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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2000
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. 000-30901
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SUPPORT.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3282005
(State or (I.R.S. Employer
Other
Jurisdiction
of Identification No.)
Incorporation
or
Organization)
575 Broadway, Redwood City, CA 94063
(Address of Registrant's (Zip
principal executive offices) Code)
Registrant's telephone number including area code (650) 556-9440
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title & Class)
----------------
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 the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the Registrant's common stock, $.0001 par
value, held by non-affiliates of the Registrant was approximately $59,635,758,
as of March 15, 2001. As of March 15, 2001, there were 33,316,889 shares of
Registrant's common stock outstanding. Shares of Common Stock held by each
executive officer and based on Schedule 13G filings, have been excluded since
such persons may be deemed affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement (the "Proxy Statement")
to be mailed to stockholders in connection with its 2001 annual meeting of
stockholders scheduled to be held on June 13, 2001 are incorporated by
reference into Part III of this report. Except as expressly incorporated by
reference, the Registrant's Proxy Statement shall not be deemed to be part of
this report.
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SUPPORT.COM, INC.
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
----
PART I ................................................................. 1
ITEM 1. Business...................................................... 1
ITEM 2. Properties.................................................... 16
ITEM 3. Legal Proceedings............................................. 16
ITEM 4. Submission of Matters to a Vote of Security Holders........... 16
Executive Officers of the Registrant.......................... 17
PART II ................................................................ 18
Market for the Registrant's Common Stock and Related
ITEM 5. Stockholder Matters........................................... 18
ITEM 6. Selected Consolidated Financial Data.......................... 19
Management's Discussion and Analysis of Financial Condition
ITEM 7. and Results of Operations..................................... 20
ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk.... 32
ITEM 8. Consolidated Financial Statements and Supplementary Data...... 33
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosures.................................... 52
PART III................................................................ 52
ITEM 10. Directors and Executive Officers of the Registrant............ 52
ITEM 11. Executive Compensation........................................ 52
Security Ownership of Certain Beneficial Owners and
ITEM 12. Management.................................................... 52
ITEM 13. Certain Relationships and Related Transactions................ 52
PART IV................................................................. 52
Exhibits, Financial Statements Schedule and Reports on Form 8-
ITEM 14. K............................................................. 52
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. Our actual results could differ materially from those indicated in such
forward-looking statements. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions identify such
forward-looking statements. These forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements. These are statements
that relate to future periods and include, but are not limited to, statements
relating to anticipated features and benefits of our products and services,
statements by independent research firms relating to industry statistics and
projections, statements by independent research firms relating to anticipated
increases in the number of people using the web, the number of programs on the
average personal computer, the amount of business to business infrastructure
spending, the market for software support, the integration services industry
and customer trends, statements relating to our strategy and components of our
strategy, including our intentions to grow with digital businesses and the
Internet, to continue to develop advanced support technologies, to expand our
sales and distribution capabilities, to expand our technology relationships, to
continue to increase customer return on investment and to meet support
requirements around the globe, statements about our expectations as to benefits
we may derive from our strategic alliances and statements as to expected net
losses, expected cash flows, expected expenses, including those related to
sales and marketing, research and development and general and administrative
expenses, expected revenue and sources of revenue, expected impact, if any, of
legal proceedings, expected increases in headcount, the adequacy of liquidity
and capital resources, growth in business and operations and the effect of
recent accounting pronouncements. Factors that could cause actual results to
differ materially from those predicted, include but are not limited to, the
Company's dependence on a small number of relatively large orders, the
Company's ability to attract and retain customers for existing and new services
and to achieve adoption and acceptance of our products and services, the
Company's ability to recruit and retain employees particularly in the areas of
sales, engineering and support services, the ability of our products to achieve
market penetration, the ability to use or integrate third-party technologies
and to expand infrastructure to meet the demand for the Company's services, the
Company's ability to expand internationally, the Company's ability to control
expenses, the economy and the strength of competitive offerings. Additional
factors, which could cause actual results to differ materially, include those
set forth in the following discussion, and, in particular, the risks discussed
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Other Factors Affecting our Business and Operating
Results." These forward-looking statements speak only as of the date hereof.
Unless required by law, the Company undertakes no obligation to update publicly
any forward-looking statements.
PART I
ITEM 1. BUSINESS
We are a leading provider of support infrastructure software for digital
business. Our software is designed to accelerate business growth by increasing
the cost efficiencies, enhancing the responsiveness, and improving the overall
capabilities of support organizations. These benefits accrue to support
organizations internal to enterprises focused on servicing the needs of
employees, as well as businesses seeking to serve the external support
requirements of their customers, partners and suppliers. Our product suite
offers automated, personalized support designed to solve technical problems
through system self-healing, call avoidance through user self-service, and
improved problem resolution through intelligent assisted support--delivered
through the Internet. We believe that by deploying our support infrastructure,
digital businesses can transform support operations from inefficient cost
centers to highly productive, scalable and competitive assets that increase
customer satisfaction and reduce operational costs.
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We believe that the need for support automation will increase as a result of
the rapid growth and increasing complexity of technology. We sell our products
and services to corporate information technology departments, service
providers, personal computer manufacturers and support outsourcers. Our
customers include Bear Stearns, The Boeing Company, Cisco Systems, Comcast
Online Communications, GE, Delta Air Lines, BT (British Telecom), IBM,
Excite@Home, Sony, CSC and Samsung SDS.
Industry Background
We believe enterprises are increasingly relying on information technology as
the backbone of their business to enable them to operate, communicate and
compete successfully.
Enterprises are adopting new processes based on innovative solutions
delivered via the Internet. For example, traditional purchasing practices are
being automated by new online procurement processes; sales contact
administration has evolved into customer relationship management, providing a
system to automate, correlate and create insights that can accelerate the
process of turning prospects into customers; and human resource management has
automated tasks ranging from performance reviews to personal leave.
Enterprises are under increasing pressure to ensure that their technology
infrastructure is reliable. Support.com's infrastructure support software is
designed to minimize the risks of technology failure, solve user problems
quickly and ensure that users and enterprises are more productive by automating
and personalizing the support process.
User Support Is Critical for Digital Businesses. Businesses are increasingly
relying on the Internet to sell more products and services, drive efficiencies
in supply chains and distribution channels, nurture customer relationships and
increase employee productivity. Among these organizations are traditional
businesses that are changing their business processes using the Internet,
companies that are formed specifically to deliver products and services over
the Internet, and Internet-related technology vendors and service providers. To
support digital business initiatives, these companies are deploying Internet,
intranet and extranet technology solutions that automate and improve the
interaction between the enterprise and its employees and customers, as well as
an extended network of enterprise suppliers, distributors and other business
partners.
We believe high-quality user support is essential to succeed in this
environment. Technical support that is automated, personalized, fast and easily
accessible can enable internal and external systems to run more efficiently,
improve employee productivity and increase customer acquisition and retention.
Deploying a comprehensive Internet-based support infrastructure can become an
essential corporate asset that enables a company to competitively differentiate
its products and services and improve the efficiency of its operations.
The Growing Difficulty in Delivering User Support. We believe technical
support has become a critical form of user support, as companies, their
employees and customers, increasingly rely upon complex information technology
and the Internet to conduct business. Delivering technical support is
increasingly difficult as systems become more sophisticated, different
electronic devices proliferate and the numbers of technology users grow in
their needs and demands.
Millions of Individuals Are Using the Web. According to IDC, the number of
people using the web will grow from 196 million in 1999 to 502 million in 2003.
These users have a broad range of support requirements and levels of
sophistication. Supporting this growing demographic is complicated by each
user's dependence on different applications, operating systems, and devices. In
turn, users also face a proliferation of new web-based services, often
requiring real-time training and electronic support.
Computing Environments Are Becoming More Complicated. A typical business
uses a broad range of operating systems, networking technologies, e-commerce
software, security solutions, server applications, off-the-shelf and internally
developed custom applications and productivity tools. In many cases, these
applications are integrated within the corporation and throughout the systems
and applications of the extended enterprise, via a variety of networks and
protocols.
2
Electronic Devices Are Proliferating. Businesses and consumers use many
different smart devices to conduct business, access the Internet and purchase
products and services. These include personal computers, personal digital
assistants and other mobile devices. Each device bears an individual profile--a
different configuration of applications, operating system components, network
access protocols and personal settings. To illustrate this proliferation,
according to IDC, the number of shipped personal computers alone will grow from
approximately 112 million in 1999 to 190 million in 2003.
Applications Are Multiplying. Meta Group estimates that the number of
programs on the average personal computer rose from approximately 200 in 1997
to over 600 in 1999. These applications are frequently upgraded, and usage
combinations can increase exponentially. Also, we believe that the variability
of device configurations will increase as customers download, install and use
thousands of programs from the Internet or access hosted applications. This
growth is not driven by mere productivity applications. Some enterprises may
have a multitude of customized applications upon which their employees may rely
for various needs.
Existing Support Solutions Are Inadequate
The nature of today's technical support mandates a highly personalized,
automated and web-based approach to the development and delivery of support.
Historically support infrastructure technology investments have primarily
focused on making incremental improvements to existing call center and help
desk solutions. For example, workflow solutions, such as automated call-
tracking, and web-based applications, such as email response management
systems, have increased the efficiency of support delivery. While these
solutions represent an advance in user support, they do not necessarily reduce
the need for assisted support, offer automated support or provide web-based
technologies for personalized problem diagnosis. Equally important, these
solutions do not consistently resolve users' problems quickly, efficiently and
effectively. The ability of call centers and help desks to support digital
business initiatives is often limited and can be expensive to maintain. User
self-help options such as manuals and software help features provide a partial
solution to this situation, but the information available is not dynamically
updated, requires considerable maintenance such as manual updating, and
involves intensive user effort to navigate and understand.
The Support.com Solution
We provide support infrastructure software for digital businesses.
Support.com's software automates, personalizes and enhances user support via
the Internet. The core of our innovative solution is a set of patented
technologies that automates information collection from the user's system,
enhances communication between support analysts and users, and enables self-
healing, automated problem resolution. Our web-based offerings are available in
a variety of configurations, including a full service support portal, or a
custom integration with the chosen Internet implementation of our customers.
Support.com's solution serves as a software platform for effective integration
of a company's support requirements across a range of networking technologies,
operating systems and applications.
Product Features
Personalized Support. Our patented software approach is designed to
automatically discover and track the unique characteristics of each user's
system and that system's components to personalize and increase the efficiency
of the support process.
Self-Healing. Our software is designed to recognize, diagnose and resolve
potential problems before they cause users to experience problems, without the
need for the user to request assistance.
Self-Service. Our software helps users to resolve their own problems through
a single, intuitive interface that provides adaptive, context-sensitive
resolution of problems and queries.
3
Assisted Service. Our software is designed to ensure that when a problem or
query is escalated to the level at which it requires the assistance of a
support analyst, that analyst will have detailed information about the user's
system and access to sets of support actions to accelerate problem resolution.
Web Support Content Authoring. Our software is designed to enable support
analysts to develop support actions that automatically implement problem
diagnosis and repair, assist in user training and provide just-in-time help
through the web. These actions are made available to other support analysts and
users to further automate the support process.
Pre-Packaged SupportActions. Our pre-packaged support actions (called
"SupportActions") help to resolve commonly received support requests with one
click. Effectively, our pre-packaged SupportActions provide adaptive learning,
in that they create standardized responses to the most common problems solved,
and make them widely accessible to others who may experience the same problems
in the future.
Internet-Based Architecture. Our products are primarily web-based, meaning
that they can be delivered and updated through the Internet, are secure,
scalable and easily integrate with widely used software platforms and
applications that may already exist within a company's information technology
environment. By structuring our software this way, we are able to offer
solutions to users, corporate information technology departments and other
support providers unconstrained by geography, making them easy to deploy and
use. By designing a support process that uses the Internet, we are able to
improve the effectiveness and efficiency of support with automated and detailed
information exchange.
Built for Growth. Our software's high degree of automation and scalability
provides our customers with a means for eliminating the support bottlenecks
that would constrain business expansion. Our products provide information-
gathering capabilities that can help our customers convert the traditional help
desk into a revenue generating business services desk.
Reduced Support Costs. Traditional support solutions involve multiple
instances of human interaction by telephone and in person visits. Our products
can enable fully automated problem and query resolution directly by users--that
is, without necessarily requiring remote or in-person assistance. We refer to
this user self-service as "tier zero," and believe that it is an effective and
efficient means of providing support. By providing a 24-hour, seven-days-a-week
automated support button on user systems, our software minimizes escalation of
problems from tier zero to levels requiring human intervention. As a result,
businesses can enhance their existing support infrastructure, reduce their
overall support costs, and create an internal environment that allows them to
attract and retain high-quality support analysts.
Improved Customer Satisfaction and Retention. Our products are personalized,
context-sensitive, and adapt to dynamically changing system environments. Our
patented DNA Probe, for example, recognizes individual system settings and
identifies the information necessary to resolve technical problems without
human intervention. In situations where problems are not eliminated at tier
zero, the Support.com infrastructure provides support analysts with a detailed
problem history for the requesting user's system. This approach resolves user
problems faster than traditional support solutions, while increasing user
satisfaction and reducing the amount of down time for users. Through better
support capabilities, we believe businesses can more easily retain existing
customers, while acquiring new customers that value high quality support.
Rapid Deployment and Integration with Existing Solutions. Our products are
designed to reduce customer deployment times and installation costs. Our
software helps customers to preserve their investments in call center and help
desk products, workflow tools, knowledge bases and other applications. Our
solution can enhance these capabilities and integrate them into a cohesive,
automated and personalized Internet support infrastructure. Our solution is
also designed to effectively support third-party software and does not require
lengthy development, testing or maintenance cycles.
4
Enhanced Competitive Advantage. Our support infrastructure solution can
accelerate problem resolution, reduce system downtime and increase user
productivity, each of which is important to maintain a competitive advantage.
We also offer our customers the ability to differentiate their product
offerings, improve their customer satisfaction and enhance their online
presence by enabling them to brand their own version of our support portal.
Support.com Strategy
Our mission is to be the leading provider of support infrastructure software
for digital businesses. Key components of our strategy include:
Grow with Digital Businesses and the Internet. We believe that as
enterprises continue to adapt their business processes to realize efficiencies
in their interactions with customers, supply chain partners and employees, the
opportunities to provide web-based products that address the support needs of
these constituencies will be substantial. As companies increasingly use the
Internet to automate business processes, their contact with customers is
progressively becoming limited to those support interactions that occur when a
user has a problem. Our goal is to use our technologies and web-based
architecture to help our customers provide superior levels of customer care for
a rapidly increasing and complex mix of digital devices, networking,
applications and system software and a similarly large and diverse set of
users.
Continue to Develop Advanced Support Technologies. Our product offerings are
based on patented technologies and are designed to solve difficult support
problems, primarily those revolving around technical issues. We intend to
continue investing substantial resources in developing and acquiring innovative
web-based technologies that enhance the personalization, automation and overall
effectiveness of our solutions. We also plan to continue developing
technologies to support additional platforms and applications, as well as
further extend our solution in supporting systems and processes inherent to the
complex and evolving natures of corporate computing environments and the
Internet.
Expand Our Sales and Distribution Capabilities. We plan to continue
developing both our internal sales force and our indirect sales channel of
resellers, systems integrators, support outsourcers, application service
providers and other added value resellers. We believe that our indirect sales
channel will add cost efficiencies, extend our reach into new customer
segments, and increase the scalability of our sales process. We believe the
combination of our existing base of reference accounts and our consultative
selling approach will assist us to further penetrate existing markets plus
attract new customers.
Expand our Technology Relationships. Our relationships with key technology
vendors are important to delivering a comprehensive support solution and
increasing our brand recognition. We work with leading technology companies in
the areas of knowledge management, customer communications, software
development tools, call center and help desk software to ensure that our
offerings can be easily integrated with and complement our customers' existing
infrastructure. We intend to strengthen our relationships with these and other
key technology providers in the future to support additional platforms and
applications and to increase the functionality and applicability of our product
offerings.
Continue to Increase Customer Return on Investment. We work closely with our
customers to develop an in-depth understanding of their businesses, and to
effectively deploy our support solution to increase their return on investment.
We intend to continue to provide a high level of customer service and support
through our professional services organization. We plan to continue to work
with our customers as they grow with the Internet to improve the quality of our
product offerings and to identify and address their new support challenges.
Meet Support Requirements Around the Globe. The demands for better, more
efficient user support are understood by corporations throughout the world.
Accordingly, global deployment has been an essential part of our product
development strategy since Support.com's inception as a company. Today, our
product is localized
5
in 9 languages. Sales and marketing of these localized solutions is managed
through the company's Asian offices headquartered in Singapore, and Tokyo,
Japan and our European operations headquartered in London, England.
These components of our strategy are part of our ongoing, overall business
plan. Because we intend to continue to pursue and continually revise these
objectives, we do not have definitive targeted implementation and completion
dates for each objective.
Products
Our support infrastructure products and services are designed to enable our
customers to support their customers, supply chain partners and employees
automatically through the Internet, extranets or intranets. Our software is
designed to allow our customers to provide their users with personalized,
automated support solutions tailored to meet the needs of their business
environments. Support solutions generated by our products are intelligent
because they are unique to each user, interactive, adaptable and have the
capability to automatically update the user as his or her support requirements
change. Our products are Internet-based, which helps reduce business deployment
time and installation expenses. This ease of deployment makes our software
highly scalable no matter what the customer need or computing environment.
The table below highlights the features of our products:
Product Description
Support Portal Hub The Support Portal Hub provides the foundation of a
support infrastructure. The Support Portal Hub is a
scalable and extensible platform that serves as the single
point of integration for all support transactions across
customers, partners, and employees.
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User Center The User Center provides an organization with
infrastructure that is integral to an effective self-
service strategy. The User Center's suite of Web-based
components enable companies to provide proactive problem
resolution and automated self-service to an extended
enterprise of customers, partners and employees.
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Support Center The Support Center is a comprehensive infrastructure to
optimize and automate problem resolution, collaboration,
and communication, enabling real-time support and allowing
an organization to keep up with the support demands of
their business initiatives.
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Foundry The Foundry is a comprehensive application for authoring
automated support actions and managing support content
that can then be utilized by the User Center, Support
Center and Support Portal Hub.
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Activators Software "activators" offer ease of integration with third
party software products already installed at a customer
location. For example, activators can automate the
traditional manual, error process of populating trouble
tickets for help desk management.
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SupportAction Pack The SupportAction Pack is a pre-packaged set of high
quality, tested software that automatically enables
customers to provide one-click fixes and diagnostics for
the most common problems experienced.
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SmartQualify SmartQualify is a Web-based product that lets ISPs
automatically check a subscriber's system to determine if
it meets the minimum requirements for broadband service.
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SmartVerify SmartVerify is a Web-based product that automates
diagnostic testing on key components of network
connectivity, which helps provide ISPs assurance that an
installation was successfully completed.
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The foundation of our product suite consists of four key products that
provide a modular approach to building comprehensive support solutions. Briefly
described, they include the following:
User Center
The User Center provides users with self-healing and automated self-service
capabilities to resolve problems and questions that normally require a call to
the call center or help desk. The User Center acts as the user's personalized,
context-sensitive support assistant, identifying and automatically solving
problems before they cause users to experience problems. The User Center
provides a single source of information for addressing software and system
malfunctions and responding to users' queries.
The User Center includes:
Self-Healing Capabilities. By monitoring the applications and components of
a user's changing system, the User Center can intelligently eliminate problems
before they cause downtime.
Automated Self-Service. Enables users to address support problems that
normally require calls to the call center or help desk. This reduces the number
of calls to the call center and provides users with an effective alternative to
contacting a support analyst.
Support for Disconnected and Mobile Users. Allows users to solve problems
when they are completely disconnected from their networks. The solutions
critical to disconnected and mobile users reside locally on the user's machine.
Undo Capability. Provides users with the ability to undo actions taken by
the User Center.
Support Center
The Support Center provides a centralized support infrastructure and a suite
of software components for remote assisted service, enterprise-wide problem
resolution and management and administration of the overall support
environment. This product provides support analysts with the ability to deliver
context-sensitive diagnosis and resolution of user problems. The Support Center
builds on the User Center's support capabilities in an effort to rapidly
resolve support requests that are escalated to the call center or help desk.
The Support Center provides support for a comprehensive range of call types,
including solving problems, answering questions and resolving requests for
system modifications.
The Support Center enables support analysts to provide enhanced assisted
service with a set of tools for diagnosing and resolving problems from remote
locations. By integrating the User Center's knowledge and user history with
remote assisted service, the Support Center provides support analysts with
appropriate information that they would normally need to gather manually. The
Support Center allows support analysts to identify the fundamental causes of
problems and enable users and support staff to systematically and rapidly
resolve them without desktop visits or lengthy interactions between the user
and the analyst. The result is a significant reduction in call times, which can
lead to improved service to users and lower support costs.
The enterprise healing capabilities of the Support Center enable the support
organization to solve problems for a large number of users across the
organization before user productivity becomes impaired. Enterprise healing
allows the support organization to identify problems that could affect large
numbers of users and repair them before users suffer downtime.
The administration and management capabilities of the Support Center provide
centralized user management, usage and status reporting, storage maintenance,
security administration and instructions for the User Center. The Support
Center manages characteristics and privileges for users and support analysts
and reports on support activities. For instance, periodic maintenance can be
performed from the Support Center to manage security parameters and storage
requirements.
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The Support Center includes:
Knowledge-Driven Remote Diagnosis. Provides the support analyst with the
knowledge and tools to remotely diagnose problems on a user's system. The
Support Center provides support analysts with information about the
configuration of a user's system, a history of all prior actions taken to
resolve the user's problems and tools to present context-sensitive solutions to
the support analyst. This allows for analysis of problems based on the status
of the user's system and personalized support requirements and results in
quicker diagnosis of the fundamental cause of the problem and its solution.
Remote Repair. Enables the support analyst to remotely solve problems with
no user interaction. This reduces desktop visits and costly, time-consuming
interaction with users. Remote repair allows the support analyst to initiate
online chat sessions with users, edit their files and execute commands on their
systems.
Reporting. Provides support organizations with information for monitoring
support transactions, identifying trends and potential problems and measuring
the effectiveness of our suite of products.
Extensibility. Provides an open architecture to enhance and extend the
capabilities of the Support Center to meet changing support needs. The Support
Center enables support organizations to transfer and use information with
knowledge bases and automatically transfers information into call tracking
databases.
Security. The user can control which activities are allowed or disallowed by
the support analyst. Also, support administrators manage overall user and group
security. All support activity occurs using industry standard security,
including encryption and the use of digital certificates.
Undo capabilities. Provides support analysts with the ability to undo
actions taken from the Support Center.
Support Portal Hub
The Support Portal Hub is the centerpiece of our suite of products. It
provides the foundation of our eSupport infrastructure. The Support Portal Hub
works with the Internet-enabled Support Center and User Center to provide
support organizations with the components and infrastructure they need to build
interactive, full-service, context-sensitive and personalized online support.
Through our SmartIssue technology, information about the user, the user's
computing environment and the user's question or problem is provided to the
Support Portal Hub. The Support Portal Hub then analyzes this information for
resolution by either self-service or optimized self-service. When appropriate,
it can feed the information into call-tracking systems in order to populate
trouble tickets or into knowledge bases to automatically enable better solution
matching and problem resolution. The Support Portal Hub also provides
mechanisms to protect the user's privacy and security. Lastly, the Support
Portal Hub acts as a repository in recording the history of all support
transactions and information for purposes of reporting and analysis.
The Support Portal Hub includes:
Web-Based Solution. The Support Portal Hub serves as a single point of
integration for support content, technologies and processes.
Interactive, Context-Sensitive Support. Interacts with users' systems to
guide those users through the complexities of their specific environments,
offering them context-sensitive, personalized support.
Support Process Automation. Connects users to support providers and
automates and reduces inefficiencies in the support process. This includes:
. self-service;
. routing of support requests to the support organization;
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. user identification and privilege verification;
. problem description;
. diagnosis and repair; and
. logging of actions taken by all parties involved in the support
transaction.
Foundry
The Foundry is a development environment for authoring support actions and
managing support content that can be utilized by the User Center, Support
Center and Support Portal Hub. The Foundry's authoring capabilities enable
support organizations to create automated solutions, or SupportActions, that
support user applications and operating system components, automate common
support activities and schedule jobs to manage user systems. SupportActions can
be created for a complete range of support requests.
The Foundry includes:
Content Creation and Content Management. The Foundry enables support
organizations to create, publish, integrate and maintain automated
SupportActions. The Foundry is a platform for authoring automated
SupportActions from a point-and-click interface. This includes support content
automation and the ability to easily integrate existing support content into a
database of solutions and content.
Personalization. The Foundry enables the support organization to create
personalized support content. Using the Foundry's capabilities, a company can:
. create support solutions that automatically identify and address the
unique support requirements of each user.
. deliver automated support solutions to a single user or set of users
based on the unique characteristics of their systems and the history of
their support needs.
Technology
Our core technologies enable our products to easily adapt to varying
environments and to reduce the manual labor in the support process. We have
four patents related to our DNA Probe, SmartIssue and Software Vault
Technologies. We have five additional patents pending.
SmartIssue Technology
When a user has a problem or question, our patented SmartIssue technology
automatically collects personalized information about the user, the system and
the problem. Based on just-in-time analysis of this information, SmartIssue
technology automatically and intelligently connects users to the support tools,
personnel and communication channels that best address the support issue.
SmartIssue technology also provides a support professional access to up-to-
date, pertinent and unique information about the issue. The information is
automatically recorded into an XML template, where it is dynamically updated at
every step within the support transaction, creating a full history of that
issue for easier escalation, analysis and logging.
SmartIssue technology is standards compliant--designed to be compatible with
Microsoft's Support Automation framework as defined in the PCHealth initiative.
Also, the information included within SmartIssues is easily integrated into
various systems or databases because it is generated with open Internet
technology standards.
9
DNA Probe--Personalized Support
Our patented DNA Probe provides detailed data about each user, their system
and the software on their system. DNA Probe technology automatically identifies
the characteristics of each user's software applications and operating system
components and tracks them over time. This personalized data can be used to
quickly sift through large amounts of information, compare historical data and
highlight potential fundamental causes of problems. For example, the DNA Probe
technology automatically identifies all of the network settings for each
individual user, including the network address, machine name, Internet
configuration and the specific drivers for their network card. In contrast to
other support process methodologies, which involve authoring generic solutions
and attempting to apply those to numerous unique users, support organizations
can use the DNA Probe's ability to dynamically learn about an individual
computing environment to efficiently provide a user with personalized support
solutions.
ContextResponse Technology--Context-Sensitive Support
ContextResponse Technology analyzes the data gathered by the DNA Probe and
SmartIssue, identifies and diagnoses the most relevant information, and then
delivers a solution for a user's problem or question. It is the ability to
gather, analyze and transmit context-sensitive information to efficiently
automate the support process. ContextResponse Technology personalizes and
automates the support process by:
. automatically gathering information that normally requires a time-
consuming and frequently complex interaction between the user and the
support analyst. For example, rather than asking a user to identify their
specific operating system parameters and software versions,
ContextResponse automatically gathers this information and electronically
relays the information to the support analyst.
. analyzing information to identify potential problems. ContextResponse is
designed to identify the fundamental cause of a problem by analyzing the
results of diagnostic programs or comparing the user's system
configuration to a previous working configuration, a reference
configuration or another user's configuration.
SupportAction--Point and Click Development and Delivery
Many custom support solutions can be packaged as SupportActions, which
enable the automation of common support activities such as solving problems or
answering questions. Support analysts use the Foundry to create custom
SupportActions using a point-and-click interface. Support organizations can
program existing applications, commands and content into SupportActions to turn
static information into automated knowledge. For example, the support
organization could integrate frequently asked questions or a diagnostic program
into a SupportAction so that the user can automatically perform the steps
described by the answers to the frequently asked questions or the diagnostics
program. SupportActions can accommodate many scripting languages and a wide
range of content.
DNA Infrastructure
Our DNA Infrastructure provides a common mechanism for the distribution and
application of changes to one or more machines. This infrastructure is used
across our products so that changes made to a user's machine are consistent,
reversible and recorded. Repair to a user's machine, comparison of one machine
to another, installation, modification and distribution can all be achieved
using our DNA Infrastructure. Support solutions are easier to develop with this
infrastructure because steps that are done manually and are potentially error-
prone are replaced by automatic and consistent mechanisms. This can facilitate
rapid development and reduce the cost of on-going maintenance.
Nexus--Enhanced Communication Infrastructure
Our products communicate directly with each other using secure protocols,
but firewalls and other network components often restrict direct communication
across the Internet. If a firewall or other device prevents direct
10
communication between remote parties, our products are designed to communicate
indirectly using our Nexus technology as an intermediary. Our Nexus technology
allows communication to take place between parties in circumstances where
direct communication is unreliable or impossible.
Software Vaults--Efficient Storage Management
Once a user's problem is diagnosed, the solution is delivered to the user
from the Software Vault. Support solutions generally require access to a large
amount of support content, in the form of files, programs and other
information, which must be available locally or across a network. Our patented
Software Vault provides storage, retrieval and management of this support
content. Files and programs for supported applications, operating system
components and all SupportActions are stored in the Software Vault.
The Software Vault provides a redundant, distributed mechanism for this
support content. For example, if a particular file on a user's system has been
corrupted and needs to be replaced, one or more Software Vaults will be
accessed in a logical sequence until the needed file has been found. Software
Vaults reside on servers to support thousands of users, and portions of
Software Vaults can also be placed locally on a user's system to provide
support for critical applications and operating system components when the user
is completely disconnected from the network.
The Software Vault's file storage mechanism is efficient. By storing each
unique file only once, the Software Vault minimizes disk space, communications
and bandwidth requirements. For example, if a number of users have multiple
applications that all use a particular version of a file or program, only one
copy of that file is kept in the Software Vault.
Services and Support
Our professional services organization provides a range of support offerings
from architectural design to on-going customer support and is critical to our
focus on customer satisfaction. Our services group customizes solutions for our
customers that can be used across all or parts of their organization. Our
services and support capabilities are divided into three areas:
. Implementation--Provides architectural design, transformation, product
integration and deployment services to our customers.
. Education--Trains our customers and those parties with whom we have
alliances in the design, implementation and use of our products.
. Technical Support--Responds to design, feature, implementation and
deployment questions.
Under a maintenance contract, our customers receive generally available new
releases, corrections, enhancements, updates and other changes to the products
they have licensed.
Customers
We market and sell our support software infrastructure primarily to
corporate enterprises, service providers, personal computer manufacturers and
businesses that seek to extend their support solution to their supplier and
partner networks.
Corporate Enterprises. Global 2000 companies in our customer base are
seeking ways to reduce the costs of providing support to users internal and
external to the enterprise, increasing the productivity of those same users--
and, by extension, the entire business. These companies require a global,
scalable support solution. Several of these companies have extended their
support capabilities outside their enterprise to reflect the increase in the
number of employees working remotely, along with the recognition that
suppliers, partners, and customers outside the company firewall can also
benefit from the enterprise's support processes.
11
Service Providers. Our service provider customers can use our software to
resolve questions or problems of their subscribers. The introduction of our
SmartQualify and SmartVerify products in first quarter of 2001 was designed to
address an important need for Internet Service Providers (ISPs). These product
enhancements to our core solution permit ISPs to quickly determine from a
remote site whether a customer's personal computer is equipped to accept a
broadband connection. ISPs can use our software to save time and money by
reducing technician visits, providing the customer with an improved
installation experience and ongoing support.
Personal Computer Manufacturers. Prior to Internet availability of support,
the principal recourse for these users was a telephone call. Moving users from
telephone support to Web-based support can reduce costs associated with
providing customer support. Personal computer manufacturers can license
Support.com's infrastructure as the support system for users of their personal
computer products.
GE accounted for 13% of our total revenue in 2000. No other single customer
accounted for more than 10% of our revenue in 2000.
Below is a representative list of companies who have purchased our products
and services organized by customer focus.
Customer Focus Representative Customers
Corporate Enterprises use Support.com's software Bear Stearns
infrastructure to support employees, partners, The Boeing Company
suppliers and customers. Broadcom
BT (British Telecom)
Cadence Design Systems
JP Morgan H&Q
Cisco Systems
Clorox
CompuCom
Delta Air Lines
GE
JCPenney
McKesson HBOC
NCR
------------------------------------------------------------------------------
Service Providers use Support.com software Comcast Online
infrastructure software to help resolve Communications
subscriber questions and problems. Excite@Home
Globo Cabo
RCN Services
PeoplePC
StarHub Internet
------------------------------------------------------------------------------
Personal Computer Manufacturers can use IBM
Support.com's software infrastructure as the Sony
support system for users of their personal PremioPC
computing products. OmniTech
Toshiba
------------------------------------------------------------------------------
Sales and Distribution Alliances
We have established sales and distribution alliances with specialized
technology and services firms that deliver our solutions to specific market
segments. We believe these distribution relationships allow us to benefit from
the marketing and lead generation capabilities of these firms, and are intended
to increase geographic sales coverage and to address mid-market businesses and
large corporate customers. The companies with which we have distribution
alliances gain the opportunity to enhance their product and service offerings
with Support.com's software infrastructure and, in turn, increase customer
satisfaction while effectively managing costs of providing support to the same
customers.
12
Included within these distribution alliances are outsourcers. Outsourcers
seek ways to provide new value and increase service levels to current
customers, as well as prospects. Support.com's software can help outsourcers
increase customer satisfaction and ensure ongoing value in the relationship by
reducing the time it takes to resolve technical problems for applications that
they may have installed on the customer's behalf.
Below is a representative list of our sales and distribution alliances:
Sales and Distribution Alliances
(Outsourcers/Resellers/System Integrators/Application Service
Providers/Embedded OEMs)
Automated Systems Limited IP-Global Net
Allstar Personnel NCS
Compaq Global Services OmniTech
CompuCom Perot Systems
Connected Support Samsung SDS
Contrado Sitel Corporation
CSC (Computer Sciences Corporation) Support Technologies
Cotelligent Sykes Enterprises
Entex Sysage
GE Capital ITS TriActive
IBM Xerox Connect
Interalyia UCC
------------------------------------------------------------------
Strategic Alliances
An important element of our sales and marketing strategy is to expand our
strategic alliances with industry leaders to increase market awareness,
acceptance and distribution of our products and services. We have established
both formal and informal technology and distribution alliances with industry
leaders to help us deliver comprehensive solutions and allow us to focus on our
core area of expertise: developing support infrastructure software for digital
businesses.
Technology Alliances
We employ technology alliances to help ensure that our support
infrastructure software can be integrated with the applications, software and
network solutions of our customers. We also enter into alliances with partners
that we believe can enhance our solution or can assist customers in gaining
more value from Support.com software. These may include companies marketing
Internet infrastructure software, operating systems, software tool providers
and applications developers. One example of such an alliance is Contrado, with
which we partner in selling an integrated solution for deployment and support
of software solutions for large enterprises.
We work with our customers to understand where technology alliances can
provide the greatest benefit to them, whether their requirements are for ease
of integration with legacy applications, providing a complementary solution to
their existing user support applications or leveraging a fully developed
knowledge base. Through this customer dialogue, we have created technical and
other forms of alliances with companies such as Tivoli, Nortel Networks,
Remedy, and Peregrine, to complement their call tracking applications, and with
companies like Serviceware and Primus to add value to their knowledge
management solutions. Our alliances can allow the customer to realize a higher
return on a Support.com investment, because we work with solutions that they
already have in place, or are actively considering for deployment.
Research and Development
We devote a substantial portion of our resources to developing new and
enhanced versions of our eSupport infrastructure software, conducting product
testing and quality assurance testing and improving our core technologies. Our
technical innovations have been recognized with four patents, with another five
patents pending.
13
Fundamental to our research and development strategy is rapid product turns,
continuous improvement, and customer feedback. We believe that customers can
serve as an extension of our research and development process by providing us
with invaluable feedback from their hands-on usage to assist with our product
improvements, implementation services and new market opportunities and
strategy. We have created a Customer Advisory Council with a representative
sample of our customers to formalize this input.
Our research and development expenditures were approximately $1.1 million in
1998, $2.3 million in 1999 and $10.9 million in 2000.
Sales and Marketing
We sell our software through a combination of direct and indirect sales
channels. Our direct sales efforts to corporate customers are focused on
several industries, including financial services, telecommunications, retail
and manufacturing. Our indirect sales channel to corporate customers consists
of outsourcers, live support providers and system integrators. We primarily
sell to corporate enterprises, service providers and personal computer
manufacturers through our direct sales channel. We have a telephone sales
organization that is responsible for lead management, customer follow-up, add-
on business and new sales to existing customers and new market segments.
Currently, we maintain direct and indirect sales personnel in North America
covering the United States, Canada and Latin America, in the United Kingdom
covering Europe, the Middle East and Africa, and in Singapore, Japan and Hong
Kong covering the Asia Pacific region.
Our sales strategy utilizes partner relationships and consultative selling
techniques and incorporates a comprehensive communication infrastructure for
both our direct and indirect sales forces. We plan to continue to invest and
increase the size and geographical locations of both our direct and indirect
sales model on a global basis.
Since most of our licenses are sold on a three-year subscription term basis,
we work with our customers over the three-year period. This enables us to
identify opportunities for product enhancements and new support needs. The
sales teams are motivated to build long-term customer relationships since their
commissions are generally paid out over the term period.
Our marketing efforts include needs assessment and market analysis, brand
awareness, category education and lead generation, and educating organizations
in our target markets.
Competition
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. Our potential competitors
may have longer operating histories, significantly greater financial, technical
and other resources or greater name recognition than we do. Competition could
seriously harm our ability to sell additional software, maintenance renewals
and services on terms favorable to us. Competitive pressures could also reduce
our market share or require us to reduce the price of products and services,
which could harm our business, financial condition and operating results.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Although we do not believe there is one
dominant competitor in the market for all aspects of our eSupport solution,
there are vendors who offer products and services with features that compete
with specific elements of our eSupport solution. These elements include
automated development of support solutions, automated delivery of support
solutions and an
14
Internet support infrastructure. For example, in the market for automated
development of support solutions, we compete with companies such as Serena
Software, Inc. In the market for automated delivery of support solutions, we
compete with Motive Communications, Inc.
In the corporate enterprise context, we also compete with companies in
different industries for the budget dollars of information technology
departments. As spending is scrutinized, these departments are seeking cost
savings, operating efficiencies and scalable, easily integrated solutions.
We may encounter competition from other software companies to the extent
that we enter each other's market. These companies may include:
. customer relationship management, or CRM, solutions companies, including
Siebel Systems, Inc., and Oracle Corporation;
. consolidated service desk solution vendors, including Nortel Networks,
Inc., Peregrine Systems, Inc. and Remedy Corporation;
. operating systems providers, including Microsoft Corporation; and
. customer communications software companies, including Kana
Communications, Inc. and eGain Communications, Inc.
We believe that the principal competitive factors in our market include:
. quality of client base;
. length of return-on-investment;
. product functionality, quality and performance;
. responsiveness of new products to the market in a timely manner;
. customer service and support; and
. pricing.
Our continued success will depend on our ability to maintain our
technological advantage, introduce timely enhanced products to meet the growing
support needs, deliver on-going value to our customers and scale our business.
Intellectual Property
We have four patents in the general areas of automated discovery of dynamic
configurations, our SmartIssue technology and our software vault technology. We
have five patent applications pending in the United States, and we may seek
additional patents in the future. We do not know if our patent applications or
any future patent application will result in a patent being issued with the
scope of the claims we seek, if at all. Also, we do not know whether any
patents we have or may receive will be challenged or invalidated. It is
difficult to monitor unauthorized use of technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States, and our competitors may independently develop technology
similar to ours.
Our trademarks include Support.com, the Support.com logo, ContextResponse
Technology, SupportAction, DNA Probe and SmartIssue. We claim common law rights
in certain additional marks as well. Third parties
15
may infringe or misappropriate our copyrights, trademarks and similar
proprietary rights. We rely on a combination of copyright, trade secret,
trademark and contractual protection to establish and protect our proprietary
rights that are not protected by patent. We also enter into confidentiality
agreements with our employees and consultants involved in product development.
We routinely require our employees, customers and potential business partners
to enter into confidentiality agreements before we will disclose any sensitive
aspects of our business. Also, we require employees to agree to surrender to us
any proprietary information, inventions or other intellectual property they
generate or come to possess while employed by us. Despite these efforts,
unauthorized parties may attempt to copy or obtain and use our products or
technology. These precautions may not prevent misappropriation or infringement
of our intellectual property.
We may be involved in legal proceedings and claims in the ordinary course of
our business, including claims of alleged infringement of the patents,
trademarks and other intellectual property rights of third parties. For
example, Previo, Inc. recently filed a patent infringement lawsuit against us.
Defending this lawsuit may be time-consuming, costly and may divert
management's attention. This lawsuit is at an early stage and its outcome may
not be favorable to us. Our products may infringe other issued patents that may
relate to our products. Also, patent applications may have been filed which
relate to our software products. Intellectual property litigation is expensive
and time-consuming and could divert management's attention away from running
our business. This litigation could also require us to develop non-infringing
technologies or enter into royalty or license agreements. These royalty or
license agreements, if required, may not be available on acceptable terms, if
at all. Our failure or inability to develop non-infringing technologies or
license the proprietary rights on a timely basis would harm our business.
Employees
As of December 31, 2000, we had 195 full-time employees, including 57 in
research and development, 31 in services, 81 in sales and marketing and 26 in
general and administrative. None of our employees are covered by collective
bargaining agreements. We believe our relations with our employees are good.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Redwood City, California, where we
lease approximately 23,200 square feet under a lease that expires in August
2001. As of December 31, 2000, we also leased office space in nine other cities
for our sales and support personnel. The terms of these leases expire beginning
in April 2001 and ending in March 2002, and automatically renew unless earlier
terminated. We also lease approximately 10,000 square feet of office space in
Palo Alto, California. This lease expires in July 2001. We are consolidating
our Redwood City and Palo Alto offices. We expect to require additional space
to meet our needs within the next 12 months. However, we may not find adequate
space on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
On March 15, 2001, Previo, Inc. filed a lawsuit against us in the United
States District Court for the Northern District of California. The complaint
alleges that features of our software relating to backing up files from
computers on a computer network infringe on Previo's United States Patent No.
5,778,395, and seeks unspecified damages and to enjoin us from further
infringing its patent. While the litigation is in the early stage and its
outcome cannot be predicted, we believe that the claims are without merit and
we intend to defend the lawsuit vigorously. We are not currently a party to any
other material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2000.
16
Executive Officers of the Registrant
Our executive officers, and their ages as of March 15, 2001, are:
Name Age Position
---- --- --------
Radha R. Basu........... 50 Chief Executive Officer, President and Chairman of the Board
Brian M. Beattie........ 47 Chief Financial Officer, Senior VP of Finance and Administration
Scott W. Dale........... 31 Chief Technical Officer and Vice President of Engineering
Cadir B. Lee............ 29 Chief Software Officer
Lucille K. Hoger........ 47 Vice President of Operations
Anthony C. Rodoni....... 36 General Manager, Europe, Middle East and Africa
Radha R. Basu. Ms. Basu has served as President, Chief Executive Officer and
as a director of Support.com since July 1999 and became Chairman of the
Company's Board of Directors in January 2001. Ms. Basu worked at Hewlett-
Packard Company, a computing and imaging solutions provider company, from
November 1978 to January 1999, and held various general management positions,
most recently the general manager of the electronic business software
organization. Ms. Basu also serves as chairman of the board of directors of
Seec, Inc., an eBusiness solutions company. Ms. Basu holds a B.S. in
engineering from the University of Madras, a masters degree in electrical
engineering and computer science from the University of Southern California and
is a graduate of the Stanford University executive management program.
Brian M. Beattie. Mr. Beattie has served as Executive Vice President of
Finance and Administration and Chief Financial Officer of Support.com since
October 1999. From May 1998 to May 1999, he served as Vice President of
Finance, Mergers and Acquisitions of Nortel Networks Corporation, a voice and
data networking company. From July 1996 to April 1998, Mr. Beattie served as
Group Vice President of Meridian Solutions of Nortel Networks Corporation. From
February 1993 to June 1996, Mr. Beattie served as Vice President of Finance,
Enterprise Networks, for Nortel Networks Corporation. Mr. Beattie holds a
bachelor of commerce and an MBA from Concordia University in Montreal.
Scott W. Dale. Mr. Dale co-founded Support.com and has served as the Chief
Technical Officer of Support.com since its incorporation in December 1997, and
assumed the role of Vice President of Engineering in April 2000. From January
1997 to December 1997, Mr. Dale served as a software consultant for M&I Data
Services, a financial transaction software company. From July 1992 to January
1997, Mr. Dale served as a software consultant to Hewlett-Packard Company, a
computing and imaging solutions provider company. Mr. Dale holds a B.S. in
computer science from Stanford University.
Cadir B. Lee. Mr. Lee co-founded Support.com and has served as the Chief
Software Officer of Support.com since its incorporation in December 1997. From
1995 to 1997, Mr. Lee served as a software consultant to Hewlett-Packard
Company, a computing and imaging solutions provider company. Mr. Lee holds a
B.S. in biological sciences and a B.A. in music from Stanford University.
Lucille K. Hoger. Ms. Hoger has served as the Vice President of Operations
of Support.com since February 2000. From 1996 to 2000, Ms. Hoger served as the
Chief Operating Officer at ConnectInc.com, an e-commerce software company. From
1992 to 1995, she served as a principal for Gemini Consulting, an affiliate of
Cap Gemini, a consulting company. Ms. Hoger holds a B.A. in accounting from
Southwest Texas State University.
Anthony C. Rodoni. Mr. Rodoni has served as Vice President of Marketing of
Support.com since June 1998. In January 2000, Mr. Rodoni became the General
Manager of Europe, Middle East and Africa. From March 1988 to June 1998, Mr.
Rodoni served in a variety of management positions, most recently as General
Manager of the Data Warehouse Business unit at Informix Software, Inc., a
database software company. Mr. Rodoni holds a B.S. in computer science from the
University of California at Santa Barbara and an MBA from Santa Clara
University.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market of Common Stock
Our common stock has been traded publicly on the Nasdaq National Market
under the symbol "SPRT" since July 19, 2000. Before July 19, 2000, there was no
public market for the common stock. The following table sets forth for the
periods indicated the highest and lowest sale price of the common stock during
each quarter since July 19, 2000:
Fiscal Year 2000 High Low
---------------- -------- -------
Third Quarter............................................... $39.1875 $22.625
Fourth Quarter.............................................. $32.50 $ 8.625
Holders of Record
As of March 15, 2001, there were approximately 654 holders of record (not
including beneficial holders of stock held in street name) of the common stock.
Dividend Policy
We did not declare or pay any cash dividends on our capital stock since our
inception and do not expect to do so in the foreseeable future. We anticipate
that all future earnings, if any, generated from operations will be retained by
us to develop and expand our business. Any future determination with respect to
the payment of dividends will be at the discretion of the Board of Directors
and will depend upon, among other things, our operating results, financial
condition and capital requirements, the terms of then-existing indebtedness,
general business conditions and such other factors as the Board of Directors
deems relevant.
Sales of Unregistered Securities
During the fiscal year ended December 31, 2000, we issued and sold the
following unregistered securities:
1. We granted options and issued warrants to purchase 2,536,739 shares of
common stock to employees, directors and consultants under our stock plans at
exercise prices ranging from $2.00 to $9.00 per share.
2. We issued 3,124,313 shares of common stock pursuant to the exercise of
stock options and warrants at exercise prices ranging from $0.10 to $9.00 per
share.
The sales of the above securities were considered to be exempt from
registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or
Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions
by an issuer not involving a public offering or transactions under compensatory
benefit plans and contracts relating to compensation provided under Rule 701.
The recipients of securities in each of these transactions represented their
intention to acquire the securities for investment only and not with a view to
or for sale with any distribution thereof, and appropriate legends were affixed
to the share certificates and instruments issued in these transactions. All
recipients had adequate access, through their relationship with the Registrant,
to information about the Registrant.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below is not necessarily indicative of results of
future operations and should be read with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included in Items 7 and 8 of Part II of
this Form 10-K.
Period from
Incorporation
Year Ended on December 3,
December 31, 1997 to
------------------ December 31,
2000 1999 1998
-------- -------- --------------
(in thousands, except per share
data)
Consolidated Statements of Operations Data:
Revenue:
License fees.............................. $ 13,732 $ 2,642 $ 18
Services.................................. 4,934 569 --
-------- -------- -------
Total revenue........................... 18,666 3,211 18
Costs and expenses:
Cost of license fees...................... 1,405 4 --
Cost of services.......................... 5,910 965 --
Amortization of purchased intangibles..... 1,158 -- --
Research and development.................. 10,913 2,348 1,132
Sales and marketing....................... 22,754 7,924 1,197
General and administrative................ 4,325 1,845 451
Amortization of deferred compensation..... 10,787 3,809 42
-------- -------- -------
Total costs and expenses................ 57,252 16,895 2,822
-------- -------- -------
Loss from operations........................ (38,586) (13,684) (2,804)
Interest income, net........................ 1,718 170 54
-------- -------- -------
Net loss.................................... (36,868) (13,514) (2,750)
Accretion on redeemable convertible
preferred stock............................ (885) (1,072) (214)
-------- -------- -------
Net loss attributable to common
stockholders............................... $(37,753) $(14,586) $(2,964)
======== ======== =======
Basic and diluted net loss per share
attributable to common stockholders........ $ (2.09) $ (2.20) $ (0.57)
======== ======== =======
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share................. 18,102 6,643 5,227
======== ======== =======
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................ $ 51,513 $ 12,489 $ 2,807
Working capital............................. 41,853 10,478 2,979
Total assets................................ 70,572 17,692 3,672
Long-term obligations....................... 3,385 2,277 449
Redeemable convertible preferred stock...... -- 21,449 5,237
Accumulated deficit......................... (53,132) (16,264) (2,750)
Total stockholders' equity (deficit)........ 46,159 (12,473) (2,423)
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read with "Selected
Consolidated Financial Data" and our Consolidated Financial Statements and the
related notes included elsewhere in this Form 10-K. The discussion in this
report on Form 10-K contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements on our expectations,
beliefs, intentions or strategies regarding the future. Our actual results
could differ materially from those indicated in such forward-looking
statements. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify such forward-
looking statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. These are statements that relate
to future periods and include, but are not limited to, statements relating to
anticipated features and benefits of our products and services, expected net
losses, expected cash flows, expected expenses, including those related sales
and marketing, research and development and general and administrative
expenses, expected revenue and sources of revenue, expected impact, if any, of
legal proceedings, expected increases in headcount, the adequacy of liquidity
and capital resources, growth in business and operations and the effect of
recent accounting pronouncements. Factors that could cause actual results to
differ materially from those predicted, include but are not limited to, the
Company's dependence on a small number of relatively large orders, the
Company's ability to attract and retain customers for existing and new services
and to achieve adoption and acceptance of our products and services, the
Company's ability to recruit and retain employees particularly in the areas of
sales, engineering and support services, the ability of our products to achieve
market penetration, the ability to use or integrate third-party technologies,
to expand infrastructure to meet the demand for the Company's services, the
Company's ability to expand internationally, the Company's ability to control
its expenses, the economy and the strength of competitive offerings. Additional
factors, which could cause actual results to differ materially, include those
set forth in the following discussion, and, in particular, the risks discussed
in "Other Factors Affecting our Business and Operating Results" and elsewhere
in this Form 10-K these forward-looking statements speak only as of the date
hereof. Unless required by law, the Company undertakes no obligation to update
publicly any forward-looking statements.
Overview
General
We provide support infrastructure software for digital business. From our
incorporation in December 1997 through the end of 1998, we primarily engaged in
research activities and developing and marketing our products. We first began
generating revenue from software license sales from the initial version of our
products sold in December 1998. During 1999, we continued to enhance the
functionality of our products, build our management team and operational
infrastructure and began shipping the second version of our products. In 2000,
we added approximately 60 customers, released two enhanced versions of our
existing products and made our products available in additional languages. As
our revenue increased we also incurred significant operating expenses,
primarily as a result of the addition of 97 employees during 2000. These
increases affected all departments including our research and development
organization, our direct and indirect sales forces and professional services
department. At December 31, 2000, we had an accumulated deficit of $53.1
million.
Revenue
We generate revenue primarily from software licenses and related
professional services. We market our products through a combination of direct
sales, resellers and service providers. Through 2000, most of our revenue was
derived from direct sales. Although we expect direct sales to continue to
account for a majority of revenue in the future, we anticipate that a greater
percentage of our sales will be generated through our indirect channel. We
generated revenue from customers outside the United States totaling 15% in 2000
and 1% in 1999. We plan to continue to expand our international operations
significantly, particularly in Europe and Asia.
20
Revenue Recognition
We license our software under term and perpetual licenses. License revenue
is generally recognized when a customer agreement has been received and
accepted, the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed or determinable, and
collection is considered probable. If any of these criteria are not met,
revenue recognition is deferred until all of the criteria are met. We sell our
term licenses with maintenance for which we do not have vendor specific
objective evidence to determine fair value. As a result, license revenue for
term licenses is recognized ratably over the service period of the agreement,
and license revenue includes maintenance for term licenses. Support.com
considers all arrangements with payment terms extending beyond 12 months and
other arrangements with payment terms longer than normal not to be fixed or
determinable. If the fee is determined not to be fixed or determinable, revenue
is recognized as payments become due from the customer. License revenue from
arrangements with resellers is recognized ratably over the term of the
arrangement commencing when payments are made or become due limited by
guaranteed minimum amounts due under the arrangement or sell through activity.
Term licenses typically have a duration of 36 months, with pre-payments
generally billed to the customer at the beginning of each 12 month period. If
we receive an order from a customer for a 36-month term license in December of
a year, we would recognize only one month of license fees for that year even if
that customer prepaid 12 months of the 36-month term. Pursuant to this
agreement, the Company would record one year of contract revenue in accounts
receivable upon signing a new term license agreement, while recognizing only
one month of revenue. As a result, our accounts receivable balance could
represent a significant portion of our total revenue and increase our day sales
outstanding (DSO) calculation. We began licensing software under term
arrangements in June 1999. A majority of the licenses executed to date have
been term-based.
Term and perpetual licensing arrangements may include service elements.
Services revenue is primarily comprised of revenue from professional services,
such as consulting services, maintenance and support. Arrangements that include
software services are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement. When
software services are considered essential, revenue under the arrangement is
recognized using contract accounting. When software services are not considered
essential, the revenue related to the software services is recognized as the
services are performed.
We intend to continue to invest in product development and technologies to
enhance our products and services and develop new products and services. Also,
an important part of our strategy is to expand our operations and employee base
and build our sales, marketing, customer support, technical and operational
resources. We expect to continue to incur substantial operating losses in the
future, and our expected increase in operating expenses will require
significant increases in revenue before we become profitable.
21
Results of Operations
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue. Results
for the period from incorporation on December 3, 1997 to December 31, 1998 are
not provided as they are not deemed meaningful.
Year Ended
December 31,
---------------
2000 1999
------ ------
Revenue:
License fees................................................ 74 % 82 %
Services.................................................... 26 18
------ ------
Total revenue............................................. 100 100
------ ------
Costs and expenses:
Cost of license fees........................................ 8 --
Cost of services............................................ 32 30
Amortization of purchased intangibles....................... 6 --
Research and development.................................... 58 73
Sales and marketing......................................... 122 247
General and administrative.................................. 23 57
Amortization of deferred compensation....................... 58 119
------ ------
Total costs and expenses.................................. 307 526
------ ------
Loss from operations.......................................... (207) (426)
Interest income, net.......................................... 9 5
------ ------
Net loss...................................................... (198)% (421)%
====== ======
For purposes of this discussion, references to 1998 include the period from
our incorporation on December 3, 1997 to December 31, 1998.
Years ended December 31, 2000, 1999 and 1998
Revenue
Total revenue increased to $18.7 million in 2000 from $3.2 million in 1999
and $18,000 in 1998. These increases were primarily because of greater demand
for and market acceptance of our software products, the growth in our direct
and indirect sales channels and professional services organization, expansion
of our product line and the increase in our customer base.
License revenue
License revenue increased to approximately $13.7 million in 2000 from $2.6
million in 1999 and $18,000 in 1998. These increases were primarily because of
market acceptance of our software products, the growth in our sales force and
the expansion in our product line. These increases also reflect the impact of
the continued growth of our term license revenue base.
Services revenue
Services revenue increased to $4.9 million in 2000 from $569,000 in 1999 and
zero in 1998. These increases were primarily because of maintenance on new
licenses and increased implementation and consulting services performed with
increased license sales.
22
Cost of revenue
Total cost of revenue increased to $7.3 million in 2000 from $969,000 in
1999 and zero in 1998. These increases were primarily because of growth in our
professional services organization and royalties paid to third party software
vendors.
Cost of license revenue
Cost of license revenue consists primarily of expenses incurred to
manufacture, package and distribute software products and related documentation
and license fees paid to third parties under technology license arrangements.
Cost of license revenue increased to $1.4 million in 2000 from $4,000 in 1999
and zero in 1998. These increases were primarily because of $1.0 million in
royalty fees we paid to ePeople, Inc. for the right to embed certain components
of their technology prior to the acquisition of this technology and other
royalty payments associated with other third-party technology embedded within
our products.
Cost of services revenue
Cost of services revenue includes salaries and other expenses from our
customer support organization, related overhead expenses and payments made to
third parties for consulting services. Cost of services revenue increased to
$5.9 million in 2000 from $965,000 in 1999 and zero in 1998. These increases
were primarily because of the growth in the number of employees in our
professional services and customer support organizations.
Amortization of purchased technology
Amortization of purchased technology increased to $1.2 million in 2000 from
zero in both 1999 and 1998. These increases were attributable to the
amortization of purchased technology from the acquisition of source code and
related intellectual property rights from ePeople, Inc. in September 2000. We
expect to amortize approximately $850,000 per quarter for the next seven
quarters related to this technology acquisition.
Operating expense
Research and development. Research and development expense consists
primarily of payroll expenses and related costs for research and development
personnel. Research and development expense is expensed as incurred. Research
and development expense increased to $10.9 million in 2000 from approximately
$2.3 million in 1999 and $1.1 million in 1998. These increases were primarily
because of an increase in the number of research and development employees,
consulting fees paid to evaluate third party software, and other costs incurred
in connection with the localization of our product into eight additional
languages. Support.com currently believes its investment in research and
development will increase in the future as Support.com hires additional
research and development personnel to design new products and to support
expanded functionality of our eSupport software, and increases in our quality
assurance and product publications operations.
Sales and marketing. Sales and marketing expense consists primarily of
payroll expense, including salaries and commissions and related costs for sales
and marketing personnel and promotional expenses, including public relations,
advertising and trade shows. Sales and marketing expense increased to $22.8
million in 2000 from approximately $7.9 million in 1999 and $1.2 million in
1998. These increases were due to a number of factors, including an increase in
the number of sales and marketing personnel, the opening of new sales offices
in the United States, Europe and Asia and commission expense associated with
increased revenue in 2000. We expect sales and marketing expense to increase as
we hire additional sales and marketing personnel, continue to expand the reach
of our sales force in domestic and international locations and execute broader
marketing programs.
23
General and administrative. General and administrative expense consists
primarily of payroll expense and related costs of administrative personnel and
professional fees for legal, accounting and other professional services.
General and administrative expense increased to $4.3 million in 2000 from
approximately $1.8 million in 1999 and $451,000 in 1998. These increases were
primarily because of the growth in the number of general and administrative
personnel and from additional legal, accounting and other professional services
costs incurred in connection with supporting business activities. We expect
general and administrative expense to increase as we continue to hire
additional general and administrative personnel to support our operations as a
public company and incur professional fees associated with defending and
protecting our intellectual property.
Amortization of deferred compensation. We recorded deferred stock
compensation of approximately $7.6 million in fiscal year 2000, representing
the difference between the exercise prices of options granted to employees and
board of directors during 2000 and the deemed fair value for reporting purposes
of our common stock on their respective grant dates and the fair value of
options and restricted stock granted to non-employees as determined under the
Black Scholes model. We amortized deferred compensation expense related to
employee and board of director option grants of approximately $10.3 million
during the year ended December 31, 2000, $3.6 million during the year ended
December 31, 1999 and $16,000 for the year ended December 31, 1998.
We also recorded variable accounting expense related to the amortization of
deferred compensation for options to non-employees and the acceleration of
vesting of certain restricted stock arrangements of $501,000 for the year ended
December 31, 2000, $255,000 for the year ended December 31, 1999 and $26,000
for the year ended December 31, 1998.
Interest income, net. Interest income, net increased to approximately $1.7
million in 2000 from $170,000 in 1999 and $54,000 in 1998. The increase in
interest income, net was primarily because of increased average cash balances
resulting from our initial public offering in July 2000, and to a lesser extent
from funds raised in our sale of Series C Preferred Stock in June 1999.
Provision for income taxes. For the years ended December 31, 2000 and
December 31, 1999, we incurred net losses for federal and state tax purposes
and have not recognized any tax provision or benefit. As of December 31, 2000,
we had federal and state net operating loss carryforwards of $22.4 million and
$14.5 million, respectively. The net operating loss carryforwards begin to
expire on various dates beginning in 2005 through 2020. Given our limited
operating history, our losses incurred to date and the difficulty in accurately
forecasting our future results, management does not believe that the
realization of the related deferred income tax asset meets the criteria
required by generally accepted accounting principles. Therefore, we have
recorded a 100% valuation allowance against the deferred income tax asset.
Liquidity and Capital Resources
Operating Activities
Net cash used in operating activities was $16.5 million in 2000, $8.0
million in 1999 and $2.4 million for 1998. Amortization of deferred stock
compensation and amortization of purchased intangibles, which is included in
the net loss, but does not require the use of cash, amounted to $11.9 million
for the year ended December, 31, 2000 compared to $3.8 million and $42,000 for
1999 and 1998. Net cash used in operations during 2000 was primarily the result
of $36.9 million in net losses and a $4.4 million increase in accounts
receivable, offset by a $9.0 million increase in deferred revenue, and a
combined increase in accrued compensation and other accrued liabilities of $5.0
million. The increase in accounts receivable and deferred revenue for 2000 is
primarily the result of increased sales at the end of the year.
Investing Activities
Net cash used in investing activities was $35.8 million in 2000, $8.7
million in 1999, and $307,000 in 1998. Net cash used in investing activities
for the year ended December 31, 2000, was primarily due to the
24
purchase of $45.2 million in short-term investments offset by $13.9 million in
the sale and maturity of short-term investments.
Financing Activities
Net cash provided by financing activities was $60.1 million for 2000, $17.9
million in 1999 and $5.5 million in 1998. For 2000, cash provided by financing
activities was primarily attributable to the $61.8 million from the issuance of
our common stock in our initial public offering in July 2000. In 1999, cash
provided by financing activities included $15.4 million in proceeds from the
issuance of preferred stock. In 1999, we borrowed $2.0 million from one
financial institution which was repaid with the proceeds from our initial
public offering.
Commitments
As of December 31, 2000, our principal commitments consisted of obligations
outstanding under capital and operating leases. Although we have no material
commitments for capital expenditures, we anticipate a substantial increase in
our capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel. As of December 31, 2000,
future lease commitments for our office facility were $1.1 million in 2001 and
$21,000 in 2002. We expect to require additional space to meet our needs in the
next 12 months. Additionally, we are required to pay ePeople approximately
$309,000 per quarter for the next 11 quarters pursuant to a technology
acquisition made during 2000.
Working Capital and Capital Expenditure Requirements
We believe that the net proceeds from the sale of common stock in our
initial public offering, our existing cash balances, and revenue from
operations, will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months. We have no present
understandings, commitments or agreements for any material acquisition of other
businesses, products and technologies. We continually evaluate potential
acquisitions of other businesses, products and technologies and may in the
future require additional equity or debt financings to accomplish any potential
acquisition.
If we require additional capital resources to grow our business internally
or to acquire complementary technologies and businesses at any time in the
future, we may seek to sell additional equity or debt securities. The sale of
additional equity or convertible debt securities could result in more dilution
to our stockholders. Financing arrangements may not be available to us, or may
not be available in amounts or on terms acceptable to us.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which will be effective for the year ending December 31, 2001. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement also requires that changes
in the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. Support.com believes the adoption of SFAS 133 will
not have a material effect on its financial statements since it currently does
not invest in derivative instruments and engage in hedging activities.
25
Other Factors Affecting our Business and Operating Results
We have a history of losses and if we do not become profitable, we may not be
able to continue to operate.
We incurred net losses of approximately $53.1 million for the period from
December 3, 1997 through December 31, 2000. We expect to continue to incur net
losses in the future. If we do not become profitable within the timeframe we
predicted or expected by securities analysts or investors, the market price of
our stock will likely decline. If we continue to incur net losses, we may not
be able to increase our number of employees or our investment in capital
equipment, sales, marketing and research and development programs. We do not
know when or if we will become profitable. If we do achieve profitability, we
may not sustain or increase profitability in the future and may not be able to
continue to operate.
Our quarterly results are difficult to predict and may fluctuate. If we do not
meet quarterly financial expectations, our stock price would likely decline.
Because of our limited operating history, our quarterly revenue and
operating results are difficult to predict and may fluctuate from quarter to
quarter. Our operating results in some quarters may fall below our predictions
or the expectations of securities analysts or investors, which would likely
cause the market price of our common stock to decline.
Several factors are likely to cause fluctuations in our operating results,
including:
. demand for our support infrastructure software;
. the price and mix of products and services we or our competitors offer;
. our ability to retain customers; and
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, infrastructure and marketing
activities.
Our quarterly results depend on the size of a small number of orders, so the
delay or loss of any single large order during a quarterly period, and
especially an order for a perpetual license rather than a term license, could
harm that quarter's results and cause our stock price to decline.
Our operating results could suffer if any large orders are delayed or
cancelled in any future period. Each quarter, we derive a significant portion
of our license revenue from a small number of relatively large orders for the
licensing of our support infrastructure software. We license our support
infrastructure software under perpetual and term licenses. Perpetual licenses
typically result in our recognition of a larger amount of revenue in the
quarter in which the license is granted as compared with term licenses. Revenue
from a perpetual license is generally recognized upon delivery of a product.
Revenue from a term license is recognized on a monthly basis over the agreement
term, which is typically three years. We expect that we will continue to depend
upon a small number of large orders for a significant portion of our license
revenue.
Because a small number of customers has historically accounted for and may in
future periods account for substantial portions of our revenue, our revenue
could decline because of delays of customer orders or the failure of existing
customers to renew licenses.
For the year ended December 31, 2000, one customer accounted for 13% of our
total revenue. No other single customer accounted for 10% or more of our total
revenue for the year ended December 31, 2000. Because we have a small number of
customers and a few customers are likely to continue to account for a
significant portion of our revenue, our revenue could decline because of the
loss or delay of a single customer order or the failure of an existing customer
to renew its term license. We may not obtain additional customers.
26
The failure to obtain additional customers, the loss or delay of customer
orders and the failure of existing customers to renew licenses will harm our
operating results.
We must achieve broad adoption and acceptance of our support infrastructure
products and services or we will not increase our market share or grow our
business.
We must achieve broad market acceptance and adoption of our products and
services or our business and operating results will suffer. Specifically, we
must encourage our customers to transition from using traditional support
methods. To accomplish this, we must:
. continually improve the performance, features and reliability of our
products and services to address changing industry standards and customer
needs; and
. develop integration with other support-related technologies.
We must attract and retain qualified personnel, which is particularly difficult
for us because we are headquartered in the San Francisco Bay Area, where
competition for personnel is extremely intense.
If we fail to retain and recruit the necessary personnel, our ability to
develop new products and services and to provide acceptable levels of customer
service could suffer. We currently plan to increase our number of employees
over the next 12 months. Competition for these personnel is intense, especially
in the San Francisco Bay Area. We have had difficulty hiring qualified
personnel as quickly as we have desired. Specifically, we may be unable to hire
a sufficient number of qualified support, training and engineering
professionals. If we hire employees from our competitors, these competitors may
claim that we have engaged in unfair hiring practices. We could incur
substantial costs in defending ourselves against any of these claims,
regardless of their merits.
Our product innovations may not achieve the market penetration or price
stability necessary for profitability.
If we fail to develop, in a timely manner, new or enhanced versions of our
support infrastructure software or to provide new products and services that
achieve rapid and broad market acceptance or price stability, we may not become
profitable. We may fail to identify new product and service opportunities
successfully. Our existing products will become obsolete if we fail to
introduce new products or product enhancements that meet new customer demands,
support new standards or integrate with new or upgraded versions of packaged
applications. We may have little or no control over the factors that might
influence market acceptance of our products and services. These factors
include:
. the willingness of enterprises to transition to automated support and
eSupport and
. acceptance of competitors' automated support or eSupport solutions.
Our software may not operate with the hardware and software platforms that are
used by our customers now or in the future, and as a result our business and
operating results may suffer.
We currently serve a customer base with a wide variety of constantly
changing hardware, packaged software applications and networking platforms. If
there is widespread adoption of other operating system environments, and if we
fail to release versions of our support infrastructure software that are
compatible with these other operating systems, our business and operating
results will suffer. Our future success also depends on:
. our ability to integrate our product with multiple platforms and to
modify our product as new versions of packaged applications are
introduced;
. the number of different operating systems and databases that our product
can work with; and
. our management of software being developed by third parties for our
customers or for use with our product.
27
We rely on third-party technologies and our inability to use or integrate
third-party technologies could delay product or service development.
We intend to continue to license technologies from third parties, including
applications used in our research and development activities and technologies,
which are integrated into our products and services. Our inability to obtain or
integrate any of these licenses could delay product and service development
until equivalent technology can be identified, licensed and integrated. These
technologies may not continue to be available to us on commercially reasonable
terms or at all. We may fail to successfully integrate any licensed technology
into our products or services. This would harm our business and operating
results. Third-party licenses also expose us to increased risks that include:
. risks of product malfunction after new technology is integrated;
. the diversion of resources from the development of our own proprietary
technology; and
. our inability to generate revenue from new technology sufficient to
offset associated acquisition and maintenance costs.
We may engage in future acquisitions or investments that could dilute our
existing stockholders, or cause us to incur significant expenses.
We may acquire or invest in complementary businesses, technologies or
products. If we are unable to use or integrate any newly acquired entities or
technologies effectively or profitably, our operating results could suffer.
Acquisitions by us could also result in large and immediate write-offs,
incurrence of debt and contingent liabilities or amortization of expenses
related to goodwill and other intangibles, which could harm our operating
results. Additional funds to finance any acquisitions may not be available on
terms that are favorable to us, or at all, and, in the case of equity
financings, may dilute our stockholders.
Our recent growth has placed a strain on our management systems, network
infrastructure and resources and our failure to manage growth could harm our
ability to provide adequate levels of service to our customers, disrupt our
operations and delay execution of our business plan.
Our rapid expansion in our personnel, facilities, systems and infrastructure
has placed, and we expect that it will continue to place, a significant strain
on our management controls, network infrastructure and financial resources. Our
failure to manage growth could harm our ability to provide adequate levels of
customer service, delay execution of our business plan or disrupt our
operations. We expect further significant expansion, including expansion
outside the San Francisco Bay Area. We will need to obtain additional office
space before the end of 2001, and if we fail to obtain sufficient space, our
business operations will be disrupted.
We may lose the services of our key personnel, which in turn would harm the
market's perception of our business.
Our success will depend on the skills, experience and performance of our
senior management, engineering, sales, marketing and other key personnel. The
loss of the services of any of our senior management or other key personnel,
including our chief executive officer, Radha R. Basu, our chief financial
officer, Brian Beattie, our chief technical officer, Scott W. Dale, and our
chief software officer, Cadir B. Lee, could harm the market's perception of our
business and our ability to achieve our business goals.
Our failure to establish and expand strategic alliances would harm our ability
to achieve market acceptance of our support infrastructure software.
If we fail to maintain, establish or successfully implement strategic
alliances, our ability to achieve market acceptance of our infrastructure
software will suffer and our business and operating results will be harmed.
Specifically, we must establish and extend existing distribution alliances with
specialized technology and services firms such as support outsourcers. We must
also establish and extend existing solutions alliances with
28
leading providers of complementary support technologies, including call center
or help desk management companies, knowledge management companies and systems
management firms.
Our products depend on and work with products containing complex software and
if our products fail to perform properly due to errors or similar problems in
the software, we may need to spend resources to correct the errors or
compensate for losses from these errors and our reputation could be harmed.
Our products depend on complex software, both internally developed and
licensed from third parties. Also, our customers may use our products with
other companies' products which also contain complex software. Complex software
often contains errors. These errors could result in:
. delays in product shipments;
. unexpected expenses and diversion of resources to identify the source of
errors or to correct errors;
. damage to our reputation;
. lost sales;
. product liability claims; and
. product returns.
Our system security is important to our customers and we may need to spend
significant resources to protect against or correct problems caused by security
breaches.
A fundamental requirement for online communications, transactions and
support is the secure transmission of confidential information. Third parties
may attempt to breach our security or that of our customers. We may be liable
to our customers for any breach in security and any breach could harm our
business and reputation. Also, computers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays or loss of data. We may be required to expend significant
capital and other resources to further protect against security breaches or to
correct problems caused by any breach.
We may face claims of invasion of privacy or inappropriate disclosure, use or
loss of our customers' information and any liability imposed could harm our
reputation and cause us to lose customers.
Our software contains features which may allow us or our customers to
control, monitor or collect information from computers running the software
without notice to the computing users. Therefore we may face claims about
invasion of privacy or inappropriate disclosure, use or loss of this
information. Any imposition of liability could harm our operating results.
Our sales cycle can be lengthy and if revenue forecasted for a particular
quarter is not realized in that quarter, significant expenses incurred may not
be offset by corresponding sales.
Our sales cycle for our support infrastructure software can range from one
week to nine months or more and may vary substantially from customer to
customer. While our customers are evaluating our products and services, we may
incur substantial sales and marketing expenses and spend significant management
effort. Any delay in completing sales in a particular quarter could cause our
operating results to be below expectations.
We have limited experience in international operations and if our revenue from
international operations does not exceed the expense of establishing and
maintaining our international operations, our business could suffer.
We intend to expand further into international markets. We have limited
experience in international operations and may not be able to compete
effectively in international markets. If we do not generate enough
29
revenue from international operations to offset the expense of these
operations, our business could suffer. Risks we face in conducting business
internationally include:
. difficulties and costs of staffing and managing international operations;
. differing technology standards;
. longer sales cycles and collection periods;
. changes in currency exchange rates and controls; and
. dependence on local vendors.
Any system failure that causes an interruption in our customers' ability to use
our products or services or a decrease in their performance could harm our
relationships with our customers and result in reduced revenue.
Our software may depend on the uninterrupted operation of our internal and
outsourced communications and computer systems. These systems are vulnerable to
damage or interruption from computer viruses, human error, natural disasters
and intentional acts of vandalism and similar events. We have no formal
disaster recovery plan and business interruption insurance may not be enough to
compensate us for losses that occur. These problems could interrupt our
customers' ability to use our eSupport products or services which could harm
our reputation and cause us to lose customers and revenue.
We may not obtain sufficient patent protection, and this could harm our
competitive position and increase our expenses which would harm our business.
Our success and ability to compete depend to a significant degree upon the
protection of our software and other proprietary technology. It is possible
that:
. our pending patent applications may not be issued;
. competitors may independently develop similar technologies or design
around any of our patents;
. patents issued to us may not be broad enough to protect our proprietary
rights; and
. our issued patents could be successfully challenged.
We rely upon trademarks, copyrights and trade secrets to protect our
proprietary rights and if these rights are not sufficiently protected, it could
harm our ability to compete and to generate revenue.
We also rely on a combination of laws, such as copyright, trademark and
trade secret laws, and contractual restrictions, such as confidentiality
agreements and licenses, to establish and protect our proprietary rights. Our
ability to compete and grow our business could suffer if these rights are not
adequately protected. Our proprietary rights may not be adequately protected
because:
. laws and contractual restrictions may not prevent misappropriation of our
technologies or deter others from developing similar technologies; and
. policing unauthorized use of our products and trademarks is difficult,
expensive and time-consuming, and we may be unable to determine the
extent of this unauthorized use.
Also, the laws of other countries in which we market our products may offer
little or no protection of our proprietary technologies. Reverse engineering,
unauthorized copying or other misappropriation of our proprietary technologies
could enable third parties to benefit from our technologies without paying us
for them, which would harm our competitive position and market share.
30
We may face intellectual property infringement claims that could be costly to
defend and result in our loss of significant rights.
Other parties may assert intellectual property infringement claims against
us and our products may infringe the intellectual property rights of third
parties. For example, Previo, Inc. has filed a patent infringement lawsuit
against us. Defending this lawsuit may be time-consuming, costly and may divert
management's attention. This lawsuit is at an early stage and its outcome may
not be favorable to us. In addition, if we do not prevail in such litigation,
we could be forced to pay significant damages or amounts in settlement.
Intellectual property litigation is expensive and time-consuming and could
divert management's attention from our business. If there is a successful claim
of infringement, we may be required to develop non-infringing technology or
enter into royalty or license agreements which may not be available on
acceptable terms, if at all. Our failure to develop non-infringing technologies
or license the proprietary rights on a timely basis would harm our business.
Our products may infringe issued patents that may relate to our products. Also,
patent applications may have been filed by third parties which relate to our
software products.
We must compete successfully in the eSupport market or we will lose market
share and our business will fail.
The market for our products is intensely competitive, rapidly changing and
significantly affected by new product introductions and other market activities
of industry participants. Competitive pressures could reduce our market share
or require us to reduce the price of products and services and therefore our
gross margin, which could harm our business and operating results. Our
integrated software solution competes against various vendors' software
products designed to accomplish specific elements of a complete eSupport
solution. For example, in the market for automated development of support
solutions, we compete with companies such as Serena Software, Inc. In the
market for automated delivery of support solutions, we compete with Motive
Communications, Inc.
We may encounter competition from companies such as:
. customer communications software companies;
. question and answer companies;
. customer relationship management solution providers;
. consolidated service desk solution vendors;
. Internet infrastructure companies; and
. operating systems providers.
Our potential competitors may have longer operating histories, significantly
greater financial, technical, and other resources or greater name recognition
than we do. Our competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements.
Because our eSupport infrastructure software is designed to support businesses
operating over the Internet, our success depends on the continued growth and
levels of performance of Internet usage.
Because a majority of our products are designed to support businesses
operating over the Internet, the success of our business will depend on the
continued improvement of the Internet as a convenient means of consumer
interaction and commerce, as well as an efficient medium for the delivery and
distribution of information by enterprises to their employees and extended
enterprise. Because global commerce on the Internet and the online exchange of
information is evolving, we cannot predict whether the Internet will continue
to be a viable commercial marketplace.
31
Governmental regulation and legal changes could impair the growth of the
Internet and decrease demand for our products or increase our cost of doing
business.
The laws and regulations that govern our business change rapidly. Any change
in laws and regulations could impair the growth of the Internet and could
reduce demand for our products, subject us to liability or increase our cost of
doing business. The United States government and the governments of states and
foreign countries have attempted to regulate activities on the Internet and the
distribution of software. Also, in 1998, Congress passed the Internet Freedom
Act, which imposes a three-year moratorium on state and local taxes on
Internet-based transactions. Failure to renew this moratorium would allow
states to impose taxes on e-commerce. This might harm our business directly and
indirectly by harming the businesses of our customers, potential customers and
the parties to our business alliances. The applicability to the Internet of
existing laws governing issues is uncertain and may take years to resolve.
Evolving areas of law that are relevant to our business include privacy laws,
intellectual property laws, proposed encryption laws, content regulation and
sales and use tax laws and regulations.
We may experience power blackouts and higher electricity prices as a result of
California's current energy crisis, which could disrupt our operations and
increase our expenses.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. We rely on the major Northern California
public utility, Pacific Gas & Electric Company, or PG&E, to supply electric
power to our headquarters in Northern California. Due to problems associated
with the de-regulation of the power industry in California and shortages in
wholesale electricity supplies, customers of PG&E have been faced with
increased electricity prices, power shortages and, in some cases, rolling
blackouts. If blackouts interrupt our power supply, we may be temporarily
unable to continue to operate our central computer, hardware and support
systems. Any interruption in our ability to continue our operations could delay
our ability to develop or provide our products and support services, which
could damage our reputation and result in lost revenue, either of which could
substantially harm our business and results of operations.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market and sell in North
America, South America, Asia and Europe. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. As all sales are currently made
in U.S. dollars, a strengthening of the dollar could make our products less
competitive in foreign markets. Our interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since the majority of
our investments are in short-term instruments. Because of the nature of our
short-term investments, we have concluded that there is no material market risk
exposure.
Our investment policy requires us to invest funds in excess of operating
requirements in:
. obligations of the U.S. government and its agencies;
. investment grade state and local government obligations;
. securities of U.S. corporations and utilities rated A1 or AA by Standard
and Poors or the Moody's equivalent; or
. money market funds, deposits or notes issued or guaranteed by U.S. and
non-U.S. commercial banks, meeting credit rating and net worth
requirements with maturities or reset dates of less than two years.
At December 31, 2000, our cash and cash equivalents consisted primarily of
money market funds held by large institutions in the U.S. and our short-term
investments were invested in corporate and government debt securities maturing
or resetting in less than eighteen months.
32
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPORT.COM, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors.......................... 34
Consolidated Balance Sheets................................................ 35
Consolidated Statements of Operations...................................... 36
Consolidated Statements of Stockholders' Equity (Deficit).................. 37
Consolidated Statements of Cash Flows...................................... 38
Notes to Consolidated Financial Statements................................. 39
33
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Support.com, Inc.
We have audited the accompanying consolidated balance sheets of Support.com,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, stockholders' equity (deficit), and cash flows for the years
ended December 31, 2000 and 1999 and for the period from incorporation on
December 3, 1997 to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Support.com,
Inc. at December 31, 2000 and 1999, and the results of its operations and its
cash flows for the years ended December 31, 2000 and 1999, and for the period
of incorporation on December 3, 1997 to December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
January 16 , 2001
34
SUPPORT.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
December 31,
------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 11,756 $ 4,023
Short-term investments................................... 39,757 8,466
Accounts receivable, less allowance of $469 and $40...... 7,872 3,450
Prepaids and other current assets........................ 3,255 618
-------- --------
Total current assets.................................... 62,640 16,557
Property and equipment, net................................ 2,420 881
Purchased intangibles, net................................. 5,230 --
Other assets............................................... 282 254
-------- --------
$ 70,572 $ 17,692
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 957 $ 1,227
Accrued compensation..................................... 2,250 451
Other accrued liabilities................................ 3,645 494
Purchased intangibles obligation, current portion........ 1,449 --
Notes payable, current portion........................... -- 921
Capital lease obligations, current portion............... 620 274
Deferred revenue......................................... 11,866 2,712
-------- --------
Total current liabilities............................... 20,787 6,079
Notes payable, net of current portion...................... -- 1,478
Capital lease obligations, net of current portion.......... 1,221 799
Purchased intangibles obligation, net of current portion... 2,164 --
Deferred revenue--long-term portion........................ 241 360
Commitments
Redeemable convertible preferred stock; no shares
authorized at December 31, 2000 and 12,280,108 shares
authorized at December 31, 1999, $0.0001 par value,
issuable in series:
Series B redeemable convertible preferred stock; no
shares issued or outstanding at December 31, 2000, and
7,346,108 shares designated, issued and outstanding at
December 31, 1999....................................... -- 5,641
Series C redeemable convertible preferred stock; no
shares issued or outstanding at December 31, 2000, and
4,934,000 shares designated, 4,638,618 shares issued and
outstanding at December 31, 1999........................ -- 15,808
Stockholders' equity (deficit):
Series A convertible preferred stock; par value $0.0001,
no shares issued or outstanding at December 31, 2000,
3,571,600 shares designated, issued and outstanding at
December 31, 1999....................................... -- 1
Common stock; par value $0.0001, 150,000,000 shares
authorized, 33,150,857 shares issued and outstanding at
December 31, 2000 and 10,874,374 shares issued and
outstanding at December 31, 1999........................ 3 1
Additional paid-in capital............................... 108,558 20,016
Receivable from stockholders............................. (2,051) (1,450)
Deferred compensation.................................... (7,219) (14,777)
Accumulated deficit...................................... (53,132) (16,264)
-------- --------
Total stockholders' equity (deficit).................... 46,159 (12,473)
-------- --------
Total liabilities and stockholders' equity (deficit).... $ 70,572 $ 17,692
======== ========
See accompanying notes.
35
SUPPORT.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Period From
Incorporation
on
Years Ended December 3,
December 31, 1997 to
------------------ December 31,
2000 1999 1998
-------- -------- -------------
Revenue:
License fees.............................. $ 13,732 $ 2,642 $ 18
Services.................................. 4,934 569 --
-------- -------- -------
Total revenue........................... 18,666 3,211 18
-------- -------- -------
Costs and expenses:
Cost of license fees...................... 1,405 4 --
Cost of services.......................... 5,910 965 --
Amortization of purchased intangibles..... 1,158 -- --
Research and development.................. 10,913 2,348 1,132
Sales and marketing....................... 22,754 7,924 1,197
General and administrative................ 4,325 1,845 451
Amortization of deferred compensation(1).. 10,787 3,809 42
-------- -------- -------
Total costs and expenses................ 57,252 16,895 2,822
-------- -------- -------
Loss from operations........................ (38,586) (13,684) (2,804)
Interest income............................. 2,048 501 105
Interest expense............................ (330) (331) (51)
-------- -------- -------
Net loss.................................... (36,868) (13,514) (2,750)
Accretion on redeemable convertible
preferred stock............................ (885) (1,072) (214)
-------- -------- -------
Net loss attributable to common
stockholders............................... $(37,753) $(14,586) $(2,964)
======== ======== =======
Basic and diluted net loss per share
attributable to common stockholders........ $ (2.09) $ (2.20) $ (0.57)
======== ======== =======
Shares used in computing basic and diluted
net loss per share......................... 18,102 6,643 5,227
======== ======== =======
--------
(1)Amortization of deferred compensation relates to the following:
Years Ended
December 31,
--------------
2000 1999
------- ------
Cost of services................................................ $ 475 $ 53
Research and development........................................ 2,136 795
Sales and marketing............................................. 3,894 1,288
General and administrative...................................... 4,282 1,673
------- ------
Total......................................................... $10,787 $3,809
======= ======
See accompanying notes.
36
SUPPORT.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands except share and per share data)
Convertible Notes
Preferred Stock Common Stock Additional Receivable Deferred Total
------------------ ----------------- Paid-In from Stock Accumulated Stockholders'
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity (Deficit)
---------- ------ ---------- ------ ---------- ------------ ------------ ----------- ----------------
Issuance of
common stock to
founders at
$0.0001,
$0.0077, and
$0.0155 per
share for
cash........... -- $ -- 6,428,880 $ 1 $ -- $ -- $ -- $ -- $ 1
Issuance of
Series A
convertible
preferred stock
at $0.07 per
share for cash,
net of issuance
costs of $6.... 3,571,600 1 -- -- 244 -- -- -- 245
Issuance of
common stock
upon exercise
of stock
options........ -- -- 40,000 -- 4 -- -- -- 4
Issuance of
warrants....... -- -- -- -- 249 -- -- -- 249
Accretion on
redeemable
convertible
preferred
stock.......... -- -- -- -- (214) -- -- -- (214)
Deferred
compensation
related to
grant of stock
options and
restricted
stock.......... -- -- -- -- 276 -- (276) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 16 -- 16
Variable
accounting
expense
associated with
options and
restricted
stock to non-
employees...... -- -- -- -- -- -- 26 -- 26
Net loss........ -- -- -- -- -- -- -- (2,750) (2,750)
---------- ---- ---------- --- -------- ------- -------- -------- --------
Balances at
December 31,
1998........... 3,571,600 $ 1 6,468,880 $ 1 $ 559 $ -- $ (234) $ (2,750) $ (2,423)
Issuance of
common and
restricted
stock upon
exercise of
options to
employees and
non-employees
for cash,
promissory
notes and
services....... -- -- 4,405,494 -- 2,083 (1,450) -- -- 633
Issuance of
warrants....... -- -- -- -- 94 -- -- -- 94
Accretion on
redeemable
convertible
preferred
stock.......... -- -- -- -- (1,072) -- -- -- (1,072)
Deferred
compensation
related to
grant of stock
options and
restricted
stock.......... -- -- -- -- 18,352 -- (18,352) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 3,554 -- 3,554
Variable
accounting
expense
associated with
options and
restricted
stock to non-
employees...... -- -- -- -- -- -- 255 -- 255
Net loss........ -- -- -- -- -- -- -- (13,514) (13,514)
---------- ---- ---------- --- -------- ------- -------- -------- --------
Balances at
December 31,
1999........... 3,571,600 $ 1 10,874,374 $ 1 $ 20,016 $(1,450) $(14,777) $(16,264) $(12,473)
Issuance of
common and
restricted
stock upon
exercise of
options and
warrants for
cash and
promissory
notes, net of
repurchases.... -- -- 1,832,657 -- 1,862 (601) -- -- 1,261
Accretion on
redeemable
convertible
preferred
stock.......... -- -- -- -- (885) -- -- -- (885)
Conversion of
preferred stock
into common
stock (see Note
5)............. (3,571,600) (1) 15,556,326 2 22,333 -- -- -- 22,334
Issuance of
common stock in
initial public
offering, net
of issuance
costs.......... -- -- 4,887,500 -- 61,777 -- -- -- 61,777
Deferred
compensation
related to
grant of stock
options and
restricted
stock, net of
$4.3 million in
cancellations.. -- -- -- -- 3,229 -- (3,229) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 10,286 -- 10,286
Variable
accounting
expense
associated with
options,
warrants and
restricted
stock issued to
non-employees
and third
party.......... -- -- -- -- 226 -- 501 -- 727
Net loss........ -- -- -- -- -- -- -- (36,868) (36,868)
---------- ---- ---------- --- -------- ------- -------- -------- --------
Balances at
December 31,
2000........... -- -- 33,150,857 $ 3 $108,558 $(2,051) $ (7,219) $(53,132) $ 46,159
========== ==== ========== === ======== ======= ======== ======== ========
See accompanying notes.
37
SUPPORT.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Period From
Incorporation
Year Ended on December
December 31, 3, 1997 to
------------------ December 31,
2000 1999 1998
-------- -------- -------------
Operating activities:
Net loss................................... $(36,868) $(13,514) $(2,750)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 1,497 294 23
Amortization of deferred compensation..... 10,787 3,809 42
Amortization of purchased intangibles..... 1,158 -- --
Other..................................... 226 170 13
Changes in assets and liabilities:
Accounts receivable, net................ (4,422) (3,385) (65)
Prepaids and other current assets....... (2,637) (296) (29)
Accounts payable........................ (270) 1,129 98
Accrued compensation.................... 1,799 391 60
Other accrued liabilities............... 3,151 335 159
Deferred revenue........................ 9,035 3,030 42
-------- -------- -------
Net cash used in operating activities...... (16,544) (8,037) (2,407)
-------- -------- -------
Investing activities:
Purchases of property and equipment........ (1,718) (89) (279)
Proceeds from sale of equipment............ -- 99 --
Other assets............................... (28) (226) (28)
Purchases of technology.................... (2,775) -- --
Purchases of short-term investments........ (45,223) (12,266) --
Sales and maturities of short-term
investments............................... 13,932 3,800 --
-------- -------- -------
Net cash provided used in investing
activities................................ (35,812) (8,682) (307)
-------- -------- -------
Financing activities:
Proceeds from notes payable................ -- 2,000 500
Proceeds from sale-leaseback............... -- 183 --
Proceeds from issuance of preferred stock,
net....................................... -- 15,390 5,017
Proceeds from initial public offering, net
of issuance costs......................... 61,777 -- --
Proceeds from issuances of common stock,
net of repurchases........................ 1,261 501 5
Repayment of notes payable................. (2,399) (100) (1)
Principal payments under capital lease
obligations............................... (550) (39) --
-------- -------- -------
Net cash provided by financing activities.. 60,089 17,935 5,521
-------- -------- -------
Net increase in cash and cash equivalents.... 7,733 1,216 2,807
Cash and cash equivalents at beginning of
period...................................... 4,023 2,807 --
-------- -------- -------
Cash and cash equivalents at end of period... $ 11,756 $ 4,023 $ 2,807
======== ======== =======
Supplemental disclosure of noncash financing
activities:
Notes receivable from stockholder in
exchange for preferred stock.............. $ -- $ -- $ 250
======== ======== =======
Notes receivable from stockholders in
exchange for common stock, net of
cancellations............................. $ 601 $ 1,450 $ --
======== ======== =======
Equipment acquired under capital lease
obligation................................ $ 1,318 $ 1,112 $ --
======== ======== =======
Supplemental schedule of cash flow
information.................................
Interest paid.............................. $ 307 $ 249 $ 39
======== ======== =======
See accompanying notes.
38
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Nature of Operations
Support.com, Inc. ("Support.com," "the Company," "We" or "Our"), formerly
known as Tioga Systems, Inc. and Replicase, Inc., was incorporated in the state
of Delaware on December 3, 1997. Support.com is a leading provider of support
infrastructure software for digital businesses. Support.com sells to corporate
enterprises, service providers and personal computer manufacturers that utilize
its software platform to increase the efficiency and effectiveness of their
support operations, while improving user responsiveness and satisfaction. Our
headquarters are in Redwood City, California, with offices throughout the
world.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The Company has export sales from the United
States and has operations in Asia and Europe. All significant intercompany
transactions and balances have been eliminated. Support.com commenced
operations in December 1997 which primarily consisted of initial development
activities. Operating expenses incurred in December 1997 of approximately
$9,000 have been included in operations for the period from incorporation on
December 3, 1997 to December 31, 1998.
Use of Estimates and Reclassifications
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ materially
from these estimates. In addition, certain amounts that were previously
reported have been reclassified to conform to the current period presentation.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject Support.com to concentration
of credit risk consist principally of cash equivalents, short term investments
and trade receivables. Support.com invests cash which is not required for
immediate operating needs principally in money market funds, commercial paper,
municipal bonds, corporate debt securities, notes and bills issued by the
United States government and its agencies and auction instruments.
Support.com's customers are currently concentrated in the United States.
Support.com performs ongoing evaluations of its customers' financial condition
and generally does not require collateral. Support.com maintains reserves for
credit losses, and such losses have been within management's expectations. The
Company provided reserves for credit losses in the years ended December 31,
2000, 1999 and 1998 of $469,000, $40,000 and $10,000, respectively. Credit
losses during the year ended December 31, 2000 were $163,000 and for the years
ended December 31, 1999 and 1998 were zero.
For the year ended December 31, 2000, one customer accounted for 13% of our
total revenue and three other customers accounted for 55%, 10% and 10% of
revenue for the year ended December 31, 1999.
Fair Value of Financial Instruments
The fair value of short-term and long-term obligations is estimated based on
current interest rates available to Support.com for debt instruments with
similar terms, degrees of risk and remaining maturities. The carrying values of
these obligations approximate their fair values.
39
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash, Cash Equivalents and Short-Term Investments
Support.com considers all liquid instruments with an original maturity at
the date of purchase of three months or less to be cash equivalents. Through
December 31, 1999, Support.com maintained cash and cash equivalents in money
market accounts with major financial institutions for which the carrying amount
approximated its fair value. At December 31, 2000, cash equivalents and short-
term investments consist primarily of commercial paper, debt instruments and
money market funds. All short-term investments mature or reset within 18
months. Support.com's cash equivalents and short-term investments are
classified as available-for-sale in accordance with the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
Currently, Support.com reports its securities at amortized cost which
approximated fair value at December 31, 2000 and December 31, 1999. Material
unrealized gains and losses, if any, are reported in stockholders' equity
(deficit) and included in other comprehensive loss. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity, both of which are included in interest income. Realized gains and
losses are recorded using the specific identification method. For the year
ended December 31, 2000 and December 31, 1999, gross unrealized gains and
losses on available-for-sale securities were immaterial.
The following is a summary of available-for-sale securities at cost, which
approximates fair value (in thousands):
December 31,
---------------
2000 1999
-------- ------
Cash and cash equivalents:
Cash...................................................... $ 2,441 $ 296
Money market funds........................................ 5,526 2,729
Commercial paper.......................................... 3,789 --
Municipal bonds........................................... -- 998
-------- ------
$ 11,756 $4,023
======== ======
Short-term investments:
Municipal bonds........................................... $ 3,977 $6,466
Auction backed securities................................. 14,125 2,000
Commercial paper.......................................... 2,958 --
Corporate bonds........................................... 7,015 --
Federal agencies.......................................... 11,682 --
-------- ------
$ 39,757 $8,466
======== ======
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation
which is provided using the straight-line method over the estimated useful
lives of 2 to 3 years.
Purchased Intangible Assets
Support.com records purchased intangible assets at fair value as determined
by amortized costs. The original cost is amortized on a straight-line basis
over the estimated life of each asset as determined by management. Support.com
regularly performs reviews to determine if the carrying value of the intangible
asset is impaired. During the year ended December 31, 2000, purchased
intangible assets were generated from the purchase of the source code and other
intellectual property rights from ePeople, Inc. These intangible assets are
being amortized on a straight-line basis over 2 years.
40
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Support.com has adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9, since its inception. License
revenue is generally recognized when a customer agreement has been received and
accepted, the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed or determinable, and
collection is considered probable. License revenue is comprised of fees for
term and perpetual licenses of Support.com's software by corporate customers
and resellers. Term licenses are sold with maintenance for which Support.com
does not have vendor specific objective evidence (VSOE) to determine fair
value. As a result, license revenue for term licenses is recognized ratably
over the service period of the agreement and license revenue includes
maintenance for term licenses. Support.com considers all arrangements with
payment terms extending beyond twelve months and other arrangements with
payment terms longer than normal not to be fixed or determinable. If the fee is
determined not to be fixed or determinable, revenue is recognized as payments
become due from the customer. License revenue from arrangements with resellers
is recognized ratably over the term of the arrangement commencing when payments
are made or become due limited by guaranteed minimum amounts due under the
arrangement or sell through activity.
Services revenue is primarily comprised of revenue from professional
services, such as consulting services, maintenance and support. Arrangements
that include software services are evaluated to determine whether those
services are essential to the functionality of other elements of the
arrangement. When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software services are
not considered essential, the revenue related to the software services is
recognized as the services are performed.
Perpetual license revenues are recognized using the residual method
described in SOP 98-9 for arrangements in which licenses are sold with multiple
elements. For perpetual licensing arrangements, maintenance revenue is deferred
and recognized over the service period of the arrangement, which is typically
one year. Fees related to contracts that require the Company to deliver
unspecified additional products are deferred and recognized ratably over the
contract term.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on Support.com's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by Support.com between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, Support.com has charged
all such costs to research and development expense in the accompanying
statement of operations. Support.com did not incur any cost related to software
developed or for software obtained for internal use as defined in SOP 98-1.
Sales Commissions
Commission expense is recognized over the period that the related license
revenue is recognized. Commissions are paid to sales agents at the time amounts
become billable to the customer regardless of the timing of revenue
recognition. Commissions paid to sales agents in advance of the recognition of
commission expense is recorded as a prepaid asset. All commission payments made
to sales agents are non-refundable unless amounts due from a customer are
determined to be uncollectible in which case commissions paid are recoverable
by Support.com.
41
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising Costs
Advertising costs are recorded as sales and marketing expense in the period
in which they are incurred. Advertising expense was $556,000 for the year ended
December 31, 2000, $71,000 for the year ended December 31, 1999 and zero for
the period from incorporation on December 3, 1997 to December 31, 1998.
Stock-Based Compensation
Support.com accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and has adopted the disclosure only
alternative of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123").
Any deferred stock compensation calculated according to APB 25 is amortized
over the vesting period of the individual options, generally four years, using
the graded vesting method. The graded vesting method provides for vesting of
portions of the overall awards at interim dates and results in greater vesting
in earlier years than straight-line.
All stock-based awards to non-employees, are accounted for at their fair
value, as calculated using the Black Scholes model, in accordance with FAS 123
and Emerging Issues Task Forces Consensus No. 96-18 ("EITF 96-18"). The options
and restricted stock purchase arrangements are subject to periodic re-valuation
over their vesting terms.
Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with the
FASB's Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS 128"), for all periods presented. In accordance with FAS 128,
basic and diluted net loss per share have been computed using the weighted-
average number of shares of common stock outstanding during the period, less
shares subject to repurchase.
The following table sets forth the computation of basic and diluted net loss
per share (in thousands, except per share amounts):
Period From
Incorporation on
Years Ended December 3, 1997
December 31, to December 31,
------------------ 1998
----------------
2000 1999
-------- --------
Net loss attributable to common
stockholders........................ $(37,753) $(14,586) $(2,964)
======== ======== =======
Basic and diluted:
Weighted average shares of common
stock outstanding................. 22,556 7,166 6,432
Less weighted average shares
subject to repurchase............. (4,454) (523) (1,205)
-------- -------- -------
Shares used in computing basic and
diluted net loss per share........ 18,102 6,643 5,227
======== ======== =======
Basic and diluted net loss per share
attributable to common
stockholders........................ $ (2.09) $ (2.20) $ (0.57)
======== ======== =======
42
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had Support.com been in a net income position, diluted earnings per share
would have excluded the impact of outstanding shares subject to repurchase and
included the conversion of outstanding preferred stock into shares of
Support.com's common stock and the dilutive impact of outstanding options and
warrants to purchase common stock. Excluded from the computation of basic and
diluted net loss per share attributable to common stockholders are
approximately 6,915,000, 19,666,000 and 13,222,000 shares related to preferred
stock and options and warrants to purchase common stock at December 31, 2000,
1999 and 1998, prior to the application of the treasury stock method. Such
shares have been excluded because they are anti-dilutive for all periods
presented.
Foreign Currency Translation
Assets and liabilities of the Company's wholly owned foreign subsidiaries
are translated from their respective functional currencies at exchange rates in
effect at the balance sheet date, and revenues and expenses are translated at
average exchange rates prevailing during the year. Any material resulting
translation adjustments are reflected as a separate component of stockholders'
equity. For the year ended December 31, 2000 and 1999, translation adjustments
were immaterial.
Comprehensive Loss
Support.com adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), at December 31, 1998. Under FAS
130, Support.com is required to display comprehensive income and its components
as part of the financial statements. Other comprehensive income includes
certain changes in equity that are excluded from net loss. Support.com has no
material components of other comprehensive income and, as a result, the
comprehensive loss is the same as the net loss for all periods presented.
Segment Information
Support.com operates in one segment, the development and marketing of
eSupport software and services for digital businesses. Support.com's foreign
offices are primarily sales and marketing offices and also support the
Company's overseas reseller network. Operating losses generated by the foreign
operations of Support.com and their corresponding identifiable assets were not
material in any period presented. Revenue from customers located outside the
United States was approximately $2,819,000 for the year ended December 31,
2000, $46,000 for the year ended December 31, 1999, and zero for the period
from incorporation on December 3, 1997 to December 31, 1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which will be effective for the year
ending December 31, 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. Support.com
believes the adoption of SFAS 133 will not have a material effect on the
financial statements, since it currently does not invest in derivative
instruments and engage in hedging activities.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN 44 clarifies the application
43
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of APB Opinion No. 25 with respect to the definition of employee for purposes
of applying Opinion No. 25, the criteria for determining whether a plan
qualifies as a noncompensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN 44, which became effective July 1, 2000, did
not have a material effect on Support.com's financial position, operating
results, or cash flow.
In December 1999, the Securities and Exchange Commission (SEC) issued SEC
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Support.com's revenue recognition policy is in conformity with SAB
101, and the adoption of SAB 101 during the fourth quarter of 2000 did not have
a significant impact on the Company's financial results since inception (see
Revenue Recognition in Note 1).
2. Property and Equipment
Property and equipment are stated at cost and consist of the following (in
thousands):
December 31,
---------------
2000 1999
------- ------
Computer and software equipment............................. $ 3,949 $1,193
Furniture and equipment..................................... 285 5
------- ------
4,234 1,198
Accumulated depreciation and amortization................... (1,814) (317)
------- ------
$ 2,420 $ 881
======= ======
As of December 31, 2000, property and equipment included amounts acquired
under capital leases of approximately $2,500,000, with related accumulated
amortization of approximately $1,375,000.
3. Purchased Intangibles
On September 20, 2000, Support.com purchased source code and other related
intellectual property rights from ePeople, Inc. (formerly known as NoWonder,
Inc.) for $6,800,000. An additional amount of $2,500,000 may be payable to
ePeople based upon revenue recognized by Support.com related to the technology.
The purchase price was recorded as purchased intangibles and included as an
other asset in the Company's consolidated balance sheet. The Company paid $3.4
million during the year ended December 31, 2000, and will be required to pay
approximately $309,000 per quarter for eleven quarters. The purchased
technology is being amortized on a straight-line basis over two years. Total
amortization for the period ended December 31, 2000 was $1.2 million.
4. Capital Leases, Borrowings and Commitments
In October 1998, Support.com entered into loan and lease agreements with a
financial institution. The loan agreement allowed Support.com to borrow up to
$2,500,000 in aggregate. At December 31, 1999, these amounts had been fully
drawn down. During the year ending December 31, 2000, the amounts borrowed
under this agreement were fully repaid. The lease agreement allowed Support.com
to borrow up to $2,500,000 to finance purchases of equipment, software and
tenant improvements. Amounts available under this lease line were fully
utilized at December 31, 2000. Advances are secured by the assets acquired and
each equipment
44
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
advance is payable in 48 monthly installments of principal and interest,
computed at the monthly rate of 2.9% of the principal balance.
Support.com leases its facilities under noncancelable operating lease
agreements which expire at various dates through 2002. Rent expense was
approximately $1,764,000 for the year ended December 31, 2000, $783,000 for the
year ended December 31, 1999 and $184,000 for the period from incorporation on
December 3, 1997 to December 31, 1998. Support.com received sublease rental
income of approximately $217,000 for the year ended December 31, 2000, $162,000
for the year ended December 31, 1999 and $45,000 for the period from
incorporation on December 3, 1997 to December 31, 1998.
As of December 31, 2000, minimum payments under noncancelable lease
agreements were as follows (in thousands):
Capital Operating
Years ending December 31, Leases Leases
------------------------- ------- ---------
2001...................................................... $ 732 $1,099
2002...................................................... 671 21
2003...................................................... 559 --
2004...................................................... 82 --
------ ------
Total minimum lease and principal payments.............. $2,044 $1,120
====== ======
Amount representing interest.............................. (203)
------
Present value of future payments.......................... 1,841
Current portion of capital lease obligations.............. 620
------
Noncurrent portion........................................ $1,221
======
5. Stockholders' Equity
Initial Public Offering
On July 19, 2000, Support.com completed an initial public offering of its
common stock. All 4.9 million shares covered by Support.com's Registration
Statement on Form S-1, including shares covered by an over-allotment option
that was exercised, were sold by Support.com at a price of $14.00 per share.
Net proceeds to the Company from the issuance of common stock in the initial
public offering were $61.8 million.
Preferred Stock
The Company is authorized to provide for the issuance of up to 5,000,000
shares of undesignated preferred stock, none of which has been issued at
December 31, 2000.
Immediately prior to the completion of the Company's initial public offering
all outstanding shares of preferred stock converted into an aggregate of
15,556,326 shares of common stock.
45
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred stock prior to the initial public offering was composed of the
following:
Non-
Cumulative Liquidation
Shares Shares Dividend Preference
Authorized Outstanding Per Share Per Share
---------- ----------- ---------- -----------
Series A ...................... 3,571,600 3,571,600 $ -- $0.070
Series B ...................... 7,346,108 7,346,108 $0.550 $0.687
Series C ...................... 4,934,000 4,638,618 $0.262 $3.271
---------- ----------
15,851,708 15,556,326
========== ==========
The following summarizes the redeemable convertible preferred stock activity
(in thousands except for share data):
Redeemable Convertible
Preferred Stock
--------------------------
Shares Amount
------------- -----------
Issuance of Series B............................... 7,346,108 $ 5,023
Accretion.......................................... -- 214
------------- ---------
Balance at December 31, 1998....................... 7,346,108 5,237
Issuance of Series C............................... 4,638,618 15,140
Accretion.......................................... -- 1,072
------------- ---------
Balance at December 31, 1999....................... 11,984,726 21,449
Accretion.......................................... -- 885
Conversion into common stock....................... (11,984,726) (22,334)
------------- ---------
Balance at December 31, 2000 ...................... -- $ --
============= =========
Common Stock
Support.com has reserved shares of common stock for issuance at December 31,
2000 as follows:
Stock Plans........................................................ 9,554,735
Warrants........................................................... 119,167
---------
9,673,902
=========
Through December 31, 2000, certain option holders have exercised options to
purchase 2,638,730 shares of common stock at prices ranging from $0.40 to
$9.00, with a weighted-average exercise price of $0.78 per share in exchange
for full recourse promissory notes. The notes bear interest at 5.9% and expire
on various dates through 2004. Support.com has the right to repurchase all
unvested shares purchased by the notes at the original exercise price in the
event of the option holders termination. The number of shares subject to this
repurchase right decreases as the shares vest under the original option terms,
generally over four years.
Stock Warrants
During the years ended 1999 and 1998, warrants to purchase 164,483 shares of
Support.com's Series C preferred stock at exercise prices ranging from $1.98 to
$6.50 per share were issued in conjunction with certain loan and lease
agreements. During the year ended December 31, 2000, these warrants were
exercised for common stock.
46
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 2000, Support.com issued a warrant to a customer in conjunction
with a software license agreement which allows the customer to purchase 119,167
shares of Support.com's common stock at an exercise price of $18.00 per share.
The warrant is immediately exercisable, non-forfeitable and expires in August
2002. The value of the warrant, which is less than amounts due under the
license agreement, has been recorded as additional paid-in capital and has
reduced the amount to be allocated to revenue under the agreement.
Stock Option Plans
During fiscal 1998, Support.com adopted the 1998 stock option plan (the
"plan"). Under the plan, up to 9,424,434 shares of Support.com's common stock
may be granted as options or sold to eligible participants. Under the plan,
options to purchase common stock may be granted at no less than 85% of the fair
value on the date of the grant (110% of fair value in certain instances), as
determined by the board of directors. Options under the plan are immediately
exercisable; however, shares issued are subject to Support.com's right to
repurchase such shares at the original issuance price, which lapses in a series
of installments measured from the vesting commencement date of the option.
In February 2000, the board of directors approved the adoption of
Support.com's 2000 omnibus equity incentive plan (the "2000 incentive plan"). A
total of 4,000,000 shares of common stock have been reserved for issuance to
eligible participants under the 2000 incentive plan. On January 1 of each year,
the number of shares reserved automatically increases by the lesser of
2,000,000 shares, 5% of outstanding shares, or an amount determined by the
board of directors. All shares that had not yet been issued under Support.com's
1998 stock option plan as of July 19, 2000, the date of Support.com's IPO, were
made available for grant under the 2000 incentive plan. The exercise price for
incentive stock options may not be less than 100% of the fair market value of
Support.com's common stock on the date of grant (85% for nonstatutory options).
Under both of Support.com's option plans, options generally vest over a 48-
month period from the date of grant and have a maximum term of 10 years.
A summary of Support.com's stock option activity under all Stock Option
Plans and related information follows:
Options Outstanding Weighted
Options ------------------------ Average
Available Number of Price Per Exercise
for Grant Shares Share Price
---------- ---------- ------------ --------
Shares authorized................ 2,929,434 -- -- --
Options granted.................. (2,343,250) 2,340,750 $ 0.10 $0.10
Options exercised................ -- (40,000) $ 0.10 $0.10
Options canceled................. 95,000 (95,000) $ 0.10 $0.10
---------- ---------- ------------ -----
Balance at December 31, 1998..... 681,184 2,205,750 $ 0.10 $0.10
Shares authorized................ 5,195,000 -- -- --
Options granted.................. (6,326,139) 6,328,639 $0.10-$ 0.99 $0.57
Options exercised................ -- (4,131,994) $0.10-$ 0.99 $0.46
Options canceled................. 457,500 (457,500) $0.10-$ 0.90 $0.23
---------- ---------- ------------ -----
Balance at December 31, 1999..... 7,545 3,944,895 $0.10-$ 0.99 $0.47
Shares authorized................ 5,300,000 -- -- --
Options granted.................. (3,705,622) 3,705,622 $2.00-$32.50 $9.99
Options exercised................ -- (2,977,745) $0.10-$ 9.00 $0.92
Options canceled................. 840,908 (840,908) $0.10-$ 9.00 $3.53
Shares repurchased............... 1,280,040 -- $0.10-$ 9.00 $0.71
---------- ---------- ------------ -----
Balance at December 31, 2000..... 3,722,871 3,831,864 $0.10-$32.50 $8.65
========== ========== ============ =====
47
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, 1999 and 1998, 2,963,652, 3,299,905 and zero shares
which had been issued upon exercise of options were subject to repurchase. At
December 31, 2000, 1999 and 1998 options to acquire 331,606, 444,899, and 5,500
shares were vested but not exercised.
Exercise prices for options outstanding as of December 31, 2000 and the
weighed-average remaining contractual life are as follows:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Average
Remaining Weighted Weighted
Number of Contractual Life Averaged Number of Average
Range of Exercise Prices Shares (In Years) Exercise Price Shares Exercise Price
------------------------ --------- ---------------- -------------- --------- --------------
$ 0.10- 0.40............ 122,187 8.0 $ 0.17 122,187 $ 0.17
0.90............ 838,677 8.6 0.90 838,677 0.90
2.00- 7.00............ 559,000 9.1 4.55 559,000 4.55
8.00- 9.00............ 1,030,450 9.4 8.85 1,030,450 8.85
10.06-14.00............ 726,550 9.9 10.74 1,794 10.06
14.63-26.00............ 364,500 9.9 19.29 711 15.44
26.75-32.50............ 190,500 9.7 30.96 0 0.00
--------- --- ------ --------- ------
3,831,864 9.3 $ 8.66 2,552,819 $ 4.89
========= === ====== ========= ======
2000 Employee Stock Purchase Plan
In February 2000, the board of directors approved the adoption of
Support.com's 2000 employee stock purchase plan (the "2000 Purchase Plan"). A
total of 2,000,000 shares of common stock have been reserved for issuance under
the 2000 Purchase Plan. On January 1 of each year, the number of shares
reserved automatically increases by the lesser of 2,000,000 shares, 3% of the
outstanding shares, or an amount determined by the board of directors. The 2000
purchase plan permits eligible employees to acquire shares of Support.com's
common stock through periodic payroll deductions of up to 15% of total
compensation. Purchases occur on the last day of each July and January
following the end of each participation period. The price at which the common
stock may be purchased is 85% of the lesser of the fair market value of
Support.com's common stock on each employee's applicable enrollment date or on
the last day of the respective participation period. As of December 31, 2000,
no shares have been issued under the 2000 Purchase Plan.
Deferred Compensation
In connection with the grant of certain stock options to employees,
Support.com recorded deferred stock compensation of approximately $7.1 million
during the year ended December 31, 2000, $17.7 million during the year ended
December 31, 1999 and $169,000 during the period from incorporation on December
3, 1997 to December 31, 1998, representing the difference between the exercise
price and the deemed fair value of Support.com's common stock on the date such
stock options were granted ("intrinsic value method") as prescribed in APB 25.
In connection with the grant of stock options to non-employees and the grant of
options to restricted stock to board members and non-employees Support.com also
recorded deferred compensation of $516,000 during the year ended December 31,
2000, $699,000 during the year ended December 31, 1999 and $107,000 during the
period from incorporation on December 3, 1997 to December 31, 1998. The rights
to purchase restricted stock granted to the board members were valued using the
intrinsic value method. The options to restricted stock and stock options
granted to non-employees were valued using the Black Scholes model prescribed
in FAS 123 and EITF 96-18. Awards relating to consulting and advisory services
have been revalued over the vesting period of the options ("fair value
method").
48
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred compensation amounts are included as a reduction of stockholders'
equity (deficit). Support.com recorded amortization of deferred stock
compensation expense in connection with the grant of certain stock options to
employees and board of directors of approximately $10.3 million in 2000, $3.6
million in 1999 and $16,000 in 1998. Deferred compensation related to these
grants is being amortized by charges to operations on a graded vesting method.
At December 31, 2000, Support.com had a total of approximately $6.6 million
remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
Support.com recorded variable accounting expense associated with the
amortization of deferred stock compensation related to non-employee stock
option grants, the grant of options to restricted stock to non-employees and
the acceleration of vesting of certain stock options to non-employees of
approximately $501,000 in 2000, $255,000 in 1999, and $26,000 in 1998. At
December 31, 2000, Support.com had approximately $638,000 of deferred
compensation related to these grants remaining to be amortized.
Pro Forma Disclosure of the Effect of Stock-Based Compensation
Support.com has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its employee and director stock-based awards,
because, as discussed below, the alternative fair value accounting provided
under FAS 123 requires use of option valuation models that were not developed
for use in valuing employee stock-based awards. Under APB Opinion No. 25,
Support.com does not recognize compensation expense with respect to such awards
if the exercise price equals or exceeds the fair value of the underlying
security on the date of grant and other terms are fixed.
Prior to December 31, 1999, the fair value for these awards was estimated at
the date of grant using the minimum value method. Subsequent to this date,
Support.com estimated fair value based on the Black-Scholes valuation model.
The following weighted average assumptions were used:
December 31,
----------------
2000 1999 1998
---- ---- ----
Risk-free interest rate.................................... 6.0% 6.5% 6.5%
Expected life (years)...................................... 4.0 4.5 4.5
Volatility................................................. 75.0% -- --
Dividend Yield............................................. 0.0% 0.0% 0.0%
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options using a
graded vesting method. The effects of applying FAS 123 for pro forma
disclosures are not likely to be representative of the effects on reported net
loss for future years.
Support.com's pro forma information follows (in thousands, except per share
amounts):
Period From
Incorporation on
Year Ended Year Ended December 3, 1997
December 31, December 31, to December 31,
2000 1999 1998
------------ ------------ ----------------
Net loss attributable to common
stockholders:
As reported................... $(37,753) $(14,586) $(2,964)
Pro forma..................... (40,268) (14,688) (2,969)
Basic and diluted net loss per
share attributable to common
stockholders:
As reported................... $ (2.09) $ (2.20) $ (0.57)
Pro forma..................... (2.22) (2.21) (0.57)
49
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average fair value of options granted during 2000 was $5.48 and
1999 was $0.12.
6. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 35% is primarily due to net operating losses not being benefited.
Accordingly there is no provision for income taxes for the years ended December
31, 2000 and December 31, 1999.
Significant components of Support.com's deferred tax assets are as follows
(in thousands):
December 31,
-----------------
2000 1999
-------- -------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 8,484 $ 4,072
Deferred compensation..................................... 4,314 1,422
Research credit carryforwards............................. 794 120
Deferred Revenue.......................................... 4,843 --
Accruals and reserves not currently deductible............ 1,721 858
-------- -------
Total deferred tax assets................................. 20,156 6,472
Valuation allowance....................................... (20,156) (6,472)
-------- -------
Net deferred tax assets................................... $ -- $ --
======== =======
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," provides for the recognition
of deferred tax assets if realization of such assets is more likely than not.
Based upon the weight of available evidence, which includes Support.com's
historical operating performance and the reported cumulative net losses in all
periods, the Company provided a full valuation allowance against its net
deferred tax assets.
The valuation allowance increased by approximately $13.7 million and $5.3
million for the years ended December 31, 2000 and December 31, 1999,
respectively.
Approximately $325,000 of the valuation allowance results from tax
deductions under the stock option plans and will be credited to Common Stock
when recognized.
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $22.4 million and $14.5 million,
respectively. The Company also had federal and state research and development
tax credit carryforwards of approximately $520,000 and $420,000, respectively.
The net operating loss and tax credit carryforwards will expire at various
dates beginning in 2005 through 2020, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the "change in ownership"
provision of the Internal Revenue Code and similar state provisions. The annual
limitation may result in the expiration of net operating loss and tax credit
carryforwards before utilization.
50
SUPPORT.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarterly Financial Information (Unaudited)
The summarized quarterly financial information for 2000 and 1999 is as
follows:
Fiscal Year 2000 Quarter Ended
-------------------------------------
Dec.
Mar. 31, June 30, Sept. 31,
2000 2000 30, 2000 2000
-------- -------- -------- -------
(in thousands, except per share
data)
Statement of Operations Data:
Net revenue......................... $ 1,872 $ 3,574 $ 5,353 $ 7,867
Gross profit........................ 954 2,277 2,414 5,706
Loss from operations................ (9,273) (9,660) (10,312) (9,341)
Net loss............................ (9,213) (9,657) (9,557) (8,441)
Basic and diluted net loss per share
attributable
to common stockholders............. $ (1.14) $ (1.23) $ (0.38) $ (0.28)
Fiscal Year 1999 Quarter Ended
------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
-------- -------- --------- --------
(in thousands, except per share
data)
Statement of Operations Data:
Net revenue........................... $ 334 $ 493 $ 782 $1,602
Gross profit.......................... 260 365 540 1,077
Loss from operations.................. (1,209) (2,025) (4,353) (6,097)
Net loss.............................. (1,207) (2,047) (4,265) (5,995)
Basic and diluted net loss per share
attributable to common stockholders.. $(0.20) $(0.34) $(0.70) $(0.95)
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K with respect to
identification of directors is incorporated herein by reference from the
information contained in the section entitled "Election of Directors" in the
Company's definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders (the "Proxy Statement"), a copy of which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2000. For
information with respect to the executive officers of the Company, see
"Executive Officers" at the end of Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated herein by
reference from the information contained in the section entitled "Executive
Compensation and Related Information" in the Proxy Statement, a copy of which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated herein by
reference from the information contained in the section entitled "Stock
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement,
a copy of which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated herein by
reference from the information contained in the section entitled "Certain
Relationships and Related Transactions" in the Proxy Statement, a copy of which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements--See Index to the Consolidated Financials
Statements and Supplementary Data in Item 8 of this Report.
(2) Financial Statement Schedules--No schedules have been filed because
the information required to be set forth therein is not applicable or is
shown in the financial statements or related notes included as part of this
Report.
(3) See Exhibit Index at page 55 of this Report, which index of exhibits
is incorporated herein by reference.
(b) Reports on Form 8-K
None.
(c) Exhibits--See Exhibit Index to this Report.
(d) See the Consolidated Financial Statements and Supplementary Data
beginning on page 33 of this Report.
52
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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, on this 29th day
of March, 2001.
SUPPORT.COM, INC.
/s/ Radha R. Basu
By: _________________________________
Radha R. Basu
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Radha Basu and Brian Beattie, and each of them
individually, as his or her attorney-in-fact, each with full power of
substitution, for him or her in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said attorney-in-
fact, or his or her substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated:
Signature Title Date
--------- ----- ----
/s/ Radha R. Basu President, Chief Executive March 29, 2001
____________________________________ Officer and Chairman
Radha R. Basu (Principal Executive
Officer)
/s/ Brian M. Beattie Chief Financial Officer March 29, 2001
____________________________________ (Principal Financial and
Brian M. Beattie Accounting Officer)
/s/ Manuel Diaz Director March 28, 2001
____________________________________
Manuel Diaz
/s/ Claude M. Leglise Director March 29, 2001
____________________________________
Claude M. Leglise
/s/ Christopher W. Lochhead Director March 29, 2001
____________________________________
Christopher W. Lochhead
/s/ Bruce Golden Director March 29, 2001
____________________________________
Bruce Golden
53
Signature Title Date
--------- ----- ----
/s/ Roger J. Sippl Director March 29, 2001
____________________________________
Roger J. Sippl
/s/ Edward S. Russell Director March 29, 2001
____________________________________
Edward S. Russell
54
EXHIBIT INDEX
Exhibit Description of Document
------- -----------------------
3.1(1) Amended and Restated Certificate of Incorporation.
3.1(1) Amended and Restated Certificate of Incorporation.
3.2(1) Amended and Restated Bylaws.
4.1(4) Form of Common Stock Certificate.
4.2(1) Registration Rights Agreement, dated June 22, 1998, by and among the
registrant and the parties who are signatories thereto.
4.3(5) Amended and Restated Registration Rights Agreement, dated March 14,
2000, by and among the registrant and the parties who are
signatories thereto.
10.1(2)* Registrant's Amended and Restated 1998 Stock Option Plan.
10.2(7)* Registrant's 2000 Omnibus Equity Incentive Plan.
10.3(6)* Registrant's 2000 Employee Stock Purchase Plan.
10.4(1)* Form of Directors and Officers' Indemnification Agreement.
10.5(4)* Employment Agreement, dated June 24, 1998, by and between the
registrant and Anthony C. Rodoni.
10.6(4)* Employment Agreement, dated July 15, 1999, by and between the
registrant and Radha R. Basu.
10.7(1)* Employment Agreement, dated August 16, 1999, by and between the
registrant and Scott Dale.
10.8(1)* Employment Agreement, dated August 16, 1999, by and between the
registrant and Cadir Lee.
10.9(4)* Employment Agreement, dated September 27, 1999, by and between the
registrant and Brian M. Beattie.
10.10(4)* Employment Agreement, dated January 18, 2000, by and between the
registrant and Lucille Hoger.
10.11(4) Sublease Agreement, dated August 6, 1999, by and between the
registrant and Excite, Inc.
10.12(6)+ Enterprise License Agreement dated February 17, 2000 by and between
the registrant and General Electric Company.
10.13(3) Form of Proprietary Information and Inventions Agreement.
10.14(6) Sale and License Agreement, dated March 20, 2000.
10.15(6)+ Amendment One to Sale and License Agreement, dated June 14, 2000.
23.1 Consent of Ernst & Young LLP.
--------
(1) Incorporated by reference from Exhibits 3.1, 3.2, 4.2, 10.4, 10.8 and 10.9,
respectively, of Registrant's Registration Statement on Form S-1 (File No.
333- 30674) filed with the Securities and Exchange Commission on February
18, 2000.
(2) Incorporated by reference from Exhibit 10.1 of Amendment No. 1 to
Registrant's Registration Statement on Form S-1 (File No. 333- 30674) filed
with the Securities and Exchange Commission on March 9, 2000.
(3) Incorporated by reference from Exhibit 10.18 of Amendment No. 2 to
Registrant's Registration Statement on Form S-1 (File No. 333- 30674)
filed with the Securities and Exchange Commission on March 31, 2000.
(4) Incorporated by reference from Exhibits 4.1, 10.5, 10.7, 10.10, 10.12 and
10.14, respectively, of Amendment No. 3 to Registrant's Registration
Statement on Form S-1 (File No. 333- 30674) filed with the Securities and
Exchange Commission on April 26, 2000.
55
(5) Incorporated by reference from Exhibit 4.3 of Amendment No. 5 to
Registrant's Registration Statement on Form S-1 (File No. 333- 30674)
filed with the Securities and Exchange Commission on June 27, 2000.
(6) Incorporated by reference from Exhibits 10.3, 10.22 and 10.23,
respectively, of Amendment No. 7 to Registrant's Registration Statement on
Form S-1 (File No. 333- 30674) filed with the Securities and Exchange
Commission on July 11, 2000.
(7) Incorporated by reference from Exhibit 10.2 of Amendment No. 8 to
Registrant's Registration Statement on Form S-1 (File No. 333- 30674)
filed with the Securities and Exchange Commission on July 13, 2000.
* Denotes an executive or director compensation plan or arrangement.
+ Confidential Treatment Requested. Confidential portions of the exhibit have
been omitted and filed separately with the Commission.
56