UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File No. 0-30260
EGAIN COMMUNICATIONS CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0466366
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
455 W. MAUDE AVENUE, SUNNYVALE, CA
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(Address of principal executive offices)
94086
-----
(Zip Code)
(408) 737-7400
--------------
(Registrant's telephone number,
including area code)
N/A
---
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 9, 1999
----- -------------------------------
Common Stock $0.001 par value 28,994,944
EGAIN COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PAGE
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 and June 30, 1999 1
Condensed Consolidated Statements of
Operations for the Three Months Ended
September 30, 1999 and September 30, 1998 2
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
September 30, 1999 and September 30, 1998 3
Notes to Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk Not Applicable
PART II--OTHER INFORMATION
Item 1. Legal Proceedings Not Applicable
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Index to Exhibits 28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGAIN COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
1999 1999
------------------- -------------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents..................................... $ 56,751,444 $ 1,265,147
Accounts receivable........................................... 1,267,551 705,488
Prepaid and other current assets.............................. 498,935 512,896
------------------- -------------------
Total Current Assets............................................... 58,517,930 2,483,531
Property and equipment, net........................................ 2,555,955 1,132,651
Goodwill and other intangibles, net................................ 18,369,386 20,194,972
Other assets....................................................... 166,119 153,884
------------------- -------------------
Total Assets.................................................. $ 79,609,390 $ 23,965,038
=================== ===================
Liabilities and Stockholders' Equity
Current Liabilities:
Bank borrowings line of credit................................ $ 1,000,000 $ 1,000,000
Accounts payable.............................................. 3,322,204 683,761
Accrued Compensation.......................................... 1,478,269 343,471
Accrued liabilities........................................... 988,010 474,757
Deferred revenue.............................................. 905,194 302,119
Current portion of notes payable.............................. 543,618 434,762
------------------- -------------------
Total Current Liabilities.......................................... $ 8,237,295 $ 3,238,870
Long-terms liabilities........................................ 496,460 242,884
Stockholders' Equity
Common Stock.................................................. 27,977 7,288,859
Paid in Capital............................................... 109,669,056 17,549,416
Preferred Stock............................................... -- 16,986,961
Notes receivable from shareholders............................ (593,879) (143,653)
Deferred Compensation......................................... (13,299,267) (8,956,117)
Cumulative Translation Adjustment............................. 1,704 757
Accumulated deficit........................................... (24,929,956) (12,242,939)
------------------- -------------------
Liabilities and stockholders' equity.......................... $ 70,875,635 $ 20,483,284
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 79,609,390 $ 23,965,038
=================== ===================
The balance sheet at June 30, 1999 has been derived from the audited
consolidated financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
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EGAIN COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
-----------------------------------------
1999 1998
------------------- ------------------
Revenue
Hosting......................................................... $ 276,362 $ --
License fees.................................................... 570,340 --
Service......................................................... 541,232 --
------------------- ------------------
Total Revenue............................................... 1,387,934 --
Cost of revenue................................................. 2,202,237 142,915
------------------- ------------------
Gross profit................................................ (814,303) (142,915)
Operating Expenses
Research and development........................................ 1,979,259 213,942
Sales and marketing............................................. 3,723,079 507,675
General and administrative...................................... 1,261,076 224,775
Amortization of goodwill........................................ 1,825,587 --
Amortization of deferred compensation........................... 3,007,309 88,512
------------------- ------------------
Total Operating Expenses.................................... 11,796,310 1,034,904
------------------- ------------------
Loss from operations........................................ (12,610,613) (1,177,819)
Non-operating income (expense), net............................. (76,406) 23,954
------------------- ------------------
Net Loss.................................................... $ (12,687,019) $ (1,153,865)
=================== ==================
Net loss per share
Pro forma basic and diluted (i)................................. $ (0.63) $ (0.13)
=================== ==================
Basic and diluted .............................................. $ (1.22) $ (0.31)
=================== ==================
Weighted-average shares outstanding used in per share calculation
Pro forma (i)................................................... 20,182,018 9,188,024
=================== ==================
Basic........................................................... 10,388,835 3,781,439
=================== ==================
(i) Pro forma basic and diluted shares outstanding include convertible stock
using the if-converted method from the original date of issuance.
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EGAIN COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended September 30,
-------------------------------------
1999 1998
--------------- ---------------
OPERATING ACTIVITIES
Net loss................................................................... $ (12,687,019) $ (1,153,865)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation........................................................... 182,632 32,300
Amortization........................................................... 4,838,395 --
Other.................................................................. (7,630) --
Changes in operating assets and liabilities:
Accounts receivable.................................................... (562,063) (1,364)
Prepaid expenses and other current assets.............................. 13,961 46,000
Other non-current assets............................................... (12,235) (91,318)
Accounts payable....................................................... 2,638,443 4,495
Accrued compensation................................................... 1,134,798 63
Other current liabilities.............................................. 513,253 (7,833)
Deferred revenues...................................................... 603,075 --
Other non-current liabilities.......................................... 3,195 --
----------------- ---------------
Net cash used in operating expenses............................... (3,341,195) (1,171,521)
----------------- ---------------
INVESTING ACTIVITIES
Purchases of property and equipment........................................ (1,605,933) ( 340,536)
----------------- ---------------
Net cash used in investing activities............................. (1,605,933) ( 340,536)
----------------- ---------------
FINANCING ACTIVITIES
Proceeds from loans........................................................ 408,021 500,000
Payments on loans.......................................................... (54,284) --
Net proceeds from issuance of common stock................................. 54,927,815 107,232
Net proceeds from issuance of preferred stock.............................. 5,151,873 --
----------------- ---------------
Net cash provided by financing activities......................... 60,433,425 607,232
----------------- ---------------
Net increase (decrease) in cash and cash equivalents....................... 55,486,297 (904,825)
Cash and cash equivalents at beginning of period........................... 1,265,147 3,830,692
----------------- ---------------
Cash and cash equivalents at end of period................................. $ 56,751,444 $ 2,925,867
================= ===============
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EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
eGain Communications Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission and include the accounts of eGain
Communications Corporation and its wholly-owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have been
eliminated.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. While in the opinion of the Company, the unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position at
September 30, 1999 and the operating results and cash flows for the three months
ended September 30, 1999 and 1998, these financial statements and notes should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto, included in the Company's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission. The condensed
balance sheet at June 30, 1999 has been derived from audited financial
statements as of that date. The results of operations for the three months ended
September 30, 1999 are not necessarily indicative of results that may be
expected for any other interim period or for the full fiscal year ending June
30, 2000.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
eGain Communications Corporation considers all highly liquid investment
securities with maturities from date of purchase of three months or less to be
cash equivalents. Cash equivalents consist primarily of money market accounts
and commercial paper with maturities less than 90 days. Realized gains have been
recorded in interest income.
REVENUE RECOGNITION
Revenue from hosting services is recognized ratably over the period of
the agreement as services are provided. Hosting agreements are typically for a
period of one year and automatically renew unless either party cancels the
agreement.
Revenue from license fees and from sales of software products is
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant eGain obligations remain, the fee is fixed
or determinable, and collectibility is probable. License fee revenue in multiple
element contracts is recognized using the residual method when there is vendor
specific appropriate evidence of the fair value of all undelivered elements in
an arrangement but vendor specific appropriate evidence of fair value does not
exist for one or more of the delivered elements in an arrangement. Under the
residual method, the total fair value of the undelivered elements, as indicated
by vendor specific objective evidence, is deferred and the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements, regardless of any
separate prices stated within the contract for each element. If sufficient
vendor-specific objective evidence does not exist for undelivered elements in an
arrangement, all revenue from the arrangement is deferred until the earlier of
the point at which (a) such sufficient vendor-specific objective evidence does
exist or (b) all elements of the arrangement have been delivered.
-4-
Service revenue is primarily comprised of revenue from consulting fees,
maintenance agreements, and training. Service revenue from consulting and
training billed on a time and materials basis is recognized as performed.
Service revenue on fixed price service arrangements is recognized upon
completion of specific contractual milestone events, or based on an estimated
percentage of completion as work progresses. Maintenance agreements include the
right to software updates on an if-and-when-available basis. Maintenance revenue
is deferred and recognized on a straight-line basis as service revenue over the
life of the related agreement, which is typically one year.
Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.
NET LOSS PER SHARE
In accordance with FAS 128, basic and diluted net loss per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted-average number of shares of
common that are subject to repurchase. The pro forma basic and diluted net loss
per share has been computed using the weighted-average number of shares of
common stock outstanding during the period which includes convertible stock
using the if-converted method from the original date of issuance, less the
weighted-average number of shares of common that are subject to repurchase.
The following table presents the calculation of basic and diluted net
loss per share:
Three Months Ended
--------------------------------------
September 30, September 30,
1999 1998
---------------- -----------------
Net Loss............................................................... $ (12,687,019) $ (1,153,865)
---------------- -----------------
Basic and diluted:
Weighted-average shares of common stock outstanding............... 12,335,002 8,036,995
Less: weighted-average shares subject to repurchase............... (1,946,167) (4,255,556)
---------------- -----------------
Weighted-average shares used in computing basic and diluted net loss
per share......................................................... 10,388,835 3,781,439
---------------- -----------------
Basic and diluted net loss per share................................... (1.22) (0.31)
Pro forma:
Shares used above................................................. 10,388,835 3,781,439
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock ........................ 9,793,183 5,406,585
---------------- -----------------
Shares used in computing pro forma basic and diluted net loss per
share (unaudited)................................................. 20,182,018 9,188,024
Pro forma basic and diluted net loss per share ................... (0.63) (0.13)
Note: Pro forma basic and diluted shares outstanding include convertible
stock using the if-converted method from the original date of issuance
-5-
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), effective for financial
statements for periods beginning after December 15, 1997. SFAS 131 establishes
standards for the way that public business enterprises report financial and
descriptive information about reportable operating segments in annual financial
statements and interim financial reports issued to stockholders. eGain adopted
SFAS 131 effective July 1, 1998. eGain operates in one segment. Operating losses
generated by the foreign operations of eGain and their corresponding
identifiable assets were not material in any period presented. eGain's export
revenue was not material in any period presented.
COMPREHENSIVE INCOME
In fiscal 1998 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components. SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Comprehensive loss for the
three months ended September 30, 1999 and 1998 were not materially different
from net loss as reported in the income statement.
NOTE 3. INITIAL PUBLIC OFFERING
On September 28, 1999, the Company completed an initial public offering
in which it sold 5,000,000 shares of Common Stock at $12.00 per share for net
proceeds of $54.7 million. Upon the closing of the offering, all the Company's
Preferred Stock converted to Common Stock. After the offering, the Company's
authorized capital consisted of 50,000,000 shares of Common Stock of which
approximately 27,977,000 shares were outstanding at September 30, 1999 and
5,000,000 shares of preferred stock, none of which were issued or outstanding at
September 30, 1999. In October 1999, the underwriters exercised an
over-allotment option of 750,000 shares resulting in net proceeds of $8.4
million.
NOTE 4. DEFERRED STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for its
employee stock-based compensation plans. Accordingly, no compensation cost is
recognized for any of its stock options when the exercise price of each option
equals or exceeds the fair value of the underlying common stock as of the grant
date for each stock option. With respect to the stock options granted to
employees since inception through September 30, 1999, the Company recorded
deferred stock-based compensation of $14,971,861 for the difference at the grant
date between the exercise price and the fair value of the common stock
underlying the options. This amount is being amortized in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options, generally 4 years.
In accordance with the Statement of Financial Accounting Standards No.
123 "Accounting for Stock Based Compensation. ("SFAS 123"), stock options issued
to non-employees are accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured. With respect to the stock options granted to non-employees
since inception through September 30, 1999, the Company recorded deferred
stock-based compensation of $6,727,426 for the difference between the exercise
price and the fair value of the common stock underlying the options.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This discussion contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
expectations and intentions, and the assumptions underlying or relating to any
of these statements. These statements may be identified by the use of words such
as "expect," "anticipate," "intend," "plan," "will" and similar expressions. Our
actual results could differ materially from those discussed in these statements.
Factors that could contribute to such differences include those discussed in
"Factors That May Affect Future Results" and elsewhere in this document and
those discussed in our registration statement on Form S-1 (File No. 333-83439).
OVERVIEW
Our company was founded in September 1997 to provide customer service
infrastructure solutions to companies engaged in electronic commerce. From
inception to September 1998, our operating activities related primarily to the
planning and developing our proprietary technological solution, recruiting
personnel, raising capital and purchasing operating assets. In September 1998,
we commenced commercial shipment of our eGain Email Management System, or eGain
EMS, an application that helps companies route, track and respond to high
volumes of customer email and Web form inquiries. On April 30, 1999, we acquired
Sitebridge Corporation and added its primary product to our customer service
platform. The product, now called eGain Web Collaboration System, or eGain WCS,
is an application that allows customer service representatives to interact
online with customers on the Web. We began selling eGain WCS in May 1999. Our
products and services are designed to enable businesses to deliver effective
customer service, improve customer satisfaction and convert Web site visitors to
buyers. Our products are designed to be highly scalable and to integrate with a
company's existing infrastructure to allow the company to consolidate customer
data from other applications in order to have access to comprehensive customer
information. We offer our customers the flexibility to access our solution from
an external hosted environment or to purchase and implement our solution
directly in-house.
Our revenue consists of hosting revenue, license fees and service
revenue associated with our eGain EMS and eGain WCS applications.
o HOSTING REVENUE. We derive hosting revenue when our customers
choose to have our applications provided through our eGain Hosted
Network, which is a network of service centers and hosting
partners linked by high speed Internet connections. Our contracts
with hosted customers generally provide for the payment of
hosting fees on a monthly basis. Hosting revenue is recognized
monthly as the services are performed.
o LICENSE FEES. We derive revenue from license fees when our
customers choose to license our software for in-house
installation. Revenue from license fees is recognized after a
license agreement has been executed or a definitive purchase
order has been received, the product has been delivered, the
license fee has become fixed and determinable and collection of
the fee is considered probable.
o SERVICE REVENUE. We derive service revenue from support and
maintenance contracts on software licenses and professional
services and training. Substantially all of our customers that
purchase software licenses also purchase annual support and
maintenance, which is paid in advance on an annual basis and
initially recorded as deferred revenue. Revenue from support and
maintenance contracts is recognized ratably over the term of the
support and maintenance period. Professional services revenue is
primarily related to customer support services and training and
installation services and is recognized upon completion of
specific contractual milestone events, or based on an estimated
percentage of completion as work progresses.
We expect to make significant investments in product development and
technology to enhance our current products and services, develop new products
and services and further advance our solution offerings. In addition,
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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. In particular, we intend to expand our strategic distribution,
hosting and solution relationships to add capabilities to our current product
offerings and to help market our products to new customers. We have incurred
significant losses since our inception, and as of September 30, 1999, had an
accumulated deficit of approximately $24.9 million. We have not achieved
profitability on a quarterly or annual basis. We expect to continue to incur
substantial operating losses for the foreseeable future. In view of the rapidly
evolving nature of our business and our limited operating history, we believe
that period-to-period comparisons of our revenue and operating results are not
meaningful and should not be relied upon as indications of future performance.
ACQUISITION OF SITEBRIDGE
We acquired Sitebridge effective April 1999. In connection with the
acquisition, we issued 1,609,793 shares of Series C convertible preferred stock,
1,455,514 shares of common stock, options and warrants to acquire 1,144,456
shares of common stock and warrants to acquire 121,006 shares of Series C
preferred stock in exchange for all the outstanding preferred stock, common
stock, and options and warrants to purchase shares of Sitebridge stock. The
acquisition was accounted for as a purchase, and accordingly the results of
operations of Sitebridge have been included in the consolidated financial
statements since the date of acquisition. The fair market value of the
securities issued in the acquisition was approximately $20.1 million.
Sitebridge, originally Social Science Incorporated, was founded in 1996
to create tools for live collaboration on Web sites. Sitebridge shipped its
first product, NetDiscussion, in 1997. In late 1997, Sitebridge shifted its
business focus to developing software applications for sales and service
organizations within large- and medium-sized companies. In the second quarter of
1998, Sitebridge shipped the first version of CustomerNow, an application that
allows customer service representatives to provide live assistance to customers
through real time Web interaction. With our acquisition of Sitebridge, we
changed the name of CustomerNow to eGain WCS. eGain EMS and eGain WCS are
available today as stand-alone applications or as combined solutions with
specific integrated functions.
GOODWILL AND OTHER NON-CASH CHARGES
We recorded goodwill and other purchased intangible assets of
approximately $21.4 million associated with our acquisition of Sitebridge.
Goodwill and other purchased intangible assets are being amortized on a
straight-line basis over the estimated useful lives of three years. We currently
expect to record amortization of goodwill and other intangible assets of
approximately $7.1 million in fiscal 2000, $7.1 million in fiscal 2001 and $6.0
million in fiscal 2002.
In connection with the grant of stock options to employees and
consultants, we recorded deferred stock compensation totaling approximately
$234,000 in fiscal 1998, $10.6 million in fiscal 1999 and $7.35 million in the
quarter ended September 30, 1999. Deferred compensation for options granted to
employees has been determined as the difference between the deemed fair value of
our common stock on the date these options were granted and the exercise price.
Deferred compensation for options granted to consultants has been determined in
accordance with SFAS 123 as the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measured. Deferred compensation for options granted to consultants is
periodically remeasured as the underlying options vest. These amounts were
initially recorded through stockholders' equity and are being amortized by
charges to operations. We recorded amortization of deferred stock compensation
of approximately $58,000 in fiscal 1998, $1.8 million in fiscal 1999 and $3.01
million in the quarter ended September 30, 1999. We expect to record
amortization expense relating to deferred stock compensation approximately as
follows: $10.4 million in fiscal 2000, $4.6 million in fiscal 2001, $2.3 million
in fiscal 2002 and $870,000 in fiscal 2003. The amortization expense relates to
options awarded to employees and consultants in all operating expense
categories.
Sitebridge previously outsourced its payroll processing and other
aspects of its employee benefits programs under a co-employment arrangement with
Ambrose, an independent professional employer organization that was terminated
effective July 31, 1999. On March 31, 1999, the Financial Accounting Standards
Board issued an Exposure Draft of an FASB Interpretation, Accounting for Certain
Transactions Involving Stock Compensation, an
-8-
interpretation of APB Opinion No. 25. This FASB Exposure Draft, if adopted in
its current form, could be interpreted to indicate that employees subject to
co-employment arrangements would not be considered employees for purposes of
applying APB No. 25. If additional clarification regarding the definition of an
employee is not provided in the final FASB pronouncement, we may be required to
establish a new measurement date for stock options granted by Sitebridge after
December 15, 1998 to these employees for the purpose of accounting for stock
options under APB No. 25. If a new measurement date is required to be
established, we would recognize the deferred stock-based compensation, which
would be amortized over the remaining vesting periods of the options. We
estimate that this charge would be approximately $6.0 million. This amortization
could have a material adverse effect on our operating results.
RESULTS OF OPERATIONS
NET REVENUE
Net revenue was $1.4 million, for the quarter ended September 30, 1999.
During the quarter ended September 30, 1999, one customer accounted for 18% of
total revenue. Revenue from application hosting was $277,000 or 20% of revenue
for the quarter ended September 30, 1999. Revenue from software license fees
was $570,000 or 41% of revenue for the quarter ended September 30, 1999.
Revenue from consulting and support services was $541,000 or 39% of revenues
for the quarter ended September 30, 1999. eGain did not earn revenue for the
corresponding period in the preceding year.
COST OF REVENUE
Cost of revenue was $2.2 million for the quarter ended September 30,
1999, an increase of $2.1 million or 1440% over the comparable quarter of 1998.
Cost of revenue includes depreciation of capital equipment used in our hosted
network, personnel costs, cost of third-party products and lease costs paid to
remote co-location centers.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $2.0 million for the quarter
ended September 30, 1999, an increase of $1.8 million or 825% over the
comparable quarter of 1998. The increase was primarily attributable to a
significant increase in headcount and related personnel costs. We believe
ongoing research and development is critical to the success of the company
and, therefore, expect research and development expenses to increase in
absolute dollars in future periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $3.7 million for the quarter ended
September 30, 1999, an increase of $3.2 million or 633% over the comparable
quarter of 1998. The increase was due primarily to an increase in headcount and
related personnel costs, European sales and marketing operations, and increased
spending on marketing programs. We expect to continue hiring sales and
marketing personnel and expect to increase marketing program spending,
therefore, we expect sales and marketing expenses to increase in absolute
dollars in future periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1.3 million for the quarter,
an increase of $1.0 million, or 460% over the comparable quarter of 1998. The
increase was due primarily to an increase in headcount and the related personnel
costs and fees for outside professional services. We expect general and
administrative expenses to increase in absolute dollars in future periods as a
result of expansion of business activity and the requirements of being a
publicly traded company.
AMORTIZATION OF GOODWILL
For the quarter ended September 30, 1999, eGain amortized goodwill
totaling $1.8 million. No goodwill was amortized during the comparable quarter
ended September 30, 1998. Goodwill represents the excess of the purchase price
over the estimated fair market value of tangible and intangible net assets
acquired in a business combination. As of September 30, 1999, goodwill and other
purchased intangible assets related to the acquisition of SiteBridge Corporation
totaled $18.4 million.
-9-
AMORTIZATION OF DEFERRED STOCK COMPENSATION
During the quarter ended September 30, 1999, amortization of
stock-based compensation increased to $3.0 million from $89,000 or an increase
of 3279% over the quarter ended September 30, 1998. Deferred stock-based
compensation represents the difference between the exercise price and the deemed
fair value of certain stock options granted to employees. Options granted to
consultants are periodically revalued as they vest in accordance with SFAS 123
and EITF 96-18. Deferred compensation is being amortized on a graded vesting
method over the vesting period of the individual options.
NON-OPERATING INCOME (EXPENSE), NET
For the quarter ended September 30, 1999, non-operating expense was
$76,000. For the comparable quarter in 1998, non-operating income was $24,000.
Non-operating expense includes interest expense on financing obligations and
use-tax expense, partially off-set by income on cash investments.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed operations primarily
through the private placement of convertible preferred stock, a bank line of
credit, and financing for capital purchases. On September 28, 1999, we completed
our initial public offering of common stock, in which we sold 5,750,000 shares
of common stock (including exercise of an over-allotment option in October 1999)
at a price of $12.00 per share. Proceeds to eGain from the offering, before
offering expenses, were approximately $69.0 million.
At September 30, 1999, we had cash and cash equivalents of $56.8
million. We regularly invest excess funds in short-term money market funds and
commercial paper.
Net cash used in operating activities for the three months ended
September 30, 1999 and 1998 was $3.3 million and $1.2 million, respectively.
Cash used in operating activities in each period was primarily the result of net
losses and an increase in accounts receivable, partially offset by the increase
in deferred revenues, accrued liabilities and increases in non-cash charges.
Net cash used in investing activities for the three months ended
September 30,1999 was $1.6 million, and net cash used in investing
activities in the three months ended September 30, 1998 was $341,000. Cash used
in investing activities in the three months ended September 30, 1999 was due to
the purchase of fixed assets and leasehold improvements.
Net cash provided by financing activities for the three months ended
September 30, 1999 and 1998 was $60.4 million and $607,000, respectively. Cash
provided by financing activities in the three months ended September 30, 1999
was due to proceeds from loans off-set by loan payments, the issuance of
preferred stock and common stock, including net proceeds of $54.7 million from
the initial public offering (excluding proceeds from the over-allotment option).
Cash provided by financing activities in the three months ended September 30,
1998 was primarily due to proceeds from a bank line of credit and the issuance
of common stock.
We expect to devote substantial capital resources to expand the eGain
hosted network, to hire and expand the research and development organization, to
hire and expand the sales, marketing and general and administrative
organizations, to expand marketing programs, to establish additional facilities
worldwide and for other general corporate activities. Although we believe that
current cash balances will be sufficient to fund operations for at least the
next 12 months, there can be no assurance that we will not require additional
financing within this time frame or that such additional funding, if needed,
will be available on acceptable terms. In addition, although there are no
present understandings, commitments or agreements with respect to any
acquisition of other businesses, products or technologies, we from time to time
evaluate potential acquisitions of other businesses, products and technologies
and may in the future require additional equity or debt financings to consummate
any potential acquisitions.
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YEAR 2000 ISSUES
BACKGROUND
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations for any company using such computer programs or hardware, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities. As a result, many companies' computer
systems may need to be upgraded or replaced in order to avoid "Year 2000"
issues.
STATE OF READINESS
We initiated a Year 2000 compliance program in April 1999. Our quality
assurance group is directing the program for our internally developed products,
and our Information Technology group is directing the program for all other
operational areas. We are a comparatively new enterprise, and, accordingly, the
software and hardware we use to manage our business has all been purchased or
developed by us within the last 24 months. While this fact pattern does not
completely protect us against Year 2000 exposure, we believe we gain some
mitigation from the fact that the information technology we use to manage our
business is not based upon older hardware and software systems developed when
there was less awareness of Year 2000 issues.
OUR PRODUCT TESTING
Our quality assurance team has tested the most current versions of
eGain EMS and eGain WCS for Year 2000 compliance. This team, led by a senior
eGain Product Manager and staffed by other eGain engineers and programmers,
devised and has been executing a Year 2000 compliance plan as follows:
o Phase 1--Inventory: Identify all products and product versions,
including eGain EMS, eGain WCS and discrete product modules, that
might have Year 2000 related issues. This phase has been
completed.
o Phase 2--Devise compliance tests: Devise appropriate and
comprehensive tests that would accurately determine whether the
inventoried product offerings, including eGain EMS, eGain WCS and
discrete product modules, are Year 2000 compliant. This included
especially determining which product features contained date data
or other code that might be affected by the Year 2000 issue. This
phase has been completed.
o Phase 3--Conduct compliance tests: Perform the compliance tests
on the inventoried products. For both eGain EMS and eGain WCS,
the members of eGain's Year 2000 quality assurance team tested
all potentially affected product features to determine whether
they could accurately recognize, process, calculate, manipulate,
sort, store and transfer date data relating to a number of key
dates. In particular, the team tested the core functionality of
the identified product features to assess their performance prior
to, through and after the following dates:
o December 31, 1999 to January 1, 2000 (millennium
transition);
o February 28, 2000 to February 29, 2000 (first leap year
transition in the new millennium);
o February 29, 2000 to March 1, 2000 (second leap year
transition in the new millennium), and
o December 31, 2010 to January 1, 2011.
This phase has been completed.
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o Phase 4--Remediation assessment: Determine, in light of the
compliance tests, whether any product-related remediation is
necessary to address any Year 2000 related issues. As a result of
the compliance tests, our quality assurance team has determined
that, when running on Year 2000 compliant hardware and operating
systems, the most current versions of eGain EMS and eGain WCS are
Year 2000 compliant according to the following definition:
o they can process, calculate, manipulate, sort, store and
transfer date data without material error or material
performance degradation, while taking into account century
boundaries and leap years where required, and
o they can operate between year 1999 and year 2000 without
producing material date-related errors.
Because our products obtain and process all date information (such as
creation dates, modification dates, and time/date stamps) from the
underlying operating system being used by our customers, the foregoing
statement only applies if:
o the other software, hardware, networks and systems with
which our applications interface are themselves Year 2000
compliant according to the above definition, and
o our products are used in accordance with applicable
documentation and other operating instructions provided by
eGain.
Our quality assurance team has determined that there are a small number
of code files relating to search and reporting features in the current
version of eGain EMS that may have Year 2000 related problems. These
are peripheral product features unrelated to the core email receiving
and processing functionality of eGain EMS. Nonetheless, our Products
Group has designed a patch that addresses the identified performance
issues that will be installed on all hosted and existing eGain EMS
licensed customers. Future eGain EMS customers will receive product
versions that do not contain the affected files.
The remediation assessment phase has been completed.
o Phase 5--Deploy remediation: The patch designed to remedy the
minor Year 2000 related issues identified in eGain EMS is
scheduled to be deployed to all existing customers no later than
November 30, 1999.
OUR INTERNAL SYSTEM
The scope of our internal Year 2000 compliance program plan covers all
computing and network resources within the eGain enterprise. This internal
compliance program is being directed by eGain's Manager of Information
Technology and a team of eGain IT professionals. As with our product-related
Year 2000 program, our internal program is comprised of a number of phases as
follows: inventory all internal hardware, software, and operating systems for
year 2000 compliance; devise a testing plan for all identified systems; conduct
compliance testing; assess any necessary remediation measures to address any
problems discovered through the compliance testing and deploy any necessary
remediation measures.
Our Year 2000 internal compliance team has completed all but the final
phase of the compliance program. We have obtained Year 2000 certification for
substantially all hardware, software and other systems we use, and we require
such certification on all new systems we have purchased or will consider
purchasing. The only noncompliant systems we identified relate to certain
Microsoft products and software programs. All identified vulnerabilities within
deployed Microsoft applications and operating systems have been well-publicized,
and Microsoft has devised remediation paths for each affected system. eGain's IT
professionals are Microsoft Corporation Systems Engineers certified and trained
in the use of Microsoft Year 2000 tools. All relevant patches have been
installed, and at this time, we believe all internal computing and network
resources within the eGain enterprise are Year 2000 compliant.
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BUDGET
We have not incurred any significant expenses to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will exceed $150,000. Expenses associated with our Year 2000 remediation
efforts will be funded from available cash reserves. We have not deferred any
specific IT projects due to our Year 2000 efforts, and we do not anticipate
doing so in the future.
REASONABLY LIKELY WORST CASE SCENARIO
If we, our customers, our providers of hardware and software, or our
third-party network providers fail to remedy any Year 2000 issues, the
reasonably likely worst case scenario would be the interruption of our services,
which in turn could require us to incur material costs or lose revenue.
Presently, we believe we are unable to reasonably estimate the duration and
extent of any such interruption, or quantify the effect it may have on our
future revenue.
CONTINGENCY PLANS
We expect our Year 2000 compliance program to be completed by November
1999. We have not yet developed a comprehensive contingency plan to address
situations that may result if we are unable to achieve Year 2000 compliance of
our critical operations, and based on the current results of our Year 2000
compliance assessment, we do not anticipate the need to do so. However, we may
experience material unanticipated problems and costs associated with undetected
errors or defects in the technology used in our products or internal information
technology, which could harm our business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
COMPANY RISKS
WE EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY, WHICH IN TURN
MAY HARM OUR FUTURE OPERATING PERFORMANCE AND MAY CAUSE THE MARKET PRICE OF OUR
STOCK TO DECLINE
We incurred net losses of approximately $938,000 for the period from
September 10, 1997 (inception) through June 30, 1998 and approximately $11.3
million for the year ended June 30, 1999. As of September 30, 1999, we had an
accumulated deficit of approximately $24.9 million. We expect to continue
to incur net losses for the foreseeable future. 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, customer support and research and
development programs in accordance with our present plans. We do not know when
or if we will become profitable. 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 do achieve profitability, we may not sustain or
increase profitability in the future.
OUR OPERATING EXPENSES MAY INCREASE AS WE BUILD OUR BUSINESS AND THIS INCREASE
MAY HARM OUR OPERATING RESULTS AND FINANCIAL CONDITION
We have spent heavily on technology and infrastructure development. We
expect to continue to spend substantial financial and other resources on
developing and introducing product and service offerings, and expanding our
sales, marketing and customer support organizations 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 MAY NOT MEET QUARTERLY FINANCIAL EXPECTATIONS, WHICH COULD CAUSE OUR STOCK
PRICE TO DECLINE
We were incorporated in September 1997 and shipped our first product in
September 1998. Because of this limited operating history and other factors, our
quarterly revenue and operating results are difficult to predict. In addition,
due to the emerging nature of the eCommerce customer service market and other
factors, our quarterly revenue and operating results may fluctuate from quarter
to quarter. It is likely that our operating results in some
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quarters will be below the expectations of securities analysts or investors. In
this event, the market price of our common stock is likely to decline.
A number of factors are likely to cause fluctuations in our operating
results, including, but not limited to, the following:
o the growth rate of eCommerce;
o demand for eCommerce customer service applications;
o our ability to attract and retain customers and maintain customer
satisfaction;
o our ability to upgrade, develop and maintain our systems and
infrastructure;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure;
o technical difficulties or system outages;
o our ability to attract and retain qualified personnel with
Internet industry expertise, particularly sales and marketing
personnel;
o the announcement or introduction of new or enhanced products and
services by our competitors;
o changes in our pricing policies and those of our competitors;
o failure to increase our international sales; and
o governmental regulation surrounding the Internet and eCommerce in
particular.
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. For example, our hosting agreements are typically for a period of one
year and automatically renew unless terminated by either party with 60 days'
prior notice. In addition, some of our hosting agreements give the customer the
right to terminate the contract at any time. Period-to-period comparisons of our
operating results are not a good indication of our future performance.
OUR BUSINESS IS PREMISED ON A NOVEL BUSINESS MODEL THAT IS LARGELY UNTESTED
Our business is premised on novel business assumptions that are largely
untested. Customer service historically has been provided primarily in person or
over the telephone. Our business model assumes that companies engaged in
eCommerce will continue to elect to provide customer service through the
Internet rather than by telephone. Our business model also assumes that many
companies recognize the benefits of a hosted delivery model and will seek to
have their customer service applications hosted by eGain. If any of these
assumptions is incorrect, our business will be seriously harmed.
OUR SUCCESS WILL DEPEND ON SALES OF THE EGAIN EMS PLATFORM
To date, we derived substantially all of our revenue from sales of the
eGain EMS platform and related services. Although we recently added eGain WCS to
our product offerings, we expect to continue to derive a majority of our revenue
from sales of the eGain EMS platform in the future. Implementation of our
strategy depends upon the eGain EMS platform being able to solve the customer
service needs of businesses engaging in eCommerce. If our existing or future
customers are not satisfied with the eGain EMS platform, our business and
operating results will be seriously harmed.
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WE FACE A NUMBER OF INTEGRATION RISKS AND SIGNIFICANT GOODWILL COSTS RELATED TO
OUR RECENT ACQUISITION OF SITEBRIDGE
We will face integration risks and record significant goodwill costs as
a result of our acquisition of Sitebridge in April 1999. We may be unable to
effectively integrate the operations, personnel and systems of Sitebridge with
our other operations in a timely fashion, or at all. In addition, we may not
achieve value from our acquisition of Sitebridge commensurate with the
consideration paid. We have just begun to integrate Sitebridge with our
operations and we expect this integration to place a significant burden on our
management team. If we are unable to effectively integrate Sitebridge into our
operations or to generate sufficient revenue from eGain WCS or our combined
operations, our business and operating results are likely to suffer.
As a result of the Sitebridge acquisition, we have recorded a
significant amount of goodwill that will adversely affect our operating results
for the foreseeable future. As of September 30, 1999, we had goodwill and other
purchased intangible assets of approximately $18.4 million, which we
expect to amortize over three years from the date of the acquisition. If the
amount of recorded goodwill or other intangible assets is increased or we have
future losses and are unable to demonstrate our ability to recover the amount of
goodwill, the amount of amortization could be increased or the period of
amortization could be shortened. This would increase annual amortization charges
or result in the write off of goodwill in a one-time non-cash charge, which
could be significant and would likely harm our operating results.
WE MAY ENGAGE IN FUTURE ACQUISITIONS OR INVESTMENTS THAT COULD DILUTE OUR
EXISTING STOCKHOLDERS, CAUSE US TO INCUR SIGNIFICANT EXPENSES OR HARM OUR
BUSINESS
We may review acquisition or investment prospects that would complement
our current business or enhance our technological capabilities. Integrating any
newly acquired businesses, technologies or products, may be expensive and
time-consuming. To finance any acquisitions, it may be necessary for us to raise
additional funds through public or private financings. Additional funds may not
be available on terms that are favorable to us and, in the case of equity
financings, may result in dilution to our stockholders. We may not be able to
operate any acquired businesses profitably or otherwise implement our growth
strategy successfully. If we are unable to 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, any of which could harm our operating
results.
WE COULD INCUR ADDITIONAL NON-CASH CHARGES ASSOCIATED WITH STOCK-BASED
COMPENSATION ARRANGEMENTS
Our operating results may be impacted if we incur significant non-cash
charges associated with stock-based compensation arrangements with employees and
non-employees. We have issued options to non-employees which are subject to
various vesting schedules of up to 48 months. For deferred compensation
purposes, these options are required to be remeasured at each vesting date,
which may require us to record additional non-cash accounting expenses. These
expenses may result in us incurring net losses or increased net losses for a
given period and this could seriously harm our operating results and stock
price.
In addition, in connection with our acquisition of Sitebridge, we may
face stock-based compensation charges related to Sitebridge's relationship with
Ambrose, an independent professional employer organization, which formerly
provided payroll and employee benefits for Sitebridge employees. Based on a
recent draft pronouncement by the Financial Accounting Standards Board, we may
be required to recognize additional deferred stock-based compensation estimated
to be approximately $6.0 million related to this relationship.
IF WE FAIL TO EXPAND OUR SALES, MARKETING AND CUSTOMER SUPPORT ACTIVITIES, WE
MAY BE UNABLE TO EXPAND OUR BUSINESS
If we do not successfully expand our sales, marketing and customer
support activities, we cannot expand our business and our stock price could
decline. The complexity of our eCommerce customer service platform and related
products and services requires us to have highly trained sales, marketing and
customer support personnel to educate prospective customers regarding the use
and benefits of our services, and provide effective customer support. With our
relatively brief operating history and our plans for expansion, we have
considerable need to
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recruit, train, and retain qualified staff. Any delays or difficulties we
encounter in these staffing efforts could impair our ability to attract new
customers and to enhance our relationships with existing customers. This in turn
would adversely impact the timing and extent of our revenue. Because the
majority of our sales, marketing and customer support personnel have recently
joined us and have limited experience working together, our sales, marketing and
customer support organizations may not be able to compete successfully against
bigger and more experienced organizations of our competitors.
WE MUST RECRUIT AND RETAIN OUR KEY EMPLOYEES TO EXPAND OUR BUSINESS
Our success will depend on the skills, experience and performance of
our senior management, engineering, sales, marketing and other key personnel,
many of whom have worked together for only a short period of time. The loss of
the services of any of our senior management or other key personnel, including
our Chief Executive Officer and co-founder, Ashutosh Roy, and our President and
co-founder, Gunjan Sinha, could harm our business. We do not have employment
agreements with, or life insurance policies on, any of our key employees. These
employees may terminate their employment with us at any time. Our success also
will depend on our ability to recruit, retain and motivate other highly skilled
engineering, sales, marketing and other personnel. Competition for these
personnel is intense, especially in the San Francisco Bay Area, and we have had
difficulty hiring employees in the timeframe we desire. In particular, we may be
unable to hire a sufficient number of qualified software engineers. If we fail
to retain and recruit necessary engineering, sales and marketing, customer
support or other personnel, our business and our ability to develop new products
and services and to provide acceptable levels of customer service could suffer.
In addition, companies in the software industry whose employees accept positions
with competitors frequently claim that competitors have engaged in unfair hiring
practices. We could incur substantial costs in defending ourselves against any
of these claims, regardless of the merits of such claims.
OUR FAILURE TO EXPAND THIRD-PARTY DISTRIBUTION CHANNELS WOULD IMPEDE OUR REVENUE
GROWTH
To increase our revenue, we must increase the number of our marketing
and distribution partners, including software and hardware vendors and
resellers. Our existing or future marketing and distribution partners may choose
to devote greater resources to marketing and supporting the products of
competitors, which could also harm us.
FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS WOULD IMPEDE
ACCEPTANCE OF OUR PRODUCTS AND GROWTH OF OUR REVENUE
To increase our revenue and implementation capabilities, we must
develop and expand relationships with systems integrators. We rely on systems
integrators to recommend our products to their customers and to install and
support our products for their customers. Systems integrators may develop,
market or recommend software applications that compete with our products.
Moreover, if these firms fail to implement our products successfully for their
customers, we may not have the resources to implement our products on the
schedule required by our customers.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR PRODUCTS AND SERVICES, WHICH COULD
HARM OUR BUSINESS AND REPUTATION
Our product and service offerings depend on complex software, both
internally developed and licensed from third parties. Complex software often
contains defects, particularly when first introduced or when new versions are
released. We may not discover software defects that affect our new or current
services or enhancements until after they are deployed. It is possible that,
despite testing by us, defects may occur in the software. These defects could
result in damage to our reputation, lost sales, product liability claims, delays
in or loss of market acceptance of our products, product returns, and unexpected
expenses and diversion of resources to remedy errors.
WE MAY FACE LIABILITY ASSOCIATED WITH OUR MANAGEMENT OF SENSITIVE CUSTOMER
INFORMATION
Our applications manage sensitive customer information, and 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 reputation and our business and operating
results.
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IF OUR SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER
A fundamental requirement for online communications and transactions is
the secure transmission of confidential information over public networks. Third
parties may attempt to breach our security or that of our customers. We may be
liable to our customers for any breach in our security and any breach could harm
our business and our reputation. Although we have implemented network security
measures, our servers 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 license encryption technology and additional technologies to
protect against security breaches or to alleviate problems caused by any breach.
DUE TO THE LENGTHY SALES CYCLES OF SOME OF OUR PRODUCTS, THE TIMING OF OUR SALES
ARE DIFFICULT TO PREDICT AND MAY CAUSE US TO MISS OUR REVENUE EXPECTATIONS
Our sales cycle for our eCommerce customer service applications can be
as long as three months or more and may vary substantially from customer to
customer. While our customers are evaluating our products and before they may
place an order with us, we may incur substantial sales and marketing expenses
and spend significant management effort. Consequently, if revenue forecasted
from a specific customer for a particular quarter are not realized in that
quarter, we may incur significant expenses that are not offset by corresponding
sales.
IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR
INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER
We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. For example, we have
established a subsidiary in the United Kingdom. If our revenue from
international operations does not exceed the expense associated with
establishing and maintaining these operations, our business and operating
results will suffer. We have limited experience in international operations and
may not be able to compete effectively in international markets. We face various
risks inherent in conducting business internationally, such as the following:
o unexpected changes in regulatory requirements;
o difficulties and costs of staffing and managing international
operations;
o differing technology standards;
o difficulties in collecting accounts receivable and longer
collection periods;
o political and economic instability;
o fluctuations in currency exchange rates;
o imposition of currency exchange controls;
o potentially adverse tax consequences; and
o reduced protection for intellectual property rights in foreign
countries.
OUR RECENT GROWTH HAS PLACED A STRAIN ON OUR RESOURCES AND IF WE FAIL TO MANAGE
OUR FUTURE GROWTH, OUR BUSINESS COULD SUFFER
We recently began to expand our operations rapidly and intend to
continue this expansion. This rapid expansion has placed, and is expected to
continue to place, a significant strain on our managerial, operational and
financial resources. To manage any further growth, we will need to improve or
replace our existing operational, customer support and financial systems,
procedures and controls. Any failure by us to properly manage these system and
procedural transitions could impair our ability to attract and service
customers, and could cause us to incur
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higher operating costs and delays in the execution of our business plan. We will
also need to continue the expansion of our operations and employee base. Our
management may not be able to hire, train, retain, motivate and manage required
personnel. In addition, our management may not be able to successfully identify,
manage and exploit existing and potential market opportunities.
WE MAY NOT BE ABLE TO UPGRADE OUR SYSTEMS AND THE EGAIN HOSTED NETWORK TO
ACCOMMODATE GROWTH IN ECOMMERCE
We face risks related to ability of the eGain Hosted Network to operate
with higher activity levels while maintaining expected performance. As the
volume and complexity of eCommerce customer communications increases, we will
need to expand our systems and hosted network infrastructure. The expansion and
adaptation of our network infrastructure will require substantial financial,
operational and management resources. Due to the limited deployment of our
products and services to date, our ability to connect and manage a substantially
larger number of customers is unknown.
Customer demand for our products and services could be greatly reduced
if we fail to maintain high capacity data transmission. In addition, as we
upgrade our network infrastructure, we are likely to encounter equipment or
software incompatibility. We may not be able to expand or adapt our hosted
network infrastructure to meet additional demand or our customers' changing
requirements in a timely manner or at all.
UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE OUR ABILITY
TO PROVIDE HOSTING SERVICES AND COULD HARM OUR BUSINESS AND OUR REPUTATION
Our customers have in the past experienced some interruptions with our
hosted network. We believe that these interruptions will continue to occur from
time to time. These interruptions could be due to hardware and operating system
failures. We expect a substantial portion of our revenue to be derived from
customers who use our hosted network. As a result, our business will suffer if
we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosted network or reduce our
ability to provide remote management services. We expect to experience
occasional temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired quality and degradation in levels of customer service. If this were to
continue to happen, our business and reputation could be seriously harmed.
Our success largely depends on the efficient and uninterrupted
operation of our computer and communications hardware and network systems.
Substantially all of our computer and communications systems are located in
Santa Clara County, California. Our systems and operations are vulnerable to
damage or interruption from fire, earthquake, power loss, telecommunications
failure and similar events.
We have entered into service agreements with some of our customers that
require minimum performance standards, including standards regarding the
availability and response time of our remote management services. If we fail to
meet these standards, our customers could terminate their relationships with us
and we could be subject to contractual monetary penalties. Any unplanned
interruption of services may harm our ability to attract and retain customers.
WE RELY ON RELATIONSHIPS WITH, AND THE SYSTEM INTEGRITY OF, HOSTING PARTNERS FOR
OUR EGAIN HOSTED NETWORK
Our hosted network consists of virtual data centers co-located in the
physical data centers of our hosting partners. Accordingly, we rely on the speed
and reliability of the systems and networks of these hosting partners. If our
hosting partners experience system interruptions or delays, or if we do not
maintain or develop relationships with hosting partners, our business could
suffer.
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 generally use our products together with products from
other companies. As a result, when problems occur in the network, it may be
difficult to identify the source of the problem. Even when these problems
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are not caused by our products, they may cause us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers and partners to protect our proprietary
rights. eGain, eGain EMS, eGain WCS, eGain Hosted Network and eGain eCommerce
Bridge are trademarks of eGain. Despite our efforts to protect our proprietary
rights through confidentiality and license agreements, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology. These
precautions may not prevent misappropriation or infringement of our intellectual
property.
In addition, the status of United States patent protection in the
software industry is not well defined and will evolve as the U.S. Patent and
Trademark Office grants additional patents. We have one patent application
pending in the United States, and we may seek additional patents in the future.
We do not know if our patent application or any future patent application will
result in a patent being issued with the scope of the claims we seek, if at all,
or whether any patents we may receive will be challenged or invalidated. It is
difficult to monitor unauthorized use of technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States, and our competitors may independently develop technology
similar to ours.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO
DEFEND
Third parties may infringe or misappropriate our copyrights, trademarks
and similar proprietary rights. In addition, other parties may assert
infringement claims against us. Although we have not received notice of any
alleged infringement, our products may infringe issued patents that may relate
to our products. In addition, because the contents of patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to our software products. We may
be subject to legal proceedings and claims from time to time in the ordinary
course of our business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third parties. 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 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, in the event of a successful claim of
infringement. Our failure or inability to develop non-infringing technology or
license the proprietary rights on a timely basis would harm our business.
WE MAY NEED TO LICENSE THIRD-PARTY TECHNOLOGIES AND MAY BE UNABLE TO DO SO
To the extent we need to license third-party technologies, we may be
unable to do so on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our services.
Third-party licenses may expose us to increased risks, including risks with the
integration of new technology, the diversion of resources from the development
of our own proprietary technology, 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 in turn would harm our business and operating results.
INDUSTRY RISKS
WE MUST COMPETE SUCCESSFULLY IN THE ECOMMERCE CUSTOMER SERVICE MARKET
The eCommerce customer service market is new and intensely competitive.
There are no substantial barriers to entry in this market, and established or
new entities may enter this market in the near future. We compete with companies
that develop and maintain internally developed email management systems. We also
compete directly with companies that provide licensed software products for
email management such as Brightware, Inc.,
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Kana Communications, Inc., Mustang Software, Inc. and Silknet Software, Inc., as
well as Web collaboration application companies such as WebLine Communications
Corp. (which was recently acquired by Cisco Systems, Inc.). In addition, some of
our competitors who currently offer licensed software products are now beginning
to offer hosted approaches. We also face competition from larger, front office
software companies such as Clarify, Inc., (recently acquired by Nortel Networks
Corp., Oracle Corporation, Siebel Systems, Inc., and Vantive Corporation
(recently acquired by PeopleSoft, Inc.). Furthermore, established enterprise
software companies, including IBM, Hewlett-Packard Company, Microsoft
Corporation and similar companies may leverage their existing relationships and
capabilities to offer eCommerce customer service applications.
We believe competition will increase as our current competitors
increase the sophistication of their offerings and as new participants enter the
market. Many of our current and potential competitors have:
o longer operating histories;
o larger customer bases;
o greater brand recognition;
o more diversified lines of products and services; and
o significantly greater financial, marketing and other resources.
These competitors may enter into strategic or commercial relationships
with larger, more established and better-financed companies. These competitors
may be able to:
o undertake more extensive marketing campaigns;
o adopt more aggressive pricing policies; and
o make more attractive offers to businesses to induce them to use
their products or services.
Further, any delays in the general market acceptance of the eCommerce
customer service applications and our hosted delivery model would likely harm
our competitive position. Any delay would allow our competitors additional time
to approve their service or product offerings, and also provide time for new
competitors to develop eCommerce customer service applications and solicit
prospective customers within our target markets. Increased competition could
result in pricing pressures, reduced operating margins and loss of market share.
WE DEPEND ON BROAD MARKET ACCEPTANCE OF WEB-BASED ECOMMERCE CUSTOMER SERVICE
APPLICATIONS
We depend on the widespread acceptance and use of Web-based customer
service applications as an effective solution for businesses seeking to manage
high volumes of customer communication over the Internet. We cannot estimate the
size or growth rate of the potential market for our product and service
offerings, and we do not know whether our products and services will achieve
broad market acceptance. The market for Web-based eCommerce customer service is
new and rapidly evolving, and concerns over the security and reliability of
online transactions, the privacy of users and quality of service or other issues
may inhibit the growth of the Internet and commercial online services. If the
market for eCommerce customer service applications fails to grow or grows more
slowly than we currently anticipate, our business will be seriously harmed.
WE MAY BE UNABLE TO DEVELOP OR ENHANCE PRODUCTS OR SERVICES THAT ADDRESS THE
CHANGING NEEDS OF THE ECOMMERCE CUSTOMER SERVICE MARKET
To be competitive in the eCommerce customer service industry, we must
continually improve the performance, features and reliability of our products
and services, including our existing eCommerce customer service applications,
and develop new products, services, functionality and technology that address
changing industry
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standards and customer needs. If we cannot adapt or respond in
a cost-effective and timely manner to changing industry standards, market
conditions or customer requirements, our business and operating results will
suffer.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, WE MAY INCUR SIGNIFICANT COSTS
AND OUR BUSINESS COULD SUFFER
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond 2000. As a
result, the networks that incorporate our products and our own internal networks
could fail, leading to disruptions in operations and business activities. As a
result of the year 2000 problem, we believe that we face potential risks which
could harm our business in the following areas:
o disruption in our customer relationships or in our sales efforts
because of failures of our customers' networks which are
correctly or incorrectly attributed to the non-compliance of our
products;
o claims from our customers based on alleged breach of warranties
concerning the Year 2000 compliance of our products;
o disruption of our business resulting from failure of systems we
use to run our business;
o disruption of our business resulting from failure of systems used
by our suppliers, customers and potential customers; and
o the potential reduced spending by companies on networking
solutions as a result of significant information systems spending
on Year 2000 remediation.
If we, our customers, our providers of hardware and software, or our
third-party network providers fail to remedy any Year 2000 issues, the
reasonably likely worst case scenario would be the interruption of our services,
which in turn could require us to incur material costs or lose revenue.
Presently, we believe we are unable to reasonably estimate the duration and
extent of any such interruption, or quantify the effect it may have on our
future revenue.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Issues."
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE CONTINUES TO
GROW
Our business will be seriously harmed if Internet usage does not
continue to grow or grows at significantly lower rates compared to current
trends. The continued growth of the Internet depends on various factors, many of
which are outside our control. These factors include the following: o the
Internet infrastructure may be unable to support the demands placed on it;
o the performance and reliability of the Internet may decline as
usage grows;
o security and authentication concerns with respect to transmission
over the Internet of confidential information, such as credit
card numbers, and attempts by unauthorized computer users,
so-called hackers, to penetrate online security systems; and
o privacy concerns, including those related to the ability of Web
sites to gather user information without the user's knowledge or
consent.
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BECAUSE WE PROVIDE OUR CUSTOMER SERVICE APPLICATIONS TO COMPANIES CONDUCTING
BUSINESS OVER THE INTERNET, OUR BUSINESS COULD SUFFER IF EFFICIENT TRANSMISSION
OF DATA OVER THE INTERNET IS INTERRUPTED
The recent growth in the use of the Internet has caused frequent
interruptions and delays in accessing the Internet and transmitting data over
the Internet. Because we provide Internet-based eCommerce customer service
applications, interruptions or delays in Internet transmissions will harm our
customers' ability to receive and respond to email messages. Therefore, our
market depends on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR THE GROWTH OF THE
INTERNET AND DECREASE DEMAND FOR OUR SERVICES OR INCREASE OUR COST OF DOING
BUSINESS
Governmental regulation may impair the growth of the Internet or
commercial online services. This could decrease the demand for our products and
services, increase our cost of doing business or otherwise harm our business and
operating results. Although there are currently few laws and regulations
directly applicable to the Internet and the use of the Internet as a commercial
medium, 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. Further, the growth and development of the market for commercial
online transactions may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies engaged in eCommerce.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
WE MAY BE LIABLE FOR ACTIVITIES OF OUR CUSTOMERS OR OTHERS USING OUR HOSTED
NETWORK
As a provider of eCommerce customer service applications, we face
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the actions of our customers or others
using our hosted network. This liability could result from the nature and
content of the communications transmitted by our customers through our hosted
network. We do not and cannot screen all of the communications generated by our
customers, and we could be exposed to liability with respect to this content.
Furthermore, some foreign governments, such as Germany, have enforced laws and
regulations related to content distributed over the Internet that are more
strict than those currently in place in the United States.
OUR STOCK PRICE MAY BE VOLATILE
Our common stock began to trade publicly on September 23, 1999. We
believe the trading price of our common stock will remain highly volatile and
may fluctuate substantially due to factors such as the following:
o actual or anticipated fluctuations in our operating results;
o changes in or our failure to meet securities analysts'
expectations;
o announcements of technological innovations;
o introduction of new services by us or our competitors;
o developments with respect to intellectual property rights;
o conditions and trends in the Internet and other technology
industries; and
o general market conditions.
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WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION LITIGATION WHICH COULD DIVERT
MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS
The stock market has from time to time 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.
In the past, following 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.
WE MAY NEED ADDITIONAL CAPITAL, AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING STOCKHOLDERS
We believe that our existing capital resources 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 due to
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
During the quarter ended September 30, 1999 we granted options to
purchase 1,485,654 shares of common stock to employees, consultants, and a
member of the board of directors under our 1998 Stock Plan.
During the quarter ended September 30, 1999, employees consultants and
a member of the board of directors of the Company exercised options for
1,048,975 shares of common stock. Also during the period, the company issued
391,774 shares of common stock pursuant to the exercise of warrants held by
investors.
The sale of the above securities was deemed to be exempt from
registration under the Securities Act of 1933 ("the Act") in reliance upon
Section 4(2) of the Act or Rule 701 promulgated under Section 3(b) of the Act.
USE OF PROCEEDS
On September 28, 1999, eGain completed the initial public offering of
its common stock. The managing underwriters in the offering were BancBoston
Robertson Stephens, Donaldson, Lufkin & Jenrette, and Volpe Brown Whelan &
Company. The shares of the common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (No. 333-83439). The Securities and Exchange Commission declared the
Registration Statement effective on September 22, 1999.
The offering commenced on September 23, 1999 and terminated on
September 28, 1999 after we had sold all of the 5,000,000 shares of common stock
registered under the Registration Statement. The initial public offering price
was $12 per share for an aggregate initial public offering of $60,000,000.
eGain paid a total of $4.2 million in underwriting discounts and
commissions. In addition, eGain incurred costs and expenses, other than
underwriting discounts and commissions, totaling $1.094 million in connection
with the offering.
After deducting the underwriting discounts and commissions and the
offering expenses, the estimated net proceeds to eGain from the offering were
approximately $54.7 million. The net proceeds were predominately held in a money
market fund at September 30, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) We solicited the consent of our stockholders as of July 21, 1999,
to approve the following:
(1) The Amended and Restated Certificates of Incorporation
authorizing 1,250,000 shares of Series D preferred stock.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
14,533,681 0 6,683,853
(b) We solicited the consent of our stockholders as of September 20,
1999 to approve the following:
(1) The Amended and Restated Certificates of Incorporation to be
effective upon the closing of our public offering.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
18,974,608 0 4,054,049
(2) An amendment to our bylaws to be effective upon the closing of
our public offering.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
18,974,608 0 4,054,049
(3) The form of indemnification agreement to be entered into by us
and certain of our officers and directors.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
18,974,608 0 4,054,049
(4) An amendment to our 1999 Stock Plan (the "Plan") which
increases the number of shares reserved for issuance under the
Plan from 3,500,000 shares of our common stock to 6,50,000
shares of our common stock.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
18,974,608 0 4,054,049
(5) The adoption of our Employee Stock Purchase Plan with a
share reserve of 750,000 shares of our common stock.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
18,974,608 0 4,054,049
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(c) We solicited the consent of our Series D preferred stockholders as
of September 22, 1999 to approve the following:
(1) The conversion of the Series D preferred stock to common stock
effective upon the closing of our initial public offering of
common stock at a price per share of at least $9.00.
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
652,000 0 0
(d) We solicited the consent of our stockholders as of September 23,
1999 to approve the following:
(1) The amendment of our Certificate of Incorporation increasing
the authorized number of shares of common stock to 50,000,000
and the authorized number of shares of preferred stock to 11,
2887,842
FOR AGAINST ABSTAIN/NOT VOTING
--- ------- ------------------
13,010,452 0 9,947,650
ITEM 5. OTHER INFORMATION
ADVANCE NOTICE PROVISION
A stockholder proposal not included in the Company's proxy statement
for the 2000 Annual Meeting will be ineligible for presentation at the meeting
unless the stockholder gives timely notice of the proposal in writing to the
Secretary of the Company at the principal executive offices of the Company and
otherwise complies with the provisions of the Company's Bylaws. To be timely,
the Company's Bylaws provide that the Company must have received the
stockholder's notice not less than 50 days nor more than 75 days prior to the
scheduled date of such meeting. However, if notice or prior pubic disclosure of
the date of the annual meeting is given or made to stockholders less than 65
days prior to the meeting date, the Company must receive the stockholder's
notice by no later than the close of business on the 15th day following the day
on which the Company mailed notice of the annual meeting date or provided such
public disclosure of the meeting date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits
are filed or incorporated by reference (as stated therein) as part of this
report on Form 10-Q.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by eGain during the three
months ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
EGAIN COMMUNICATIONS CORPORATION
By /S/ HARPREET GREWAL
---------------------------------------
Harpreet Grewal
Chief Financial Officer
(Duly Authorized Officer and
Dated: November 12, 1999 Principal Financial Officer)
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Amended and Restated Certificate of Incorporation, filed as
Exhibit 3.2 to the registrant's registration statement on
Form S-1 (File No. 333-83439) and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of the Registrant, filed as Exhibit
3.4 to the registrant's registration statement on Form S-1
(File No. 333-83439) and incorporated herein by reference.
4.1 Form of Common Stock Certificate, filed as Exhibit 4.1 to the
registrant's registration statement on Form S-1 (File No.
333-83439) and incorporated herein by reference.
4.2 Amended and Restated Investors' Rights Agreement dated as of
July 21, 1999, filed as Exhibit 4.2 to the registrant's
registration statement on Form S-1 (File No. 333-83439) and
incorporated herein by reference.
27.1 Financial Data Schedule.
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