our chief software officer, Cadir B.
Lee, could harm our business.
Our failure to establish and expand our strategic alliances would harm our
ability to achieve market acceptance of our eSupport infrastructure software.
If we fail to maintain, establish or successfully implement strategic
alliances, our ability to achieve market acceptance of our eSupport
infrastructure software will suffer and our business and operating results will
be harmed. Specifically, we must establish and extend existing distribution
alliances with specialized technology and services firms such as support
outsourcers. We must also establish and extend existing solutions alliances
with leading providers of complementary support technologies, including call
center or help desk management companies, knowledge management companies and
systems management firms.
We need to expand and upgrade our infrastructure to meet customer requirements
and our failure to do so would harm our business.
As the volume and complexity of customers' needs increase, we will need to
expand our systems and network infrastructure. We may not be able to expand or
adapt our network infrastructure to meet additional demand or our customers'
changing requirements in a timely manner, or at all. The expansion and
adaptation of our network infrastructure for any reason will require
substantial financial, operational and management resources as well as
uncertain equipment incompatibility and capacity issues.
eSupport products depend on complex software and our business and reputation
could suffer if our products fail to perform properly due to errors or similar
problems.
Our eSupport products depend on complex software, both internally developed
and licensed from third parties. Complex software often contains errors. These
errors could result in:
. delays in product shipments;
. unexpected expenses and diversion of resources to correct errors;
. damage to our reputation;
. lost sales;
. product liability claims;
. delays in or loss of market acceptance of our products; and
. product returns.
Our system security may be breached, we may be subject to claims associated
with invasion of privacy or inappropriate disclosure and our business and
reputation could suffer.
A fundamental requirement for online communications, transactions and
support is the secure transmission of confidential information. Third parties
may attempt to breach our security or that of
12
our customers. We may be liable to our customers for any breach in security and
any breach could harm our business and reputation. Our software contains
features which may allow us or our customers to control, monitor or collect
information from computers running the software without notice to the computing
users. Therefore we may be subject to claims associated with invasion of
privacy or inappropriate disclosure, use or loss of this information. Any
imposition of liability, particularly liability that is not covered by
insurance or is in excess of insurance coverage, could harm our operating
results. Also, computers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays or loss of data. We may be required to expend significant
capital and other resources to further protect against security breaches or to
correct problems caused by any breach.
The sales cycle for our eSupport software is lengthy and variable, which may
cause us not to achieve our revenue expectations.
Our sales cycle for our eSupport infrastructure software can be as long as
nine months or more and may vary substantially from customer to customer. While
our customers are evaluating our products and services, we may incur
substantial sales and marketing expenses and spend significant management
effort. If revenue forecasted from a specific customer for a particular quarter
is not realized in that quarter, we may incur significant expenses that are not
offset by corresponding sales. Any delay in completing sales in a particular
quarter could cause our operating results to be below expectations.
We have limited experience in international operations and if we do not
successfully address the risks associated with our international operations,
our business could suffer.
We intend to expand further into international markets. If our revenue from
international operations does not exceed the expense associated with
establishing and maintaining our international operations, our business could
suffer. We have limited experience in international operations and may not be
able to compete effectively in international markets. Some risks we face in
conducting business internationally include:
. difficulties and costs of staffing and managing international operations;
. differing technology standards;
. difficulties in collecting accounts receivable and longer collection
periods;
. changes in currency exchange rates and controls;
. dependence on local vendors;
. compliance with multiple conflicting and changing governmental laws and
regulations; and
. longer sales cycles.
Technical problems with either our internal or our outsourced computer and
communications systems could reduce our ability to provide eSupport services
and could harm our business and our reputation.
The success of our eSupport infrastructure software depends on the efficient
and uninterrupted operation of our own and outsourced computer and
communications hardware and software systems. These systems and operations are
vulnerable to damage or interruption from human error, natural disasters,
telecommunications failures, break-ins, sabotage, computer viruses, intentional
acts of
13
vandalism and similar events. Any system failure that causes an interruption in
our customers' ability to use our eSupport products or services or a decrease
in their performance could harm our relationships with our customers and result
in reduced revenue. Since all of our internal computer and communications
hardware and networks systems are located in the San Francisco Bay Area, an
earthquake or other natural disaster could affect all of our facilities and our
systems located there simultaneously. We have no formal disaster recovery plan
in the event of damage to or interruption of our internal or outsourced
systems, and business interruption insurance may not adequately compensate us
for losses that may occur.
Problems arising from use of our products with other vendors' products could
cause us to incur significant costs, divert attention from our product
development efforts and cause customer relations problems.
Our customers may use our eSupport products together with products from
other companies. When problems occur, it may be difficult to identify the
source of the problem. Even when these problems are not caused by our products,
they may cause us to incur significant warranty costs, divert the attention of
our engineering personnel from our product development efforts and cause
significant customer relations problems.
We may not obtain sufficient patent protection, and as a result our business
may be harmed.
Our success and ability to compete depend to a significant degree upon the
protection of our software and other proprietary technology. We believe the
protection of patentable inventions is important to our business. It is
possible that:
. any of our pending patent applications may not be issued;
. any patents issued to us may not be broad enough to protect our
proprietary rights;
. any issued patent could be successfully challenged;
. competitors may independently develop similar technologies, duplicate our
products or design around any of our patents; and
. effective patent protection may not be available in every country in
which we do business.
We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights and if these rights are not sufficiently protected, it could
significantly harm our business.
We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights.
However, despite any precautions that we have taken,
. laws and contractual restrictions may not prevent misappropriation of our
technologies or deter others from developing similar technologies;
. other companies may claim common law trademark rights that precede the
federal registration of our marks; and
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
Also, the laws of other countries in which we market our products may offer
little or no effective protection of our proprietary technologies. Reverse
engineering, unauthorized copying or
14
other misappropriation of our proprietary technologies could enable third
parties to benefit from our technologies without paying us for it, which would
significantly harm our business.
We may face intellectual property infringement claims that could be costly to
defend and result in our loss of significant rights.
Other parties may assert infringement claims against us and our products may
infringe issued patents. Intellectual property litigation is expensive and
time-consuming and could divert management's attention from our business in the
event of a successful claim of infringement. We may be required to develop non-
infringing technology or enter into royalty or license agreements. These
royalty or license agreements, if required, may not be available on acceptable
terms, if at all. Our failure or inability to develop non-infringing
technologies or license the proprietary rights on a timely basis would harm our
business. Our products may infringe issued patents that may relate to our
products. Also, patent applications may have been filed which relate to our
software products. We and our customers may be subject to legal proceedings and
claims, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties.
Industry Risks
We must compete successfully in the eSupport market or our business will fail.
The market for our products is intensely competitive, rapidly changing and
significantly affected by new product introductions and other market activities
of industry participants. Competitive pressures could reduce our market share
or require us to reduce the price of products and services, any of which could
harm our business and operating results. Although we do not currently compete
against any one entity with respect to all aspects of our eSupport solution,
our integrated software solution does compete against various vendors' software
products designed to accomplish specific elements of a complete eSupport
solution. For example, we currently compete with companies that provide
automated development of support solutions such as Serena Software, Inc., as
well as with companies that provide automated delivery of support solutions
such as Motive Communications, Inc.
We may encounter competition from companies such as:
. customer communications software companies;
. question and answer companies;
. customer relationship management solution providers;
. consolidated service desk solution vendors;
. Internet infrastructure companies; and
. operating systems providers.
Our 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.
15
Because our eSupport infrastructure software is designed to support businesses
operating over the Internet, our success depends on the continued growth and
levels of performance of Internet usage.
Because a majority of our products are designed to support businesses
operating over the Internet, our success depends on the continued development
and maintenance of the Internet infrastructure. Because global commerce on the
Internet and the online exchange of information is evolving, we cannot predict
whether the Internet will continue to be a viable commercial marketplace. The
success of our business will depend on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of information by
enterprises to their employees.
Governmental regulation and legal uncertainties could impair the growth of the
Internet and decrease demand for our products or increase our cost of doing
business.
The laws and regulations that govern our business change rapidly. Any
changes in laws and regulations could impair the growth of the Internet and
could reduce demand for our products or increase our cost of doing business.
The United States government and the governments of other states and foreign
countries have attempted to regulate activities on the Internet and the
distribution of software. A number of laws have been proposed involving the
Internet. These proposed laws include laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Moreover, the applicability to the Internet of existing
laws governing issues is uncertain and may take years to resolve. Evolving
areas of law that are relevant to our business include privacy law, proposed
encryption laws, content regulation and sales and use tax laws and regulations.
Any new laws and regulations could harm us by subjecting us to liability or
forcing us to change how we do business. For example, in 1998, Congress passed
the Internet Freedom Act, which imposes a three-year moratorium on state and
local taxes on Internet-based transactions. Failure to renew this moratorium
would allow various states to impose taxes on e-commerce. This in turn might
harm our business directly and indirectly by harming the businesses of our
customers, potential customers and business alliances.
Offering Risks
Our stock price may be volatile, and you may not be able to sell your shares at
or above the offering price.
Before this offering, our common stock has not been publicly traded, and an
active trading market may not develop or be sustained after this offering. You
may not be able to sell your shares at or above the offering price. The price
at which our common stock will trade after this offering is likely to be highly
volatile and may fluctuate substantially because of the following:
. actual or anticipated fluctuations in our operating results;
. changes in or our failure to meet securities analysts' expectations;
. conditions and trends in the Internet and other technology industries;
and
. fluctuations in stock market price and volume, which are particularly
common among securities of software and Internet-oriented companies.
16
The initial public offering price is expected to be substantially higher than
the book value per share of our common stock, which will cause you to suffer
immediate and substantial dilution.
Purchasers of our common stock in this offering will experience immediate
dilution of $ in the pro forma net tangible book value per share of common
stock, based on an assumed initial public offering price of $ per share.
Purchasers will also experience additional dilution upon the exercise of
outstanding stock options and warrants. The initial public offering price is
expected to be substantially higher than the book value per share of our common
stock. Some elements of our market value do not originate from measurable
transactions. Therefore, there is not a corresponding rise in book, or
historical accounting, value for our rise in market value, if any. Examples of
these elements include the perceived value associated with our strategic
relationships, perceived growth prospects of our market and our perceived
competitive position within that market.
After this offering, our directors, executive officers and principal
stockholders will continue to have substantial control over matters requiring
stockholder approval, which could delay or prevent a change in control of
Support.com.
After this offering, our directors, executive officers and stockholders who
currently own over 5% of our common stock will collectively beneficially own,
in the aggregate, approximately % of our outstanding common stock. These
stockholders, if they vote together, will be able to significantly influence
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may also delay or prevent a change in control of Support.com.
Most of our outstanding shares of common stock may be sold in the market
shortly after this offering, which may cause our stock price to decline.
Sales of a substantial number of shares of common stock, including shares
issued upon the exercise of outstanding options and warrants, in the public
market after this offering or after the expiration of lockup and holding
periods could cause the market price of our common stock to decline. After this
offering, we will have approximately shares of common stock
outstanding. All the shares sold in this offering will be freely tradable. The
remaining shares of common stock outstanding after this offering are
subject to lock-up agreements that prohibit the sale of the shares for 180 days
after the date of this prospectus. Any or all of these shares may be released
before expiration of the 180-day lockup period at the discretion of Credit
Suisse First Boston Corporation. Immediately after the 180-day lockup period,
of these shares of outstanding options and warrants will become
available for sale. The remaining shares of our common stock will become
available at various times thereafter upon the expiration of one-year holding
periods.
Our stock price is expected to be volatile, which may result in securities
class action litigation against us, that could divert management's attention
and harm our business.
The stock market has experienced significant price and volume fluctuations
that have affected the market prices for the common stocks of technology
companies, particularly Internet companies. These broad market fluctuations may
cause the market price of our common stock to decline. After periods of
volatility in the market price of a particular company's securities, securities
class action litigation has often been brought against that company. We may
become involved in this type of litigation in the future. Litigation is often
expensive and diverts management's attention and resources, which could harm
our business and operating results.
17
We may need additional capital, which may not be available and which may dilute
existing stockholders.
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may choose to, or be
required to, raise additional funds because of unforeseen circumstances. If our
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. This financing may not be
available in sufficient amounts or on terms acceptable to us and may be
dilutive to existing stockholders. If adequate funds are not available or are
not available on acceptable terms, our ability to hire, train or retain
employees, to fund our expansion, take advantage of unanticipated
opportunities, develop or enhance services or products, or respond to
competitive pressures would be significantly limited.
Our certificate of incorporation, bylaws and Delaware corporate law contain
provisions which could delay or prevent a change in control even if the change
in control would be beneficial to our stockholders.
Delaware law as well as our certificate of incorporation and bylaws contain
provisions that could delay or prevent a change in control of Support.com, even
if it were beneficial to the stockholders. These provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. These provisions:
. authorize the issuance of preferred stock without prior stockholder
approval to deter or prevent a takeover attempt;
. require all stockholder actions to be taken at a meeting of our
stockholders;
. limit the ability of stockholders to call special meetings; and
. establish advance notice requirements for nominations of directors or for
proposing matters that can be acted upon at stockholder meetings.
Also, Section 203 of the Delaware General Corporation Law may discourage,
delay or prevent a change in control of Support.com.
Our management has significant flexibility in using the net proceeds of this
offering, and if they do not use the proceeds in a manner that increases our
operating results or market value, our business could suffer.
Our management will have significant flexibility in applying the net
proceeds of this offering. The net proceeds could be applied in ways that do
not increase our operating results. We intend generally to use the net proceeds
from this offering to repay $2.4 million in debt and for general corporate
purposes, including working capital. We have not determined the actual expected
expenditures and thus cannot estimate the amounts to be used for each specified
purpose. The actual amounts and timing of these expenditures will vary
significantly depending on a number of factors, including the amount of cash
used in or generated by our operations and the market response to the
introduction of any new product and service offerings. Depending on future
developments and circumstances, we may use some of the proceeds for purposes
other than those described above. You will not have the opportunity, as part of
your investment decision, to assess whether proceeds are being used
appropriately.
18
Shares issued, and option grants made, under our 1998 stock option plan
violated the registration requirements of state securities laws.
Shares issued and options granted under our 1998 stock option plan violated
state securities laws because these stock issuances and option grants were not
exempt from registration or qualification under state securities laws and
registration or qualification was not obtained. If the rescission offer that we
intend to make to the holders of these shares and options is accepted, we could
be required to make aggregate payments to the holders of these shares and
options of up to $200,455 plus statutory interest of seven percent per year. If
any or all of these holders reject the rescission offer, we may continue to be
liable under state securities laws for up to an aggregate amount of
approximately $200,455 plus statutory interest of seven percent per year.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Amendmentprospectus contains forward-looking statements. These statements relate
to our, and in some cases our customers' and/or alliance partners', future
plans, objectives, expectations, intentions and financial performance. In some
cases, you can identify forward-looking statements because they use terms such
as anticipates, believes, continue, could, estimates, expects, intends, may,
plans, potential, predicts, should or will or the negative of those terms or
other comparable words. These statements involve risks, uncertainties and other
factors that may cause industry trends or our actual results, activities or
achievements to be materially different from those expressed or implied by
these statements. These factors include those listed under Risk Factors,
Business, Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this prospectus.
Although we believe that expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or changes in our expectations. You should not place undue
reliance on these forward-looking statements, which apply only as of the date
of this prospectus.
19
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $
million from the sale of shares of our common stock. If the
underwriters exercise their over-allotment option in full, we estimate that we
will receive aggregate net proceeds of approximately $ . These net proceed
amounts are based on an initial public offering price of $ per share
less the estimated underwriting discounts, commissions and offering expenses
payable by us.
We intend to use the net proceeds of this offering to repay $2.4 million in
principal under secured and subordinated debt facilities and for general
corporate purposes, including working capital.
We may also use a portion of the net proceeds to acquire additional
businesses, products and technologies that we believe will complement our
business. We currently have a 90-day option, which we may or may not exercise,
to purchase for up to $11,350,000 technology related to problem identification.
We may use some of the proceeds from this offering to purchase the technology.
We do not have more specific plans for the net proceeds from this offering.
The amounts and timing of any expenditures will vary depending on the amount of
cash generated by our operations, competitive and technological developments
and the rate of growth, if any, of our business. As a result, we will retain
broad discretion in the allocation of the net proceeds of this offering.
Pending the uses described above, we will invest the net proceeds of this
offering in short term interest bearing, investment-grade securities. We may
not invest the proceeds to yield a favorable return. We believe that our
available cash, together with the net proceeds of this offering, will be
sufficient to meet our capital requirements for at least the next 12 months.
DIVIDEND POLICY
We have never declared or paid dividends on our capital stock and do not
anticipate paying any dividends. We currently expect to retain our earnings, if
any, for the development of our business. Our bank line of credit currently
prohibits the payment of dividends.
20
CAPITALIZATION
The following table lists our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis after giving effect to:
. the assumed exercise of outstanding warrants to purchase an aggregate
of 38,461 shares of preferred stock at an exercise price of $6.50 that
expire upon completion of this offering; and
. the conversion of all outstanding shares of preferred stock into common
stock and changes to our authorized capital stock upon completion of
this offering;
. on the same pro forma basis as adjusted to give effect to the sale of
shares of common stock by us at an assumed initial public
offering price of $ per share and after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by us.
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------- --------- -----------
(in thousands except share
data)
Long-term obligations, excluding current
portion....................................... $ 2,277 $ 2,277 $
-------- -------- ----
Redeemable convertible preferred stock:
12,156,108 shares authorized:
series B--7,346,108 shares designated,
7,346,108 issued and outstanding actual,
none authorized, issued and outstanding pro
forma and pro forma as adjusted............. 5,641 -- --
series C--4,810,000 shares authorized,
4,638,618 issued and outstanding actual,
none authorized, issued and outstanding pro
forma and pro forma as adjusted............. 15,808 -- --
Stockholders' equity (net capital deficiency):
series A preferred stock, 3,571,600 shares
authorized, 3,571,600 shares issued and
outstanding actual, none authorized, issued
and outstanding pro forma and pro forma as
adjusted.................................... 1 -- --
common stock, 31,060,000 shares authorized,
10,874,374 shares issued and outstanding
actual; 150,000,000 shares authorized,
26,469,161 shares issued and outstanding pro
forma; shares issued and
outstanding pro forma as adjusted........... 1 3
Additional paid-in capital................... 19,491 41,189
Receivable from stockholders................. (1,450) (1,450)
Deferred compensation........................ (14,252) (14,252)
Accumulated deficit.......................... (17,044) (17,044)
-------- --------
Total stockholders' equity (deficit)....... (13,253) (8,446)
-------- --------
Total capitalization....................... $ 10,473 $ 10,723
======== ========
This table excludes the following shares:
. 245,189 shares of common stock issuable upon exercise of warrants that
will be outstanding after this offering at a weighted average exercise
price of $9.91 per share;
. 3,944,895 shares of common stock subject to options outstanding under our
1998 stock option plan as of December 31, 1999; and
. 7,307,545 shares of common stock reserved for issuance under our 1998
stock option plan, 2000 omnibus equity incentive plan and our 2000
employee stock purchase plan.
21
DILUTION
The pro forma net tangible book value of our common stock was approximately
$8.6 million, or approximately $0.33 per share, on December 31, 1999.
Calculation of pro forma net tangible book value assumes that, upon completion
of this offering, a warrant for 38,461 shares of preferred stock will be
exercised and all outstanding shares of preferred stock will convert into
common stock upon completion of the offering.
Pro forma net tangible book value per share represents the amount of our
total tangible assets less total liabilities divided by the number of shares of
common stock outstanding. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
our common stock in this offering and the net tangible book value per share of
our common stock immediately afterwards.
Assuming our sale of shares of common stock offered by this
prospectus at an assumed initial public offering price of $ per share, and
after deducting estimated underwriting discounts, commissions and offering
expenses, our pro forma net tangible book value at December 31, 1999 would have
been approximately $ million or $ per share. This represents an
immediate increase in net tangible book value of $ per share to the
existing stockholders and an immediate dilution of $ per share to new
investors purchasing common stock in this offering.
The following table illustrates this per share dilution:
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share at December 31,
1999.......................................................... $0.33
Increase per share attributable to new investors...............
-----
Pro forma net tangible book value per share after this
offering.......................................................
----
Pro forma dilution per share to new investors................... $
====
The following table summarizes, on a pro forma basis, as of December 31,
1999, the differences between the number of shares of common stock purchased
from us, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors purchasing shares in this
offering. We used the assumed initial public offering price of $ per
share, and we have not deducted estimated underwriting discounts and
commissions and estimated offering expenses in our calculations.
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
Existing stockholders.......... 26,469,161 % $22,577,000 % $0.85
New investors.................. $ $
---------- ------ ----------- ------
Total........................ 100.00% $ 100.00%
========== ====== =========== ======
The above discussion and table assume no exercise of any outstanding stock
options. The exercise of options outstanding under our stock option plans
having an exercise price less than the offering price would increase the
dilutive effect to new investors.
If the underwriters exercise the over-allotment in full, the following will
occur:
. the number of shares of common stock held by existing stockholders will
decrease to approximately % of the total number of shares of our
outstanding common stock; and
. the number of shares held by new investors will increase to ,
or approximately % of the total number of shares of our common stock
outstanding after completion of this offering.
22
SELECTED FINANCIAL DATA
The following selected statement of operations data for the period from our
incorporation on December 3, 1997 through December 31, 1998 and the year ended
December 31, 1999 and the selected balance sheet data as of December 31, 1998
and 1999 are derived from our audited financial statements that have been
prepared in accordance with generally accepted accounting principles. Our
historical results are not necessarily indicative of results to be expected for
any future period.
The data should be read together with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the financial statements
and related notes included elsewhere in this prospectus.
Period from
incorporation on
December 3, 1997 Year ended
to December 31, December 31,
1998 1999
---------------- ------------
(in thousands
except per share data)
Statement of Operations Data:
Revenue:
License fees.................................. $ 18 $ 2,746
Services...................................... -- 569
------- --------
Total revenue............................... 18 3,315
Costs and expenses:
Cost of license fees.......................... -- 4
Cost of services.............................. -- 965
Research and development...................... 1,132 2,401
Sales and marketing........................... 1,197 8,974
General and administrative.................... 477 1,881
Amortization of deferred compensation......... 16 3,554
------- --------
Total costs and expenses.................... 2,822 17,779
------- --------
Loss from operations............................ (2,804) (14,464)
Interest and other income (expense), net........ 54 170
------- --------
Net loss........................................ (2,750) (14,294)
Accretion on redeemable convertible preferred
stock.......................................... (214) (1,072)
------- --------
Net loss attributable to common stockholders.... $(2,964) $(15,366)
======= ========
Basic and diluted net loss per share............ $ (0.57) $ (2.31)
======= ========
Shares used in computing basic and diluted net
loss per share................................. 5,227 6,643
======= ========
Unaudited pro forma basic and diluted net loss
per share...................................... $ (0.71)
========
Shares used in computing unaudited pro forma
basic and diluted net loss per share........... 20,137
========
December 31,
-----------------
1998 1999
------- --------
(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments............ $ 2,807 $ 12,489
Working capital (deficit).................................... 2,979 9,698
Total assets................................................. 3,672 17,525
Long-term obligations, net of current portion................ 449 2,277
Redeemable convertible preferred stock....................... 5,237 21,449
Total stockholders' equity (deficit)......................... (2,423) (13,253)
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading provider of eSupport infrastructure software. From our
incorporation in December 1997 through the end of 1998, we primarily engaged in
research activities and developing and marketing our products. We first began
generating revenue from software license fees from the initial version of our
products in December 1998. During 1999, we continued to enhance the
functionality of our products, and build our management team and operational
infrastructure. We began shipping the second version of our products in June
1999 and the third version of our products in January 2000. As our revenue
increased from quarter to quarter during 1999, we also incurred significant
operating expenses as we expanded our research and development organization,
our direct sales force and professional services department. At December 31,
1999, we had an accumulated deficit of $17.0 million.
We generate revenue primarily from software licenses and related
professional services. We market our products through a combination of direct
sales, resellers, support outsourcers and distributors. Through 1999,
substantially all of our revenue was derived from direct sales. We focused on
building our indirect sales channel in the fourth quarter of 1999. Although we
expect direct sales to continue to account for a majority of revenue in the
future, we anticipate a more significant portion of sales to be generated
through our indirect channel. In 1998, no revenue was attributable to licenses
to customers outside of North America and, in 1999, 2% of our revenue was
attributable to these customers. We plan to expand our international operations
significantly, particularly in Europe and Asia.
We license our software under subscription and perpetual licenses. Revenue
under subscription licenses is recognized ratably over the term of the
subscription period beginning upon delivery of the product. Subscription
licenses typically have a term of three years, with payments generally made at
the beginning of each annual period. We began licensing software under a
subscription model in June 1999. Because revenue under perpetual license
agreements is recognized more rapidly than subscription-based revenue, a
majority of the revenue recognized to date has been derived from perpetual
licenses. To date, however, a majority of the licenses executed were
subscription-based. In determining whether we recognize revenue for
subscription and perpetual license fee arrangements, we consider whether
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collection is probable. If any of these criteria are not met,
revenue recognition is deferred until such time as all of the criteria are met.
Subscription and perpetual licensing arrangements may include service
elements. Services consist primarily of fees from professional services, such
as consulting services, maintenance and support. Consulting services include a
range of services including installation, implementation and building of
complex and non-complex interfaces for the customer's specific application. Our
maintenance arrangements provide technical support and include the right to
unspecified upgrades, if and when available.
In all cases, we assess whether the service element of the arrangement is
essential to the functionality of the other elements of the arrangement. In
this determination we focus on whether the software is off-the-shelf software,
whether the services include significant alterations to the features and
functionality of the software, whether the services involve the building of
complex interfaces, the timing of payments and the existence of milestones. In
determining whether the installation of our
24
software may require the building of complex or non-complex interfaces to the
customer's existing applications, we consider:
. the relative fair value of the services compared to the software;
. the amount of time and effort subsequent to delivery of the software
until the interfaces or other modifications are completed;
. the degree of technical difficulty in building interfaces;
. whether the services are available from other vendors or could be
performed by the customer;
. the degree of involvement of customer personnel; and
. any contractual cancellation, acceptance, or termination provisions for
failure to complete the interfaces.
In those instances where we determine that the service elements are
essential to the other elements of the arrangement, we account for the entire
arrangement in accordance with Accounting Research Bulletin (ARB) No. 45, Long-
Term Construction-Type Contracts, using the relevant guidance in SOP 97-2, and
in SOP 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts.
For those arrangements for which we have concluded that the service element
is not essential to the other elements of the arrangement we determine:
. whether the services are available from other vendors;
. whether the services do not involve a significant degree of risk or
unique acceptance criteria; and
. whether we have sufficient experience in providing the service to be able
to separately account for the service.
When the service qualifies for separate accounting and we have established
vendor-specific objective evidence of fair value for the service, we (1)
recognize revenue for the fees associated with a perpetual license using the
residual method in accordance with SOP 98-9, regardless of any separate prices
stated within the contract for each element or, (2) recognize revenue for the
fees associated with a subscription license on a monthly basis over the
remaining term of the subscription period. Vendor-specific objective evidence
of fair value of services is based upon hourly rates. We have entered into
stand alone contracts for services. These hourly rates are used to assess the
vendor-specific objective evidence of fair value in multiple element
arrangements.
Maintenance is not priced or offered separately in subscription licensing
arrangements and is therefore recognized as part of the subscription fee over
the subscription period. For perpetual licensing arrangements, in accordance
with paragraph 57 of SOP 97-2, vendor-specific objective evidence of fair value
of maintenance is determined by reference to the price the customer will be
required to pay when it is sold separately, that is, the renewal rate. Vendor-
specific objective evidence of fair value for maintenance contracts under a
perpetual license arrangement is based upon our pricing practice that
maintenance renewal fees 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. Maintenance contracts are typically one year in
duration. To date we have had one maintenance contract come up for renewal
which the customer elected to renew. We believe that given the nature of our
products, our customers view maintenance of those products as important to
their business. As a result, we believe renewals will occur in the future as
more contracts come up for renewal.
25
To date we have not entered into arrangements solely for license of our
products and, therefore, we have not demonstrated vendor-specific objective
evidence of fair value for the license element in perpetual license
arrangements. In those instances where perpetual licenses are bundled with
other elements we have used the residual method following the guidance in SOP
98-9. We account for license fees in these perpetual arrangements when vendor-
specific objective evidence of fair value exists for all undelivered elements
in the arrangement and when the fair value of all the undelivered elements is
less than the arrangement fee. We defer the total fair value of the undelivered
elements, until they are delivered, and recognize as license revenues the
difference between the total arrangement and the amount deferred for the
undelivered elements.
For the fiscal year ended December 31,1999 we recognized 71% of license and
services revenues on perpetual arrangements under the residual method, 23%
under subscription arrangements and 6% under the contract accounting method.
We intend to continue to invest in product development and technologies to
enhance our current products and services, develop new products and services
and further advance our solution offerings. Also, an important part of our
strategy is to expand our operations and employee base and build our sales,
marketing, customer support, technical and operational resources. As a result,
we expect to continue to incur substantial operating losses in the future, and
our expected increase in operating expenses will require significant increases
in revenue before we become profitable.
For purposes of this discussion, references to 1998 include the period from
our incorporation on December 3, 1997 to December 31, 1998.
Results of Operations
Revenue
Total revenue increased from $18,000 in 1998 to $3.3 million in 1999. During
1999, Bear Stearns and CompuCom licensed our software under a perpetual
licensing arrangement. Bear Stearns accounted for 53% of our total revenue in
1999. CompuCom accounted for 10% of our total revenue in 1999. No other single
customer accounted for more than 10% of our total revenue.
License revenue
License revenue increased from approximately $18,000 in 1998 to $2.7 million
in 1999. This increase was primarily because we did not ship our first product
until December 1998.
Services revenue
Services revenue increased from $0 in 1998 to $569,000 in 1999. This
increase was primarily because maintenance on new licenses and increased
implementation and consulting services performed with increased license sales.
Cost of revenue
Total cost of revenue increased from $0 in 1998 to approximately $969,000 in
1999.
26
Cost of license revenue
Cost of license revenue in 1999 consists primarily of expenses incurred to
manufacture, package and distribute software products and related documentation
and license fees paid to third parties under technology license arrangements
which have not been significant to date. Cost of license revenue increased from
$0 in 1998 to approximately $4,000 in 1999. We expect cost of license revenue
to continue to remain a relatively small percentage of total revenue and to
grow in absolute dollars as we license third party technologies.
Cost of services revenue
Cost of services revenue includes salaries and other expenses related to our
customer support organization and related overhead expenses, and payments made
to third parties for consulting services provided to our customers. Cost of
services revenue increased from $0 in 1998 to approximately $965,000 in 1999.
This increase was primarily because of an increase in the number of employees
in our customer support and professional services organizations from no
employees at December 31, 1998 to 13 at December 31, 1999. Cost of services
revenue exceeds services revenue during 1999 because of the increase in the
number of personnel in our services organization. We expect to continue to
invest heavily in customer support, professional services, consulting and
training and expect cost of services revenue to increase as well.
Operating Expense
Research and development. Research and development expense consists
primarily of payroll expenses and related costs for research and development
personnel. Research and development expense is expensed as incurred. Research
and development expenses increased from approximately $1.1 million in 1998 to
approximately $2.4 million in 1999. This increase was primarily because of the
increase in the number of engineering personnel from 10 at December 31, 1998 to
30 at December 31, 1999. We expect research and development expense to increase
in absolute dollars in 2000 as we continue to hire additional research and
development personnel and spend additional amounts on third party development
efforts.
Sales and marketing. Sales and marketing expense consists primarily of
payroll expense, including salaries and commissions and related costs for sales
and marketing personnel and promotional expenditures, including public
relations, advertising and trade shows. Sales and marketing expense increased
from approximately $1.2 million in 1998 to approximately $9.0 million in 1999.
This increase was primarily because of a $2.5 million increase in personnel
costs associated with the increase in the number of direct sales, pre-sales
support and marketing employees. We also incurred $0.3 million of expense as we
increased the number of regional and international sales offices. Also, sales
commissions increased $1.6 million as we expense sales commissions in the
period in which a sale occurs. As a result, we expect that sales and marketing
expense will continue to be a significant component of operating expense. We
expect sales and marketing expense will increase in absolute dollars as we
increase our sales and marketing activities.
General and administrative. General and administrative expense consists
primarily of payroll expense and related costs of administrative personnel and
professional fees for legal, accounting and other professional services.
General and administrative expense increased from approximately $477,000 in
1998 to approximately $1.9 million in 1999. The increase was primarily because
of increased numbers of administrative personnel from five at December 31, 1998
to 15 at December 31, 1999. We expect general and administrative expense to
increase as we hire additional
27
administrative personnel to support the anticipated growth of our business and
our operations as a public company.
Deferred stock-based compensation. We have recorded deferred stock-based
compensation related to stock options granted to employees and consultants
through December 31, 1999 of approximately $17.8 million. This amount
represents the difference between the exercise price of these stock option
grants and the fair value of the common stock at the time of grant as set by
the board of directors. Of this amount, we amortized approximately $3.5 million
through December 31, 1999. The remaining $14.3 million and the additional
amount of stock-based compensation from recent grants will be amortized over
the remaining vesting period of the options. Based on option grants through
December 31, 1999, we expect to amortize approximately $2.7 million in each of
the first and second quarters of 2000, $2.1 million in the third quarter of
2000 and $1.8 million in the fourth quarter of 2000. We expect to recognize
lower amounts in subsequent quarters.
Interest and other income (expense), net. Interest income, net consists
primarily of interest earned on our cash, cash equivalents and short term
investments offset by interest expenses associated with our capital leases and
equipment advances. Interest and other income, net was approximately $54,000 in
1998 and approximately $170,000 in 1999. The increase in interest income and
other income, net relates primarily to increased average cash balances
resulting from our equity financing in June 1999.
Provision for income taxes. From our incorporation in December 1997 through
December 31, 1999, we incurred net losses for federal and state tax purposes
and have not recognized any tax provision or benefit. As of December 31, 1999,
we had $10.1 million of federal and state net operating loss carryforwards to
offset future taxable income. The net operating loss carryforwards begin to
expire on varying dates beginning in 2005 through 2019. Given our limited
operating history, our losses incurred to date and the difficulty in accurately
forecasting our future results, management does not believe that the
realization of the related deferred income tax asset meets the criteria
required by generally accepted accounting principles. Therefore we have
recorded a 100% valuation allowance against the deferred income tax asset.
28
Quarterly Results of Operations
The following table sets forth unaudited quarterly statement of operations
data for the four quarters ended December 31, 1999. This information has been
derived from our unaudited financial statements, which, in management's
opinion, have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not necessarily
indicative of the operating results for any future period.
Three months ended
----------------------------------
Mar. June Sept. Dec.
31, 30, 30, 31,
1999 1999 1999 1999
------- ------- ------- -------
Statement of Operations Data:
Revenue
License fees............................. $ 330 $ 492 $ 624 $ 1,300
Services................................. 4 21 154 390
------- ------- ------- -------
Total revenue.......................... 334 513 778 1,690
Costs and expenses
Cost of license fees..................... 1 -- 2 1
Cost of services......................... 73 128 240 524
Research and development................. 373 370 787 871
Sales and marketing...................... 862 1,648 2,576 3,888
General and administrative............... 182 322 488 889
Amortization of deferred compensation.... 52 183 1,324 1,995
------- ------- ------- -------
Total costs and expenses............... 1,543 2,651 5,417 8,168
------- ------- ------- -------
Loss from operations....................... (1,209) (2,138) (4,639) (6,478)
Interest and other income (expense), net... 2 (22) 88 102
------- ------- ------- -------
Net loss................................... $(1,207) $(2,160) $(4,551) $(6,376)
======= ======= ======= =======
Our quarterly revenue increased sequentially in 1999 due to the
introduction of and increased demand for our software products as well as the
growth of our direct sales force. In June 1999, we began offering subscription
licenses of our software. Services revenue consisting of the maintenance
components of our license agreements and consulting services which began in
the second quarter. Services revenue and related costs increased sequentially
as we hired services personnel and grew our customer base.
On a quarterly basis we have increased the level of spending throughout the
organization. Total operating expenses increased primarily because of expenses
associated with building a sales and marketing infrastructure, and increased
spending on research and development to support new product introductions.
Specifically:
. Sales and Marketing. During the third and fourth quarters, sales and
marketing expenses increased because of additional personnel costs which
include commissions and travel expenditures, as we grew our direct sales
force and indirect sales channel. We also incurred expenses in this
period in connection with the launch and branding of the Support.com
name and web site.
. Research and Development. In the third quarter, research and development
costs increased because of additional hiring of engineering personnel,
and related recruitment expenses.
. General and Administrative. In the fourth quarter, general and
administrative costs increased as we hired additional personnel to
manage our expanding operations and incurred expenses associated with
executive recruiting, information technology and other infrastructure
developments.
29
Interest and other income (expense), net increased in the third and fourth
quarters primarily because of the financing we obtained in June 1999. We
invested the proceeds of the financing in short term investments.
We have incurred operating losses since our incorporation in December 1997,
and we may never achieve profitability in the future. In the past, a
significant portion of our sales have been realized near the end of the
quarter. As a result, a delay in an anticipated sale past the end of a
particular quarter could negatively impact our results of operations for that
quarter. We believe that future operating results will fluctuate on a quarterly
basis.
Liquidity and Capital Resources
Since our incorporation in December 1997, we have financed our operations
primarily through the private placement of our preferred stock, and to a lesser
extent through revenues, bank borrowings and capital equipment lease financing.
As of December 31, 1999, we had $12.5 million in cash, cash equivalents and
short-term investments. Net cash provided by financing activities was $17.9
million in 1999 and $5.5 million in 1998. In both cases, the cash was primarily
from the net proceeds from the issuance of preferred stock.
We have both a secured and subordinated debt facility with a single lender
under which we are entitled to borrow up to $2.5 million, all of which has been
used. We intend to repay $2.4 million in principal under secured and
subordinated debt facilities with the proceeds of this offering. We also have
an aggregate of $2.5 million available under equipment lease credit facilities,
of which $1.1 million is currently outstanding. Under the equipment lease line,
we are entitled to lease equipment with payment terms extending 48 months. The
ability to lease new equipment expires in July 2001. Amounts outstanding under
these facilities bear interest at rates ranging from 9.0% to 12.0% and are
secured by substantially all of our assets.
Net cash used in operating activities was $2.4 million in 1998 and $8.0
million in 1999. Cash used in operating activities was primarily the result of
net losses and increases in accounts receivable, partially offset by increases
in deferred revenue accounts payable and accrued expenses.
Net cash used in investing activities was $307,000 in 1998 and $8.7 million
in 1999. Net cash used in investing activities during 1999 included $8.5
million net purchases of short-term investments.
As of December 31, 1999, our principal commitments consisted of obligations
outstanding under notes payable, capital and operating leases. Although we have
no material commitments for capital expenditures, we anticipate a substantial
increase in our capital expenditures and lease commitments consistent with our
anticipated growth in operations, infrastructure and personnel. As of
December 31, 1999, future lease commitments for our office facility were $1.3
million in 2000 and $850,000 in 2001. We expect to require additional space to
meet our needs in the next 12 months. Adequate space may not be available on
commercially reasonable terms.
We believe that the net proceeds from the sale of common stock in this
offering, together with our current cash balances, will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. Although there are no present understandings, commitments or
agreements with respect to any acquisition of other businesses, products and
technologies, we evaluate potential acquisitions of other businesses, products
and technologies and may in the future require additional equity or debt
financings to accomplish any potential acquisitions.
30
If we require additional capital resources to grow our business internally
or to acquire complementary technologies and businesses at any time in the
future, we may seek to sell additional equity or debt securities. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. Financing arrangements may not be available to
us, or may not be available in amounts or on terms acceptable to us.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities", which provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for all fiscal quarters for fiscal
years beginning after June 15, 2000 and is not anticipated to have a
significant impact on our operating results or financial condition when
adopted.
Qualitative and Quantitative Disclosures about Market Risk
We develop products in the United States and market and sell in North
America, South American, Asia and Europe. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets. As all sales are
currently made in U.S. dollars, a strengthening of the dollar could make our
products less competitive in foreign markets. 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. Because of the
nature of our short-term investments, we have concluded that there is no
material market risk exposure.
Our investment policy requires us to invest funds in excess of current
operating requirements in:
. obligations of the U.S. government and its agencies;
. investment grade state and local government obligations;
. securities of U.S. corporations rated A1 or AA by Standard and Poors or
the Moody's equivalent; and
. money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks, meeting credit rating and net worth
requirements with maturities of less than two years.
At December 31, 1999, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.
and our short-term investments were invested in corporate debt securities
maturing in less than one year.
31
BUSINESS
Overview
We are a leading provider of eBusiness infrastructure software that
automates, personalizes and enhances user support over the Internet. Our
eSupport software is designed to accelerate eBusiness growth by increasing the
strategic value of support organizations and reducing support inefficiencies
that would otherwise constrain expanding Internet initiatives. We offer
customers the ability to automate problem avoidance through self-healing,
promote call avoidance through user self-service and improve problem resolution
through online assisted support. We believe that by deploying our eSupport
infrastructure, customers can transform eBusiness support operations from
inefficient cost centers to highly productive and scalable competitive assets
that increase customer loyalty, improve operational efficiencies and generate
incremental revenue. We sell our products and services to corporate information
technology departments, Internet service providers, application service
providers and support outsourcers. Our customers include Bear Stearns, Compaq
Professional Services, Computer Sciences Corp., everdream, Excite@Home, Globo
Cabo, JCPenney and micronpc.com.
Industry Background
User Support Is Critical for eBusiness
Businesses are increasingly relying on the Internet to sell more products
and services, drive efficiencies in supply chains and distribution channels,
establish and improve customer relationships and increase employee
productivity. Among these organizations are traditional businesses that are
increasingly conducting business over the Internet, companies that are formed
specifically to deliver products and services over the Internet, and Internet-
related technology vendors and service providers. To support their eBusiness
initiatives, businesses are deploying Internet, intranet and extranet
technology solutions that automate and improve the interaction between the
enterprise and its employees and customers, as well as the members of an
extended enterprise of suppliers, distributors and business partners.
In this environment, high-quality support is critical for customers and
eBusiness infrastructure users and the growth of eBusiness initiatives. As
businesses increase their reliance on the Internet, user support becomes a
primary interface between a business and its employees, supply chain partners
and customers. High-quality, personalized and continuous user support enables
internal and external systems to run more efficiently, improves employee
productivity and increases customer acquisition, retention and satisfaction.
Therefore, deploying a comprehensive Internet-based support infrastructure is
becoming a competitive asset that enables a company to differentiate its
products and services and improve the efficiency of its operations.
The Growing Difficulty in Delivering User Support
We believe technical support has become the most critical form of user
support, as businesses and users increasingly rely upon complex information
technology infrastructure and the Internet to conduct business. IDC estimates
that 59% of businesses either lose business, or are no longer able to conduct
business, if their system or network is not available. Delivering technical
support is increasingly complex and difficult as systems become more
sophisticated, different electronic devices proliferate and the number of users
and their demands grow.
32
Millions of Individuals Are Using the Web. According to IDC, the number of
people using the web will grow from 196 million in 1999 to 502 million in 2003.
These users have a broad range of support requirements and levels of
sophistication. Supporting this growing demographic is further complicated by
each user's dependence on different applications and devices. These users also
face a proliferation of new web-based services and require real-time training
and electronic support.
Computing Environments Are Becoming More Complicated. A typical business
uses a broad range of operating systems, networking technologies, e-commerce
software, security solutions, server applications, packaged and internally
developed applications and productivity tools. In many cases, these
applications are integrated within the corporation and with the systems and
applications of the extended enterprise, through a variety of networks and
protocols.
Electronic Devices Are Proliferating. Businesses and consumers use many
different electronic devices to conduct business, access the Internet and
purchase products and services, such as personal computers, personal digital
assistants and other mobile devices. Each device bears an individual profile--a
different configuration of applications, operating system components, network
access protocols and personal settings. To illustrate this proliferation,
according to IDC, the number of shipped personal computers alone will grow from
approximately 112 million in 1999 to 190 million in 2003.
Applications Are Multiplying. Meta Group estimates that the number of
programs on the average personal computer has risen from approximately 200 in
1997 to over 600 in 1999. These applications are frequently upgraded, and
combinations will increase exponentially. Also, we believe that the variability
of device configurations will increase as customers download, install and use
thousands of programs from the Internet or access hosted applications.
Existing Support Solutions Are Inadequate
Existing approaches to user support are increasingly inefficient and costly
in today's rapidly evolving and dynamic Internet economy. Providing scalable,
personalized technical support is especially difficult. Businesses have
traditionally provided support to users on-site or remotely through call
centers and help desks. These methods are highly labor intensive because
support is typically provided through time consuming phone interaction, e-mail
or on-site visits. Moreover, call centers and help desks generally experience
high turnover and have difficulty scaling. Support professionals are provided
with limited knowledge of users, their systems and business needs and therefore
cannot properly and rapidly diagnose and resolve users' problems. Also, user
self-help options such as manuals and software help features have been of
limited effectiveness, as they are static and require intensive user effort.
The increasing complexity of support requires a highly personalized,
automated and web-based approach to the development and delivery of support. To
date, support infrastructure technology investments have primarily focused on
making incremental improvements to existing call center and help desk
solutions. For example, work-flow solutions, such as automated call-tracking,
and web-based applications, such as email response management systems, have
increased the efficiency of support delivery. However, these solutions do not
reduce the need for assisted support, offer automated support or provide web-
based technologies for personalized problem diagnosis or resolution.
The Growth of eSupport
According to the Gartner Group, the volume of non-financial goods and
services sold through business-to-business e-commerce is expected to reach over
$7 trillion worldwide in 2004. However,
33
most organizations lack an adequate support infrastructure to meet the demands
imposed by this increasing volume of Internet commerce. The inadequacy of
existing support infrastructure impedes the growth and rapid acceptance of
eBusiness. Therefore, businesses are seeking more effective and efficient ways
to deliver user support. Support solutions must deliver highly personalized
services that are able to automatically and intelligently identify and resolve
user problems and questions. Organizations need to transform eBusiness support
operations from inefficient cost centers to highly productive and scalable
competitive assets that increase customer loyalty, improve operational
efficiencies and generate incremental revenue. Businesses must fully build out
their web-based support infrastructure. The market for eSupport, the automated
delivery of user support over the Internet, is estimated by IDC to grow to over
$14 billion in 2003.
The Support.com Solution
We are a leading provider of eBusiness infrastructure software that
automates, personalizes and enhances user support over the Internet. The core
of our solution is an Internet support infrastructure that automates
information collection from the user's system, enhances communication between
support analysts and users, and enables self-healing and automated problem
resolution. Our web-based offerings are available in a variety of
configurations, including a full-service web site, or support portal, that
serves as the nexus of an eBusiness support infrastructure.
The key features of our products include:
Personalized Support. Our software automatically discovers and tracks the
unique characteristics of each user's system and that system's components to
personalize and increase the efficiency of the support process.
Self-Healing. Our software proactively recognizes, diagnoses and resolves
potential problems as they arise, without the need for the user to request
specific assistance.
Self-Service. Our software helps users to resolve their own problems through
a single, intuitive interface that provides adaptive, context-sensitive
resolution of problems and queries.
Assisted Service. Our solution is designed to ensure that when a problem or
query is escalated to the level at which it requires the assistance of a
support analyst, that analyst will have detailed information about the user's
system and access to sets of support actions to accelerate problem resolution.
Web Support Content Authoring. Our solution enables support analysts to
develop support actions that automatically implement problem diagnosis and
repair, user training and just-in-time help through the web. These actions are
made available to other support analysts and users to further automate the
support process.
Internet-Based Architecture. Our products are primarily web-based, meaning
that they can be delivered and updated through the Internet, are secure,
scalable and extensible. By structuring our software this way, we are able to
offer solutions to users, corporate information technology departments and
other support providers that are geographically unconstrained and easy to use
and deploy. By designing a new eSupport process that uses the Internet, we are
able to improve the effectiveness and efficiency of support with automated and
detailed information exchange.
34
Through the features, our solutions:
Accelerate eBusiness Growth. Our software's high degree of automation and
scalability provides our customers with a means for eliminating the support
bottlenecks that would constrain their rapidly expanding eBusiness initiatives.
Our products provide information-gathering capabilities that can help our
customers convert the traditional help desk into a revenue generating business
services desk. For instance, one of our customers utilizes our eSupport
solution in their support portal to drive sales of additional products and
services.
Reduce Support Costs. Traditional support solutions involve multiple
instances of human interaction by telephone and in person. Our products can
enable fully automated problem and query resolution directly by users--that is,
without necessarily requiring remote or in-person assistance. We refer to this
user self-service as tier zero, and believe that it is an effective and
efficient means of providing support. By providing a 24-hour, seven-days-a-week
automated support button on systems, our software minimizes escalation of
problems from tier zero to levels requiring human interaction. As a result, our
customers can enhance their existing support infrastructure, reduce their
overall support costs, and create an internal environment that allows them to
attract and retain high-quality support analysts.
Increase Customer Satisfaction. Our products are personalized, context-
sensitive, and adapt to dynamically changing system environments. Our patented
DNA Probe, for example, recognizes individual system settings and provides our
eSupport solution with the information necessary to resolve technical problems
at tier zero. In situations where problems are not eliminated at tier zero, the
Support.com infrastructure provides support analysts with detailed user and
process information and problem history. Our approach resolves user problems
faster and more quickly than traditional support solutions, while increasing
user satisfaction and reducing downtime.
Rapidly Deploy and Integrate with Existing Solutions. Our products are
designed to reduce customer configuration deployment times and installation
costs. Our software helps customers to preserve their investments in and
deployments of call center and help desk products, workflow tools, knowledge
bases and other applications. Our solution can enhance these capabilities and
integrate them into a cohesive, automated and personalized Internet support
infrastructure. Our solution is also designed to effectively support third-
party software and does not require lengthy development, testing or maintenance
cycles.
Enable Businesses to Achieve Competitive Advantage. Our comprehensive
eSupport solution can accelerate problem resolution, reduce system downtime and
increase user productivity, each of which is important to maintaining a
competitive advantage in the Internet economy. We also offer our customers the
ability to differentiate their product offerings, improve their customer
satisfaction and enhance their online presence by enabling them to brand their
own version of our support portal.
Support.com Strategy
Our mission is to be the leading provider of comprehensive eSupport
infrastructure software. Key components of our strategy include:
Grow with eBusiness and the Internet. We believe that as businesses continue
to use the power of the Internet to realize efficiencies in their interactions
with customers, supply chain partners and employees, the opportunities to
provide web-based products that address the support needs of these
constituencies will be substantial. As companies increasingly use the Internet
to automate
35
business processes, their contact with customers is progressively becoming
limited to those support interactions that occur when a user has a problem. Our
goal is to use our technologies and web-based architecture to help our
customers provide superior levels of customer care through the Internet.
Continue to Develop Advanced Support Technologies. Our current eSupport
product offerings are based on patented technology and are designed to solve
many complex user support problems, primarily those revolving around technical
support. We intend to continue investing substantial resources in developing
innovative web-based technologies that enhance the personalization, automation
and overall effectiveness of our solutions. We also plan to continue developing
technologies to support additional platforms and applications and to address
the complex and evolving natures of corporate computing environments and the
Internet. We believe that our focus on providing technical support
infrastructure gives us a competitive advantage as we develop solutions to
address broader customer support opportunities.
Extend Market Leadership Position by Expanding Our Sales and Distribution
Capabilities. We plan to continue developing both our internal sales force and
our indirect sales channel of resellers, systems integrators, support
outsourcers and other service providers. We also intend to expand our web-based
sales strategies. We believe that our indirect sales channel and web sales will
add cost efficiencies to and increase the scalability of our sales process. We
believe that distribution of our products through Internet service providers
and application service providers, which typically have large numbers of
customers, will help promote recognition of our brand and enhance our market
penetration and position. We believe the combination of our existing base of
reference accounts and our consultative selling approach will assist us to
further penetrate our markets and to attract new customers.
Expand our Technology Relationships. Our relationships with key technology
vendors are important to delivering a comprehensive support solution and
increasing our brand recognition. We currently work with leading technology
companies in the areas of knowledge management, customer communications, call
center and help desk software to ensure that our offerings can be integrated
with our customers' existing infrastructure. We intend to strengthen our
relationships with these and other key technology providers in the future to
support additional platforms and applications and to increase the functionality
and applicability of our product offerings.
Continue to Increase Customer Return on Investment. We work in close
partnership with our customers to develop an in-depth understanding of their
businesses, and to effectively deploy our eSupport solution to increase their
return on investment. We intend to continue to provide a high level of customer
service and support through our services organization and by using our own
eSupport technologies. We will continue to work with our customers as they grow
with the Internet to improve the quality of our product offerings and to
identify and address their new support challenges.
Products
Our eSupport infrastructure products and services can enable our customers
to support their customers, supply chain partners and employees automatically
and through the Internet, extranets or intranets. Our software allows our
customers to provide their users with personalized, automated support solutions
tailored to meet the needs of each of their business environments. Support
solutions generated by our products are unique for each user and are
intelligent because they are interactive, adaptable and have the capability to
automatically update themselves as the user's support
36
requirements change. Our products are web-based, which reduces user deployment
and installation expenses. This ease of deployment makes our software scalable
in corporate environments.
The following table highlights the features of our products:
Product Description
Healing Agent A comprehensive, context-sensitive user-based support
application that enables personalized self-service and makes
software self-healing by proactively identifying and repairing
problems on users' systems.
- -------------------------------------------------------------------------------
Support Center A centralized support infrastructure and a suite of software
components for remote assisted service, enterprise-wide
problem resolution and management and administration of the
overall support environment. Builds on the Healing Agent's
capabilities to rapidly resolve user requests that are
escalated to a support analyst.
- -------------------------------------------------------------------------------
Support Portal An interactive web platform that enables self-service and
assisted service. Works with the Internet-enabled Support
Center and Healing Agent to provide support organizations with
the components and infrastructure they need to provide
interactive, full-service and personalized online support.
- -------------------------------------------------------------------------------
Foundry A comprehensive application for authoring automated support
actions and managing support content that can then be utilized
by the Healing Agent, Support Center and Support Portal.
37
Our eSupport suite consists of four products that provide a modular approach
to building comprehensive eSupport solutions. The following diagram illustrates
the components of our eSupport Suite and how they interact:
[GRAPHIC APPEARS HERE]
Healing Agent
The Healing Agent provides users with self-healing and automated self-
service capabilities to resolve problems and questions that normally require a
call to the call center or help desk. The Healing Agent acts as the user's
personalized, context-sensitive support assistant, proactively identifying and
automatically solving problems as they arise. The Healing Agent provides a
single source of information for addressing software and system malfunctions
and responding to users' queries. The Healing Agent serves as the foundation
for our comprehensive support infrastructure.
The Healing Agent includes the following features:
Self-Healing Capabilities. By actively monitoring the applications and
components of a user's changing system, the Healing Agent can intelligently
eliminate problems before they cause downtime.
Automated Self-Service. Enables users to address support problems that
normally require calls to the call center or help desk. This reduces the number
of calls to the call center and provides users with a more efficient and
satisfying support experience.
38
Support for Disconnected and Mobile Users. Allows users to solve problems
when they are completely disconnected from their networks. The solutions
critical to disconnected and mobile users reside locally on the user's
machine.
Undo Capability. Provides users with the ability to undo actions taken by
the Healing Agent.
Support Center
The Support Center provides a centralized support infrastructure and a
suite of software components for remote assisted service, enterprise-wide
problem resolution and management and administration of the overall support
environment. This product provides support analysts with the ability to
deliver context-sensitive diagnosis and resolution of user problems. The
Support Center builds on the Healing Agent's support capabilities in an effort
to rapidly resolve support requests that are escalated to the call center or
help desk. The Support Center provides support for a comprehensive range of
call types, including solving problems, answering questions and resolving
requests for system modifications.
The Support Center enables support analysts to provide enhanced assisted
service with a set of tools for diagnosing and resolving problems from remote
locations. By integrating the Healing Agent's knowledge and user history with
remote assisted service, the Support Center provides support analysts with
appropriate information that they would normally have to gather manually. The
Support Center allows support analysts to identify the fundamental causes of
problems and enable users and support staff to systematically and rapidly
resolve them without desktop visits or lengthy interactions between the user
and the analyst. The result is significant reductions in call times, which can
lead to improved service to users and lower support costs.
The enterprise healing capabilities of the Support Center enable the
support organization to solve problems for a large number of users across the
organization before user productivity becomes impaired. Enterprise healing
allows the support organization to identify problems that could affect large
numbers of users and repair them before users suffer downtime.
The administration and management capabilities of the Support Center
provide centralized user management, usage and status reporting, storage
maintenance, security administration and instructions for the Healing Agent.
The Support Center manages characteristics and privileges for users and
support analysts and reports on support activities. For instance, periodic
maintenance can be performed from the Support Center to manage security
parameters and storage requirements. The Support Center provides centralized
instructions for the Healing Agents, which control their behavior and
activity.
The Support Center includes the following features:
Knowledge-Driven Remote Diagnosis. Provides the support analyst with the
knowledge and tools to remotely diagnose problems on a user's system. The
Support Center provides support analysts with information about the current
configuration of a user's system, a history of all prior actions taken to
resolve the user's problems and tools to present context-sensitive solutions
to the support analyst. This allows for analysis of problems based on the
status of the user's system and personalized support requirements and results
in quicker diagnosis of the fundamental cause of the problem and its solution.
39
Remote Repair. Enables the support analyst to remotely solve problems with
no user interaction. This reduces desktop visits and costly, time-consuming
interaction with users. Remote repair allows the support analyst to initiate
online chat sessions with users, edit their files and execute commands on their
systems.
Reporting. Provides support organizations with information for monitoring
support transactions, identifying trends and potential problems and measuring
the effectiveness of our eSupport suite.
Extensibility. Provides an open architecture to enhance and extend the
capabilities of the Support Center to meet changing support needs. The Support
Center enables support organizations to transfer and use information with
knowledge bases and automatically transfers information into call tracking
databases.
Security. The user can control which activities are allowed or disallowed by
the support analyst. Also, support administrators manage overall user and group
security. All support activity occurs using industry standard security,
including encryption and the use of digital certificates.
Undo capabilities. Provides support analysts with the ability to undo
actions taken from the Support Center.
Support Portal
The Support Portal is an interactive web platform that enables businesses to
add to or enhance self-service or assisted service capabilities. The Support
Portal works with the Internet-enabled Support Center and Healing Agent to
provide support organizations with the components and infrastructure they need
to build interactive, full-service, context-sensitive and personalized online
support. The Support Portal enhances existing support solutions, such as
knowledge bases and call tracking systems, by delivering context-sensitive
information that allows for better solution matching and automated problem
resolution. The result is a support experience in which the Support Portal
interacts with the user, the system and other support technologies to provide a
personalized solution to the user's support request.
The Support Portal includes the following features:
Web-Based Solution. The Support Portal serves as a single point of
integration for all support content, technologies and processes.
Interactive, Context-Sensitive Support. Interacts with users' systems to
guide those users through the complexities of their specific environments,
offering them context-sensitive, personalized support.
Support Process Automation. Connects users to support providers and
automates and reduces inefficiencies in the support process. This includes:
. self-service;
. routing of support requests to the support organization;
. user identification and privilege verification;
40
. problem description;
. diagnosis and repair; and
. logging of actions taken by all parties involved in the support
transaction.
Foundry
The Foundry is a development environment for authoring support actions and
managing support content that can be utilized by the Healing Agent, Support
Center and Support Portal. The Foundry's authoring capabilities enable support
organizations to create automated solutions, or SupportActions, that support
user applications and operating system components, automate common support
activities and schedule jobs to manage user systems. SupportActions can be
created for a complete range of support requests.
The Foundry includes the following features:
Content Creation and Content Management. The Foundry enables support
organizations to create, publish, integrate and maintain automated
SupportActions. The Foundry is a platform for authoring automated
SupportActions from a point-and-click interface. This includes support content
automation and the ability to easily integrate existing support content into a
database of solutions and content.
Personalization. The Foundry enables the support organization to create
personalized support content. Using the Foundry's capabilities, a company can:
. create support solutions that automatically identify and address the
unique support requirements of each user.
. deliver automated support solutions to a single user or set of users
based on the unique characteristics of their systems, the history of
their support needs and other criteria.
Technology
We believe that our core technologies provide the foundation for a scalable
support infrastructure. The intelligent nature of our core technologies enables
our products to automatically adapt to varying environments and to reduce the
manual labor associated with the support process.
DNA Probe--Personalized Support
The DNA Probe provides detailed data about each user, their system and the
software on their system. The patented DNA Probe technology automatically
identifies the characteristics of each user's software applications and
operating system components and tracks them over time. This personalized data
can be used to quickly sift through large amounts of information, compare
historical data and highlight potential fundamental causes of problems. For
example, the DNA Probe technology automatically identifies all of the network
settings for each individual user, including the network address, machine name,
Internet configuration and the specific drivers for their network card.
41
In contrast to other support process methodologies, which involve authoring
generic solutions and attempting to apply those to numerous unique users,
support organizations can use the DNA Probe's ability to learn about each
dynamic environment to efficiently provide users with personalized support
solutions.
ContextResponse--Context-Sensitive Support
ContextResponse analyzes the data gathered by the DNA Probe, identifies and
diagnoses the most relevant information, and then delivers a solution for a
user's problem or question. It is the ability to gather, analyze and transmit
context-sensitive information which efficiently automates the support process.
ContextResponse personalizes and automates the support process by:
. automatically gathering information that normally requires a time-
consuming and frequently complex interaction between the user and the
support analyst. For example, rather than asking a user to identify their
specific operating system parameters and software versions,
ContextResponse automatically gathers this information and electronically
relays the information to the support analyst.
. analyzing information to identify potential problems. ContextResponse is
designed to identify the fundamental cause of a problem by analyzing the
results of diagnostic programs or comparing the user's current system
configuration to a previous working configuration, a reference
configuration or another user's configuration.
SupportActions--Point and Click Development and Delivery
Many custom support solutions can be packaged as SupportActions, which
enable the automation of common support activities such as solving problems or
answering questions. Support analysts use the Foundry to create custom
SupportActions using a point-and-click interface. Support organizations can
integrate existing programs, commands and content into SupportActions to turn
static information into automated knowledge. For example, the support
organization could integrate frequently asked questions or a diagnostic program
into a SupportAction so that the user can automatically perform the steps
described by the answers to the frequently asked questions or the diagnostics
program. SupportActions can accomodate many scripting languages and a wide
range of content.
Change Management Infrastructure
Our change management infrastructure provides a common mechanism for the
distribution and application of changes to one or more machines. This
infrastructure is used across our products so that changes made to a user's
machine are consistent, reversible and recorded. Repair to a user's machine,
comparison of one machine to another, installation, modification and
distribution can all be achieved using our common change management
infrastructure. Support solutions are easier to develop with this
infrastructure because steps that are done manually and are potentially error-
prone are replaced by automatic and consistent mechanisms. This can facilitate
rapid development and reduce the cost of on-going maintenance.
Nexus--Enhanced Communication Infrastructure
Our products communicate directly with each other using secure protocols,
but firewalls and other network components often restrict direct communication
across the Internet. If a firewall or
42
other device prevents direct communication between remote parties, our products
are designed to communicate indirectly using our Nexus technology as an
intermediary. Our Nexus technology allows communication to take place between
parties in circumstances where direct communication is unreliable or
impossible.
Software Vaults--Efficient Storage Management
Once a user's problem is diagnosed, the solution is delivered to the user
from the Software Vault. Support solutions generally require access to a large
amount of support content, in the form of files, programs and other
information, which must be available locally or across a network. Our patent-
pending Software Vault provides storage, retrieval and management of this
support content. Files and programs associated with supported applications,
operating system components and all SupportActions are stored in the Software
Vault.
The Software Vault provides a redundant, distributed mechanism for this
support content. For example, if a particular file on a user's system has been
corrupted and needs to be replaced, one or more Software Vaults will be
accessed in a logical sequence until the needed file has been found. Software
Vaults reside on servers to support thousands of users, and portions of
Software Vaults can also be placed locally on a user's system to provide
support for critical applications and operating system components when the user
is completely disconnected from the network.
The Software Vault's file storage mechanism is efficient. By storing each
unique file only once, the Software Vault minimizes disk space, communications
and bandwidth requirements. For example, if a number of users have multiple
applications that all use a particular version of a file or program, only one
copy of that file is kept in the Software Vault.
Services and Support
Our services organization provides a range of support offerings from
architectural design to on-going customer support and is critical to our focus
on customer satisfaction. Our services group customizes solutions for our
customers that can be used across all or parts of their organization. Our
services and support capabilities are divided into three areas:
. Implementation--Provides architectural design, transformation, product
integration and deployment services to our customers. Each implementation
is customized according to the customer's organizational and technical
requirements.
. Education--Trains our customers and those parties with whom we have
alliances in the design, implementation and use of our products.
. Technical Support--Responds to design, feature, implementation and
deployment questions.
Under a maintenance contract, our customers receive generally available new
releases, corrections, enhancements, updates and other changes to the products
they have licensed.
As of January 31, 2000, we had 12 employees engaged in services and support
activities.
43
Customers
We market and sell our eSupport solutions to corporate information
technology departments, support outsourcers, Internet service providers,
application service providers and other businesses that use the Internet. In
1999, Bear Stearns accounted for 53% of our total revenue.
Organizations in our target markets can use our software to provide user
support to their employees, partners and customers. For example, corporate
information technology departments use our software in their help desk to
support users of internal software and their call centers to support software
used by external customers and partners. With our software, customer support
departments of Internet service providers resolve many of the questions or
problems of their subscribers, including those related to Internet
connectivity, email and browser use. Application service providers use our
technology to enhance their web-based application delivery models with web-
based support for the software and systems they provide. Support outsourcers
use our software to meet customer service levels for the complex environments
they support.
The following is a representative list of companies who have purchased our
products and services organized by our customer focus categories. We have
listed our customers who have orders with us of at least $100,000.
Corporate ISP/ASP Support Outsourcers
--------- ------------- ----------------------------
Bear Stearns everdream Compaq Professional Services
Broadcom Excite@Home CompuCom
Cadence Design Systems Globo Cabo Computer Sciences Corp.
Chase H&Q Jamcracker Inacom
Equifax micronpc.com Samsung
KBA Marketing Xerox Connect
JCPenney
McKesson HBOC
44
Case Studies
The following case studies illustrate how our customers integrate our
solution:
- --------------------------------------------------------------------------------
Customer Description
Bear, Stearns & Co. Bear, Stearns & Co. Inc. is a leading investment
Inc. banking and securities trading and brokerage firm
serving organizations and individuals worldwide. Bear
Stearns was seeking a solution to manage the more than
11,000 troubleshooting calls per month received by its
support organization from internal and external users.
Bear Stearns selected us because of our ability to
solve complex problems related to the diverse
environments of its systems. By using our software,
Bear Stearns support analysts can remotely support
these users, streamline the support process and solve
their most common problems in a more effective and
timely manner. Bear Stearns support analysts now have
more time to focus on additional support issues.
- -------------------------------------------------------------------------------
Excite@Home Excite@Home is a global media company that provides
high-speed Internet access to over 1,200,000 consumer
and small business users. Excite@Home needed a
solution to better manage calls related to
connectivity difficulties, one of their most common
support calls. They chose the Support.com Healing
Agent, which is installed as a standard part of
Excite@Home's service. The Healing Agent supports
personal computer, network and Internet
configurations, provides continuous support for
network components and client software, and can
automatically solve user's connection problems. The
Support.com solution also delivers the information the
support team needs to perform remote diagnosis. As a
result, Excite@Home has seen a reduction in the number
of connection related calls to the help desk, as well
as a reduction in the time it takes to solve calls
that do reach the help desk.
- -------------------------------------------------------------------------------
JCPenney JCPenney, the worldwide leader in the retail industry,
was seeking a solution to enhance its support process
while providing a better service level to its
employees. JCPenney uses our software to provide a
full range of eSupport solutions focused on automating
the support process and improving the user community
experience with the help desk.
- -------------------------------------------------------------------------------
Compaq Professional Compaq Professional Services, a division of Compaq
Services Computer Corporation, operates one of the world's
largest and leading multi-lingual help desks,
providing service to some of Compaq's corporate
clients. Compaq was looking for a solution to resolve
user problems as quickly as possible and decrease
overall support costs. The eSupport solution for
Compaq is a part of the Compaq Professional Services
global help desk and provides comprehensive self-
healing, self-service and assisted service over the
Internet.
- -------------------------------------------------------------------------------
everdream everdream is an application service provider that
delivers hardware, software, networking infrastructure
and support to small business customers, thereby
offering its customers a single point of support. With
the integration of our self-healing, self-service and
assisted service technology on the everdream platform,
everdream is able to increase the number of technical
problems solved for its customers and decrease the
time it takes to solve them. As a result, everdream's
customers can experience increased productivity and
cost savings.
45
Strategic Alliances
An important element of our sales and marketing strategy is to expand our
strategic alliances with industry leaders to increase market awareness,
acceptance and distribution of our products and services. We have established
formal and informal distribution and solutions alliances with industry leaders
to help us to deliver comprehensive solutions and allow us to focus on our core
area of expertise: developing eSupport software. We employ this network of
alliances to expand our sales, service and marketing capabilities and to extend
the technical and functional application of our eSupport solutions.
Distribution Alliances
We have established distribution alliances with specialized technology and
services firms that deliver our solutions to specific market segments. These
distribution relationships allow us to benefit from the marketing and lead
generation capabilities of these firms and are intended to increase geographic
sales coverage and to address small- to-medium-sized businesses and large
corporate customers. Also, the companies with which we have distribution
alliances can enhance their product and service offerings and increase customer
satisfaction with our products while effectively managing costs associated with
providing support to their customers.
The following table illustrates our formal distribution alliances:
- --------------------------------------------------------------------------------
Target Category Company
Support Outsourcers deliver outsourced Compaq Professional Services
technical support and
help desk capabilities to large corporations. CompuCom
Computer Sciences Corp.
Cotelligent
Inacom
Samsung
Service911.com
Sykes Enterprises
Xerox Connect
- -------------------------------------------------------------------------------
Internet Service Providers offer their Excite@Home
customers Internet access.
Globo Cabo
- -------------------------------------------------------------------------------
Personal Computer Vendors provide support to Omni Tech
their customers
with their hardware product offerings. Premio Computer
- -------------------------------------------------------------------------------
Application Service Providers offer hardware, everdream
software,
networking infrastructure with Internet Jamcracker
accessible applications
and support to small- and medium-sized micronpc.com
companies.
- -------------------------------------------------------------------------------
Support Integrators provide strategic Support Technologies
consulting and implementation services to
organizations building their
support infrastructure.
Solutions Alliances
We have established solutions alliances with leading providers of
complementary support technologies such as call center/help desk management
companies, knowledge management companies and systems management firms. Our
relationships with these technology providers help us deliver comprehensive
solutions to our customers and allow us to adapt our solutions to our
customers' needs. We also seek to generate referral sales from these alliances.
By establishing alliances with Support.com, these technology providers can
provide a more comprehensive support solution to their customers while
informing and educating their customers about new support products and
technologies.
46
The following table illustrates our formal and informal solutions alliances:
- --------------------------------------------------------------------------------
Target Category Company
Call Center/Help Desk Management solution providers HP OpenView
offer software that allows organizations to respond to Peregrine Systems
service call requests and monitor support activity. Remedy
- -------------------------------------------------------------------------------
Knowledge Management companies provide solutions that Inference
collect, organize and share an enterprise's support
data. ServiceWare
- -------------------------------------------------------------------------------
Email Management solutions providers enable help Kana Communications
desk/customer service departments to route, track and
respond to high volumes of customer email.
- -------------------------------------------------------------------------------
Systems Management solutions providers enable global Computer Associates
organizations to control their information technology Tivoli
resources, increase application availability and
improve customer service.
- -------------------------------------------------------------------------------
Password Reset companies provide solutions to automate Courion
the reset and synchronization of user passwords.
- -------------------------------------------------------------------------------
Content Providers deliver support-related content. MyHelpdesk.com
Shaman Corporation
ZDNet
- -------------------------------------------------------------------------------
Hardware Diagnostics solutions providers offer utilities PC-Doctor
to accurately determine the cause of hardware problems.
Research and Development
The emerging market for eSupport solutions is characterized by rapid
technological change, new product introductions and enhancements, evolving
customer requirements and rapidly changing industry standards. We devote a
substantial portion of our resources to developing new and enhanced versions of
our eSupport infrastructure software, conducting product testing and quality
assurance testing and improving our core technologies.
As of January 31, 2000, we had 30 employees in research and development
activities. Our research and development expenditures were approximately $1.1
million in 1998 and $2.4 million in 1999. We expect to continue to devote
significant resources to research and development for the next several years.
Sales and Marketing
We currently sell our eSupport software through a combination of direct and
indirect sales channels. Our direct sales efforts to corporate customers are
focused on several industries, including financial services,
telecommunications, retail and manufacturing. Our indirect sales channel to
corporate customers consists of outsourcers, live support providers and system
integrators. We primarily sell to Internet service providers and application
service providers through our direct sales channel. In the near future, we plan
to establish a telephone and web sales organization that will be responsible
for lead management, customer follow-up, add-on business and new sales over the
web to existing customers and new market segments.
47
We maintain direct and indirect sales personnel in North America covering
the United States, Canada and Latin America, in the United Kingdom covering
Europe, the Middle East and Africa, and in Singapore covering the Asia Pacific
region.
Our sales strategy utilizes partner relationships and consultative selling
techniques and incorporates a comprehensive communication infrastructure for
both our direct and indirect sales forces. We plan to continue to invest and
increase the size and geographical locations of both our direct and indirect
sales model on a global basis.
Our marketing efforts include needs assessment and market analysis, brand
awareness, category education and lead generation, and educating organizations
in our target markets.
As of January 31, 2000, approximately 45 of our employees were engaged in
sales and marketing activities.
Competition
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. Our potential competitors
may have longer operating histories, significantly greater financial, technical
and other resources or greater name recognition than we do. Competition could
seriously harm our ability to sell additional software, maintenance renewals
and services on terms favorable to us. Competitive pressures could reduce our
market share or require us to reduce the price of products and services, any of
which could harm our business, financial condition and operating results.
Current Competition
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 compete
against any one entity with respect to all aspects of our eSupport solution, we
do compete with various vendors as to specific elements of our eSupport
solution. These elements include automated development of support solutions,
automated delivery of support solutions, and an Internet support
infrastructure. For example, we currently compete with companies that provide
automated development of support solutions, such as Serena Software, Inc. We
also compete with companies that provide automated delivery of support
solutions, such as Motive Communications, Inc.
Future Competition
We may encounter competition from other software companies to the extent
that we enter each other's market. These companies may include:
. customer communications software companies, including Kana
Communications, Inc. and eGain Communications, Inc.;
. question and answer companies, including Ask Jeeves;
. customer relationship management, or CRM, solutions companies, including
Siebel Systems, Inc., Oracle Corporation and Silknet Software, Inc.;
. consolidated service desk solution vendors, including Clarify, Inc.,
Peregrine Systems, Inc. and Remedy Corporation; and
. operating systems providers, including Microsoft Corporation.
48
We believe that the principal competitive factors in our market include:
. establishing a significant base of reference customers;
. demonstrating ongoing value and return-on-investment;
. product functionality, quality and performance;
. introducing new products to the market in a timely manner;
. customer service and support; and
. pricing.
Although we believe our solutions compete favorably with respect to each of
these factors, the market for our products is new and rapidly evolving. We may
not be able to maintain our competitive position against current and potential
competitors, especially those with greater resources.
Intellectual Property
Patents
We have one patent in the general area of automated discovery of dynamic
configurations. We currently have four patent applications pending in the
United States, and we may seek additional patents in the future. We do not know
if our patent applications or any future patent application will result in a
patent being issued with the scope of the claims we seek, if at all. In
addition, we do not know whether any patents we have or may receive will be
challenged or invalidated. It is difficult to monitor unauthorized use of
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States, and our competitors
may independently develop technology similar to ours.
Copyright, Trademark and other Proprietary Rights
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. We rely on a combination of copyright, trade
secret, trademark and contractual protection to establish and protect our
proprietary rights that are not protected by patent. We also enter into
confidentiality agreements with our employees and consultants involved in
product development. We routinely require our employees, customers and
potential business partners to enter into confidentiality agreements before we
will disclose any sensitive aspects of our business. Also, we require employees
to agree to surrender to us any proprietary information, inventions or other
intellectual property they generate or come to possess while employed by us.
Despite these efforts, unauthorized parties may attempt to copy or obtain and
use our products or technology. These precautions may not prevent
misappropriation or infringement of our intellectual property.
Our Infringement of Others' Intellectual Property
We may be subject to legal proceedings and claims in the ordinary course of
our business, including claims of alleged infringement of the patents,
trademarks and other intellectual property rights of third parties. Our
products may infringe issued patents that may relate to our products. Also,
patent applications may have been filed which relate to our software products.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running our business. This litigation
could also require us to develop non-infringing technologies or enter into
royalty or license agreements. These royalty or license agreements, if
required, may not be
49
available on acceptable terms, if at all. Our failure or inability to develop
non-infringing technologies or license the proprietary rights on a timely basis
would harm our business.
Employees
As of January 31, 2000, we had 102 full-time employees, including 30 in
research and development, 12 in services, 45 in sales and marketing and 15 in
general and administrative. None of our employees are covered by collective
bargaining agreements. We believe our relations with our employees are good.
Legal Proceedings
We are not a party to any material legal proceeding. We may be subject to
various claims and legal actions arising in the ordinary course of business.
Facilities
Our corporate headquarters are located in Redwood City, California, where we
lease approximately 23,200 square feet under a lease that expires in August
2001. As of December 31, 1999, we also leased office space in 6 other cities
for our sales and support personnel. The terms of these leases expire beginning
in April 2000 and ending in July 2001, and automatically renew unless earlier
terminated. We are currently subleasing our previous office space in Palo Alto,
California, which is approximately 10,000 square feet, and anticipate
terminating the sublease and occupying the subleased space until that lease
expires in July 2001.
We expect to require additional space to meet our needs in the next 12
months. We are currently pursuing our options with respect to obtaining
additional facilities. Adequate space may not be available on commercially
reasonable terms.
50
MANAGEMENT
Directors and Executive Officers
Our directors, executive officers and key employees and their ages as of
December 31, 1999 are as follows:
Name Age Position
- ---- --- --------
Radha R. Basu.................. 49 Chief Executive Officer, President and Director
Mark J. Pincus................. 34 Chairman of the Board
Brian M. Beattie............... 46 Chief Financial Officer, Senior VP of Finance and
Administration
Jim R. Hilbert................. 39 Senior Vice President of Sales and Business
Development
Scott W. Dale.................. 30 Chief Technical Officer
Cadir B. Lee................... 28 Chief Software Officer
Lucille K. Hoger............... 46 Vice President of Operations
Michael P. O'Rourke............ 40 Vice President of Engineering
Anthony C. Rodoni.............. 35 Vice President of Marketing
Matthew T. Cowan............... 28 Director
William L. Dunn................ 63 Director
Bruce Golden................... 40 Director
Edward S. Russell.............. 39 Director
Roger J. Sippl................. 44 Director
Radha R. Basu. Ms. Basu has served as president, chief executive officer and
as a director of Support.com since July 1999. Ms. Basu worked at Hewlett-
Packard Company, a computing and imaging solutions provider company, from
November 1978 to January 1999, and held various general management positions,
most recently the general manager of the Electronic Business Software
Organization. Ms. Basu also serves as chairman of the board of directors of
Seec, Inc., an eBusiness solutions company. Ms. Basu holds a B.S. in
engineering from the University of Madras, a Masters degree in electrical
engineering and computer science from the University of Southern California and
is a graduate of the Stanford University Executive Management Program.
Mark J. Pincus. Mr. Pincus co-founded, and has served as the chairman of
Support.com since its inception in December 1997. Mr. Pincus served as the
chief executive officer and president of Support.com since its incorporation
until July 1999. Mr. Pincus is also a part-time employee of Support.com. From
1995 to 1997, Mr. Pincus was a co-founder and chief executive officer of
FreeLoader, Inc., a web-based push technology service. From 1994 to 1995, he
served as vice president with Columbia Capital, a venture capital firm. From
1993 to 1994, he served as manager at Tele-Communications, Inc. now AT&T Cable.
Mr. Pincus holds a B.S. in economics from Wharton, University of Pennsylvania
and an MBA from Harvard Business School.
Brian M. Beattie. Mr. Beattie has served as executive vice president of
finance and administration and chief financial officer of Support.com since
October 1999. From May 1998 to May 1999, he served as vice president of
finance, mergers and acquisitions of Nortel Networks Corporation, a voice and
data networking company. From July 1996 to April 1998, Mr. Beattie served as
Group Vice President of Meridian Solutions of Nortel Networks Corporation. From
February 1993 to June 1996, Mr. Beattie served as vice president of finance,
Enterprise Networks, for Nortel Networks Corporation. Mr. Beattie holds a
Bachelor of Commerce and an MBA from Concordia University in Montreal.
51
Jim R. Hilbert. Mr. Hilbert has served as senior vice president of sales and
business development of Support.com since December 1999. From December 1998 to
December 1999, he served as vice president and general manager of Tivoli
Systems, Inc., a provider of systems management software and subsidiary of
International Business Machines Corporation. From March 1997 to December 1998,
he served as vice president of sales of Tivoli Systems, Inc. From 1987 to 1997,
he served in several senior management positions in sales and marketing for
Amdahl Corporation, a computer company. Mr. Hilbert holds a B.S. in computer
science from the University of Texas.
Scott W. Dale. Mr. Dale co-founded Support.com and has served as the chief
technical officer of Support.com since its incorporation in December 1997. From
January 1997 to December 1997, Mr. Dale served as a software consultant for M&I
Data Services, a financial transaction software company. From July 1992 to
January 1997, Mr. Dale served as a software consultant to Hewlett-Packard
Company, a computing and imaging solutions provider company. Mr. Dale holds a
B.S. in computer science from Stanford University.
Cadir B. Lee. Mr. Lee co-founded Support.com and has served as the chief
software officer of Support.com since its incorporation in December 1997. From
1995 to 1997, Mr. Lee served as a software consultant to Hewlett-Packard
Company, a computing and imaging solutions provider company. Mr. Lee holds a
B.S. in biological sciences and a B.A. in music from Stanford University.
Lucille K. Hoger. Ms. Hoger has served as the vice president of operations
of Support.com since February 2000. From 1996 to 2000, Ms. Hoger served as the
chief operating officer at ConnectInc.com, an e-commerce software company. From
1992 to 1995, she served as a principal for Gemini Consulting, an affiliate of
Cap Gemini, a consulting company. Ms. Hoger holds a B.A. in accounting from
Southwest Texas State University.
Michael P. O'Rourke. Mr. O'Rourke has served as the vice president of
engineering of Support.com since December 1999. From July 1999 to December 1999
he served as vice president of operations of Support.com. From April 1993 to
June 1999, Mr. O'Rourke served in several executive positions at Tivoli
Systems, a provider of systems management software and subsidiary of
International Business Machines Corporation. Mr. O'Rourke most recently served
as vice president of the packaged solutions business unit at Tivoli Systems.
Mr. O'Rourke holds a B.S. in computer science from the University of Vermont.
Anthony C. Rodoni. Mr. Rodoni has served as vice president of marketing of
Support.com since June 1998. From March 1988 to June 1998, Mr. Rodoni served in
a variety of management positions, most recently as general manager of the data
warehouse business unit, at Informix Software, Inc., a database software
company. Mr. Rodoni holds a B.S. in computer science from the University of
California at Santa Barbara and an MBA from Santa Clara University.
Matthew T. Cowan. Mr. Cowan has served as a director of Support.com since
June 1999. From September 1998 to the present, Mr. Cowan has served as general
partner of Bowman Capital Management, an institutional investor specializing in
both public and private technology growth companies. From July 1994 to
September 1998, Mr. Cowan served as director, corporate business development of
Intel Corporation. Mr. Cowan holds a B.A. degree in political science from
Tufts University.
William L. Dunn. Mr. Dunn has served as a director of Support.com since
April 1998. From 1961 to 1989, Mr. Dunn served as an executive vice-president
of Dow-Jones & Company, a publishing company. Mr. Dunn holds a B.A. in
economics from Drake University.
52
Bruce Golden. Mr. Golden has served as a director of Support.com since June
1998. Since September 1997, Mr. Golden has served initially as entrepreneur-in-
residence and then as a partner at Accel Partners, a venture capital firm. From
1993 to August 1996, Mr. Golden served as a vice president of marketing at
Illustra Information Technology, which was acquired by Informix Corporation, a
database company, in 1996. Mr. Golden was employed by Informix Corporation
after the acquisition. Mr. Golden holds a B.A. in political science from
Columbia University.
Edward S. Russell. Mr. Russell has served as a director of Support.com since
June 1998. Since October 1996, Mr. Russell served as a general partner at
Softbank Technology Ventures, Inc. From 1988 to October 1996, Mr. Russell
served as the executive director at SBC Warburg. Mr. Russell is a director of
Buy.com, a multi-category Internet superstore. Mr. Russell received his B.S. in
computer science from Carnegie Mellon University and an Executive MBA from
London School of Business.
Roger J. Sippl. Mr. Sippl has served as a director of Support.com since
January 1999. Since August 1995, Mr. Sippl has served as the managing partner
of Sippl Macdonald Ventures, a venture capital firm. From 1980 to 1989, Mr.
Sippl was the founder and served as chief executive officer and chairman of the
board of Informix Corporation, a database company. From 1989 to 1993, Mr. Sippl
served as chairman of the board of Informix Corporation. From December 1990 to
1996, he co-founded and served as a director of The Vantive Corporation, a
customer relationship management solutions company. From 1996 to 1998, he
served as chairman of the board of The Vantive Corporation. From February 1993
until March 1998, Mr. Sippl was the founder and served as the chief executive
officer and chairman of the board of Visigenic Software, Inc., a software tools
provider company. From March 1998 to July 1998, he served as chief technology
officer of Borland International, Inc. Mr. Sippl holds a B.S. in computer
science from the University of California at Berkeley.
There are no family relationships among any of our directors or executive
officers.
Board Committees
Our board of directors has a compensation committee and an audit committee.
Our compensation committee is responsible for determining salaries,
incentives and other forms of compensation for our directors and executive
officers and administering various incentive compensation and benefit plans.
Our board of directors established executive compensation levels for 1999.
Bruce Golden and Roger J. Sippl are the current members of the compensation
committee. Radha R. Basu, our chief executive officer, will participate in all
discussions and decisions regarding salaries and incentive compensation for all
non-executive employees and consultants.
Our audit committee reviews our annual audit and meets with our independent
auditors to review our internal controls and financial management practices.
Edward S. Russell, Matthew T. Cowan and William L. Dunn are the current members
of the audit committee.
Director Compensation
Except for the grant of stock options and the grant of common stock under
restricted stock purchase agreements, we do not currently compensate our
directors for their services as directors. Our directors are eligible to
participate in our 2000 omnibus equity incentive plan and our directors who are
employees of Support.com are eligible to participate in our 2000 employee stock
purchase plan. We also reimburse each member of our board of directors for out-
of-pocket expenses incurred by attending board meetings.
53
We granted Bruce Golden, a director of Support.com, an option to purchase
50,000 shares of our common stock under our 1998 stock option plan at a
purchase price of $0.10 per share. We granted William Dunn, a director of
Support.com, the right to purchase 80,000 shares of our common stock pursuant
to a restricted stock purchase agreement at a purchase price of $0.10 per
share. On February 18, 1999, Mr. Dunn purchased these shares of our common
stock, subject to our right of repurchase which lapses over time. We granted
Roger J. Sippl, a director of Support.com, the right to purchase 100,000 shares
of our common stock pursuant to a restricted stock purchase agreement, at a
purchase price of $0.10 per share. On January 14, 1999, Mr. Sippl purchased
these shares of our common stock, subject to our right of repurchase which
lapses over time.
Executive Compensation
The following table provides summary information concerning compensation
earned by or paid to our chief executive officer, our former chief executive
officer and to our three other most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000, for services provided in all
capacities to Support.com during 1999. These individuals are referred to as the
named executive officers. Other than the salary and bonus described below,
Support.com did not pay any executive officer named in the summary compensation
table any fringe benefits, perquisites or other compensation in excess of 10%
of that executive officer's salary and bonus during 1999.
Summary Compensation Table
Long-Term
Compensation
Awards
------------
Annual
Compensation(1) Security
-------------------- Underlying
Name and Principal Position Salary ($) Bonus ($) Options (#)
- --------------------------- ---------- --------- ------------
Radha R. Basu................................. $ 94,744 $45,834 1,680,189
President and Chief Executive Officer
Mark J. Pincus(1)............................. 146,692 -- 500,000
Chairman of the Board
Scott W. Dale................................. 120,833 -- 250,000
Chief Technical Officer
Cadir B. Lee.................................. 120,833 -- 250,000
Chief Software Officer
Anthony C. Rodoni............................. 135,000 30,000 25,000
Vice President of Marketing
- --------
(1) Mr. Pincus served as our Chief Executive Officer until July 15, 1999.
Option Grants in Last Fiscal Year
The percentage of total options granted is based on an aggregate of
6,326,139 options granted in 1999. The exercise price on the date of grant was
equal to the fair market value on the date of grant as determined by the board
of directors. Options have a maximum term of 10 years subject to earlier
termination for specified events related to termination of employment. The 5%
and 10%, assumed rates of appreciation are required by the rules of the
Securities and Exchange Commission and do not represent Support.com's estimate
or projection of the future stock price.
54
The values reflected in the table may never be achieved. The dollar values
have been calculated by determining the difference between the fair market
value of the securities underlying the options at December 31, 1999 and the
exercise prices of the options. Solely for purposes of determining the value of
the options at December 31, 1999, we have assumed that the fair market value of
shares of common stock issuable upon exercise of options was $ per share,
the assumed initial public offering price, since the common stock was not
traded in an established market before the offering.
These stock options were granted under the 1998 stock plan and are
immediately exercisable. We have a right to repurchase at cost any shares which
have been exercised but remain unvested at the time of the officer's cessation
of employment. Ms. Basu's options vest at a rate of 25% upon the first
anniversary of her vesting start date and then at a rate of 1/48 per month. If
we merge or consolidate with another entity or sell all or substantially all of
our assets and Ms. Basu is terminated without reason or if she terminates her
employment under specified circumstances following such event, all of her
remaining unvested shares will vest.
Of Mr. Pincus' 500,000 options, 250,000 options vest at a rate of 25% upon
the first anniversary of his vesting start date and then at a rate of 1/48 per
month, and 250,000 options vest at a rate of 1/12 per month over one year. If
we merge or consolidate with another entity or sell all or substantially all of
our assets and Mr. Pincus is terminated without reason or if he terminates his
employment under specified circumstances following such event, all of his
remaining unvested shares will vest.
Mr. Dale's and Mr. Lee's options vest at a rate of 25% upon the first
anniversary of their vesting start dates and then at a rate of 1/48 per month.
Mr. Rodoni's options were fully vested on the date of grant.
Option Grants in Last Fiscal Year
Individual Grants
---------------------------------------------- Potential Realizable Value at
Number of % of Assumed Annual Rates of
Shares Total Options Exercise Stock Price Appreciation for
Underlying Granted to or Base Option Term
Options Employees in Price Expiration -------------------------------
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ----------- ------------- --------- ---------- -------------- ---------------
Radha R. Basu........... 1,680,189 26.55% $0.40 7/15/09
Mark J. Pincus.......... 500,000 7.90 0.99 7/22/09
Scott W. Dale........... 250,000 3.95 0.90 7/22/09
Cadir B. Lee............ 250,000 3.95 0.90 7/22/09
Anthony C. Rodoni....... 7,500 0.12 0.10 2/11/09
55
The following table assumes a per-share fair market value equal to
$ , the mid-point of the initial public offering range.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options at
Acquired on Value Options at FY-End (#) FY-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------ ------------ ------------------------- -------------------------
Radha R. Basu........... -- $ -- 1,680,189/-- $ /
Mark J. Pincus.......... 500,000 --/-- /
Scott W. Dale........... -- -- 250,000/--
Cadir B. Lee............ -- -- 250,000/--
Anthony C. Rodoni....... 286,944 170,556/--
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee are currently Bruce Golden and
Roger J. Sippl. No interlocking relationship exists, or has existed in the
past, between the board of directors or compensation committee and the board of
directors or compensation committee of any other company.
1998 Stock Option Plan
General
The board of directors in October 1998 adopted our 1998 stock option plan.
Our 1998 stock option plan provides for the grant of incentive stock options as
defined in Section 422 of the Internal Revenue Code to employees and the grant
of nonstatutory stock options to employees, non-employee directors and
consultants. A total of 8,124,434 shares of common stock have been reserved for
issuance under our 1998 stock option plan as of December 31, 1999. In February
2000 we increased the number of shares of common stock reserved for issuance
under our 1998 stock option plan by an aggregate of 1,300,000 shares. As of
December 31, 1999,
. 4,171,994 shares of common stock have been issued upon the exercise of
options; and
. 7,545 shares were available for future awards.
Administration
Our compensation committee and our non-insider option committee administer
our 1998 stock option plan. Our compensation committee consists of at least two
directors who are non-employee directors, as defined in Rule 16b-3. The board
of directors may amend our 1998 stock option plan as desired without further
action by Support.com's stockholders except as required by applicable law. Our
1998 stock option plan will continue in effect until terminated by the board or
for a term of 10 years from its amendment and restatement date, whichever is
earlier.
The consideration for each award under our 1998 stock option plan will be
established by the compensation committee, but the option price for incentive
stock options will not be less than 100% of the fair market value of the stock
on the date of grant. Awards will have the terms and be exercisable in the
manner and at the times as the compensation committee may determine. However,
each incentive stock option must expire within a period of not more than 10
years from the date of grant.
56
Vesting
Generally, options granted under the 1998 stock option plan vest over four
years and are nontransferable other than by will or the laws of descent and
distribution. If there are specified changes in control of Support.com, the
acquiring or successor corporation may assume or substitute for options
outstanding under the 1998 stock option plan, or these options will terminate.
Some options granted to our executive officers provide for partial acceleration
upon a change in control of Support.com.
2000 Omnibus Equity Incentive Plan
General
The 2000 omnibus equity incentive plan was adopted by our board of directors
on February 15, 2000 and will be submitted for approval by our stockholders
prior to the completion of this offering.
Administration
The 2000 omnibus equity incentive plan will be administered by our
compensation committee. The 2000 omnibus equity incentive plan provides for the
direct award or sale of shares of common stock and for the grant of options to
purchase shares of common stock. The 2000 Omnibus Equity Incentive Plan
provides for the grant of incentive stock options as defined in Section 422 of
the Internal Revenue Code and the grant of nonstatutory stock options and stock
purchase rights to employees, non-employee directors, advisors and consultants.
The board of directors will be able to amend or modify the 2000 omnibus equity
incentive plan at any time, subject to any required stockholder approval. The
2000 omnibus equity incentive plan will terminate no later than .
Authorized Shares
4,000,000 shares of common stock have been authorized for issuance under the
2000 omnibus equity incentive plan. However, no participant in the 2000 omnibus
equity incentive plan can receive option grants or direct stock issuances for
more than 1,000,000 shares in the aggregate per fiscal year. The number of
shares reserved for issuance under the 2000 omnibus equity incentive plan will
be increased on the first day of each of our fiscal years from 2000 through
2009 by the lesser of:
. 2,000,000;
. 5% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. the number of shares determined by the board of directors.
Plan Features
The 2000 omnibus equity incentive plan will have the following features:
. Qualified employees will be eligible for the grant of incentive stock
options to purchase shares of common stock;
. Qualified non-employee directors will be eligible to receive automatic
option grants to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the date of
grant;
57
. The compensation committee will determine the exercise price of options
or the purchase price of stock purchase rights, but the option price for
incentive stock options will not be less than 100% of the fair market
value of the stock on the date of grant;
. The exercise price or purchase price may, at the discretion of the
compensation committee, be paid in cash, cash equivalents, full-recourse
promissory notes, past services or future services.
Vesting
The 2000 omnibus equity incentive plan will include change in control
provisions that may result in the accelerated vesting of outstanding option
grants and stock issuances. The committee may grant options or stock purchase
rights in which all or some of the shares shall become vested if there is a
change in control of Support.com. Change in control is defined under the 2000
omnibus equity incentive plan as:
. a change in the composition of the board of directors, as a result of
which fewer than one-half of the incumbent directors are directors who
either:
. had been directors of Support.com 24 months before the change; or
. were elected, or nominated for election, to the board with the
affirmative votes of at least a majority of the directors who had been
directors 24 months before the change and who were still in office at
the time of the election or nomination; or
. an acquisition or aggregation of securities by a person, including two or
more persons acting together, as a result of which the person becomes the
beneficial owner of 20% or more of the voting power of Support.com's
outstanding securities.
2000 Employee Stock Purchase Plan
General
The board of directors adopted our 2000 employee stock purchase plan on
February 15, 2000, to be effective upon completion of this offering. We will be
submitting it for approval by our stockholders before the completion of this
offering. A total of 2,000,000 shares of common stock have been reserved for
issuance under our employee stock purchase plan. The number of shares reserved
for issuance under the 2000 employee stock purchase plan will be increased on
the first day of each of our fiscal years from 2000 through 2009 by the lesser
of:
. 2,000,000;
. 3% of our outstanding common stock on the last day of the immediately
preceding fiscal year; or
. the number of shares determined by the board of directors.
Administration
Our 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, is administered by the board of
directors or by a committee appointed by the board. Employees, including
officers and employee directors of Support.com but excluding 5% or greater
stockholders, are eligible to participate if they are customarily employed for
more than 20
58
hours per week and for at least five months in any calendar year. Our 2000
employee stock purchase plan permits eligible employees to purchase common
stock through payroll deductions, which may not exceed 15% of an employee's
total compensation. The maximum number of shares a participant may purchase
during a single offering period is 1,000 shares.
Offering and Participation Periods
The 2000 employee stock purchase plan will be implemented by a series of
overlapping offering periods of 24 months' duration, with new offering periods,
other than the first offering period, beginning in January and July of each
year. The board of directors will establish participation periods for our 2000
employee stock purchase plan, none of which will exceed six months. During each
participation period, payroll deductions will accumulate, without interest. On
the purchase dates set by the board of directors for each participation period,
accumulated payroll deductions will be used to purchase common stock. The
initial offering period is expected to begin on the date of this offering and
end on December 31, 2001. The initial purchase period is expected to begin on
the date of this offering and end on June 30, 2000.
The purchase price will be equal to 85% of the fair market value per share
of common stock on either the first day of the participation period or on the
purchase date, whichever is less. Employees may withdraw their accumulated
payroll deductions at any time. Participation in our 2000 employee stock
purchase plan ends automatically on termination of employment with Support.com.
Immediately before the effective time of a corporate reorganization, the
participation period then in progress shall terminate and stock will be
purchased with the accumulated payroll deductions, unless the 2000 employee
stock purchase plan is assumed by the surviving corporation or its parent
corporation pursuant to the plan of merger or consolidation.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan for
which Support.com's employees will generally be eligible. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation and have
the amount of such reduction contributed to the 401(k) Plan. To date,
Support.com has made no matching contributions. The 401(k) Plan is intended to
qualify under Section 401 of the Internal Revenue Code of 1986, so that
contributions to the 401(k) Plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that any
contributions by Support.com will be deductible by Support.com when made.
Employment Agreements
Officer Offer Letters
We have offer letters with our chief executive officer, our chief financial
officer, our senior vice president of sales and business development, our vice
president of engineering, our vice president of marketing and our vice
president of operations.
Ms. Basu's offer letter provides for an initial annual salary of $200,000
and an incentive bonus of up to $100,000. The offer letter also provides for
her election to our board of directors. Ms. Basu received an option to purchase
1,680,189 shares of our common stock at an exercise price of $0.40 per share.
If we terminate her employment without reason or if she terminates her
employment under
59
specified circumstances, we must pay her salary and other benefits for 12
months after termination, unless Ms. Basu is employed full-time by another
employer. We must also pay a pro-rata share of her bonus if specified criteria
are met before termination. If we merge or consolidate with another entity or
sell all or substantially all of our assets and Ms. Basu is terminated without
reason or if she terminates her employment, her remaining unvested shares will
vest and she will receive her salary for 12 months in a lump sum and benefits
for 12 months after termination and a pro-rata share of her bonus if specified
criteria are met before termination. Ms. Basu's employment may be terminated at
any time.
Mr. Beattie's offer letter provides for an initial annual salary of $180,000
and a $15,000 bonus paid immediately upon signing of the letter. Mr. Beattie is
also eligible for an annual bonus of up to $72,000. Mr. Beattie received an
option to purchase 560,000 shares of our common stock at an exercise price of
$0.90 per share. If we terminate his employment without reason or if he
terminates his employment under specified circumstances, we must pay his salary
and other benefits for six months after termination, unless Mr. Beattie is
employed full-time by another employer. We must also pay a pro-rata share of
his bonus if specified criteria are met before termination. If we merge or
consolidate with another entity or sell all or substantially all of our assets
and Mr. Beattie is terminated without reason or if he terminates his
employment, 50% of any unvested shares will vest and Mr. Beattie will receive
his salary for six months in a lump sum and benefits for six months after
termination and a pro-rata share of his bonus if specified criteria are met
before termination. Mr. Beattie's employment may be terminated at any time.
Mr. Hilbert's offer letter provides for an initial annual salary of $150,000
and an incentive bonus. Mr. Hilbert received an option to purchase 500,000
shares of our common stock at an exercise price of $0.90 per share. If we
terminate his employment without reason or if he terminates his employment
under specified circumstances, we must pay his salary and other benefits for
six months following termination, unless Mr. Hilbert is employed full-time by
another employer. If we merge or consolidate with another entity or sell all or
substantially all of our assets and Mr. Hilbert is terminated without reason or
if he terminates his employment under specified circumstances, 50% of any
unvested shares will vest and Mr. Hilbert will receive his salary for six
months in a lump sum and benefits for six months after termination and a pro-
rata share of his bonus if specified criteria are met before termination.
Mr. Hilbert's employment may be terminated at any time.
Mr. O'Rourke's offer letter provides for an annual salary of $160,000 and an
annual incentive bonus for shares of common stock up to 25,000 shares per year
for two years and a $30,000 bonus paid when he signed the letter. Mr. O'Rourke
received an option to purchase 350,000 shares of our common stock at an
exercise price of $0.40 per share. Mr. O'Rourke's employment may be terminated
at any time.
Mr. Rodoni's offer letter provides for an annual salary of $135,000 and an
incentive bonus of up to $30,000 and options to purchase 25,000 shares of
common stock in 1999 and $15,000 in 1998 and shares of common stock tied to
specified criteria. Instead of receiving his cash bonus in 1998, Mr. Rodoni
received a grant of 7,500 shares of our common stock. Mr. Rodoni received an
option to purchase 425,000 shares of our common stock at an exercise price of
$0.10 per share. If we merge or consolidate with another entity or sell all or
substantially all of our assets, 50% of his unvested shares will vest. Mr.
Rodoni's employment may be terminated at any time.
Ms. Hoger's offer letter provides for an annual salary of $160,000 and an
incentive bonus of up to $20,000. Ms. Hoger received an option to purchase
300,000 shares of our common stock at an
60
exercise price of $2.00 per share. On January 20, 2001, Ms. Hoger is eligible
to receive an additional option to purchase 50,000 shares of our common stock.
If we terminate her employment without reason or if she terminates her
employment under specified circumstances, we must pay her salary and other
benefits for six months, unless Ms. Hoger is employed full-time by another
employer. If we merge or consolidate with another entity or sell all or
substantially all of our assets and Ms. Hoger is terminated without reason or
if she terminates her employment under specified circumstances following this
type of event, 50% of her unvested shares will vest and she will receive her
salary and benefits for six months after termination. Ms. Hoger's employment
may be terminated at any time.
Officer Employment Agreements
We have formal employment agreements with our chief technical officer and
our chief software officer.
Scott Dale, our chief technical officer, entered into an employment
agreement with us in August 1999. This agreement establishes Mr. Dale's annual
salary of $150,000 and eligibility for benefits and bonuses tied to criteria
established by our board of directors. The initial term of the agreement is one
year and is automatically renewed for three successive additional one-year
terms unless terminated with 30 days notice. If we terminate his employment for
good reason, we must pay his salary and other benefits through the date of his
termination. If his employment is terminated for disability, we must pay his
salary and other benefits for three months after the date of termination. Mr.
Dale received options to purchase 250,000 shares of our common stock at an
exercise price of $0.90 per share. Mr. Dale's agreement also contains a non-
competition provision.
Cadir Lee, our chief software officer, entered into an employment agreement
with us in August 1999. This agreement establishes Mr. Lee's annual salary of
$150,000 and eligibility for benefits and bonuses tied to criteria established
by our board of directors. The initial term of the agreement is one year and is
automatically renewed for three successive additional one-year terms unless
terminated with 30 days notice. If we terminate his employment for good reason,
we must pay his salary and other benefits through the date of his termination.
If his employment is terminated for disability, we must pay his salary and
other benefits for three months after the date of termination. Mr. Lee received
options to purchase 250,000 shares of our common stock at an exercise price of
$0.90 per share. Mr. Lee's agreement also contains a non-competition provision.
Limitation of Liability and Indemnification Matters
Delaware Law
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemption; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
61
Certificate of Incorporation and Bylaws
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. Our bylaws
also permit us to purchase insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
Indemnification Agreements
We are also entering into agreements to indemnify our directors and
executive officers. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
62
CERTAIN TRANSACTIONS
Since our incorporation, we have not been a party to any transaction or
series of transactions in which:
. the amount involved exceeded or exceeds $60,000 and
. any director, executive officer or 5% stockholder or any of their
immediate family had or will have a material interest.
Prior Sales of Equity
Between December 1997 and June 1999, we issued and sold the following
securities:
. December 8, 1997 and June 22, 1998: 6,428,880 shares of common stock to
Mark Pincus, Scott Dale and Cadir Lee for an aggregate consideration of
$646,
. December 8, 1997 to March 19, 1998: 3,571,600 shares of Series A
preferred stock at a price of $0.07 per share,
. June 22, 1998: 7,346,108 shares of Series B preferred stock at a price of
$0.68747 per share, and
. June 14, 1999: 4,638,618 shares of Series C preferred stock at a price of
$3.27148 per share.
Upon completion of this offering, each share of Series A, Series B and
Series C preferred stock will convert into one share of common stock.
Transactions with Management and Others
The following table summarizes purchases, valued in excess of $60,000, of
shares of our capital stock by our directors, executive officers and our 5%
stockholders:
Shares
-----------------------------
Series A Series B Series C
--------- --------- ---------
Directors and Executive Officers:
Mark J. Pincus.................................. 1,535,788 -- --
Roger J. Sippl (1).............................. -- -- 305,672
5% Stockholders Affiliated with Directors:
Entities affiliated with Accel VI L.P. (2)...... -- 3,618,503 775,394
Entities affiliated with Softbank Technology
Ventures IV (3)................................ -- 3,254,834 697,465
Entities affiliated with Spinnaker Founders
Fund, L.P. (4)................................. -- -- 1,528,359
- --------
(1) Roger J. Sippl, one of our directors, is a managing partner of venture
funds associated with Sippl MacDonald Ventures, a venture fund associated
with Sippl MacDonald Ventures II, L.P. and its related entities.
(2) Bruce Golden, one of our directors, is a partner of venture funds
associated with Accel Partners, a venture fund associated with Accel VI
L.P. and its related entities.
(3) Edward S. Russell, one of our directors, is a general partner of venture
funds associated with Softbank Technology Ventures, Inc. and its related
entities.
(4) Matthew T. Cowan, one of our directors, is a general partner of Bowman
Capital Management, a venture fund associated with Spinnaker Founders
Fund, L.P. and its related entities.
63
These affiliates purchased the securities described above at the same price
and on the same terms and conditions as the unaffiliated investors in the
private financings. Mark J. Pincus was affiliated with Support.com when he
purchased the securities described above. Accel VI L.P, Softbank Technology
Ventures IV and their affiliated entities became affiliates of Support.com when
they purchased their shares of series B preferred stock. Spinnaker Founders
Fund, L.P. and its affiliated entities became affiliates of Support.com when
they purchased their shares of the series C preferred stock.
Indebtedness of Management
It is our policy that all transactions between us and our officers,
directors, 5% stockholders and their affiliates will be entered into only if
these transactions are approved by a majority of the disinterested directors,
are on terms at least as favorable to us as those that could be obtained from
unaffiliated parties and are reasonably expected to benefit us.
The following individuals have elected to pay the exercise price for some of
their outstanding options with full recourse promissory notes secured by the
common stock underlying the options. The notes bear interest at 5.86% per year
and payment on the notes is set forth below. As of December 31, 1999, the
original and outstanding aggregate principal amounts of the promissory notes
executed by each executive officer in favor of Support.com are listed below:
Aggregate
Original
and
Outstanding
Executive Officer Note Amount
----------------- -----------
Mark J. Pincus/Chairman of the Board......................... $ 99,999.90(1)
Mark J. Pincus/Chairman of the Board......................... $147,500.10(2)
Mark J. Pincus/Chairman of the Board......................... $247,500.00(2)
Brian M. Beattie/Chief Financial Officer..................... $504,000.00(3)
Jim R. Hilbert/Senior Vice President......................... $449,950.00(3)
- --------
(1) 50% of the principal and interest will be due and payable on the earlier
of our initial public offering or two years from the date of the note. The
remaining 50% will be due upon the earlier of our initial public offering
or four years from the date of the note.
(2) 50% of the principal and interest will be due and payable on the earlier
of the date nine months following the effective date of our initial public
offering or two years from the date of the note. The remaining 50% will be
due upon the earlier of the date nine months after the effective date of
our initial public offering or four years from the date of the note.
(3) 50% of the principal and interest will be due and payable on the earlier
of one year from the effective date of our initial public offering or two
years from the date of the note. The remaining 50% will be due upon the
earlier of one year from the effective date of our initial public offering
or four years from the date of the note.
64
PRINCIPAL STOCKHOLDERS
The following table provides information regarding beneficial ownership of
common stock as of December 31, 1999, by:
. each person or entity known to us to own beneficially more than 5% of our
common stock;
. each of the named executive officers;
. each of our directors; and
. all executive officers and directors as a group.
The following table assumes no exercise of the underwriters' over-allotment
option. Applicable percentage ownership is based on 26,469,161 shares of common
stock outstanding as of December 31, 1999 and shares outstanding
immediately after completion of this offering.
Beneficial ownership is determined according to the rules and regulations of
the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of December 31, 1999 are
deemed outstanding. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, each stockholder named in the table has sole voting and
investment power with respect to the shares listed opposite that stockholder's
name.
Unless otherwise indicated, the address for the following stockholders is
c/o Support.com Corp., 575 Broadway, Redwood City, California 94063.
Percentage of
Common Stock
Total Shares -----------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ -------- --------
5% Stockholders:
Entities affiliated with Accel VI L.P. (1)...... 4,393,896
c/o Accel Partners, 428 University Avenue, Palo
Alto, California 94301
Entities affiliated with Softbank Technology
Ventures IV (2)................................ 3,952,299
333 W. San Carlos St., Suite 1225, San Jose,
California 95110
Entities affiliated with Spinnaker Founders
Fund, L.P. (3)................................. 1,528,359
c/o Bowman Capital Management, 1875 South Grand
Street, Suite 600, San Mateo, California 94402
Executive Officers and Directors:
Radha R. Basu (4)............................... 1,680,189
Mark J. Pincus ................................. 5,250,228
Scott W. Dale (5)............................... 2,375,114
Cadir B. Lee (6)................................ 2,375,114
Anthony C. Rodoni (7)........................... 457,500
Matthew T. Cowan (3)............................ 1,528,359
William L. Dunn (8)............................. 80,000
Bruce Golden (1)(9)............................. 4,443,897
Edward S. Russell (2)........................... 3,952,299
Roger J. Sippl (10)............................. 405,672
All directors and executive officers as a group
(14 persons)(11)............................... 24,358,372
- --------
* Less than 1%.
(1) Includes 3,576,631 shares held by Accel VI L.P. Accel VI Associates L.L.C.
is the general partner of Accel VI L.P. and has the sole voting and
investment power. Arthur C. Patterson,
65
ACP Family Partnership L.P., James R. Swartz, James W. Breyer, The Breyer
1995 Trust dated 10/4/95, Swartz Family Partnership L.P., J. Peter Wagner,
and G. Carter Sednaoui are the managing members of Accel VI Associates
L.L.C. and share these powers.
Also includes 456,965 shares held by Accel Internet Fund II L.P. Accel
Internet Fund II Associates L.L.C., or AIF2A, is the general partner of
Accel Internet Fund II L.P. and has the sole voting and investment
power. Arthur C. Patterson, ACP Family Partnership L.P., James R.
Swartz, James W. Breyer, Swartz Family Partnership L.P., J. Peter
Wagner, and G. Carter Sednaoui are the managing members of AIF2A and
share these powers.
Also includes 57,121 shares held by Accel Keiretsu VI L.P. Accel Keiretsu
VI Associates L.L.C. is the general partner of Accel Keiretsu VI L.P. and
has the sole voting and investment power. Arthur C. Patterson, James R.
Swartz, James W. Breyer, J. Peter Wagner, and G. Carter Sednaoui are the
managing members of Accel Keiretsu VI Associates L.L.C. and share these
powers.
Also includes 303,179 shares held by Accel Investors '98 L.P. Arthur C.
Patterson, James R. Swartz, James W. Breyer, J. Peter Wagner, and G.
Carter Sednaoui are the general partners of Accel Investors '98 L.P. and
therefore share the voting and investment powers. Bruce Golden, a partner
at Accel Partners and one of our directors, disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest in entities
affiliated with Accel Partners.
(2) Includes 3,874,090 shares held by Softbank Technology Ventures IV, L.P.
and 78,209 shares held by Softbank Technology Advisors Fund, L.P. Edward
S. Russell, a general partner at Softbank Technology Ventures, Inc. is
one of our directors. Mr. Russell disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in entities
affiliated with Softbank Technology Ventures, Inc.
(3) Includes 470,315 shares held by Spinnaker Founders Fund, L.P., 366,806
shares held by Spinnaker Technology Fund, L.P., 366,806 shares held by
Spinnaker Technology Offshore Fund, Ltd., 263,297 shares held by
Spinnaker Offshore Founders Fund, Ltd. and 61,135 shares held by
Spinnaker Clipper Fund, L.P. Mr. Cowan is a general partner of Bowman
Capital Management and one of our directors. Mr. Cowan disclaims
beneficial ownership of all these shares except to the extent of his
pecuniary interest in entities affiliated with Spinnaker Founders Fund,
L.P.
(4) Includes 1,680,189 shares of common stock issuable upon immediately
exercisable options and subject to our right of repurchase.
(5) Includes 250,000 shares of common stock issuable under immediately
exercisable options and subject to our right of repurchase.
(6) Includes 250,000 shares of common stock issuable under immediately
exercisable options and subject to our right of repurchase.
(7) Includes 56,319 shares of common stock subject to our right of
repurchase and 181,806 shares of common stock issuable under immediately
exercisable options, of which 166,806 shares are subject to our right of
repurchase.
(8) Includes 80,000 shares of common stock subject to our right of
repurchase.
(9) Includes 50,000 shares of common stock subject to our right of
repurchase.
(10) Includes 200,000 shares of common stock held by Sippl MacDonald Ventures
II, L.P., 105,672 shares of common stock held by Sippl Investments LLC
and 100,000 shares of common stock held by Mr. Sippl, subject to our
right of repurchase. Mr. Sippl is a managing partner of Sippl MacDonald
Ventures and one of our directors. Mr. Sippl disclaims beneficial
ownership of the shares held by Sippl MacDonald Ventures II, L.P. and
Sippl Investments LLC, except to the extent of his pecuniary interest in
those entities.
(11) Includes 305,444 shares of common stock subject to our right of
repurchase. Also includes 2,350,745 shares of common stock issuable
under immediately exercisable options and subject to our right of
repurchase.
66
DESCRIPTION OF CAPITAL STOCK
When this offering is completed and after the conversion of all outstanding
preferred stock into common stock and the amendment of our certificate of
incorporation, our authorized capital stock will consist of 150,000,000 shares
of common stock and 5,000,000 shares of preferred stock.
Common Stock
As of December 31, 1999, there were 10,874,374 shares of common stock
outstanding held by approximately 98 stockholders of record.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of common stock are entitled to the
following:
Dividends. Holders of common stock are entitled to receive dividends out of
assets legally available for the payment of dividends at the times and in the
amounts as the board of directors may determine.
Voting. Holders of common stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders, including the election of
directors, and will not have cumulative voting rights unless Support.com is
subject to Section 2115 of the California Corporations Code.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
Preemptive rights, conversion and redemption. The common stock is not
entitled to preemptive rights and is not subject to conversion or redemption.
Liquidation, dissolution and winding-up. Upon liquidation, dissolution or
winding-up of Support.com, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation of any preferred stock.
Each outstanding share of common stock is, and all shares of common stock to
be outstanding upon completion of this offering will be, when paid for, duly
and validly issued, fully paid and nonassessable.
Preferred Stock
The board of directors is authorized, without action by the stockholders, to
designate and issue up to 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions on these shares.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock.
The issuance of preferred stock could have the effect of delaying, deferring
or preventing a change in control of Support.com. We have no current plans to
issue any shares of preferred stock.
67
Warrants
We issued warrants to purchase 283,650 shares of Series C preferred stock as
follows:
. 98,511 shares at an exercise price of $1.979 per share,
. 38,461 shares at an exercise price of $6.50 per share,
. 27,511 shares at an exercise price of $3.27 per share, and
. 119,167 shares at an exercise price of $18.00 per share.
The 38,461 warrants expire upon completion of this offering.
Registration Rights
Upon completion of this offering, the holders of 15,594,787 shares of common
stock issuable upon conversion of the Series A, B and C preferred stock and
upon the exercise of warrants have the right to cause us to register these
shares under the Securities Act as follows:
. Demand Registration Rights. At the earlier of June 14, 2002 or six months
after this offering, one or more holders of 30% of the common stock
issued upon conversion of Series A, B or C preferred stock may request
that we register their shares.
. Piggyback Registration Rights. The holders of registrable securities may
request to have their shares registered anytime we file a registration
statement to register any of our securities for our own account or for
the account of others subject to a pro rata cutback to a minimum of 20%
of any offering other than our initial public offering.
. S-3 Registration Rights. The holders of at least 5% of registrable
securities have the right to request registrations on Form S-3 if we are
eligible to use Form S-3 and have not already effected such an S-3
registration within the past six months and if the aggregate proceeds are
at least $1,000,000.
Registration of shares of common stock pursuant to the exercise of demand
registration rights, piggyback registration rights or S-3 registration rights
under the Securities Act would result in these shares becoming freely tradable
without restriction under the Securities Act immediately upon the effectiveness
of such registration. Support.com will pay all registration expenses, other
than underwriting discounts and commissions, related to any registration. The
registration rights terminate five years after completion of this offering, or,
as to each holder of registrable securities, when the holder can sell all of
the holder's shares in any 90-day period under Rule 144 under the Securities
Act.
Section 2115
We are currently subject to Section 2115 of the California General
Corporation Law. Section 2115 provides that, regardless of a company's legal
domicile, some provisions of California corporate law will apply to that
company if more than 50% of its outstanding voting securities are held of
record by persons having addresses in California and the majority of the
company's operations occur in California. For example, while we are subject to
Section 2115, stockholders may cumulate votes in electing directors. This means
that each stockholder may vote the number of votes equal to the number of
candidates multiplied by the number of votes to which the stockholder's shares
are normally entitled in favor of one candidate. This potentially allows
minority stockholders
68
to elect some members of the board of directors. When we are no longer subject
to Section 2115, cumulative voting will not be allowed and a holder of 50% or
more of our voting stock will be able to control the election of all directors.
Section 2115 also has the following effects:
. enables removal of directors with majority stockholder approval;
. places limitations on the distribution of dividends;
. extends additional rights to dissenting stockholders in any
reorganization, including a merger, sale of assets or exchange of shares;
and
. provides for information rights and required filings if we effect a sale
of assets or complete a merger.
We anticipate that our common stock will be qualified for trading as a
national market security on the Nasdaq National Market and that we will have at
least 800 stockholders of record by the record date for our 2000 annual meeting
of stockholders. If these two conditions occur, then we will no longer be
subject to Section 2115 as of the record date for our 2000 annual meeting of
stockholders.
Delaware Anti-Takeover Law and Certain Charter Provisions
Delaware Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to some exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder, unless:
. before this date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction began, excluding for purposes of determining the number
of shares outstanding those shares owned by:
. persons who are directors and also officers, and
. employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. on or after this date, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66-2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
In general, Section 203 defines an interested stockholder as any entity or
person who, together with affiliates and associates owns, or within three
years, did own beneficially 15% or more of the outstanding voting stock of the
corporation. Section 203 defines business combination to include:
. any merger or consolidation involving the corporation and the interested
stockholder; and
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder.
69
. subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that increases the
proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Certificate of Incorporation and Bylaws
Undesignated Preferred Stock. Under our certificate of incorporation, the
board of directors has the power to authorize the issuance of up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the stockholders. The issuance of preferred stock
may:
. delay, defer or prevent a change in control of Support.com;
. discourage bids for the common stock at a premium over the market price
of our common stock;
. adversely affect the voting and other rights of the holders of our common
stock; and
. discourage acquisition proposals or tender offers for our shares and, as
a consequence, inhibit fluctuations in the market price of our shares
that could result from actual or rumored takeover attempts.
Advance Notice Provisions. Our bylaws establish advance notice procedures
for stockholder proposals and nominations of candidates for election as
directors other than nominations made by or at the direction of the board of
directors or a committee of the board.
Special Meeting Requirements. Our bylaws provide that special meetings of
stockholders be called by the chief executive officer or the board of
directors.
Cumulative Voting. Both our certificate of incorporation and our bylaws do
not provide for cumulative voting in the election of directors.
These provisions may only be amended by approval of the holders of at least
66 2/3% of the outstanding common stock and may have the effect of deterring a
hostile takeover or delaying a change in control or management of Support.com.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust.
Nasdaq National Market Listing
We have applied to have our common stock quoted on the Nasdaq National
Market under the symbol SPRT.
70
RESCISSION OFFER
Reasons for the Offer
Shares issued, and option grants made under, our 1998 stock option plan
were not exempt from registration or qualification under California state
securities laws. These stock issuances and option grants violated the
registration requirements of California state securities laws because
registration or qualification was not obtained. Although we were able to rely
upon Rule 701 exemption under the federal securities law, we were unable to
rely on the exemption provided by Section 25102(f) of the California
Corporation Code because these options were granted, and these shares were
issued, to more than 35 persons during a 12-month period. We were also unable
to rely on the exemption provided by Section 25102(o) of the California
Corporation Code because the required filing under that section was not made.
Terms of the Offer
We intend to make a rescission offer to the holders of these shares and
options. This offer will be held open for 30 days after the date of the offer
to rescind. These holders will be able to accept our rescission offer before
the expiration date of the offer by returning to us shares to be repurchased
and an election notice that we will deliver to the holders together with the
preliminary prospectus. If accepted, our rescission offer could require us to
make aggregate payments to the holders of these shares and options of up to
approximately $200,455 plus statutory interest.
Shares Subject to the Offer
This rescission offer will cover a total of 2,931,150 shares issuable
pursuant to options granted under the 1998 stock option plan, of which
1,660,900 shares were issued upon option exercises and 1,216,500 shares were
never exercised. We will offer to rescind these prior sales at the price per
share paid for them under the 1998 stock option plan, plus interest at a
statutory rate from the date of purchase by the purchaser to the expiration of
the rescission offer. Also, we will offer to rescind these prior option grants
not exercised at a price of $0.01 per share. If any or all of these holders
reject the rescission offer, we may continue to be liable under state
securities laws for up to an aggregate amount of approximately $200,455 plus
statutory interest of seven percent per year.
To date, we are not aware of any claims for rescission of any claims for
rescission against us.
71
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and we cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price prevailing. As
described below, only a limited number of shares will be available for sale
shortly after this offering due to contractual and legal restrictions on
resale.
Sales of substantial amounts of our common stock in the public market after
the restrictions lapse could cause the market price of our common stock to
decline.
When this offering is completed, we will have a total of shares
of common stock outstanding, assuming no exercise of outstanding options. The
shares offered by this prospectus will be freely tradable
unless they are purchased by a person that directly or indirectly controls, is
controlled by or is under common control with, us. These persons are considered
to be affiliates of ours under Rule 144 of the Securities Act of 1933, as
amended. The remaining 26,469,161 shares are restricted, which means they were
originally sold in offerings that were not subject to a registration statement
filed with the Securities and Exchange Commission. These restricted shares may
be resold only through registration under the Securities Act of 1933 or under
an available exemption from registration, including Rule 144.
Lock-up Agreements
The holders of shares of common stock have agreed to a 180-day
lock-up of these shares. This generally means that they cannot sell these
shares during the 180 days after the date of this prospectus. After the 180-day
lock-up period, these shares may be sold in accordance with Rule 144. Credit
Suisse First Boston may release some or all of these shares before the
expiration of the lock-up period.
Rule 144
In general, under Rule 144, a person or persons whose shares are aggregated,
who has beneficially owned restricted securities for at least one year,
including the holding period of any holder who is not an affiliate, is entitled
to sell within any three-month period a number of our shares of common stock
that does not exceed the greater of:
. 1% of the outstanding shares of our common stock at that time, which will
equal approximately shares upon completion of this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks before the date on which
notice of sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us. Under Rule
144 and subject to volume limitations, of the restricted shares will
be eligible for sale beginning 180 days after the date of the final prospectus
and the remaining restricted shares will become salable at various times
afterwards.
Rule 144(k)
A person who is not an affiliate of Support.com at any time during the 90
days before a sale and who has beneficially owned shares for at least two
years, including the holding period of any prior
72
owner who is not an affiliate, would be entitled to sell shares following this
offering under Rule 144(k) without taking into account the volume limitations,
manner of sale provisions, public information or notice requirements of Rule
144.
Rule 701 and Options
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with some restrictions, including the holding period requirement, of
Rule 144. Any employee, officer or director or consultant who purchased his
shares pursuant to a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell
their Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may
sell such shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait 90 days after the
date of this prospectus before selling these shares. However, all shares issued
by us pursuant to Rule 701 are subject to lock-up provisions and will only
become eligible for sale upon the expiration of 180 days after the date of this
prospectus.
Registration
After this offering, we intend to file a registration statement under the
Securities Act covering shares of common stock subject to outstanding options
or issued or issuable under our 1998 Stock Plan, our 2000 Stock Incentive Plan
and our 2000 Employee Stock Purchase Plan. Based on the number of shares
subject to outstanding options at December 31, 1999, and currently reserved for
issuance under these plans, this registration statement would cover
approximately 15,424,434 shares.
This registration statement will automatically become effective upon filing.
Accordingly, shares registered under this registration statement will, subject
to Rule 144 volume limitations applicable to our affiliates, be available for
sale in the open market immediately after the expiration of the 180-day lock-up
agreements. Holders of 15,594,787 shares of common stock will be entitled to
registration rights.
73
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Chase Securities
Inc., Bear, Stearns & Co. Inc. and Wit SoundView Corporation, are acting as
representatives, the following respective numbers of shares of common stock:
Number of
Underwriter Shares
----------- ---------
Credit Suisse First Boston Corporation.............................
Chase Securities Inc...............................................
Bear, Stearns & Co. Inc............................................
Wit SoundView Corporation..........................................
---
Total..........................................................
===
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
For a period of 180 days after the date of this prospectus, we and our
officers and directors and all of our stockholders have agreed not to do any of
the following without the prior written consent of Credit Suisse First Boston
Corporation:
. offer, sell, contract to sell, pledge or dispose of any of our common
stock or securities convertible into or exchangeable or exercisable for
any of our common stock, or enter into a transaction which would have the
same effect, except common stock issued upon the exercise of employee
stock options outstanding as of the date of this prospectus;
74
. in our case file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to our common
stock or securities convertible into or exchangeable or exercisable for
any of our common stock;
. in the case of our stockholders enter into any swap, hedge or other
arrangement that transfers any part of the economic consequences of
ownership of our common stock, whether any such transaction is to be
settled by delivery of our common stock, other securities, cash, or other
consideration; or,
. publicly disclose the intention to make any such offer, sale, pledge or
disposition.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. This group may include , who have
expressed an interest in acquiring up to shares of common stock in the
offering, based upon an assumed initial public offering price of $ per share.
The number of shares available for sale to the general public in the offering
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the underwriters to the
general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol SPRT.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
. the information included in this prospectus;
. market conditions for initial public offerings;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. our prospects for our future earnings;
. the present state of our development and our current financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
Entities associated with Chase Securities Inc. beneficially own 61,135
shares of our Series C preferred stock. Additionally, Access Technology
Partners, L.P., a fund of outside investors that is managed by an entity
affiliated with Chase Securities Inc., owns 244,538 shares of our Series C
preferred stock. Access Technology Partners, L.P. and the entities associated
with Chase Securities Inc. purchased these shares in June 1999 at $3.27148 per
share in connection with a private placement. In February 2000, one of our
stockholders sold 9,200 shares of his own Series A preferred stock to entities
associated with Chase Securities Inc. at $10.00 per share, and 36,800 shares of
his own Series A preferred stock to Access Technology Partners, L.P. at
$10.00 per share. Chase Securities Inc. is also our customer.
75
Individuals employed by Bear, Stearns & Co. Inc. purchased 17,000 shares of
our common stock at prices ranging from $0.10 to $0.40 per share. In June 1999,
individuals employed by Bear, Stearns & Co. Inc. purchased 17,642 shares of our
Series C preferred stock at $3.27148 per share in connection with a private
placement. In 1999, we had total revenue of $3.3 million. Bear, Stearns & Co.
Inc. accounted for 53% of our total revenue in 1999.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act of 1934.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would be in
the absence of these transactions. These transactions may be completed on the
Nasdaq National Market or such other trading markets as our common stock may be
traded upon in the future, and, if commenced, may be discontinued at any time.
A prospectus in electronic format will be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Distribution will be
allocated by the underwriters that may make Internet distributions on the same
basis as other allocations.
76
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of the common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (1) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (2) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (3) such purchaser has reviewed the text above under Resale
Restrictions.
Rights of Action--Ontario Purchasers
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or such persons outside of Canada.
Notice to British Columbia Residents
A purchaser of the common stock to whom the Securities Act of British
Columbia applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any common stock acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one
such report must be filed in respect of common stock acquired on the same date
and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of the common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
77
LEGAL MATTERS
Selected legal matters with respect to the validity of the common stock
offered by this prospectus are being passed upon for Support.com by Pillsbury
Madison & Sutro LLP, Palo Alto, California. Some partners of Pillsbury Madison
& Sutro LLP beneficially own an aggregate of 7,642 shares of Support.com common
stock. The underwriters have been represented by Wilson Sonsini Goodrich &
Rosati, Palo Alto, California.
EXPERTS
Ernst & Young, LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1999 and for the period from incorporation
on December 3, 1997 to December 31, 1998 and the year ended December 31, 1999,
as set forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered by this prospectus.
This prospectus, which is a part of the registration statement, does not
contain all of the information in the registration statement or the exhibits
and schedules which are part of the registration statement.
For more information with respect to Support.com and the common stock
offered by this prospectus, we refer you to the registration statement and the
exhibits and schedules filed as part of the registration statement. You may
read and copy any document we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference rooms. Our SEC filings are
also available to the public from the SEC'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 and Exchange Act, as
amended, and will file periodic reports, proxy statements and other information
with the SEC. These periodic reports, proxy statements and other information
will be available for inspection and copying at the SEC's public reference
rooms and the web site of the SEC.
78
SUPPORT.COM, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors........................ F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit)........................................................ F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Support.com, Inc.
We have audited the accompanying balance sheets of Support.com, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit), and
cash flows for the period from incorporation on December 3, 1997 to December
31, 1998 and for the year 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 Support.com, Inc. at
December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from incorporation on December 3, 1997 to December 31,
1998 and for the year ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 15, 2000
F-2
SUPPORT.COM, INC.
BALANCE SHEETS
(in thousands except share and per share data)
Pro Forma
Stockholders'
December 31, Equity at
----------------- December 31,
1998 1999 1999
------- -------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents................... $ 2,807 $ 4,023
Short-term investments...................... -- 8,466
Accounts receivable, less allowance of $10
and $40, respectively...................... 65 3,450
Prepaids and other current assets........... 516 451
------- --------
Total current assets...................... 3,388 16,390
Property and equipment, net................... 256 881
Other assets.................................. 28 254
------- --------
$ 3,672 $ 17,525
======= ========
Liabilities and stockholders' equity (deficit)
Current liabilities:
Notes payable, current portion.............. $ 50 $ 921
Capital lease obligations, current portion.. -- 274
Accounts payable............................ 98 1,227
Accrued compensation........................ 60 1,168
Other accrued liabilities................... 159 494
Deferred revenue............................ 42 2,608
------- --------
Total current liabilities................. 409 6,692
Notes payable, net of current portion......... 449 1,478
Capital lease obligations, net of current
portion...................................... -- 799
Deferred revenue--long-term portion........... -- 360
Commitments
Redeemable convertible preferred stock;
7,346,108 and 12,156,108 shares authorized at
December 31, 1998 and 1999, $0.0001 par
value, issuable in series:
Series B redeemable convertible preferred
stock; 7,346,108 shares designated, issued
and outstanding at December 31, 1998 and
1999, and none pro forma (liquidation
preference at December 31, 1999 of
$5,668).................................... 5,237 5,641
Series C redeemable convertible preferred
stock; 4,810,000 shares designated;
4,638,618 shares issued and outstanding at
December 31, 1999, and none pro forma
(liquidation preference at December 31,
1999 of $15,844)........................... -- 15,808
Stockholders' equity (deficit):
Series A convertible preferred stock; par
value $0.0001, 3,571,600 shares authorized,
3,571,600 shares issued and outstanding at
December 31, 1998 and 1999, and none pro
forma (liquidation preference at December
31, 1999 of $250).......................... 1 1 $ --
Common stock; par value $0.0001, 31,060,000
shares authorized, 6,468,880 and 10,874,374
shares issued and outstanding at December
31, 1998 and 1999, respectively;
150,000,000 authorized, 26,430,700 shares
issued and outstanding pro forma........... 1 1 3
Additional paid-in capital.................. 478 19,491 40,939
Receivable from stockholders................ -- (1,450) (1,450)
Deferred compensation....................... (153) (14,252) (14,252)
Accumulated deficit......................... (2,750) (17,044) (17,044)
------- -------- --------
Total stockholders' equity (deficit)...... (2,423) (13,253) $ 8,196
------- -------- ========
Total liabilities and stockholders' equity
(deficit)................................ $ 3,672 $ 17,525
======= ========
See accompanying notes.
F-3
SUPPORT.COM, INC.
STATEMENTS OF OPERATIONS
(in thousands except per share data)
Period from
incorporation on
December 3, 1997 to Year ended
December 31, 1998 December 31, 1999
------------------- -----------------
Revenue:
License fees.......................... $ 18 $ 2,746
Services.............................. -- 569
------- --------
Net revenues........................ 18 3,315
------- --------
Costs and expenses:
Cost of license fees.................. -- 4
Cost of services...................... -- 965
Research and development.............. 1,132 2,401
Sales and marketing................... 1,197 8,974
General and administrative............ 477 1,881
Amortization of deferred compensation
(1).................................. 16 3,554
------- --------
Total costs and expenses............ 2,822 17,779
------- --------
Loss from operations.................... (2,804) (14,464)
Interest income......................... 105 501
Interest expense........................ (51) (331)
------- --------
Net loss................................ (2,750) (14,294)
Accretion on redeemable convertible
preferred stock........................ (214) (1,072)
------- --------
Net loss attributable to common
stockholders........................... $(2,964) $(15,366)
======= ========
Basic and diluted net loss per share.... $ (0.57) $ (2.31)
======= ========
Shares used in computing basic and
diluted net loss per share............. 5,227 6,643
======= ========
Pro forma basic and diluted net loss per
share (unaudited)...................... $ (0.71)
========
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited)............................ 20,137
========
- --------
(1) Amortization of deferred compensation relates to the following in 1999:
Cost of services..................................................... $ 53
Research and development............................................. 742
Sales and marketing.................................................. 1,122
General and administrative........................................... 1,637
------
Total.............................................................. $3,554
======
See accompanying notes.
F-4
SUPPORT.COM, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(in thousands except share and per share data)
Redeemable
Convertible Convertible Notes
Preferred Stock Preferred Stock Common Stock Additional Receivable
------------------ ---------------- ----------------- Paid-In From
Shares Amount Shares Amount Shares Amount Capital Stockholders
---------- ------- --------- ------ ---------- ------ ---------- ------------
Issuance of
common stock to
founders at
$0.0001,
$0.0077, and
$0.0155 per
share for cash.. -- $ -- -- $ -- 6,428,880 $ 1 $ -- $ --
Issuance of
Series A
convertible
preferred stock
at $0.07 per
share for cash,
net of issuance
costs of $6..... -- -- 3,571,600 1 -- -- 244 --
Issuance of
Series B
redeemable
convertible
preferred stock
at $0.68747 per
share for cash
and receivable,
net of issuance
costs of $27.... 7,346,108 5,023 -- -- -- -- -- --
Issuance of
common stock
upon exercise of
stock options... -- -- -- -- 40,000 -- 4 --
Issuance of
warrants........ -- -- -- -- -- -- 249 --
Issuance of
stock options to
non-employees... -- -- -- -- -- -- 26 --
Accretion on
redeemable
convertible
preferred
stock........... -- 214 -- -- -- -- (214) --
Deferred
compensation
related to grant
of stock
options......... -- -- -- -- -- -- 169 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- --
---------- ------- --------- ---- ---------- ---- ------- -------
Balances at
December 31,
1998............ 7,346,108 5,237 3,571,600 1 6,468,880 1 478 --
Issuance of
Series C
redeemable
convertible
preferred stock
at $3.271 per
share for cash,
net of issuance
costs of $36.... 4,638,618 15,140 -- -- -- -- -- --
Issuance of
common stock
upon exercise of
options to
employees and to
consultants for
cash and
promissory
notes........... -- -- -- -- 4,131,994 -- 1,914 (1,450)
Issuance of
common stock for
services........ -- -- -- -- 51,500 -- 132 --
Issuance of
warrants........ -- -- -- -- -- -- 94 --
Issuance of
restricted stock
to non-
employees....... -- -- -- -- 222,000 -- 37 --
Expense on
issuance of
restricted stock
and stock
options to non-
employees....... -- -- -- -- -- -- 255 --
Accretion on
redeemable
convertible
preferred
stock........... -- 1,072 -- -- -- -- (1,072) --
Deferred
compensation
related to grant
of stock
options......... -- -- -- -- -- -- 17,653 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- --
---------- ------- --------- ---- ---------- ---- ------- -------
Balances at
December 31,
1999............ 11,984,726 $21,449 3,571,600 $ 1 10,874,374 $ 1 $19,491 $(1,450)
- --------------------------------------------------
========== ======= ========= ==== ========== ==== ======= =======
Total
Deferred Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficit)
------------ ----------- -------------
Issuance of
common stock to
founders at
$0.0001,
$0.0077, and
$0.0155 per
share for cash.. $ -- $ -- $ 1
Issuance of
Series A
convertible
preferred stock
at $0.07 per
share for cash,
net of issuance
costs of $6..... -- -- 245
Issuance of
Series B
redeemable
convertible
preferred stock
at $0.68747 per
share for cash
and receivable,
net of issuance
costs of $27.... -- -- --
Issuance of
common stock
upon exercise of
stock options... -- -- 4
Issuance of
warrants........ -- -- 249
Issuance of
stock options to
non-employees... -- -- 26
Accretion on
redeemable
convertible
preferred
stock........... -- -- (214)
Deferred
compensation
related to grant
of stock
options......... (169) -- --
Amortization of
deferred
compensation.... 16 -- 16
Net loss........ -- (2,750) (2,750)
------------ ----------- -------------
Balances at
December 31,
1998............ (153) (2,750) (2,423)
Issuance of
Series C
redeemable
convertible
preferred stock
at $3.271 per
share for cash,
net of issuance
costs of $36.... -- -- --
Issuance of
common stock
upon exercise of
options to
employees and to
consultants for
cash and
promissory
notes........... -- -- 464
Issuance of
common stock for
services........ -- -- 132
Issuance of
warrants........ -- -- 94
Issuance of
restricted stock
to non-
employees....... -- -- 37
Expense on
issuance of
restricted stock
and stock
options to non-
employees....... -- -- 255
Accretion on
redeemable
convertible
preferred
stock........... -- -- (1,072)
Deferred
compensation
related to grant
of stock
options......... (17,653) -- --
Amortization of
deferred
compensation.... 3,554 -- 3,554
Net loss........ -- (14,294) (14,294)
------------ ----------- -------------
Balances at
December 31,
1999............ $(14,252) $(17, 044) $(13,253)
- --------------------------------------------------
============ =========== =============
See accompanying notes.
F-5
SUPPORT.COM, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Period from
incorporation on
December 3, 1997 to Year ended
December 31, 1998 December 31, 1999
------------------- -----------------
Operating activities
Net loss............................... $(2,750) $(14,294)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 23 294
Amortization of deferred
compensation........................ 16 3,554
Other................................ 39 425
Changes in assets and liabilities:
Accounts receivable, net........... (65) (3,385)
Prepaids and other current assets.. (29) (129)
Accounts payable................... 98 1,129
Accrued compensation............... 60 1,108
Other accrued liabilities.......... 159 335
Deferred revenue................... 42 2,926
------- --------
Net cash used in operating activities.. (2,407) (8,037)
------- --------
Investing activities
Purchases of property and equipment.... (279) (89)
Proceeds from sale of equipment........ -- 99
Other assets........................... (28) (226)
Purchases of short-term investments.... -- (12,266)
Sales of short-term investments........ -- 3,800
------- --------
Net cash used in investing activities.. (307) (8,682)
------- --------
Financing activities
Proceeds from notes payable............ 500 2,000
Proceeds from sale-leaseback........... -- 183
Proceeds from issuance of preferred
stock, net............................ 5,017 15,390
Proceeds from issuances of common
stock................................. 5 501
Repayment of notes payable............. (1) (100)
Principal payments under capital lease
obligations........................... -- (39)
------- --------
Net cash provided by financing
activities............................ 5,521 17,935
------- --------
Net increase in cash and cash
equivalents............................. 2,807 1,216
Cash and cash equivalents at beginning of
period.................................. -- 2,807
------- --------
Cash and cash equivalents at end of
period.................................. $ 2,807 $ 4,023
======= ========
Supplemental disclosure of noncash
financing activities
Note received from stockholder in
exchange for preferred stock.......... $ 250 $ --
======= ========
Note received from stockholders in
exchange for common stock............. $ -- $ 1,450
======= ========
Equipment acquired under capital lease
obligation............................ $ -- $ 1,112
======= ========
Supplemental schedule of cash flow
information
Interest paid.......................... $ 39 $ 249
======= ========
See accompanying notes.
F-6
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Organization and Summary of Significant Accounting Policies
Nature of Operations
Support.com, Inc. ("Support.com"), formerly known as Tioga Systems, Inc.
and Replicase, Inc., was incorporated in the state of Delaware on December 3,
1997. Support.com is a provider of eBusiness infrastructure software that
automates, personalizes and enhances the efficiency of user support over the
Internet. Support.com's suite of eSupport software products and services is
designed to accelerate eBusiness growth by enabling the elimination of user
support bottlenecks that would otherwise constrain expanding Internet
initiatives. Support.com sells its products primarily in the United States
and, to a lesser extent in Europe, through its direct sales force.
Support.com commenced operations in December 1997. Operations through
December 31, 1997 consisted of initial development activities. Operating
expenses were approximately $9,000 for the period from incorporation on
December 3, 1997 to December 31, 1997. As such activities were not
significant, the results have been included in operations for the period ended
December 31, 1998.
Support.com has incurred operating losses to date and had an accumulated
deficit of $17,044,000 at December 31, 1999. Support.com's activities have
been primarily financed through private placements of equity securities and
capital lease financings. Support.com may need to raise additional capital
through the issuance of debt or equity securities and capital lease
financings. Such financing may not be available on terms satisfactory to
Support.com, if at all. If adequate funds are not available, Support.com may
be required to reduce its level of spending.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ materially from these
estimates.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject Support.com to concentration
of credit risk consist principally of cash investments and trade receivables.
Support.com invests cash which is not required for immediate operating needs
principally in money market funds and commercial paper, which incur minimal
risk. Support.com's customers are currently concentrated in the United States.
Support.com performs ongoing evaluations of its customers' financial condition
and generally does not require collateral. Support.com maintains reserves for
credit losses, and such losses have been within management's expectations.
For the year ended December 31, 1999, two customers accounted for 53% and
10% of revenue.
Fair Value of Financial Instruments
The fair value of notes payable is estimated by discounting the future cash
flows using the current interest rates at which similar loans would be made to
borrowers with similar credit ratings and for the
F-7
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
same remaining maturities. The carrying value of the notes payable approximated
its fair value. The fair value of short-term and long-term capital lease
obligations is estimated based on current interest rates available to
Support.com for debt instruments with similar terms, degrees of risk and
remaining maturities. The carrying values of these obligations approximate
their fair values.
Cash, Cash Equivalents and Short-Term Investments
Support.com considers all highly liquid, low-risk debt instruments with an
original maturity at the date of purchase of three months or less to be cash
equivalents. Through December 31, 1998, Support.com maintained cash and cash
equivalents in money market accounts with major financial institutions for
which the carrying amount approximated its fair value. Upon the completion of
the Series C Financing (see Note 4), Support.com invested some of its proceeds
in short-term investments with original maturities of greater than three
months. At December 31, 1999, cash equivalents and short-term investments
consist primarily of commercial paper, other debt instruments and money market
funds. Support.com's cash equivalents and short-term investments are classified
as available-for-sale in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
Currently, Support.com classifies its securities as available-for-sale,
which are reported at amortized cost which approximated fair value at December
31, 1998 and 1999. Material unrealized gains and losses, if any, are reported
in stockholders' equity (deficit) and included in other comprehensive loss. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity, both of which are included in interest
income. Realized gains and losses are recorded using the specific
identification method. For the period from incorporation on December 3, 1997 to
December 31, 1998 and for the year ended December 31, 1999, gross unrealized
gains and losses on available-for-sale securities were immaterial.
The following is a summary of available-for-sale securities at cost, which
approximates fair value (in thousands):
December 31, December 31,
1998 1999
------------ ------------
Cash and cash equivalents
Cash............................................. $ 699 $ 296
Money market funds............................... 2,108 2,729
Municipal bonds.................................. -- 998
------ ------
$2,807 $4,023
====== ======
Short-term investments
Municipal bonds.................................. $ -- $6,466
Auction backed securities........................ -- 2,000
------ ------
$ -- $8,466
====== ======
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
which is provided using the straight-line method over the estimated useful
lives of the assets, generally three years.
F-8
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Revenue Recognition
License revenue is comprised of fees for perpetual and subscription licenses
of Support.com's software by corporate customers and resellers. Revenue from
perpetual license fees is recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, no obligations remain, the fee is
fixed or determinable and collectibility is probable. If the fee due from the
customer is not fixed or determinable, revenue is recognized as payments become
due from the customers. If collectibility is not considered probable, revenue
is recognized when the fee is collected. Revenue related to arrangements with
resellers is recognized when the product is delivered to the end user. Revenue
from subscription licenses is recognized ratably over the term of the
subscription beginning upon the delivery of the licensed product.
Services revenue is primarily comprised of revenue from professional
services, such as consulting services, maintenance and support. Consulting
services include a range of services including installation, implementation and
building of complex and 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, Support.com assesses whether the service element of the
arrangement is essential to the functionality of the other elements of the
arrangement. In this determination, Support.com 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. Judgement is required in the determination of whether the building
of interfaces to the customer's existing applications constitute complex
interfaces. In making this determination Support.com considers the following:
(1) the relative fair value of the services compared to the software, (2) the
amount of time and effort subsequent to delivery of the software until the
interfaces or other modifications are completed, (3) the degree of technical
difficulty in building of the interface, (4) 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 Support.com determines that the service elements
are essential to the other elements of the arrangement, Support.com accounts
for the entire arrangement in accordance with Accounting Research Bulletin
(ARB) No. 45, "Long--Term Construction--Type Contracts," using the relevent
guidance in SOP 97-2, and in SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts."
For those arrangements for which Support.com has concluded that the service
element is not essential to the other elements of the arrangement, Support.com
determines whether the services are available from other vendors, do not
involve a significant degree of risk or unique acceptance criteria, and whether
Support.com has sufficient experience in providing the service to be able to
separately account for the service. When the service qualifies for separate
accounting and Support.com has vendor-specific objective evidence of fair value
(VSOE) for the service,
F-9
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Support.com (1) recognizes revenue for the fees associated with a perpetual
license using the residual method in accordance with SOP 98-9, regardless of
any separate prices stated within the contract for each element or, (2)
recognizes revenue for the fees associated with a subscription license on a
monthly basis over the remaining term of the subscription period. VSOE of
services in multiple element arrangements is based upon hourly rates which
Support.com has charged in stand alone contracts for services.
Maintenance is not priced or offered separately in subscription licensing
arrangements and is therefore recognized as part of the subscription fee over
the subscription period. For perpetual licensing arrangements, in accordance
with paragraph 57 of SOP 97-2, VSOE 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. VSOE for maintenance contracts under perpetual
license arrangements is based upon Support.com's pricing practice that
maintenance renewal fees 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. 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 Support.com has not entered into arrangements solely for license of
products and, therefore, Support.com has not demonstrated VSOE for the purposelicense
element. In those instances where perpetual licenses are bundled with other
elements, Support.com has used the residual method following the guidance in
SOP 98-9. Support.com 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. Support.com 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.
For the year ended December 31, 1999, Support.com recognized 71% of license
and services revenues on perpetual arrangements under the residual method, 23%
under subscription arrangements and 6% under the contract accounting method.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
Support.com adopted Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"), and Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition" ("SOP
98-4"), as of January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for
recognizing revenue on software transactions and supersede 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 Support.com's future revenues
and results of operations. In December 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" ("SOP 98-9"). 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
F-10
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. Support.com does not expect the final
adoption of SOP 98-9 to have a material impact on its future revenues or
results of operations.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on Support.com's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by Support.com between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, Support.com has charged
all such costs to research and development expense in the accompanying
statement of operations. Support.com did not incur any cost related to software
developed or obtained for internal use as defined SOP 98-1.
Advertising Costs
Advertising costs are recorded as sales and marketing expense in the period
in which they are incurred. Advertising expense for the period from
incorporation on December 3, 1997 to December 31, 1998 was $0 and for the year
ended December 31, 1999 was $70,675.
Stock-Based Compensation
Support.com accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and has adopted the disclosure only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123").
Any deferred stock compensation calculated according to APB 25 is amortized
over the vesting period of the individual options, generally four years, using
the graded vesting method. The graded vesting method provides for vesting of
portions of the overall awards at interim dates and results in greater vesting
in earlier years than straight-line.
All stock-based awards to non-employees are accounted for at their fair
value, as calculated using the Black-Scholes model, in accordance with FAS 123
and Emerging Issues Task Force Consensus No. 96-18 ("EITF 96-18"). The options
and restricted stock purchase arrangements are subject to periodic re-valuation
over their vesting terms.
Net Loss Per Share
Basic and diluted net loss per share are presented in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128"), for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, ordinary
F-11
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
shares and convertible preferred shares issued or granted for nominal
consideration prior to the anticipated effective date of Support.com's initial
public offering must be included in the calculation of basic and diluted net
loss per share as if they had been outstanding for all periods presented. To
date, Support.com has not had any issuances or grants for nominal
consideration.
Basic and diluted net loss per share has been computed using the weighted-
average number of shares of common stock outstanding during the period. Had
Support.com been in a net income position, diluted earnings per share would
have included the shares used in the computation of basic net loss per share as
well as the impact of common shares outstanding subject to repurchase and
outstanding options and warrants to purchase an additional 2,306,761 and
7,586,002 shares, prior to the application of the treasury stock method, for
the period from incorporation on December 3, 1997 to December 31, 1998 and the
year ended December 31, 1999. Such shares have been excluded because they are
antidilutive for all periods presented. Shares of convertible preferred stock
have been excluded from the computation.
Comprehensive Loss
Support.com adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), at December 31, 1998. Under FAS
130, Support.com is required to display comprehensive income and its components
as part of the financial statements. Other comprehensive income includes
certain changes in equity that are excluded from net loss. Support.com has no
material components of other comprehensive loss and, as a result, the
comprehensive loss is the same as the net loss for all periods presented.
Segment Information
Support.com operates in one segment. For the year ended December 31, 1999,
revenue from customers located outside the United States was approximately
$46,000 and was derived from customers in Canada and the United Kingdom.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted-average number
of shares of common stock outstanding, including the pro forma effects of the
automatic conversion of Support.com's convertible preferred stock into shares
of common stock, effective upon the closing of Support.com's initial public
offering as if such conversion occurred at the date of original issuance. Pro
forma stockholders' equity at December 31, 1999, as adjusted for the conversion
of the convertible preferred stock, is disclosed on the balance sheet.
F-12
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
A reconciliation of shares used in the calculation of basic and diluted and
pro forma net loss per share follows (In thousands except per share data):
Period from
incorporation on
December 3, 1997 to Year ended
December 31, 1998 December 31, 1999
------------------- -----------------
Net loss attributable to common
stockholders........................ $(2,964) $(15,366)
======= ========
Basic and diluted:
Weighted-average shares of common
stock outstanding................. 6,432 7,166
Less weighted-average shares
subject to repurchase............. (1,205) (523)
------- --------
Shares used in computing basic and
diluted net loss per share........ 5,227 6,643
======= ========
Basic and diluted net loss per
share............................... $ (0.57) $ (2.31)
======= ========
Pro forma:
Net loss........................... $(14,294)
========
Shares used above.................. 6,643
Unaudited pro forma adjustment to
reflect weighted effect of assumed
conversion of convertible
preferred stock................... 13,494
--------
Shares used in computing unaudited
pro forma basic and diluted net
loss per share.................... 20,137
========
Unaudited pro forma basic and diluted
net loss per share.................. $ (0.71)
========
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will be effective for the year ending December 31, 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. Support.com believes the adoption of SFAS 133 will
not have a material effect on the financial statements, since it currently does
not invest in derivative instruments and engage in hedging activities.
F-13
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
2. Property and Equipment
Property and equipment are stated at cost and consist of the following (In
thousands):
December
31,
------------
1998 1999
---- ------
Computer and software equipment................................ $168 $1,193
Furniture and equipment........................................ 106 5
Leasehold improvements......................................... 5 --
---- ------
279 1,198
Accumulated depreciation and amortization...................... (23) (317)
---- ------
$256 $ 881
==== ======
As of December 31, 1999, property and equipment included amounts acquired
under capital leases of approximately $1,112,000, with related accumulated
amortization of approximately $267,000. This includes property and equipment
with a net book value of approximately $122,000 at December 31, 1999 that was
acquired in 1998 and financed in 1999 through a sale-leaseback transaction.
3. Capital Leases, Borrowings and Commitments
In October 1998, Support.com entered into a loan and security agreement, a
subordinated loan and security agreement and a lease agreement with a financial
institution. In connection with each of these agreements, Support.com issued
warrants to the financial institution (see Note 4). Additionally, Support.com
cannot declare or pay any cash dividends or make a distribution on any class of
stock without the consent of the lender.
The loan and security agreement allows Support.com to borrow up to
$1,500,000 in minimum installments of $500,000 evidenced by secured promissory
notes. Each promissory note bears interest at the rate of 9% per year, is
payable in 36 monthly installments, and is secured by substantially all of
Support.com's assets. At December 31, 1999, Support.com had borrowed $1,500,000
under this agreement. Remaining principal payments under these notes are
approximately $639,000 in 2000, $699,000 in 2001 and $61,000 in 2002.
The subordinated loan and security Agreement allows Support.com to borrow up
to $1,000,000 in two installments of $500,000 evidenced by subordinated secured
promissory notes. Each promissory note bears interest at the rate of 12.5% per
year, is payable in 9 monthly installments of interest only followed by
33 monthly installments of principal and interest. Each note is secured by
substantially all of Support.com's assets. At December 31, 1999, Support.com
had borrowed $1,000,000 under this agreement. Principal payments due are
approximately $282,000 in 2000, $362,000 in 2001 and $356,000 in 2002.
The lease agreement allows Support.com to borrow up to $2,500,000.
Support.com can borrow under this agreement until 2001 and advances may only be
used to finance purchases of equipment,
F-14
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
software and tenant improvements, subject to certain limitations. Advances are
secured by the assets acquired. Each equipment advance is payable in 48 monthly
installments of principal and interest, computed at the monthly rate of 2.9% of
the principal balance. At December 31, 1999, Support.com had borrowed
approximately $1,112,000 under this agreement.
Support.com leases its facilities under noncancelable operating lease
agreements which expire at various dates from 2000 to 2001. Rent expense was
approximately $783,000 for the year ended December 31, 1999 and approximately
$184,000 for the period from incorporation on December 3, 1997 to December 31,
1998. Support.com has subleased one of its facilities to a third party.
Sublease rental income was approximately $162,000 for the year ended December
31, 1999 and approximately $45,000 for the period from incorporation on
December 3, 1997 to December 31, 1998. Payments due under the sublease rental
agreement are approximately $309,000 in 2000 and $178,000 in 2001. The sublease
rental agreement expires in July 2001.
As of December 31, 1999, minimum payments under noncancelable lease
agreements were as follows (in thousands):
Years ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
2000.................................................... $ 336 $1,349
2001.................................................... 344 850
2002.................................................... 344 --
2003.................................................... 187 --
------ ------
Total minimum lease and principal payments............ 1,211 $2,199
======
Amount representing interest............................. (138)
------
Present value of future payments......................... 1,073
Current portion of capital lease obligations............. 274
------
Noncurrent portion....................................... $ 799
======
4. Redeemable Convertible Preferred Stock and Stockholders' Equity
Preferred Stock
Each share of preferred stock is, at the option of the holder, convertible
into one share of common stock, subject to certain adjustments for dilution, if
any, resulting from future stock issuances. The outstanding shares of preferred
stock automatically convert into common stock immediately prior to the closing
of an underwritten public offering of common stock under the Securities Act of
1933 in which Support.com receives at least $15,000,000 in gross proceeds and
the market valuation for Support.com is at least $125,000,000. Each class of
preferred stock automatically converts into common stock at the election of
holders of at least a majority of the outstanding shares.
F-15
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
As of December 31, 1999, convertible preferred stock consisted of the
following:
Non-
cumulative Liquidation
Shares Shares Dividend Preference
Authorized Outstanding Per Share Per Share
---------- ----------- ---------- -----------
Series A....................... 3,571,600 3,571,600 $ -- $0.070
Series B....................... 7,346,108 7,346,108 $0.550 $0.687
Series C....................... 4,810,000 4,638,618 $0.262 $3.271
---------- ----------
15,727,708 15,556,326
========== ==========
The holders of Series B and C preferred stock are entitled to receive
dividends payable in preference and priority to any payment of any dividend on
Series A preferred stock and common stock. No dividends have been declared as
of December 31, 1999.
The liquidation preference of the convertible preferred stock is subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination, or other similar recapitalization affecting such share and, in
addition, an amount equal to all declared but unpaid dividends on the shares of
preferred stock. The liquidation preference of the Series B and C preferred
stock is increased at the rate, without compounding, of 8% per year, such rate
to be prorated over the length of any partial year. Any remaining assets would
then be distributed on a pro rata basis among the holders of common stock.
The majority of the holders of Series B redeemable convertible preferred
stock can require Support.com to redeem one-third, two-thirds, and all of the
outstanding Series B redeemable convertible preferred stock, together with a 8%
annual rate of return, at any time after June 19, 2003, June 19, 2004 and June
19, 2005. The carrying amount of Series B redeemable convertible preferred
stock is being increased by periodic accretions so that its carrying amount
will equal the redemption amount at the redemption date.
The majority of the holders of Series C redeemable convertible preferred
stock can require Support.com to redeem one-third, two-thirds, and all of the
outstanding Series C redeemable convertible preferred stock, together with a 8%
annual rate of return, at any time after June 14, 2004, June 14, 2005 and June
14, 2006. The carrying amount of Series C redeemable convertible preferred
stock is being increased by periodic accretions so that its carrying amount
will equal the redemption amount at the redemption date.
The preferred stockholders have voting rights equal to the common shares
issuable upon conversion of their preferred shares.
At December 31, 1998, Support.com had a receivable from a stockholder for
$250,229 in connection with the purchase of Series B preferred stock. The
receivable was included in prepaids and other currents assets. Support.com
collected the receivable during 1999.
F-16
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Common Stock
Support.com has reserved shares of common stock for issuance at December 31,
1999 as follows:
Stock Option Plan................................................. 3,952,440
Warrants.......................................................... 164,483
Conversion of preferred stock..................................... 15,556,326
----------
19,673,249
==========
During 1999, certain option holders exercised options to purchase 1,560,000
shares of common stock at prices ranging from $0.90 to $0.99, with a weighted-
average exercise price of $0.93 per share in exchange for four-year, full
recourse promissory notes. The notes bear interest at 5.9% and expire on
various dates through 2003. Support.com has the right to repurchase all
unvested shares purchased by the notes at the original exercise price in the
event of employee termination. The number of shares subject to this repurchase
right decreases as the shares vest under the original option terms, generally
over four years.
Subsequent to year end, an option holder exercised 1,680,189 options to
purchase shares of common stock in exchange for a four-year, full recourse
promissory note. The note has terms which are identical to the notes exercised
prior to year end. These options were exercised at a price per share of $0.40.
Stock Warrants
In October 1998 and July 1999, Support.com issued warrants to a financial
institution in conjunction with the loan and security agreement, subordinated
loan and security agreement and the master lease agreement (see Note 3). The
warrant issued in October 1998 allows the financial institution to purchase
98,511 shares of Support.com's Series C preferred stock at an exercise price of
$1.98 per share. The warrant issued in July 1999 allows the financial
institution to purchase 27,511 shares of Support.com's Series C preferred stock
at an exercise price of $3.27 per share. The warrants became exercisable in
June 1999 and July 1999, respectively. The warrants granted in July 1999 shall
be exercisable for a period of seven years or three years from the effective
date of Support.com's initial public offering, whichever is longer. The
warrants granted in October 1998 will expire 7 years from issuance or at the
time of Support.com's initial public offering. The warrants were valued using
the Black-Scholes model. In applying the Black-Scholes model, Support.com used
an expected dividend yield of zero, a risk-free interest rate of 6.5% and a
volatility factor of 0.5. The value of approximately $249,000 on the warrant
issued in 1998 and $59,000 on the warrant issued in 1999 is being amortized to
interest expense over the term of the financing agreements.
In August 1999, Support.com issued warrants to a lessor in conjunction with
a sublease agreement. The warrant allows the lessor to purchase 38,461 shares
of Support.com's Series C preferred stock at an exercise price of $6.50 per
share. The warrant is immediately exercisable and expires in November 2001 or
at the time of Support.com's initial public offering. The warrants were valued
using the Black-Scholes model. In applying the Black-Scholes model, Support.com
used an
F-17
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
expected dividend yield of zero, a risk-free interest rate of 6.5% and a
volatility factor of 0.5. The total value of approximately $35,000 is being
amortized to interest expense over the term of the lease agreements.
Restricted Common Stock
In 1999, Support.com issued 42,000 shares of restricted common stock to non-
employees and 180,000 shares of restricted common stock to two members of the
board of directors. Support.com has the right to repurchase all unvested shares
purchased at the original exercise price. The number of shares subject to this
repurchase right decreases as the shares vest under the original terms of the
restricted stock purchase agreements, generally over four years. As of December
31, 1999, there were 201,029 shares subject to repurchase. The restricted stock
was purchased at prices ranging from $0.10 to $0.90, with a weighted-average
exercise price of $0.17 per share.
The restricted stock issued to the directors was valued using the intrinsic
value method prescribed in APB 25. The restricted stock issued to non-employees
was valued using the Black-Scholes model prescribed in FAS 123 and EITF 96-18.
In applying the Black-Scholes model, Support.com used an expected dividend
yield of zero, a risk-free interest rate of 6.5%, a volatility factor of 0.5
and the deemed fair value of Support.com's common stock on the date such
restricted stock became vested. The restricted stock issued to non-employees is
subject to periodic re-valuation over the vesting terms. The total value of the
restricted stock which became fully vested in 1999 of approximately $123,000
was recognized as compensation expense in 1999.
1998 Stock Option Plan
During fiscal 1998, Support.com adopted the 1998 stock option plan (the
"plan"). Under the plan, up to 8,124,434 shares of Support.com's common stock
may be granted as options or sold to eligible participants. Under the plan,
options to purchase common stock may be granted at no less than 85% of the fair
value on the date of the grant (110% of fair value in certain instances), as
determined by the board of directors. Options under the plan are immediately
exercisable; however, shares issued are subject to Support.com's right to
repurchase such shares at the original issuance price, which lapses in a series
of installments measured from the vesting commencement date of the option.
Options generally vest and the repurchase rights lapse over a 48-month period
from the date of grant and have a maximum term of 10 years.
Pro forma information regarding net loss is required by FAS 123 and has been
determined as if Support.com had accounted for its employee stock options under
the fair value method of FAS 123. The fair value of these options was estimated
at the date of grant using the minimum value method with the following
weighted-average assumptions: risk-free interest rates of 6.5%; a dividend
yield of 0%; and a weighted-average expected life of the option of 4.5 years
for the years ended December 31, 1998 and 1999.
F-18
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using a
graded vesting method. The effects of applying FAS 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
loss for future years.
Support.com's pro forma information follows (in thousands, except per share
amounts):
Period from incorporation
on December 3, 1997 to Year ended
December 31, 1998 December 31, 1999
------------------------- -----------------
Net loss:
As reported.................. $(2,964) $(15,366)
Pro forma.................... (2,969) (15,468)
Basic and diluted net loss per
share:
As reported.................. $ (0.57) $ (2.31)
Pro forma.................... (0.57) (2.33)
Information with respect to stock option activity is summarized as follows:
Options Outstanding Weighted
Options ----------------------- Average
Available Number of Price Per Exercise
for Grant Shares Share Price
---------- ---------- ----------- --------
Shares authorized.............. 2,929,434 -- -- --
Options granted................ (2,343,250) 2,343,250 $ 0.10 $0.10
Options exercised.............. -- (40,000) $ 0.10 $0.10
Options canceled............... 95,000 (95,000) $ 0.10 $0.10
---------- ---------- -----------
Balance at December 31, 1998... 681,184 2,208,250 $ 0.10 $0.10
Shares authorized.............. 5,195,000 -- -- --
Options granted................ (6,326,139) 6,326,139 $0.10-$0.99 $0.57
Options exercised.............. -- (4,131,994) $0.10-$0.99 $0.46
Options canceled............... 457,500 (457,500) $0.10-$0.90 $0.23
---------- ---------- -----------
Balance at December 31, 1999... 7,545 3,944,895 $0.10-$0.90 $0.47
========== ========== ===========
At December 31, 1998 and 1999, zero and 3,299,905 shares which had been
issued upon exercise of options were subject to repurchase. At December 31,
1998 and 1999, options to acquire 5,500 and 444,899 shares were vested but not
exercised.
F-19
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Exercise prices for options outstanding as of December 31, 1999 and the
weighted-average remaining contractual life are as follows:
Options Outstanding and Exercisable
-------------------------------------------------
Weighted-
Average
Remaining
Exercise Number of Contractual
Price Range Shares Life
----------- --------- -----------
(In years)
$0.10 764,556 7.79
$0.40 2,163,689 9.54
$0.90 1,016,650 9.68
--------- ----
3,944,895 9.22
========= ====
The weighted-average fair value of options granted during 1998 was $0.02
and 1999 was $0.12.
Stock Compensation
During the period from incorporation December 31, 1997 to December 31, 1998
and for the year ended December 31, 1999, in connection with the grant of
certain share options to employees, Support.com recorded deferred stock
compensation of approximately $169,000 and $17.7 million, respectively,
representing the difference between the exercise price and the deemed fair
value of Support.com's common stock on the date such stock options were
granted. Such amounts are included as a reduction of stockholders' equity
(deficit) and are being amortized by charges to operations on a graded vesting
method. Support.com recorded amortization of deferred stock compensation
expense of approximately $16,000 in 1998 and $3.5 million in 1999. At December
31, 1999, Support.com had a total of approximately $14.3 million remaining to
be amortized over the corresponding vesting period of each respective option,
generally four years. The amortization expense relates to options awarded to
employees in all operating expense categories. This amount has not been
separately allocated to these categories.
5. Income Taxes
No provision for income taxes has been recorded as Support.com incurred net
operating losses for the period from incorporation on December 3, 1997 to
December 31, 1998 and for the year ended December 31, 1999. The following is a
reconciliation of the statutory federal income tax rate (35%) to Support.com's
effective income tax rate (In thousands):
Period from incorporation
on December 3, 1997 to Year ended
December 31, 1998 December 31, 1999
------------------------- -----------------
Statutory federal income tax
expense (benefit)................ $(963) $(5,003)
Loss for which no tax benefit is
currently recognizable........... 963 5,003
----- -------
$ -- $ --
===== =======
F-20
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Significant components of Support.com's deferred tax assets are as follows
(in thousands):
December 31,
----------------
1998 1999
------- -------
Deferred tax assets:
Net operating loss carryforwards......................... $ 1,000 $ 4,100
Deferred compensation.................................... -- 1,400
Other.................................................... 100 900
------- -------
Total deferred tax assets.............................. 1,100 6,400
Valuation allowances....................................... (1,100) (6,400)
------- -------
Net deferred tax assets.................................... $ -- $ --
======= =======
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," provides for the recognition of deferred tax assets if realization of
such assets is more likely than not. Based upon the weight of available
evidence, which includes Support.com's historical operating performance and the
reported cumulative net losses in all periods, Support.com has provided a full
valuation allowance against its net deferred tax assets.
The valuation allowance increased by approximately $1.1 million during the
period from incorporation on December 3, 1997 to December 31, 1998 and $5.3
million during the year ended December 31, 1999.
As of December 31, 1999, Support.com had federal and state net operating
loss carryforwards each of approximately $10.1 million. The net operating loss
carryforwards will expire at various dates beginning in 2005 through 2019, if
not utilized.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of net operating loss carryforwards before
utilization.
6. Subsequent Events (Unaudited)
Initial Public Offering
In February 2000, the board of directors authorized the filing exhibits.of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed initial public
offering ("IPO"). If the offering is consummated under the terms presently
anticipated, all of the currently outstanding convertible preferred stock will
convert to shares of common stock upon the closing of the IPO on a one-for-one
basis. The effect of this conversion has been reflected as unaudited pro forma
stockholders' equity in the accompanying balance sheet at December 31, 1999.
In February 2000, the board of directors also authorized 5,000,000 shares of
undesignated preferred stock, for which the board of directors is authorized to
fix the designation, powers,
F-21
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
preferences and rights, and an increase in the authorized number of shares of
common stock to 150,000,000 shares.
2000 Employee Stock Purchase Plan
In February 2000, the board of directors approved the adoption of
Support.com's 2000 employee stock purchase plan (the "2000 purchase plan"). A
total of 2,000,000 shares of common stock have been reserved for issuance under
the 2000 purchase plan. On January 1 of each year, the number of shares
reserved automatically increases by the lesser of 2,000,000 shares, 3% of the
outstanding shares, or an amount determined by the board of directors. The 2000
purchase plan permits eligible employees to acquire shares of Support.com's
common stock through periodic payroll deductions of up to 15% of total
compensation. No more than 1,000 shares may be purchased on any purchase date
per employee. Each offering period will have a maximum duration of 24 months.
Purchases occur on the last day of each June and December of each offering
period. The price at which the common stock may be purchased is 85% of the
lesser of the fair market value of Support.com's common stock on each
employee's applicable enrollment date or on the last day of the respective
purchase period. The initial offering period commenced on the effectiveness of
the initial public offering and will end on the last business day of December
2001.
2000 Omnibus Equity Incentive Plan
In February 2000, the board of directors approved the adoption of
Support.com's 2000 omnibus equity incentive plan (the "2000 incentive plan"),
subject to stockholder approval. A total of 4,000,000 shares of common stock
have been reserved for issuance to eligible participants under the 2000
incentive plan. On January 1 of each year, the number of shares reserved
automatically increases by the lesser of 2,000,000 shares, 5% of outstanding
shares, or an amount determined by the board of directors. The types of awards
that may be made under the 2000 incentive plan include the grant of incentive
stock options, the grant of nonstatutory stock options and stock purchase
rights to employees, non-employee directors, advisors and consultants. Any
shares not yet issued under Support.com's 1998 stock option plan as of the date
of Support.com's IPO will be available for grant under the 2000 incentive plan.
The exercise price for incentive stock options may not be less than 100% of the
fair market value of Support.com's common stock on the date of grant (85% for
nonstatutory options).
Increase in Shares Available Under the 1998 Stock Option Plan
In February 2000, the board of directors authorized, and the stockholders
approved, an increase of 1,300,000 shares for issuance under Support.com's
stock option plan.
Equity Activity
From January 1, 2000 to March 30, 2000, options to purchase 1,168,067 shares
of common stock were granted to employees pursuant to the 1998 stock option
plan with exercise prices of between $2.00 and $8.00 per share. Support.com
estimates that additional deferred compensation of $4.9 million will be
recorded as a result of these option grants and will be amortized to expense in
F-22
SUPPORT.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
accordance with Support.com's policy. Support.com also expects to incur non-
cash charges of at least $700,000 in the first quarter of 2000 associated with
other option arrangements.
In February 2000, Support.com issued warrants to a customer in conjunction
with a license agreement. The warrant allows the customer to purchase 119,167
shares of Support.com's Series C preferred stock at an exercise price of $18.00
per share. The warrant is immediately exercisable and expires in August 2002.
The warrants will be valued using the Black-Scholes valuation model. The value
of the warrants will be recorded as a reduction to license revenues as the
related revenues are recognized under the agreement.
Rescission Offer
Specific shares issued, and option grants made under, Support.com's 1998
stock option plan were not exempt from registration or qualification under
California state securities laws, and these stock issuances and option grants
violated the registration requirements of California state securities laws
because registration or qualification was not obtained. Support.com intends to
make a rescission offer of $0.01 per share to the holders of 2,931,150 shares
and options which will be held open for 30 days. If accepted, the rescission
offer could require Support.com to make payments of up to $200,000 as
consideration for the return of any such shares issued and options granted
including statutory interest.
F-23
[Company Logo]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
Payable by
Registrant
----------
SEC registration fee.............................................. $16,395
National Association of Securities Dealers, Inc. filing fee....... 6,710
Nasdaq National Market Listing Fee................................ 95,000
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Printing and engraving expenses................................... *
Blue Sky fees and expenses........................................ *
Registrar and Transfer Agent's fees............................... *
Miscellaneous fees and expenses................................... *
-------
Total........................................................... *
=======
- --------
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article XI.B. of the
Registrant's Amended and Restated Certificate of Incorporation (Exhibit 3.1
hereto) and Article XII of the Registrant's Amended and Restated Bylaws
(Exhibit 3.2 hereto) provide for indemnification of the Registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law. The
Registrant has also entered into agreements with its directors and officers
that will require the Registrant, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or
service as directors or officers to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act and affords certain rights of contribution with respect
thereto.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
ourselves, our underwriters and our directors and officers of the
underwriters, for certain liabilities, including liabilities arising under the
Act and affords certain rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
1. From December 1997 to December 31, 1999, the Registrant issued and
sold 10,874,374 shares of common stock to employees, directors and
consultants at prices ranging from $0.0001 to $0.90 per share.
2. From December 8, 1997 to March 19, 1998, the Registrant issued and
sold 3,571,600 shares of Series A preferred stock to a total of 4 investors
for an aggregate purchase price of $250,012.00.
3. On June 22, 1998, the Registrant issued and sold 7,346,108 shares of
Series B preferred stock to a total of 9 investors for an aggregate
purchase price of $5,050,228.87.
4. On June 14, 1999, the Registrant issued and sold 4,638,618 shares of
Series C preferred stock to a total of 35 investors for an aggregate
purchase price of $15,175,147.93.
II-1
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to
compensatory benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of securities in each of these transactions
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof,
and appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationship with the Registrant, to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
See exhibits listed on the Exhibit Index following the signature page
Exhibit
Number Description of Document
------- -----------------------
1.1* Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2** Amended and Restated Bylaws, to be effective upon consummation of this
offering.
3.3** Amended and Restated Certificate of Incorporation.
3.4** Certificate of Correction of the Amended and Restated Certificate of
Incorporation.
3.5** Bylaws.
4.1* Form of Common Stock Certificate.
4.2** Registration Rights Agreement, dated June 22, 1998, by and among the
registrant and the parties who are signatories thereto.
4.3** Amended and Restated Registration Rights Agreement, dated June 14,
1999, by and among the registrant and the parties who are signatories
thereto.
4.4** Warrant Agreement to Purchase Shares of Series C Convertible Preferred
Stock, dated July 12, 1999, by and between the registrant and
Comdisco, Inc.
4.5** Warrant Agreement to Purchase Shares of Series C Preferred Stock,
dated October 27, 1998, by and between the registrant and Comdisco,
Inc.
4.6** Warrant Agreement to Purchase Shares of Series C Preferred Stock,
dated October 27, 1998, by and between the registrant and Comdisco,
Inc.
4.7** Warrant Agreement to Purchase Shares of Series C Preferred Stock,
dated October 27, 1998, by and between the registrant and Comdisco,
Inc.
4.8** Letter Agreement, dated June 7, 1999, by and between the registrant
and Comdisco, Inc.
4.9** Warrant Agreement to Purchase Shares of Series C Preferred Stock by
and between the registrant and Excite, Inc.
4.10** Warrant Agreement to Purchase Shares of Series C Preferred Stock dated
February 17, 2000 by and between the registrant and General Electric
Company.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.1** Registrant's Amended and Restated 1998 Stock Option Plan.
10.2** Registrant's 2000 Omnibus Equity Incentive Plan.
10.3 Registrant's 2000 Employee Stock Purchase Plan.
10.4** Form of Directors and Officers' Indemnification Agreement.
10.5** Employment Agreement, dated June 24, 1998, by and between the
registrant and Anthony C. Rodoni.
10.6** Employment Agreement, dated May 26, 1999, by and between the
registrant and Michael O'Rourke.
10.7** Employment Agreement, dated July 15, 1999, by and between the
registrant and Radha R. Basu.
10.8** Employment Agreement, dated August 16, 1999, by and between the
registrant and Scott Dale.
10.9** Employment Agreement, dated August 16, 1999, by and between the
registrant and Cadir Lee.
10.10** Employment Agreement, dated September 27, 1999, by and between the
registrant and Brian M. Beattie.
II-2
Exhibit
Number Description of Document
------- -----------------------
10.11** Employment Agreement, dated December 7, 1999, by and between the
registrant and Jim Hilbert.
10.12** Employment Agreement, dated January 18, 2000, by and between the
registrant and Lucille Hoger.
10.13* Employment Agreement, dated February , 2000, by and between the
registrant and Mark Pincus.
10.14 Sublease Agreement, dated August 6, 1999, by and between the
registrant and Excite, Inc.
10.15+** Enterprise License Agreement, dated May 27, 1999, by and between the
registrant and Bear, Stearns & Co., Inc.
10.16+** Amendment No. 1 to Enterprise License Agreement, dated October 6,
1999, by and between the registrant and Bear, Stearns & Co., Inc.
10.17+** Enterprise License Agreement dated February 17, 2000 by and between
the registrant and General Electric Company.
10.18 Form of Proprietary Information and Inventions Agreement.
10.19+ OEM Agreement, dated July 14, 1994, by and between the registrant and
Excite@Home.
10.20+ Amendment to OEM Agreement, dated March , 2000, by and between the
registrant and Excite@Home.
10.21+ Reseller Agreement, dated March , 2000, by and between the
registrant and Samsung SDS Co. Ltd.
10.22+ Sale and License Agreement, dated March 20, 2000.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Pillsbury Madison & Sutro LLP (contained in their opinion
filed as Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule for Support.com, Inc.
99.1 Consent of Bear, Stearns & Co. Inc.
99.2 Consent of Excite@Home.
99.3 Consent of JCPenney.
99.4 Consent of Compaq Professional Services.
99.5 Consent of everdream.
- --------
* To be filed by amendment.
** Previously Filed.
+ Confidential Treatment Requested. Confidential portions of the Form S-1, which is incorporated herein by reference.exhibit have
been omitted and filed separately with the Commission.
(b) Financial Statement Schedules
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 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
II-3
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, 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 Securities
Act of 1933, as amended, 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.
(3) The Registrant will provide to the underwriters at the closing(s)
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.
II-2II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment Number 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Redwood City, State of California, on the 9th31st day of March, 2000.
Support.Com, Inc.
/s/ Radha Ramaswami Basu
By __________________________________
Radha Ramaswami Basu
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Radha Ramaswami Basu President, Chief Executive March 9,31, 2000
____________________________________ Officer and Director
Radha Ramaswami Basu (Principal Executive
Officer)
/s/ Brian M. Beattie Senior Vice President of March 9,31, 2000
____________________________________ Finance and Administration,
Brian M. Beattie Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)
* Director March 9,31, 2000
____________________________________
Mark J. Pincus
* Director March 9,31, 2000
____________________________________
Matthew T. Cowan
* Director March 9,31, 2000
____________________________________
William L. Dunn
* Director March 9,31, 2000
____________________________________
Bruce Golden
* Director March 9,31, 2000
____________________________________
Edward S. Russell
* Director March 9,31, 2000
____________________________________
Roger J. Sippl
/s/ Radha Ramaswami
Basu
*By:_________________________________________________
Radha Ramaswami Basu
(Attorney-in-Fact)
II-3II-5
EXHIBIT INDEX
Exhibit
Number Description of Document
------- -----------------------
1.1* Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation, to be effective
upon consummation of this offering.
3.2** Amended and Restated Bylaws, to be effective upon consummation of
this offering.
3.3** Amended and Restated Certificate of Incorporation.
3.4** Certificate of Correction of the Amended and Restated Certificate of
Incorporation.
3.5** Bylaws.
4.1* Form of Common Stock Certificate.
4.2** Registration Rights Agreement, dated June 22, 1998, by and among the
registrant and the parties who are signatories thereto.
4.3** Amended and Restated Registration Rights Agreement, dated June 14,
1999, by and among the registrant and the parties who are signatories
thereto.
4.4** Warrant Agreement to Purchase Shares of Series C Convertible
Preferred Stock, dated July 12, 1999, by and between the registrant
and Comdisco, Inc.
4.5** Warrant Agreement to Purchase Shares of Series C Preferred Stock,
dated October 27, 1998, by and between the registrant and Comdisco,
Inc.
4.6** Warrant Agreement to Purchase Shares of Series C Preferred Stock,
dated October 27, 1998, by and between the registrant and Comdisco,
Inc.
4.7** Warrant Agreement to Purchase Shares of Series C Preferred Stock,
dated October 27, 1998, by and between the registrant and Comdisco,
Inc.
4.8** Letter Agreement, dated June 7, 1999, by and between the registrant
and Comdisco, Inc.
4.9** Warrant Agreement to Purchase Shares of Series C Preferred Stock by
and between the registrant and Excite, Inc.
4.104.10** Warrant Agreement to Purchase Shares of Series C Preferred Stock
dated February 17, 2000 by and between the registrant and General
Electric Company.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.110.1** Registrant's Amended and Restated 1998 Stock Option Plan.
10.2** Registrant's 2000 Omnibus Equity Incentive Plan.
10.3**10.3 Registrant's 2000 Employee Stock Purchase Plan.
10.4** Form of Directors and Officers' Indemnification Agreement.
10.5** Employment Agreement, dated June 24, 1998, by and between the
registrant and Anthony C. Rodoni.
10.6** Employment Agreement, dated May 26, 1999, by and between the
registrant and Michael O'Rourke.
10.7** Employment Agreement, dated July 15, 1999, by and between the
registrant and Radha R. Basu.
10.8** Employment Agreement, dated August 16, 1999, by and between the
registrant and Scott Dale.
10.9** Employment Agreement, dated August 16, 1999, by and between the
registrant and Cadir Lee.
10.10** Employment Agreement, dated September 27, 1999, by and between the
registrant and Brian M. Beattie.
10.11** Employment Agreement, dated December 7, 1999, by and between the
registrant and Jim Hilbert.
10.12** Employment Agreement, dated January 18, 2000, by and between the
registrant and Lucille Hoger.
10.13* Employment Agreement, dated February , 2000, by and between the
registrant and Mark Pincus.
10.14**10.14 Sublease Agreement, dated August 6, 1999, by and between the
registrant and Excite, Inc.
10.15+** Enterprise License Agreement, dated May 27, 1999, by and between the
registrant and Bear, Stearns & Co., Inc.
EXHIBIT INDEX--(Continued)
Exhibit
Number Description of Document
------- -----------------------
10.16+** Amendment No. 1 to Enterprise License Agreement, dated October 6,
1999, by and between the registrant and Bear, Stearns & Co., Inc.
10.17+** Enterprise License Agreement dated February 17, 2000 by and between
the registrant and General Electric Company.
23.1**10.18 Form of Proprietary Information and Inventions Agreement.
10.19+ OEM Agreement, dated July 14, 1994, by and between the registrant
and Excite@Home.
10.20+ Amendment to OEM Agreement, dated March , 2000, by and between the
registrant and Excite@Home.
10.21+ Reseller Agreement, dated March , 2000, by and between the
registrant and Samsung SDS Co. Ltd.
10.22+ Sale and License Agreement, dated March 20, 2000.
23.1 Consent of Ernst & Young LLP.
23.2* Consent of Pillsbury Madison & Sutro LLP (contained in their opinion
filed as Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule for Support.com, Inc.
(in EDGAR format only).99.1 Consent of Bear, Stearns & Co. Inc.
99.2 Consent of Excite@Home.
99.3 Consent of JC Penney.
99.4 Consent of Compaq Professional Services.
99.5 Consent of everdream.
- ---------------
* To be filed by amendment.
** Previously Filed.
+ Confidential Treatment Requested. Confidential portions of the exhibit have
been omitted and filed separately with the Commission.