<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 2000
REGISTRATION NO. 333-93439
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NIKU CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7371 77-0473454
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
NIKU CORPORATION
305 MAIN STREET
REDWOOD CITY, CALIFORNIA 94063
(650) 298-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FARZAD DIBACHI
CHIEF EXECUTIVE OFFICER
NIKU CORPORATION
305 MAIN STREET
REDWOOD CITY, CALIFORNIA 94063
(650) 298-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
DENNIS R. DEBROECK, ESQ. ALAN F. DENENBERG, ESQ.
JEFFREY R. VETTER, ESQ. SHEARMAN & STERLING
FENWICK & WEST LLP 1550 EL CAMINO REAL
TWO PALO ALTO SQUARE MENLO PARK, CALIFORNIA 94025
PALO ALTO, CALIFORNIA 94306 (650) 330-2200
(650) 494-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE(2) FEE
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Common Stock, $0.0001 par
value....................... 9,200,000(1) $22.00 $202,400,000 $53,433.60(3)
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</TABLE>
(1) Includes 1,200,000 shares subject to the underwriters' over-allotment
option.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) $30,360 was paid in connection with the original filing on December 22,
1999. The remainder was paid in connection with the Pre-Effective Amendment
filed on February 24, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION. DATED FEBRUARY 25, 2000.
8,000,000 Shares
NIKU CORPORATION LOGO
Niku Corporation
Common Stock
----------------------
This is an initial public offering of shares of common stock of Niku
Corporation. All of the 8,000,000 shares of common stock are being sold by us.
Prior to this offering, there has been no public market for our common
stock. Niku anticipates that the initial public offering price per share will be
between $20.00 and $22.00. Niku has applied for approval for quotation of its
common stock on the Nasdaq National Market under the symbol "NIKU."
See "Risk Factors" beginning on page 7 to read about factors you should
consider before buying shares of our common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- --------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Niku.......................... $ $
</TABLE>
To the extent that the underwriters sell more than 8,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,200,000 shares from Niku at the initial public offering price, less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares on , 2000.
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
----------------------
Prospectus dated , 2000.
<PAGE> 3
[Description of graphic on page 49]
This graphic is entitled "Niku Application Framework." Under the title is
a cloud-shaped object with the word "Browser" written in the middle of it. Below
the cloud shape is a large rectangle with several smaller horizontal rectangles
arranged top to bottom and two vertical rectangles towards the sides inside of
it. A small arrow points upwards from the outside of the top of the rectangle to
the cloud shape. Another small arrow points downwards from the inside of the box
to a smaller rectangle within the box which is labeled "FrontWorks." Directly
below and connected to this rectangle is a smaller rectangle labeled
"Application Modules." Directly below this rectangle is another rectangle of the
same size labeled "Niku Adaptable KnowledgeStore." Directly below this rectangle
are three small rectangles lined up from left to right. The rectangle on the
left is labeled "Relational Database Management System." The middle rectangle is
labeled "File System." The rectangle on the right is labeled "Search Engine."
From the left hand side of the inside of the large rectangle is a small arrow
pointing to the right that is directed towards a vertical rectangle labeled
"ImportWorks." From the right hand side of the inside of the large rectangle is
a small arrow pointing to the left that is directed towards a vertical rectangle
labeled "Datalink Adapters." On the left hand side of the graphic, on the
outside of the large rectangle, is a rectangle with arced edges. Inside this
rectangle are the words, in order from top to bottom, "Web," "E-mail," "Fax" and
"Other." On the right hand side of the graphic, on the outside of the large
rectangle, a small arrow points towards a rectangle with arced edges. Inside
this rectangle are the words, in order from top to bottom, "Enterprise Resource
Planning," "Document Management," "Groupware" and "Other."
<PAGE> 4
PROSPECTUS SUMMARY
You should read this summary together with the entire prospectus, including
the more detailed information in our consolidated financial statements and
accompanying notes appearing elsewhere in this prospectus. Unless otherwise
indicated, all information contained in this prospectus assumes (1) no exercise
of the underwriters' over-allotment option, (2) the conversion of each
outstanding share of preferred stock into one share of common stock and (3) no
exercise of outstanding stock options or warrants.
NIKU
We provide Internet software products and an online marketplace for the
sourcing, management and delivery of professional services. Professional
services include consulting, financial services, medicine, law, engineering,
advertising and other industries in which knowledge and information, or
intellectual capital, are an important element of the services.
According to the U.S. Department of Commerce, the gross domestic product of
the professional services industry, including business, health, legal and
educational services, exceeded $900 billion in 1997. Unlike product-oriented
businesses, which produce finished goods from raw materials and component parts
and sell these goods on a per-item basis, professional services businesses
create information-based deliverables using human resources that are often
billed at time-based rates. As a result of these characteristics, professional
services businesses require sophisticated applications to manage knowledge and
information, including unstructured data and human resources. The market for
business-to-business electronic commerce for services is large and growing, with
Forrester Research estimating that it will increase from approximately $22
billion in 1999 to approximately $220 billion by 2003, representing a compound
annual growth rate of approximately 78%.
We offer a set of Internet software products, eNiku, xNiku and iNiku, which
are designed to automate the core business processes of professional services
organizations, professional services providers within enterprises, and small
businesses and individual professionals. eNiku enables organizations to manage
knowledge, human resources and projects, track time and expenses and analyze
business performance on their corporate "intranets," internal Internet-based
networks. xNiku enables organizations to extend the functions and features of
eNiku to business partners, customers and suppliers using corporate "extranets,"
private Internet-based networks reaching beyond the enterprise. iNiku, our
website for individual professionals and small businesses, allows users to gain
access to relevant content and services and operate their businesses over the
Internet. We have designed our products to be used in an integrated fashion. For
example, an organization using eNiku on its intranet could work with business
partners through its extranet with xNiku and supplement its resources with
contractors who are part of the iNiku community. The common technology linking
eNiku, xNiku and iNiku also allows users to easily participate in our Niku
Services Marketplace, a marketplace for buyers and sellers of professional
services.
We believe key benefits to users of our products and services include:
- significantly enhanced client service;
- substantially expanded revenue opportunities;
- increased profitability; and
- improved recruitment and retention of employees and contractors.
Our goal is to be the leading provider of Internet software products and
online marketplaces for the sourcing, management and delivery of professional
services in a number of professional services industries. Key elements of our
strategy to achieve this goal are as follows:
- target leading enterprise customers;
- enhance our iNiku website;
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<PAGE> 5
- expand the Niku Services Marketplace;
- target additional professional services industries, including financial
services, medicine, law and advertising;
- pursue acquisitions of complementary businesses, products and
technologies; and
- expand our global operations in Europe and the Asia-Pacific region,
where we currently have approximately 25 employees.
An investment in our common stock involves risks which are described in the
section entitled "Risk Factors" on page 7 as well as elsewhere in this
prospectus. We have incurred net losses of $3.0 million for our fiscal year
ended January 31, 1999 and $13.5 million for the nine months ended October 31,
1999. As of October 31, 1999, we had an accumulated deficit of $16.6 million. We
expect to incur net losses for the foreseeable future. We have only recently
introduced the latest versions of our Internet software products. For the
foreseeable future, we expect that our revenues and operating results will
depend upon sales of licenses of our primary Internet software product, eNiku.
For the nine months ended October 31, 1999, we derived approximately 50% of our
revenues from three customers and we expect that for the foreseeable future our
revenues will continue to be concentrated in a relatively small number of
customers. Therefore, our operating results could suffer if we cannot market
eNiku successfully and obtain additional customers. We operate in a competitive
industry in which a number of companies offer products that provide some of the
functionality of our products. Upon completion of this offering, our officers
and directors will beneficially own approximately 39% of our outstanding common
stock. Other risks of an investment in our common stock include our limited
operating history, the potential for fluctuations in our operating results, the
long sales cycle for our products, our need to expand our sales channels, the
fact that our products have not been deployed on a large scale, the complexity
of implementation of our products for large customers and our ability to
effectively integrate recent acquisitions. Other risks also include risks
related to the Internet industry in which we operate and risks related to this
offering.
We were incorporated in Delaware in January 1998. In December 1999, we
acquired Proamics Corporation, a provider of project accounting,
time-and-expense and billing solutions for the professional services industry.
In January 2000, we acquired Legal Anywhere, Inc., a provider of Internet
collaboration software for the legal profession. Our principal executive offices
are located at 305 Main Street, Redwood City, California 94063. Our telephone
number at this location is (650) 298-4600. The information on our website does
not constitute a part of this prospectus. The Niku logo, Niku, eNiku, iNiku,
xNiku, Niku Adaptable KnowledgeStore, NAKS and Niku Services Marketplace are our
trademarks. All other brand names and trademarks appearing in this prospectus
are the property of their respective owners.
4
<PAGE> 6
THE OFFERING
Common stock offered....... 8,000,000 shares
Common stock to be
outstanding after the
offering................. 69,044,235
Use of proceeds............ For general corporate purposes, capital
expenditures and working capital. See "Use of
Proceeds."
Proposed Nasdaq National
Market symbol............ "NIKU"
The number of shares of our common stock to be outstanding after the
offering is based on the number of shares outstanding as of January 29, 2000.
The number of shares to be outstanding excludes as of January 29, 2000:
- 5,409,954 shares of our common stock subject to outstanding options and
warrants;
- 647,148 shares of our common stock to be available for future grant under
our stock plans; and
- options to purchase shares of Legal Anywhere common stock representing
options to purchase up to 141,282 shares of our common stock, which were
assumed in connection with our acquisition of Legal Anywhere.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
NINE
NINE MONTHS MONTHS
YEAR ENDED ENDED OCTOBER 31, YEAR ENDED ENDED
JANUARY 31, ------------------ JANUARY 31, OCTOBER 31,
1999 1998 1999 1999 1999
----------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................ $ 15 $ -- $ 2,976 $ 10,933 $ 12,332
------- ------- -------- -------- --------
Gross profit............................ 11 -- 2,373 5,772 6,287
------- ------- -------- -------- --------
Operating expenses...................... 3,161 1,721 16,084 28,751 38,642
------- ------- -------- -------- --------
Operating loss.......................... (3,150) (1,721) (13,711) (22,979) (32,355)
------- ------- -------- -------- --------
Net loss................................ $(3,020) $(1,665) $(13,533) $(23,340) $(32,373)
Basic and diluted net loss per share.... $ (0.62) $ (0.35) $ (2.31) $ (1.48) $ (1.94)
Shares used in computing basic and
diluted net loss per share............ 4,882 4,800 5,871 15,729 16,718
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 19,329 $ 63,323 $218,563
Working capital............................................. 10,323 53,619 208,859
Total assets................................................ 28,738 146,300 301,540
Long-term obligations, less current portion................. 968 3,341 3,341
Redeemable convertible preferred stock...................... 28,580 100,966 --
Total stockholders' equity (deficit)........................ (13,828) 24,209 280,415
</TABLE>
See note 1 of notes to our financial statements for a description of the
method that we used to compute the net loss per share amounts. Niku's operations
for the period from January 8, 1998 (inception) through January 31, 1998, were
not significant and are included in Niku's results of operations for the year
ended January 31, 1999.
The unaudited pro forma combined statement of operations data give effect
to our acquisition of Proamics Corporation in December 1999 and Legal Anywhere
in January 2000 as if the acquisitions had occurred on February 1, 1998 and do
not assume the conversion of the shares of our outstanding preferred stock into
common stock upon the closing of this offering. The unaudited pro forma combined
balance sheet data give effect to (1) our acquisition of Proamics, (2) our
acquisition of Legal Anywhere and (3) the sale of 7,998,012 shares of our Series
D preferred stock in November 1999 for proceeds of approximately $39.9 million
as if the acquisitions and sale each occurred on October 31, 1999. The pro forma
as adjusted balance sheet data give effect to the conversion of all outstanding
shares of our preferred stock into common stock upon the closing of this
offering and the sale of the 8,000,000 shares of common stock that we are
offering under this prospectus, at an assumed initial public offering price of
$21.00 per share, and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses. See "Capitalization."
Pro forma net loss for the nine months ended October 31, 1999 excludes an
extraordinary gain on early extinguishment of long-term debt of $2.4 million
recorded by Proamics.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock.
The occurrence of any of the following risks could materially and adversely
affect our business, financial condition and operating results. In this case,
the trading price of our common stock could decline and you might lose all or
part of your investment.
RISKS RELATED TO OUR BUSINESS
WE ARE AN EARLY STAGE COMPANY WHICH MAKES IT DIFFICULT TO EVALUATE OUR CURRENT
BUSINESS
We were incorporated in January 1998 and have a limited operating history.
We began licensing our Internet software in December 1998 and introduced the
latest version of this software and our iNiku website in November 1999.
Therefore, we have only a limited operating history upon which to base an
evaluation of our current business and prospects.
DUE TO OUR LIMITED OPERATING HISTORY, IT IS DIFFICULT TO PREDICT OUR FUTURE
OPERATING RESULTS
Due to our limited operating history, it is difficult or impossible for us
to predict future results of operations. For example, we cannot forecast
operating expenses based on our historical results because we have recently
introduced the latest version of iNiku, acquired Proamics Corporation, or
Proamics, and Legal Anywhere, Inc., or Legal Anywhere, and begun to pursue
additional markets, and we are required to forecast expenses in part based on
future revenue projections.
WE HAVE INCURRED LOSSES DURING OUR OPERATING HISTORY AND WE EXPECT TO INCUR
FUTURE LOSSES FOR THE FORESEEABLE FUTURE
We have experienced operating losses in each quarterly and annual period
since we were formed and we expect to incur significant losses in the future. We
incurred net losses of $3.0 million for the year ended January 31, 1999 and
$13.5 million for the nine months ended October 31, 1999. As of October 31,
1999, we had an accumulated deficit of $16.6 million. Proamics has never been
profitable, and as of September 30, 1999, it had an accumulated deficit of $13.4
million. Legal Anywhere has never been profitable and as of December 31, 1999,
it had an accumulated deficit of $1.7 million. We expect to significantly
increase our research and development, sales and marketing, and general and
administrative expenses, in part as a result of our recent acquisitions. In
addition, as a result of our acquisitions of Proamics and Legal Anywhere, we
will record approximately $67.8 million of goodwill and other intangible assets,
which will result in non-cash charges as these assets are amortized over the
next three to five years. Further, we will incur substantial stock-based
compensation expense in future periods, which represents non-cash charges
incurred as a result of the issuance of stock and stock options prior to this
offering. As a result of these factors, we will need to significantly increase
our revenues to achieve and maintain profitability. We may not be able to
sustain our recent revenue growth rates. In fact, we may not have any revenue
growth, and our revenues could decline. Our failure to significantly increase
our revenues would seriously harm our business and operating results.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND IF
OUR FUTURE RESULTS ARE BELOW THE EXPECTATIONS OF INVESTORS, THE PRICE OF OUR
COMMON STOCK WILL DECLINE
Our results of operations could vary significantly from quarter to quarter.
We expect to incur significant sales and marketing expenses to promote our
products and services. Our quarterly operating results are likely to be
particularly affected by the number of customers licensing our products during
any quarter as well as sales and marketing and other expenses for a particular
quarterly period.
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Other factors that could affect our quarterly operating results include:
- our ability to attract new customers, including Proamics' customers, and
retain current customers;
- the announcement or introduction of new products or services by us or our
competitors;
- changes in the pricing of our products and services or those of our
competitors;
- variability in the mix of our products and services revenues in any
quarter; and
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business.
Due to these and other factors, we believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of our future performance. It is possible that in some
future periods, our results of operations may be below the expectations of
investors. If this occurs, the price of our common stock will decline.
For a discussion of our quarterly operating results, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
WE EXPECT TO FACE SEASONALITY IN OUR SALES, WHICH COULD CAUSE OUR QUARTERLY
OPERATING RESULTS TO FLUCTUATE
We expect to experience seasonality in the sales of our products and
services. For example, we anticipate that sales may be lower in our first fiscal
quarter due to patterns in the capital budgeting and purchasing cycles of our
current and prospective customers as well as due to our sales commission
structure. We also expect that sales may decline during summer months,
particularly in European markets. These seasonal variations in our sales may
lead to fluctuations in our quarterly operating results.
OUR PRODUCTS HAVE A LONG SALES CYCLE WHICH MAKES IT DIFFICULT TO PREDICT OUR
QUARTERLY RESULTS AND MAY CAUSE OPERATING RESULTS TO VARY SIGNIFICANTLY
The sales cycle for our products is long, typically from three to six
months, making it difficult to predict the quarter in which we may recognize
revenue from a sale, if at all. Our products often are part of a significant
strategic decision by our customers regarding their information systems.
Accordingly, the decision to license our products typically requires significant
pre-purchase evaluation. We spend substantial time educating and providing
information to prospective customers regarding the use and benefits of our
products. During this evaluation period, we may expend significant funds in
sales and marketing efforts.
Our lengthy sales cycle may cause license revenues and operating results to
vary significantly from period to period. If anticipated sales from a specific
customer for a particular quarter are not realized in that quarter, our
operating results may vary significantly.
IF WE FAIL TO EXPAND OUR DIRECT AND INDIRECT SALES CHANNELS, OUR ABILITY TO
INCREASE REVENUES WILL BE LIMITED
In order to grow our business, we need to increase market awareness and
sales of our products and services. To achieve this goal, we need to increase
both our direct and indirect sales channels. Our failure to do so could harm our
ability to increase revenues. We currently receive substantially all of our
revenues from direct sales, but intend to increase sales through indirect sales
channels in the future. We need to expand our direct sales force by hiring
additional salespersons and sales management. We are seeking to hire at least 40
more of these types of personnel in the current fiscal year. There is strong
competition for qualified sales personnel in our business, and we may not be
able to attract and retain sufficient new sales personnel to expand our
operations.
We intend to derive some of our revenues from our indirect sales channels,
which involves selling our software through value added resellers and other
third parties. Currently, five of these
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other companies market our products. These resellers offer our software products
to their customers together with consulting and implementation services or
integrate our software solutions with other software. We also intend to offer
our Internet software through application service providers, who install our
software on their own computer servers and charge their customers for access to
our software. We are seeking to expand our indirect sales channel to involve at
least 20 relationships with third parties in the current fiscal year and we may
not be able to do so successfully.
TO DATE, CUSTOMERS HAVE NOT DEPLOYED OUR PRODUCTS ON A LARGE-SCALE AND WE MAY
EXPERIENCE CUSTOMER DISSATISFACTION AND LOST SALES IF OUR PRODUCTS DO NOT
ACCOMMODATE LARGE SCALE DEPLOYMENTS
Our software must be able to accommodate substantial increases in the
number of people using our products. To date, however, only eight of our
customers have deployed our Internet software. Thus, our products have not been
tested in the context of large-scale customer implementations. If our customers
cannot successfully implement large-scale deployments, or if they determine that
our products cannot accommodate large-scale deployments, we could lose some or
all of our existing customers and be unable to obtain new customers.
IMPLEMENTATION OF OUR PRODUCTS BY LARGE CUSTOMERS MAY BE COMPLEX AND CUSTOMERS
COULD BECOME DISSATISFIED IF IMPLEMENTATION OF OUR PRODUCTS PROVES DIFFICULT,
COSTLY OR TIME-CONSUMING
Our products must integrate with many existing computer systems and
software programs used by our customers. Integrating with many other computer
systems and software programs can be complex, time-consuming and expensive and
cause delays in the deployment of our products. Because we are one of the first
companies to offer products designed for professional services automation, many
customers will be facing these integration issues for the first time in the
context of professional services automation software. Customers could become
dissatisfied with our products if implementations prove to be difficult, costly
or time-consuming.
WE EXPECT TO DEPEND ON LICENSES OF OUR ENIKU INTERNET SOFTWARE PRODUCT FOR
SUBSTANTIALLY ALL OF OUR REVENUES FOR THE FORESEEABLE FUTURE
Revenues from licenses of our Internet software products, particularly
eNiku products, and related services revenues accounted for all of our revenues
for our fiscal year ended January 31, 1999, and for the nine months ended
October 31, 1999. We anticipate that revenues from the license of these products
and related services revenues, as opposed to transactional and other revenues
from iNiku and the Niku Services Marketplace, will continue to constitute the
vast majority of our revenues for the foreseeable future. Consequently, a
decline in the price of or demand for these products and related services, or
their failure to achieve broader market acceptance, would seriously harm our
business.
WE MAY NOT BE ABLE TO SELL OUR NIKU PRODUCTS TO PROAMICS' CUSTOMERS OR
EFFECTIVELY UTILIZE THE PROAMICS PROFESSIONAL SERVICES PERSONNEL
We acquired Proamics in December 1999. For the nine months ended October
31, 1999, Proamics' revenues of $9.2 million accounted for 75% of our total pro
forma revenues of $12.3 million. Proamics revenue primarily consisted of $2.5
million of software licenses and approximately $6.7 million of services.
However, we do not intend to separately market the Proamics product line.
Although we plan to market Niku products incorporating functionality contained
in Proamics' products to Proamics' customers, we do not know whether any
Proamics' customer will purchase any Niku products. In addition, a large portion
of Proamics' business consisted of software implementation services. If we are
unable to successfully market our products to Proamics' customers or effectively
utilize the Proamics professional services personnel, our business will be
harmed and we may not meet investors' expectations, either of
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which could adversely affect our operating results and cause a drop in the
market price of our common stock.
WE HAVE SOLD OUR PRODUCTS TO COMPANIES AS PART OF BROADER BUSINESS RELATIONSHIPS
AND REVENUES FROM THESE CONTRACTS MAY NOT BE INDICATIVE OF FUTURE REVENUES
We have licensed our products to companies from whom we have purchased
products and services under separate arrangements. These companies generally
consist of (1) companies to whom we license our Internet software and from whom
we receive software to use in our business and (2) members of our Niku Partners
Network.
During the nine months ended October 31, 1999, we derived approximately
$2.0 million of our total revenues from customers from whom we received products
or services. In these relationships, we typically license our Internet software
to a company and that company licenses us software that it markets. These
software licenses are typically non-exclusive, have a perpetual term and may
only be terminated if the terms of the license are violated.
Revenues attributable to Niku Partners were approximately $574,000 of our
total revenues for the nine months ended October 31, 1999. Members of our Niku
Partners Network typically license our software in return for a fee. In
addition, we typically pay a fee to these companies to provide implementation
services to our customers or to provide development services for us. Our
agreements with Niku Partner Network members typically have a term of two years
and may be terminated sooner if there is a breach of the agreement.
It may be more difficult to sell our products and services to potential
customers if we do not also agree to use the software products or services that
a potential customer provides. We cannot assure you that we will be successful
in licensing our products to customers without having to enter into broader
relationships with them.
For an additional discussion of how we recognize revenue and how we
calculate the amount of revenue we recognize from these types of arrangements,
see note 1 of the notes to our consolidated financial statements.
WE EXPECT REVENUES FROM OUR PRODUCTS TO BE CONCENTRATED IN A RELATIVELY SMALL
NUMBER OF CUSTOMERS
For the nine months ended October 31, 1999, three Niku customers,
USinternetworking or USi, Sybase and SalesLogix, accounted for 18%, 22% and 10%
of Niku's total revenues. In addition, each of USi and Sybase, had an officer
and/or director serving on our board of directors. We expect to derive a
significant portion of our revenues from a relatively small number of customers
for the foreseeable future. As a result, if we lose a major customer, our
quarterly and annual results of operations could be harmed. We cannot be certain
that customers that have accounted for significant revenues in past periods,
individually or as a group, will continue to purchase products or renew our
services in any future period.
THE MARKET FOR OUR PRODUCTS AND SERVICES IS NEWLY EMERGING AND CUSTOMERS MAY NOT
ACCEPT OUR PRODUCTS AND SERVICES
The market for professional services automation software products and
services is newly emerging. Services businesses have not traditionally automated
the management of their business processes. We cannot be certain that this
market will continue to develop and grow or that companies will elect to utilize
our products and services rather than attempt to develop applications internally
or through other sources. In addition, the use of the Internet, as well as
corporate intranets and extranets, have not been widely adopted for professional
services automation. Companies that have already invested substantial resources
in other methods may be reluctant to adopt a new approach that may replace,
limit or compete with their existing systems or methods. We expect that we will
need to continue intensive marketing and sales efforts to educate prospective
customers about the uses and benefits of our products and
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services. Therefore, demand for and market acceptance of our products and
services will be subject to a high level of uncertainty.
DEFECTS IN OUR PRODUCTS OR SERVICES COULD RESULT IN LOSS OF OR DELAY IN
REVENUES, LOSS OF MARKET SHARE, FAILURE TO ACHIEVE MARKET ACCEPTANCE OR
INCREASED COSTS
Products and services as complex as those we offer or develop frequently
contain undetected defects or errors. Despite internal testing and testing by
our customers or potential customers, defects or errors may occur in our
existing or future products and services, including year 2000 errors. For
example, from time to time in the past, versions of our software that have been
delivered to customers have contained errors. In these instances, we have
resolved the errors. In the future, if we are not able to detect and correct
errors prior to release, we may experience a loss of or delay in revenues, loss
of market share, failure to achieve market acceptance or increased costs to
remediate errors, any of which could significantly harm our business.
Defects or errors could also result in tort or warranty claims. Although we
attempt to reduce the risk of losses resulting from any claims through warranty
disclaimers and liability limitation clauses in our customer agreements, these
contractual provisions may not be enforceable in every instance. Furthermore,
although we maintain errors and omissions insurance, this insurance coverage may
not adequately cover us for claims. If a court refused to enforce the
liability-limiting provisions of our contracts for any reason, or if liabilities
arose that were not contractually limited or adequately covered by insurance,
our business could be harmed.
THE LATEST VERSION OF OUR INIKU WEBSITE WAS ONLY RECENTLY INTRODUCED, IS AT AN
EARLY STAGE OF DEVELOPMENT AND MAY NOT ACHIEVE MARKET ACCEPTANCE
We introduced the latest version of our iNiku website in November 1999.
Broad and timely acceptance of iNiku is an important part of our success. We may
not be able to attract a sufficient number of users to iNiku and therefore we
may never derive significant revenues from iNiku.
IF WE CANNOT BUILD A CRITICAL MASS OF BUYERS AND SELLERS FOR OUR NIKU SERVICES
MARKETPLACE, THE MARKETPLACE WILL NOT BE SUCCESSFUL
The success of the Niku Services Marketplace depends in large part on our
ability to build a critical mass of buyers and sellers of services for our Niku
Services Marketplace. To attract sellers of services, we must build a critical
mass of buyers interested in obtaining services. However, buyers must perceive
value in the Niku Services Marketplace, which, in part, depends upon the breadth
of the offerings from sellers of services. If we are unable to increase the
number of buyers and sellers of services, the Niku Services Marketplace will not
be successful.
WE HAVE FOCUSED ON THE IT CONSULTING INDUSTRY AND OUR EFFORTS TO EXPAND SALES OF
OUR PRODUCTS AND SERVICES TO OTHER SERVICE INDUSTRIES MAY NOT SUCCEED
To date, our products and services have been targeted for the information
technology, or IT, consulting industry and our primary product has been eNiku
for IT Consulting. However, we intend to develop and market our products and
services in other professional services industries. For example, with our
acquisition of Legal Anywhere in January 2000, we began to offer products to the
legal profession. Businesses may be less likely to use our products and services
outside of the IT consulting industry. Even if they do, we may need to develop
additional expertise or industry-specific knowledge which we may not be able to
do in a timely manner. Therefore, we may not succeed in marketing our products
and services for use outside of the IT consulting industry. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new or enhanced products and services for new
professional services industries in the future. In addition, those products and
services may not meet the requirements of the marketplace in these new markets
and may not achieve market acceptance.
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SYSTEM FAILURE MAY CAUSE INTERRUPTION OF OUR SERVICES
The performance of our website servers and networking hardware and software
infrastructure is critical to iNiku, our hosted professional services automation
software and our ability to provide high quality customer service. Currently,
our infrastructure and systems for iNiku, our hosted applications and our
corporate website are located at one site maintained by USi, at its data center
in Milpitas, California. The California hosting site is in an area susceptible
to earthquakes. We depend on this single-site infrastructure and any disruption
to this infrastructure resulting from a natural disaster or other event could
result in an interruption in our services.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures,
break-ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan or alternative provider
of hosting services. In addition, we do not carry sufficient business
interruption insurance to compensate us for losses that could occur. In the past
we have experienced temporary outages with respect to our iNiku website. These
outages were due to temporary malfunctions of our website servers. To date,
these outages have resulted in our iNiku website being temporarily unavailable
to users for periods of several minutes to several hours. We believe that the
longest period of time our iNiku website has been unavailable due to outages was
approximately five hours in a month. The latest outage occurred in December
1999. Any system failure that causes an interruption in service or a decrease in
responsiveness of our Internet-based services, if sustained or repeated, could
harm our reputation and the attractiveness of our brand name.
WE DEPEND ON DISTRIBUTION, MARKETING AND TECHNOLOGY RELATIONSHIPS AND IF OUR
CURRENT AND FUTURE RELATIONSHIPS ARE NOT SUCCESSFUL, OUR BUSINESS MAY BE HARMED
We rely on distribution, marketing and technology relationships with a
variety of companies. These distribution, marketing and technology relationships
include relationships with:
- the Niku Partners Network of consulting firms;
- operators of high traffic websites such as CNET; and
- vendors of e-commerce and Internet software, such as Allaire, Fulcrum,
Microsoft, Oracle and Seagate Software, whose products or technologies we
incorporate into or integrate with our products, such as development
tools, databases and search engines.
We depend on these companies to promote our products, provide our direct
sales force with customer leads, attract users to iNiku and the Niku Services
Marketplace, integrate and implement our products with those of customers or
provide enhanced functionality to our products. Some of these relationships are
not documented in writing, or are governed by agreements that can be terminated
by either party with little or no prior notice or do not provide for minimum
payments to us. Our Internet marketing relationships also require us to make
significant cash payments.
Companies with which we have a distribution, marketing or technology
relationship may promote products or services of several different companies,
including, in some cases, products or services that compete with ours. These
companies may not devote adequate resources to selling or promoting our products
and services. We may not be able to maintain these relationships or enter into
additional relationships in the future. For example, our agreements with USi
have terms of three years, and our agreement with CNET has a term of two years.
We cannot assure you that we can renew our agreements with USi and CNET on
reasonable terms, or at all.
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MARKET ACCEPTANCE OF OUR PRODUCTS AND SERVICES MAY SUFFER IF WE ARE UNABLE TO
INCORPORATE THE RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY INTO OUR PRODUCTS
Rapidly changing technology and standards may impede market acceptance of
our products and services. Our current products and services have been designed
based upon currently prevailing technology. If new technologies emerge that are
incompatible with our products, our key products and services may become
obsolete and our existing and potential customers may seek alternatives to our
products and services. We may not be able to quickly adapt to any new Internet
technology.
Additionally, we have designed our products to work with databases such as
Oracle Enterprise Server and Microsoft SQL Server and operating systems such as
Windows NT and Sun Solaris. Any changes to those databases or systems, or
increasing popularity of other databases or systems, could require us to modify
our products or services and could cause us to delay releasing future products
and enhancements. As a result, uncertainties related to the timing and nature of
new product announcements, introductions or modifications by vendors or
operating systems, databases, web servers and other enterprise and
Internet-based applications could delay our product development, increase our
product development expenses or cause customers to delay evaluation, purchase
and deployment of our products.
BECAUSE WE HAVE EXPANDED OUR OPERATIONS, OUR SUCCESS WILL DEPEND ON OUR ABILITY
TO MANAGE OUR EXPECTED GROWTH, IMPROVE OUR EXISTING SYSTEMS AND IMPLEMENT NEW
SYSTEMS, PROCEDURES AND CONTROLS
We have rapidly and significantly expanded our operations and expect to
continue to expand our operations. This growth has placed, and is expected to
continue to place, a significant strain on our managerial, operational,
financial and other resources. For example, we have grown to approximately 400
employees as of January 29, 2000 from less than 50 employees as of January 31,
1999. We are seeking to hire at least an additional 200 employees in the current
fiscal year. Our ability to compete effectively and to manage future expansion
of our operations, if any, will require us to continue to improve our financial
and management controls, reporting systems and procedures on a timely basis. We
expect to hire additional new employees to support our business and to implement
and integrate new accounting and control systems. We may not be able to manage
our growth efficiently.
THE PROAMICS AND LEGAL ANYWHERE ACQUISITIONS MAY PRESENT RISKS TO OUR BUSINESS
We acquired Proamics in December 1999 and Legal Anywhere in January 2000.
The acquisitions of Proamics and Legal Anywhere as well as future acquisitions
could create risks for us, including:
- amortization of expenses related to goodwill and other intangible assets,
such as the approximately $47.8 million relating to our acquisition of
Proamics and the approximately $20.0 million relating to our acquisition
of Legal Anywhere;
- difficulties in assimilating the acquired personnel, operations,
technologies or products of Proamics or Legal Anywhere;
- our ability to effectively market and sell our products to Proamics'
customers;
- unanticipated costs associated with the acquisitions;
- the need to manage geographically-dispersed operations, such as Proamics'
operations in Illinois and Legal Anywhere's operations in Oregon;
- diversion of management's attention from other business concerns;
- the inability to retain the acquired employees of Proamics or Legal
Anywhere; and
- adverse effects on our, Proamics' or Legal Anywhere's existing business
relationships.
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If we fail to effectively integrate Proamics or Legal Anywhere, we may face
disruptions to our business activities and our business may be seriously harmed.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT MAY BE DIFFICULT FOR US TO INTEGRATE
OR OTHERWISE HARM OUR OPERATING RESULTS
As part of our business strategy, we may make acquisitions of complementary
businesses, products or technologies. If we acquire a company, we may face
issues which similar to those we are facing with respect to our acquisitions of
Proamics and Legal Anywhere. If we experience difficulties in assimilating
acquired businesses, products or technologies, our ongoing business could be
disrupted, our management and employees could be distracted and we could incur
increased expenses. Furthermore, we may issue equity securities to pay for any
future acquisitions, which could be dilutive to our existing stockholders. We
may also incur debt or assume unknown liabilities in connection with
acquisitions.
THERE IS COMPETITION IN OUR MARKET, WHICH COULD MAKE IT DIFFICULT TO ATTRACT
CUSTOMERS, CAUSE US TO REDUCE PRICES AND RESULT IN REDUCED GROSS MARGINS OR LOSS
OF MARKET SHARE
The market for our products and services is competitive, dynamic and
subject to frequent technological changes. The intensity of competition and the
pace of change are expected to increase in the future. Our products and services
primarily compete with solutions that have been developed by potential
customers' in-house developers and IT departments. In addition, we face
competition from a number of competitors offering products and services that
vary in functionality. These include:
- developers of professional services automation software and related
Internet-based applications;
- providers of hosted software for IT consultants;
- operators of Internet-based job boards;
- developers of project management software; and
- enterprise resource planning software companies that may decide to
develop software or applications for the professional services industry.
We believe that there are a number of companies that offer products that
provide some of the functionality of our products. However we do not believe any
one company has a dominant position in our market as a whole.
We expect additional competition from other established and emerging
companies as the professional services automation market continues to develop.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our
business. We may not be able to compete successfully against current and future
competitors.
WE DEPEND ON THE CONTINUED SERVICES OF OUR EXECUTIVE OFFICERS
Our future success depends upon the continued service of our executive
officers, who are listed in the section entitled "Management," particularly
Farzad Dibachi, our chief executive officer. None of our executive officers is
bound by an employment agreement for any specific term or which prevents them
from terminating their employment at any time. Our business would be seriously
harmed if we lost the services of one or more of our executive officers or if
one or more of them decide to join a competitor or otherwise compete directly or
indirectly with us.
IN ORDER TO GROW OUR BUSINESS, WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL AT
A TIME WHEN COMPETITION FOR PERSONNEL IN OUR INDUSTRY IS INTENSE
We are seeking to hire at least an additional 200 employees in the current
fiscal year. We may be unable to attract, assimilate or retain highly qualified
employees. In particular, we believe
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that we will need to hire additional engineering personnel. We have from time to
time in the past experienced, and we expect in the future to continue to
experience, difficulty in hiring highly skilled employees with appropriate
qualifications as a result of our rapid growth and expansion. Attracting and
retaining qualified personnel with experience in the software and Internet
industries is an additional challenge for us. There is a shortage of qualified
technical personnel and competition for this personnel is intense in our
industry, particularly in the San Francisco Bay Area, where our headquarters is
located. We may not be able to attract, assimilate or retain and motivate new
personnel.
OUR INCREASED INTERNATIONAL ACTIVITIES MAY NOT RESULT IN INCREASED REVENUES
We only recently expanded our operations into Canada, the United Kingdom,
The Netherlands, Germany and Australia. In the future, we intend to expand our
operations into other areas, particularly in the Asia-Pacific region. We believe
we must expand the sales of our products and services outside the United States
and hire additional international personnel. In connection with this expansion,
we also will need to develop internationalized versions of our products.
Therefore, we expect to commit significant resources to expand our international
sales, marketing and development. We may not be successful in marketing our
products and services to customers in markets outside the United States, where
adoption of the Internet and electronic commerce may evolve slowly or may not
evolve at all.
INCREASED INTERNATIONAL ACTIVITIES WILL EXPOSE US TO ADDITIONAL OPERATIONAL
CHALLENGES THAT WE MIGHT NOT OTHERWISE FACE
If we succeed in increasing our international activities, we will be
exposed to additional operational challenges that we would not otherwise face if
we conducted our operations only in the United States. These include:
- currency exchange rate fluctuations, particularly if we sell our products
in denominations other than U.S. dollars;
- seasonal fluctuations in purchasing patterns in other countries,
particularly declining sales during summer months in European markets;
- tariffs, export controls and other trade barriers;
- difficulties in collecting accounts receivable in foreign countries;
- the burdens of complying with a wide variety of foreign laws;
- reduced protection for intellectual property rights in some countries,
particularly in Asia; and
- the need to develop internationalized versions of our products.
WE MIGHT NOT BE ABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS
We regard substantial elements of our products and services as proprietary
and attempt to protect them by relying on patent, trademark, service mark,
copyright and trade secret laws and restrictions, as well as confidentiality
procedures and contractual provisions. Any steps we take to protect our
intellectual property may be inadequate, time consuming and expensive.
Furthermore, despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property, which could harm
our business.
We have applied for four U.S. patents. It is possible that no patents will
issue from our currently pending patent applications. Moreover, new patent
applications may not result in issued patents and may not provide us with any
competitive advantages over, or may be challenged by, third parties.
We have applied for registration of our Niku, iNiku and NAKS trademarks
with the U.S. Patent and Trademark Office. We have not applied for registration
of our logo or our eNiku, xNiku or Niku Services Marketplace trademarks.
Although we rely on copyright laws with respect
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to our software, we have not made any copyright registration with any government
entity with respect to our software.
Legal standards relating to the validity, enforceability and scope of
protection of intellectual property rights in software or Internet-related
industries are uncertain and still evolving, and the future viability or value
of any of our intellectual property rights is uncertain. Effective trademark,
copyright and trade secret protection may not be available in every country in
which our products are distributed or made available. Furthermore, our
competitors may independently develop similar technologies that substantially
limit the value of our intellectual property or design around patents issued to
us.
Substantially all of our iNiku users' usage of our services is governed by
Internet-based license agreements, rather than by means of a formal, written
contract. Users "click" on a dialog box and are deemed to agree to the terms and
conditions that are posted on iNiku, and our relationship with these customers
is then governed by these terms and conditions. There is a possibility that a
court, arbitrator or regulatory body could deem this type of agreement to be
invalid or determine that the terms and conditions governing the agreement do
not fully protect our intellectual property rights.
THIRD PARTIES MIGHT BRING INFRINGEMENT CLAIMS AGAINST US OR OUR THIRD-PARTY
SUPPLIERS THAT COULD HARM OUR BUSINESS
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights, particularly in our
software and Internet industries. We could become subject to intellectual
property infringement claims as the number of our competitors grows and our
products and services overlap with competitive offerings. These claims, even if
not meritorious, could be expensive and divert management's attention from
operating our company. If we become liable to third parties for infringing their
intellectual property rights, we could be required to pay a substantial damage
award and to develop noninfringing technology, obtain a license or cease selling
the products that contain the infringing intellectual property. We may be unable
to develop noninfringing technology or obtain a license on commercially
reasonable terms, if at all.
In addition, as part of our product licenses, we agree to indemnify our
customers against claims that our products infringe upon the intellectual
property rights of others. We could incur substantial costs in defending
ourselves and our customers against infringement claims. In the event of a claim
of infringement, we and our customers may be required to obtain one or more
licenses from third parties. We cannot assure you that we or our customers could
obtain necessary licenses from third parties at a reasonable cost, or at all.
WE ARE UNCERTAIN OF OUR ABILITY TO OBTAIN ADDITIONAL FINANCING FOR OUR FUTURE
CAPITAL NEEDS
We may need to raise additional funds in order to fund more rapid
expansion, expand our marketing activities, develop new or enhance existing
services or products, respond to competitive pressures or acquire complementary
businesses, products or technologies. We may also need to raise funds in the
future to meet our working capital needs. Additional financing may not be
available on terms favorable to us, or at all. If we issue additional equity
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of the
then existing holders of our common stock.
OUR BUSINESS MIGHT BE HARMED IF THE SYSTEMS WE USE ARE NOT YEAR 2000 COMPLIANT
OR IF OUR CUSTOMERS OR POTENTIAL CUSTOMERS ALTER THEIR PURCHASING PATTERNS AS A
RESULT OF THE YEAR 2000 PROBLEM
Although January 1, 2000 has occurred, our information technology systems
could be impaired or cease to operate due to the year 2000 problem.
Additionally, we rely on technology supplied by third parties. These third
parties may experience year 2000 related problems. Any
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year 2000 problems experienced by us or any of these third parties could harm
our business. Additionally, the Internet could face serious disruption arising
from the year 2000 problem.
Further, any year 2000 problems with respect to our products could lead to
claims from our customers asserting liability, including liability for breach of
warranties related to our products, which could result in large settlements or
judgments against us.
RISKS RELATED TO THE INTERNET INDUSTRY
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE ADOPTION OF THE INTERNET FOR
ELECTRONIC COMMERCE AND COMMUNICATIONS
Our business is based on providing software for the sourcing, management
and delivery of professional services using the Internet. Therefore, in order
for our business to be successful, the Internet must be widely adopted, in a
timely manner, as a means of electronic commerce and communication relating to
professional services. Because electronic commerce and communication over the
Internet are new and evolving, it is difficult to predict the size of this
market and its sustainable growth rate. To date, many businesses and consumers
have been deterred from utilizing the Internet for a number of reasons,
including, but not limited to:
- potentially inadequate development of network infrastructure;
- security concerns, including the potential for fraud or theft of stored
data and information communicated over the Internet;
- inconsistent quality of service, including well-publicized down times for
popular websites;
- lack of availability of cost-effective, high-speed service;
- limited numbers of local access points for corporate users;
- delay in the development of enabling technologies or adoption of new
standards;
- inability to integrate business applications with the Internet;
- the need to operate with multiple and frequently incompatible products;
and
- a lack of tools to simplify access to and use of the Internet.
INCREASING GOVERNMENTAL REGULATION OF THE INTERNET COULD LIMIT THE MARKET FOR
OUR PRODUCTS AND SERVICES
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, such as user privacy,
taxation of goods and services provided over the Internet, pricing, content and
quality of products and services. Legislation could dampen the growth in
Internet usage and decrease or limit its acceptance as a communications and
commercial medium. If enacted, these laws and regulations could limit the market
for our products and services. In addition, existing laws could be applied to
the Internet, including consumer privacy laws. Legislation or application of
existing laws could expose companies involved in electronic commerce, to
increased liability, which could limit the growth of electronic commerce
generally.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF OUR PRODUCTS AND
SERVICES
A fundamental requirement to conduct Internet-based electronic commerce is
the secure transmission of confidential information over public networks.
Failure to prevent security breaches of our customers' networks, or well
publicized security breaches affecting the Internet in general, could
significantly harm our business. We cannot be certain that advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments will not result in a compromise or breach of the security measures
of our products and services or our iNiku business website. Anyone who is able
to circumvent our security measures could
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misappropriate proprietary, confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.
NEW TAX TREATMENT OF COMPANIES ENGAGED IN INTERNET COMMERCE MAY ADVERSELY AFFECT
THE INTERNET INDUSTRY
Tax authorities on the international, federal, state and local levels are
currently reviewing the appropriate tax treatment of companies engaged in
Internet commerce. New state tax regulations may subject companies engaged in
electronic commerce to additional state sales, income and other taxes. A
recently passed federal law places a temporary moratorium on certain types of
taxation on electronic commerce. We cannot predict the effect of current
attempts to impose sales, income or other taxes on commerce over the Internet;
although, if imposed, these taxes would likely increase our cost of doing
business.
RISK RELATED TO THIS OFFERING
OUR OFFICERS, DIRECTORS AND OTHER EXISTING STOCKHOLDERS WILL OWN APPROXIMATELY
59% OF OUR VOTING STOCK AFTER THIS OFFERING AND WILL BE ABLE TO CONTROL US
As of January 29, 2000, our officers, directors and 5% or greater
stockholders beneficially owned or controlled, directly or indirectly,
40,998,318 shares of our capital stock, which in the aggregate represented
approximately 67.2% of the outstanding shares of our common stock on an as
converted to common stock basis. After this offering and assuming no additional
issuances of common stock, our officers, directors and 5% or greater
stockholders will beneficially own or control, directly or indirectly,
approximately 59.4% of the outstanding shares of our common stock. As a result,
if these persons act together, they will have the ability to influence all
matters submitted to our stockholders for approval, including the election and
removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. This ability to exercise influence over all
matters requiring stockholder approval could prevent or significantly delay
another company or person from acquiring or merging with us.
THE MARKET PRICE FOR OUR COMMON STOCK, LIKE OTHER TECHNOLOGY STOCKS, MIGHT BE
VOLATILE AND COULD RESULT IN A DECLINE IN THE VALUE OF YOUR INVESTMENT
We believe that the market price of our common stock, like other
early-stage Internet-related companies, could be volatile. The value of your
investment in our common stock could decline due to the impact of any of the
following factors upon the market price of our common stock:
- variations in our quarterly operating results;
- announcements of new product or service offerings by us or our
competitors;
- announcement of new customer relationships by us or our competitors;
- changes in market valuations of Internet-related companies;
- additions to, or departures of, our executive officers; and
- conditions and trends in the Internet and electronic commerce industries.
Further, the stock markets, particularly the Nasdaq National Market on
which we have applied to have our common stock listed, have experienced
substantial price and volume fluctuations. These fluctuations have particularly
affected the market prices of equity securities of many technology and
Internet-related companies and have often been unrelated or disproportionate to
the operating performance of those companies. The trading prices of many
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technology companies' stocks are at or near historical highs. These high trading
prices may not be sustained.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE
Sales of a large number of shares of our common stock in the market after
this offering, or the belief that these sales could occur, could cause a drop in
the market price of our common stock. Upon completion of this offering, we will
have outstanding 69,044,235 shares of common stock. All of the shares sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act of 1933, unless the shares are purchased
by our "affiliates," as that term is defined under the Securities Act. The
remaining 61,044,235 shares of common stock outstanding upon completion of this
offering will be "restricted securities," as that term is defined under Rule 144
of the Securities Act. Of these shares:
- 40,722,293 shares will become eligible for resale beginning 180 days
after the date of this prospectus, as a result of the expiration of
lock-up agreements with the underwriters that prohibit the sale of these
shares;
- 8,356,137 shares will become freely tradeable after November 17, 2000;
- 8,289,236 shares will become freely tradeable after December 8, 2000;
- 167,384 shares will be freely tradeable after January 31, 2001;
- 64,930 shares will be freely tradeable after February 24, 2001;
- 2,245,643 shares will be freely tradeable after June 8, 2001; and
- 1,198,612 shares will be freely tradeable after that date.
However, the underwriters have the right to waive these lock-up restrictions
prior to the end of the 180-day period. In addition, the underwriters have the
right to waive lock-up restrictions on the sale of newly issued shares by us.
The waiver of restrictions is solely at the discretion of the underwriters and
no specific criteria determine the timing of a waiver or the number of shares
released from lock-up. The shares subject to lock-up may therefore be available
for sale at any time. See "Shares Eligible For Future Sale."
PROVISIONS OF DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD
DELAY OR PREVENT A TAKEOVER OF US, EVEN IF DOING SO WOULD BENEFIT OUR
STOCKHOLDERS
Provisions of Delaware law, our certificate of incorporation and bylaws
could have the effect of delaying or preventing a third party from acquiring us,
even if a change in control would be beneficial to our stockholders. These
provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring two-thirds of the outstanding shares to approve amendments to
some provisions of our certificate of incorporation and bylaws;
- requiring a majority of the stockholders to call stockholders meetings;
and
- prohibiting stockholder actions by written consent.
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION FROM THIS
OFFERING
We expect that the initial public offering price of our common stock will
be substantially higher than the book value per share of the outstanding common
stock. As a result, investors purchasing stock in this offering will experience
an immediate dilution in the net tangible book value of the common stock of
$17.49 per share, based on the number of outstanding shares as of October 31,
1999, assuming conversion of all outstanding shares of our preferred stock into
our common stock, and an assumed initial public offering price of $21.00 per
share. On a pro forma basis, after taking into account our acquisitions of
Proamics and Legal Anywhere,
19
<PAGE> 21
investors purchasing stock in this offering will experience an immediate
dilution in the net tangible book value of the common stock of $18.08 per share.
In the past, we issued options to acquire our common stock at prices
significantly below the initial offering price. To the extent these outstanding
options are ultimately exercised, there will be further dilution to investors in
this offering.
MANAGEMENT DOES NOT HAVE A SPECIFIC PLAN FOR USING THE PROCEEDS OF THIS OFFERING
AND MIGHT APPLY THE NET PROCEEDS FROM THIS OFFERING TO USES THAT DO NOT INCREASE
OUR OPERATING RESULTS OR MARKET VALUE
The net proceeds from the sale of our common stock in this offering will be
added to our general working capital. We intend to spend at least $70.0 million
in the current fiscal year for general and administrative expenses, sales and
marketing expenses and research and development activities. We anticipate that
we will fund these activities from our existing cash, which was approximately
$19.3 million at October 31, 1999, the approximately $39.9 million of proceeds
from our November 1999 preferred stock financing and proceeds from this
offering. Assuming an initial public offering price of $21.00 per share, we
expect that we will have net proceeds of approximately $155.2 million from this
offering. Despite our current estimates, the actual allocations of our proceeds
could change significantly in the future. Therefore, we cannot specify with
certainty how we will use these proceeds. Consequently, our management will have
broad discretion with respect to the application of the proceeds from this
offering, and you will not have the opportunity, as part of your investment in
our common stock, to assess whether the proceeds are being used appropriately.
The net proceeds may be used for corporate purposes that do not increase our
operating results or market value. Pending application of the proceeds, they
might be placed in investments that do not produce income or that lose value.
INVESTORS SHOULD NOT EXPECT TO RECEIVE DIVIDENDS
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. In
addition, our loan agreements prohibit us from paying cash dividends without the
consent of our lenders. Therefore, investors should not expect us to declare
dividends on our common stock.
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<PAGE> 22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts, but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks" and "estimates," and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements. These risks and
uncertainties include those described in "Risk Factors" and elsewhere in this
prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our management's view only as of the
date of this prospectus. Except as required by law, we undertake no obligation
to update any forward-looking statement, whether as a result of new information,
future events or otherwise.
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<PAGE> 23
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 8,000,000 shares of
common stock that we are offering will be approximately $155.2 million, at an
assumed initial public offering price of $21.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $178.7 million.
The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock, to enhance our ability to
acquire other businesses, products or technologies and to facilitate future
access to public equity markets. We intend to use the net proceeds of this
offering, together with our cash on hand and the approximately $39.9 million of
proceeds from our November 1999 preferred stock financing, to fund our
operations, including at least $10.0 million for general and administrative
expenses, primarily to support increased personnel, $40.0 million for sales and
marketing, primarily to support increased personnel and promotional activities,
and $20.0 million for research and development activities, primarily to support
increased personnel. We anticipate that the remainder of the proceeds will be
used for working capital purposes. We may also use a portion of the net proceeds
from this offering to acquire or invest in businesses, products or technologies
that are complementary to our business. We currently have no commitments or
agreements with respect to any future acquisitions or investments. We have not
determined the amounts we plan to spend on any of the uses described above or
the timing of these expenditures. Pending our use of the net proceeds, we intend
to invest them in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends in the foreseeable future. In
addition, our loan agreements prohibit us from paying cash dividends without the
consent of the lenders.
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<PAGE> 24
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect (1) the issuance of 3,501,938 shares of
our common stock and 6,491,203 shares of our Series D preferred stock in
connection with our acquisition of Proamics in December 1999, (2) the
sale of 7,998,012 shares of our Series D preferred stock in November 1999
for aggregate proceeds of approximately $39.9 million and (3) the
issuance of 853,689 shares of our common stock in connection with our
acquisition of Legal Anywhere; and
- on a pro forma as adjusted basis to reflect the conversion of all
outstanding shares of our preferred stock into our common stock upon the
closing of this offering and the sale of our common stock in this
offering, at an assumed initial public offering price of $21.00 per
share, after deducting estimated underwriting discounts and commissions
and our estimated offering expenses.
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term obligations.................... $ 5,502 $ 6,388 $ 6,388
======== ======== ========
Long-term obligations, less current portion................. $ 968 $ 3,341 $ 3,341
-------- -------- --------
Redeemable convertible preferred stock and warrants, $0.0001
par value, 34,272,843 shares authorized, 33,130,282 shares
issued and outstanding, actual; 51,910,282 shares
authorized, 47,619,497 shares issued and outstanding, pro
forma; no shares authorized, issued or outstanding, pro
forma as adjusted......................................... 28,580 100,966 --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; no shares authorized,
issued or outstanding, actual and pro forma; 10,000,000
shares authorized no shares issued or outstanding, pro
forma as adjusted....................................... -- -- --
Common stock, $0.0001 par value; 50,000,000 shares
authorized, 7,106,118 shares issued and outstanding,
actual; 100,000,000 shares authorized, 11,461,745 shares
issued and outstanding, pro forma; 250,000,000 shares
authorized, 67,081,242 shares issued and outstanding,
pro forma as adjusted................................... 1 1 7
Additional paid-in capital................................ 10,100 48,137 304,337
Treasury stock............................................ (30) (30) (30)
Deferred stock-based compensation......................... (7,238) (7,238) (7,238)
Notes receivable from stockholders........................ (108) (108) (108)
Accumulated deficit....................................... (16,553) (16,553) (16,553)
-------- -------- --------
Total stockholders' equity (deficit)............... (13,828) 24,209 280,415
-------- -------- --------
Total capitalization............................... $ 15,720 $128,516 $283,756
======== ======== ========
</TABLE>
The share numbers above exclude:
- 3,629,127 shares of our common stock subject to options outstanding under
our 1998 Stock Plan as of October 31, 1999, at a weighted average
exercise price of $0.26 per share;
- 2,302,250 shares of our common stock available for future grant under our
1998 Stock Plan as of October 31, 1999;
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<PAGE> 25
- 6,000,000 shares of our common stock to be available for future grant
under our 2000 Equity Incentive Plan and 1,000,000 shares of our common
stock to be available for future grant under our 2000 Employee Stock
Purchase Plan; and
- 630,000 shares of our Series B preferred stock issuable upon the exercise
of outstanding warrants as of October 31, 1999, at a weighted average
exercise price of $0.75 per share.
Subsequent to October 31, 1999 and through January 29, 2000, we granted
options to purchase 1,604,960 shares of our common stock under our 1998 Stock
Plan at a weighted average exercise price of $2.61 per share, issued 362,693
shares of our common stock pursuant to exercise of options and grants of
restricted shares under our 1998 Stock Plan, and cancelled options to purchase
95,580 shares of our common stock under the 1998 Stock Plan and issued 1,600,000
shares of our common stock to employees under stock purchase agreements at a
weighted average purchase price of $1.00 per share. In connection with our
acquisition of Legal Anywhere, we assumed options to purchase shares of Legal
Anywhere common stock which represent options to purchase 141,282 shares of our
common stock.
You should read this table together with "Management -- Director
Compensation," "-- Employee Benefit Plans," "Description of Capital Stock,"
"Certain Transactions" and notes 6 and 9 of the notes to our consolidated
financial statements.
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<PAGE> 26
DILUTION
Our pro forma net tangible book value as of October 31, 1999 was $13.9
million or approximately $0.35 per share, assuming the conversion of all
outstanding shares of our preferred stock into shares of our common stock. Pro
forma net tangible book value per share is determined by dividing the pro forma
number of outstanding shares of our common stock into our net tangible book
value, which is our total tangible assets less total liabilities. After giving
effect to the receipt of the estimated net proceeds from this offering, based
upon an assumed initial public offering price of $21.00 per share and after
deducting the estimated underwriting discounts and commissions and our estimated
offering expenses, our pro forma net tangible book value as of October 31, 1999
would have been approximately $169.2 million, or $3.51 per share. This
represents an immediate increase in pro forma net tangible book value of $3.16
per share to existing stockholders and an immediate dilution in net tangible
book value of $17.49 per share to new investors purchasing shares at the initial
public offering price. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $21.00
------
Pro forma net tangible book value per share as of October
31, 1999.................................................. $0.35
-----
Increase per share attributable to new investors............ 3.16
-----
Pro forma net tangible book value per share after
offering.................................................. 3.51
------
Dilution per share to new investors......................... $17.49
======
</TABLE>
If the acquisitions of Proamics and Legal Anywhere had occurred as of
October 31, 1999, our pro forma net tangible book value at that date would have
been $17.6 million, or $0.34 per share. After giving effect to the receipt of
the estimated net proceeds of this offering, our pro forma net tangible book
value would be approximately $172.8 million, or $2.92 per share. This would
represent an immediate increase in pro forma net tangible book value per share
of $2.58 per share to existing stockholders and an immediate dilution in net
tangible book value of $18.08 per share to new investors.
The following table summarizes as of October 31, 1999, on the pro forma
basis described above, the number of shares of common stock purchased from us,
the total consideration paid and the average price per share paid by existing
stockholders and by investors purchasing shares of our common stock in this
offering, before deducting the estimated underwriting discounts and commissions
and our estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- -----------------------
NUMBER PERCENT AMOUNT PERCENT
---------- ------- ------------ -------
<S> <C> <C> <C> <C>
Existing stockholders...................... 40,236,400 83.4% $ 28,775,000 14.6%
New investors.............................. 8,000,000 16.6 168,000,000 85.4
---------- ----- ------------ -----
Total...................................... 48,236,400 100.0% $196,775,000 100.0%
========== ===== ============ =====
</TABLE>
In November 1999, we sold 7,998,012 shares of our Series D preferred stock
for aggregate proceeds of approximately $39.9 million, or a purchase price of
approximately $5.00 per share. In December 1999, in connection with our
acquisition of Proamics, we issued 3,501,938 shares of our common stock and
6,491,203 shares of our Series D preferred stock in exchange for all of the
outstanding capital stock of Proamics. In January 2000, in connection with our
acquisition of Legal Anywhere, we issued 853,689 shares of our common stock in
exchange for all of the outstanding capital stock of Legal Anywhere and assumed
options which are exercisable for 141,282 shares of our common stock.
As of October 31, 1999, there were options outstanding to purchase a total
of 3,629,127 shares of our common stock at a weighted average exercise price of
$0.26 per share, and warrants outstanding to purchase a total of 630,000 shares
of our Series B preferred stock
25
<PAGE> 27
at a weighted average exercise price of $0.75 per share. Subsequent to October
31, 1999 and through January 29, 2000, we granted options to purchase 1,604,960
shares of our common stock under our 1998 Stock Plan at a weighted average
exercise price of $2.61 per share and issued 1,600,000 shares of our common
stock to employees under stock purchase agreements at a weighted average
purchase price of $1.00 per share. To the extent that any options or warrants
are exercised, there will be further dilution to new public investors. See
"Capitalization," "Management -- Employee Benefit Plans," "Description of
Capital Stock," "Certain Transactions" and notes 6 and 9 of the notes to our
financial statements.
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<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, our consolidated financial
statements and related notes to our financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
consolidated statement of operations data for the year ended January 31, 1999,
and the nine months ended October 31, 1999, and the balance sheet data as of
January 31, 1999 and October 31, 1999, are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in this
prospectus, which have been audited by KPMG LLP, independent auditors. The
unaudited statement of operations data for the nine months ended October 31,
1998, is derived from unaudited financial statements included elsewhere in this
prospectus. We have prepared the unaudited information on the same basis as the
audited consolidated financial statements and have included all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for these
periods. Niku's operations for the period from January 8, 1998 (inception)
through January 31, 1998, were not significant and are included in Niku's
results of operations for the year ended January 31, 1999, and nine months ended
October 31, 1998.
The historical results are not necessarily indicative of results to be
expected in any future period and results for the nine months ended October 31,
1999 are not necessarily indicative of results to be expected for the full
fiscal year.
The unaudited pro forma combined condensed statement of operations data
presents our consolidated statement of operations for the fiscal year ended
January 31, 1999, combined with the consolidated statement of operations of
Proamics and the statement of operations of Legal Anywhere for the year ended
December 31, 1998, and our consolidated statement of operations for the nine
months ended October 31, 1999, combined with the consolidated statement of
operations for Proamics and the statement of operations for Legal Anywhere for
the nine months ended September 30, 1999, giving effect to our acquisitions of
Proamics and Legal Anywhere as if they had occurred on February 1, 1998. The
unaudited pro forma combined condensed balance sheet data gives effect to the
acquisitions as if the transactions occurred on October 31, 1999, and combines
our consolidated balance sheet as of October 31, 1999, with the consolidated
balance sheet of Proamics and the balance sheet of Legal Anywhere as of
September 30, 1999, and gives effect to the sale of our Series D preferred stock
as if the sale had occurred on October 31, 1999.
The unaudited pro forma combined condensed information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of the
future operating results or financial position of the combined companies.
The pro forma adjustments are preliminary and based on management's
estimates of the value of the tangible and intangible assets acquired. The
actual adjustments may differ materially from those presented in these pro forma
financial statements.
27
<PAGE> 29
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
YEAR NINE MONTHS ENDED NINE MONTHS
ENDED OCTOBER 31, YEAR ENDED ENDED
JANUARY 31, ------------------- JANUARY 31, OCTOBER 31,
1999 1998 1999 1999 1999
----------- ------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
License........................................... $ -- $ -- $ 1,962 $ 3,198 $ 4,576
Services.......................................... 15 -- 1,014 7,735 7,756
------- ------- -------- -------- --------
Total revenues.............................. 15 -- 2,976 10,933 12,332
------- ------- -------- -------- --------
Cost of revenues.................................... 4 -- 603 5,161 6,045
------- ------- -------- -------- --------
Gross profit........................................ 11 -- 2,373 5,772 6,287
Operating expenses:
Research and development.......................... 1,610 849 6,062 3,050 8,367
Sales and marketing............................... 290 75 5,983 2,978 9,417
General and administrative........................ 996 720 1,837 3,409 4,313
Stock-based compensation.......................... 245 77 2,018 245 2,074
Amortization of goodwill and other intangible
assets.......................................... 20 -- 184 19,069 14,471
------- ------- -------- -------- --------
Total operating expenses.................... 3,161 1,721 16,084 28,751 38,642
------- ------- -------- -------- --------
Operating loss.................................. (3,150) (1,721) (13,711) (22,979) (32,355)
Interest and other.................................. 130 56 178 (361) (18)
------- ------- -------- -------- --------
Loss before extraordinary gain...................... $(3,020) $(1,665) $(13,533) (23,340) (32,373)
======= ======= ======== ======== ========
Basic and diluted net loss before extraordinary gain
per share......................................... $ (0.62) $ (0.35) $ (2.31) $ (1.48) $ (1.94)
======= ======= ======== ======== ========
Shares used in computing basic and diluted net loss
before extraordinary gain per share............... 4,882 4,800 5,871 15,729 16,718
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AS OF
JANUARY 31, OCTOBER 31, OCTOBER 31,
1999 1999 1999
----------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments........... $ 5,147 $ 19,329 $ 63,323
Working capital............................................. 4,786 10,323 53,619
Total assets................................................ 6,555 28,738 146,300
Long-term obligations, less current portion................. -- 968 3,341
Redeemable convertible preferred stock...................... 8,259 28,580 100,966
Accumulated deficit......................................... (3,020) (16,553) (16,553)
Total stockholders' equity (deficit)........................ (2,363) (13,828) 24,209
</TABLE>
Pro forma net loss for the nine months ended October 31, 1999 excludes an
extraordinary gain on early extinguishment of long-term debt of $2.4 million
recorded by Proamics.
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following Management's Discussion and Analysis of
Financial Condition and Results of Operations together with the consolidated
financial statements and related notes included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We provide Internet software products and an online marketplace for the
sourcing management and delivery of professional services. Our principal
products are eNiku, xNiku and iNiku. We commenced operations in January 1998.
From January 1998 through November 1998, we were in the development stage,
conducting research and developing our initial products. In December 1998, we
began offering our Internet software products and related services and currently
offer them in the United States and, to a lesser extent, in Europe and the
Asia-Pacific region. We currently market our products primarily through our
direct sales force and other channels, such as resellers. In November 1999, we
introduced the most recent version of our iNiku website. In December 1999, we
acquired Proamics, a provider of project accounting, time-and-expense and
billing software for the professional services industry. In January 2000, we
acquired Legal Anywhere, a provider of Internet collaboration software for the
legal profession.
OUR HISTORY OF LOSSES
Although our revenues have increased from quarter to quarter, we incurred
significant costs to develop our technology and products and to recruit and
train personnel for our engineering, sales, marketing, professional services and
administrative organizations. As a result, we incurred net losses for the nine
months ended October 31, 1999 and for the year ended January 31, 1999 of $13.5
million and $3.0 million. We expect to incur net losses in the foreseeable
future. As of October 31, 1999, we had an accumulated deficit of $16.6 million.
We believe our success is contingent on increasing our customer base, on
continuing to develop our eNiku, xNiku and iNiku products, related services and
the Niku Services Marketplace and on expanding our market presence into new
professional services industries. We intend to continue to invest heavily in
sales, marketing and research and development. We also expect to incur
substantial non-cash charges relating to the amortization of goodwill and other
intangible assets and stock-based compensation.
Pro forma amortization of the October 31, 1999 balance of goodwill and
other intangible assets will result in pro forma expense totaling approximately
$2.1 million for the three months ending January 29, 2000, $19.3 million for the
2001 fiscal year, $19.3 million for the 2002 fiscal year, $18.0 million for the
2003 fiscal year, $5.5 million for the 2004 fiscal year and $4.2 million for the
2005 fiscal year. We expect to record approximately $40.6 million of additional
deferred stock-based compensation related to stock options granted between
November 1, 1999 and February 21, 2000. Amortization of total deferred stock
compensation recorded through February 21, 2000, will result in pro forma
expense totaling approximately $6.3 million for the three months ending January
29, 2000, $26.0 million for the 2001 fiscal year, $10.1 million for the 2002
fiscal year, $4.3 million for the 2003 fiscal year, and $1.1 million for the
2004 fiscal year. Due to these and other factors, we expect to continue to incur
substantial operating losses for the foreseeable future.
SOURCES OF REVENUES AND REVENUE RECOGNITION POLICY
Through October 31, 1999, our revenues were principally derived from the
sale of licenses of our Internet software products, the provision of maintenance
and support and the delivery of
29
<PAGE> 31
implementation consulting services. In the future we intend to pursue revenues
from a third source -- our iNiku website and the Niku Services Marketplace.
Customers who license eNiku receive a per seat, or user, license and all of
the applicable modules and adapters to interface with existing enterprise
systems. License fees are generally based upon the number of seats licensed by
the customer. Customers may also license eNiku under a server capacity license,
the fee for which is based upon the customer's estimated annual volume of users
or "billable consultants" requiring access to the applications. Capacity or
"site" licensing allows customers to scale the total cost of eNiku to their
initial estimated volume requirements and they can purchase additional capacity.
Customers who license our Internet software products generally enter into
maintenance and support agreements which allow for application version upgrades
and technical support for a stated term of generally one year. Customers may
purchase implementation services from us or from third-party consulting
organizations. In the future, we expect to rely in significant part on
third-party consulting organizations to deliver these services. We also offer
fee-based training to our customers. Currently, our standard iNiku website
offering is available to users free of charge.
We have adopted the provisions of Statement of Position, or SOP No. 97-2
Software Revenue Recognition, as amended by SOP No. 98-9, modification of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions. Revenue
recognized from multiple-element software arrangements are allocated to each
element of the arrangement based on fair values of the elements, such as
software products, maintenance and support and consulting services. The
determination of fair value is based on objective evidence which is specific to
us.
We recognize license revenues when persuasive evidence of an arrangement
exists, delivery of the product has occurred, no significant company obligations
with regard to installation or implementation of the software remain, the fee is
fixed or determinable and collectibility is probable. We consider all
arrangements with payment terms extending beyond three months and other
arrangements with payment terms longer than normal not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer. As payments become due from the customer,
the initial amounts are first allocated to deferred revenue elements such as
maintenance and support and consulting services. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Arrangements that include consulting services are evaluated to determine whether
those services are essential to the functionality of other elements of the
arrangement. When services are considered essential, revenue under the agreement
is recognized using contract accounting. When services are not considered
essential, the revenue allocable to the software services is recognized as the
services are performed. Maintenance and support revenue is deferred and
recognized on a straight-line basis over the life of the related agreement,
which is typically one year.
REVENUE RECOGNITION FOR NONMONETARY EXCHANGES AND TRANSACTIONS WITH NIKU
PARTNERS
We have entered into a number of customer agreements involving the
licensing of our products and services to companies from whom we have purchased
products under separate agreements. Although these transactions are governed by
individual and distinct contracts, some are viewed as "nonmonetary" for
accounting purposes. For the nine months ended October 31, 1999, approximately
$1.4 million of our total revenues derived from these types of transactions were
considered to be nonmonetary.
We recognize revenue for arrangements involving nonmonetary exchanges of
our products for customer products or services when the following three
conditions have been met: (1) the fair value of the products received is
objectively determinable; (2) the product received will not be incorporated into
or integrated with our products; and (3) the product received will be used
internally by us in a manner consistent with its fair value.
30
<PAGE> 32
In addition, members of our Niku Partners Network are also our customers.
In most of our Niku Partner alliance arrangements we have committed that these
Niku Partners would receive a minimum dollar value of professional services from
us. These transactions are classified as either monetary or nonmonetary,
depending on the amount of value received by us from the Niku Partner. If the
value we receive or pay in the transaction exceeds 25% of the fair value of the
exchange with the Niku Partner, the transaction is considered to be monetary,
otherwise the transaction is considered to be nonmonetary for accounting
purposes. Revenue recognized from monetary transactions is limited at any time
to the fair value of the Niku Partner's professional services used by us.
Revenue from nonmonetary transactions is recognized when we use the Niku
Partner's professional services time for internal use as codevelopment experts
in developing future versions of our product functionality. Revenues
attributable to monetary transactions with Niku Partners for the nine months
ended October 31, 1999, were $436,000 and revenues attributable to nonmonetary
transactions with Niku Partners were $138,000.
We believe that these arrangements have expanded our presence in key
markets and have helped us to ensure that consulting organizations are trained,
experienced and available to perform implementation work at our customers' sites
and offer our products for resale. We intend to enter into these types of
relationships in the future, although we anticipate that revenues related to
these relationships will decline as a percentage of our total revenues. Please
see note 1 of our notes to our consolidated financial statements for a
description of the nature of these contracts and our related revenue recognition
accounting policies.
DEFERRED REVENUES
Deferred revenues include amounts billed to customers for which revenues
have not been recognized which generally results from the following: (1)
deferred maintenance and support; (2) consulting services not yet rendered; (3)
amounts billed to third parties for products not yet sold through to end-user
customers; (4) amounts billed to customers with extended payments terms which
are not yet due; and (5) amounts billed under monetary Niku Partner customer
arrangements in excess of Niku Partner professional services used by us. Of our
$1.9 million of deferred revenues as of October 31, 1999, $342,000, was
attributable to nonmonetary transactions with our customers within the
categories described above.
COST OF REVENUES
Our cost of revenues includes costs of our license revenues and costs of
our services revenues. Our cost of license revenues includes royalties due to
third parties for technology products integrated into our software products, the
cost of manuals and product documentation, production media and shipping costs.
Our cost of service revenues include salaries and related expenses for our
customer support, implementation and training organizations, as well as the
costs of third parties contracted to provide consulting services to our
customers. Because our cost of service revenues is greater than cost of license
revenues, cost of revenues may fluctuate based on the mix of products and
services sold.
OPERATING EXPENSES
Our operating expenses are classified into three general operational
categories: sales and marketing, research and development and general and
administrative. In addition, our operating expenses include two non-cash
categories: stock-based compensation and amortization of goodwill and other
intangible assets. We classify all charges to the sales and marketing, research
and development and general and administrative expense categories based on the
nature of the expenditures. Although each of these three categories includes
expenses that are unique to the category type, there are commonly recurring
expenditures that are typically included in these categories, such as salaries,
employee benefits, sales commissions, travel and entertainment costs, allocated
communication, rent and facilities costs, and third party professional service
fees. The sales and marketing category of operating expenses also includes
expenditures
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specific to the marketing group such as public relations and advertising, trade
shows and marketing collateral materials.
We allocate the total cost of overhead and facilities to each of the
functional areas that use overhead and facilities based upon their respective
headcount. These allocated charges include facility rent for the corporate
office, communications charges and depreciation expense for office furniture and
equipment.
In connection with the granting of stock options to, and restricted stock
purchases by, our employees through October 31, 1999, we recorded deferred
stock-based compensation totaling approximately $9.3 million. This amount
represents the difference between the exercise or purchase price, as applicable,
and the deemed fair value of our common stock for accounting purposes on the
date these stock options were granted or purchase agreements were signed. This
amount is included as a component of stockholders' equity and is being amortized
on an accelerated basis by charges to operations over the vesting period of the
options consistent with the method described in Financial Accounting Standards
Board Interpretation No. 28. The stock options and restricted stock purchases
generally vest at a rate of 25% upon the first anniversary of the option grant
date or restricted stock purchase date and 2.083% each month thereafter for
three years. We expect to record additional substantial stock-based compensation
for stock options granted subsequent to October 31, 1999. Amortization of the
October 31, 1999 balance of deferred stock-based compensation will result in
charges to operations of $1.3 million, $3.7 million, $1.5 million, $613,000 and
$75,000 for the three months ending January 29, 2000 and for fiscal years 2001,
2002, 2003 and 2004, respectively.
ACQUISITION OF ALYANZA, PROAMICS AND LEGAL ANYWHERE
In December 1998, we completed the acquisition of Alyanza, a privately held
software company in San Diego, California. We issued 525,000 shares of common
stock and paid $135,000 in cash for all of Alyanza's outstanding capital stock.
The transaction was accounted for as a purchase. The purchase price of
approximately $735,000 is being amortized over a three year period as
amortization of goodwill and other intangible assets.
In connection with our acquisition of Proamics in December 1999, we
acquired all of the outstanding capital stock of Proamics in exchange for
3,501,938 shares of our common stock and 6,491,203 shares of our Series D
preferred stock. In addition, subsequent to the transaction, we issued options
to purchase 1,040,160 shares of our common stock to the former employees of
Proamics who became our employees. Our acquisition of Proamics will be accounted
for as a purchase. Of the approximately $50.5 million purchase price, we expect
to record goodwill and other intangible assets of approximately $47.8 million to
be amortized over the next three to five years. The acquisition of Proamics may
have an adverse effect on our future operating results if we are unable to
market our products to Proamics customers or effectively utilize the Proamics
professional services consultants.
In connection with our acquisition of Legal Anywhere in January 2000, we
acquired all of the outstanding capital stock of Legal Anywhere in exchange for
853,689 shares of our common stock. In addition, we assumed options to purchase
shares of Legal Anywhere common stock which are exercisable for 141,282 shares
of our common stock. Our acquisition of Legal Anywhere will be accounted for as
a purchase. Of the approximately $21.0 million purchase price, we expect to
record goodwill and other intangible assets of approximately $20.0 million to be
amortized over the next three years.
MANAGEMENT OF GROWTH
We had approximately 400 full-time employees as of January 29, 2000, as
compared to less than 50 employees at January 31, 1999. We also intend to hire a
significant number of employees in the future. This expansion places significant
demands on our management and operational resources. To manage this rapid
growth, we must invest in scalable operational
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systems, procedures and controls. We must also be able to recruit qualified
candidates to manage our expanding operations. We expect future expansion to
continue to challenge our ability to hire, train, manage and retain our
employees. Additional personnel will increase our operating expenses in the
foreseeable future.
LIMITED OPERATING HISTORY
Our limited operating history makes the prediction of future operating
results very difficult. Our prospects must be considered in light of the risks,
expenses and difficulties encountered by companies at an early state of
development, particularly companies in new and rapidly evolving markets, such as
the Internet and Internet software. We may not be successful in addressing these
risks and difficulties. Although we have experienced significant growth in
revenues in recent periods, we do not believe that prior growth rates are
sustainable or indicative of our future operating results.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1999
REVENUES
License. Our license revenues increased from no revenues for the period
ended October 31, 1998 to $2.0 million for the nine months ended October 31,
1999. This increase is attributable to an increase in sales to new customers
resulting from increased headcount in our sales force and, to a lesser extent,
the commencement of international operations. Sales to new customers accounted
for all of the license revenues, of which international operations accounted for
$20,000 for the nine months ended October 31, 1999. Pro forma license revenues
were $4.6 million for the nine months ended October 31, 1999, which primarily
consist of sales to the Proamics' customers. We do not intend to separately
market the Proamics product line in the future. Although we plan to market Niku
products to Proamics customers incorporating functionality contained in Proamics
products, we do not know whether any of these customers will purchase Niku
products. Therefore, prior levels of Proamics software license revenues are not
necessarily indicative of our future results.
Services. Our services revenues increased from no revenues for the period
ended October 31, 1998 to $1.0 million for the nine months ended October 31,
1999. This increase is attributable to the increased activity described above,
which resulted in increased revenues from customer implementations and
maintenance contracts. Pro forma services revenues were $7.8 million for the
nine months ended October 31, 1999, which included Proamics' services revenues
derived from installation, implementation and customization work for its license
customers. Although we plan to deploy Proamics services personnel on new Niku
installations, implementation and customization engagements, we do not know
whether we will be able to offset an expected decline in services revenues
derived from existing Proamics customers in the future.
During the nine months ended October 31, 1999, Sybase accounted for 22%,
USi accounted for 18% and SalesLogix accounted for 10% of total revenues. One of
our directors is a director of USi and a second director is an officer and
director of Sybase.
COST OF REVENUES
Cost of revenues increased from no cost of revenues for the period ended
October 31, 1998 to $603,000 for the nine months ended October 31, 1999. This
increase in the cost of revenues is primarily attributable to royalty agreements
for technology incorporated into our products and the cost of manuals, media,
product documentation and shipping costs related to product sales to new
customers as well as the shipment of product updates to existing customers. We
recorded cost of license revenues of $174,000 for the nine months ended October
31, 1999. Additionally, included in these costs are costs of services associated
with implementation, training and technical support personnel, which increased
from two people at January 31, 1999 to 13 people at October 31, 1999. We
recorded cost of service revenues of
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$429,000 for the nine months ended October 31, 1999. Pro forma cost of revenues
was $6.0 million for the nine months ended October 31, 1999 which includes
Proamics' costs of packaging, distribution and third-party royalties related to
product sales to customers. Additionally, included in the pro forma costs are
costs associated with Proamics' implementation, training and technical support
personnel, which included 50 people as of October 31, 1999. We anticipate that
the cost of revenues will increase in future periods, primarily as a result of
the addition of Proamics services personnel.
GROSS PROFIT
We had no revenues, cost of revenues or gross profit for the period ended
October 31, 1998. Our gross profit was $2.4 million for the nine months ended
October 31, 1999 primarily due to the incremental amounts of revenues that we
recognized in each quarter. Gross profit margin was 79.7% for the nine months
ended October 31, 1999. Pro forma gross profit was $6.3 million for the nine
months ended October 31, 1999 which includes Proamics' gross margins derived
from sales of Proamics software licenses and delivery of services. We expect
that our gross margins will decline at least in the near term as a result of the
addition of services personnel from Proamics. Pro forma gross profit margin was
51.0%, largely influenced by the relatively high mix of Proamics services.
OPERATING EXPENSES
Research and development. Research and development expenses increased from
$849,000 for the period ended October 31, 1998 to $6.1 million for the nine
months ended October 31, 1999. This increase is primarily attributable to an
increase in the number of research and development personnel. Headcount
increased from 23 as of January 31, 1999 to 71 as of October 31, 1999. To date,
all software development costs have been expensed in the period incurred. Pro
forma research and development expenses were $8.4 million for the nine months
ended October 31, 1999. We believe that continued investment in research and
development is critical to attaining our strategic objectives, and we anticipate
that research and development expenses will continue to increase in absolute
dollars due to our internal product development efforts and the addition of 29
Proamics research and development personnel. We do not anticipate developing
separate new or enhanced versions of Proamics products, and therefore, we expect
these personnel to be deployed in development activities for Niku products.
Sales and marketing. Sales and marketing expenses increased from $75,000
for the period ended October 31, 1998 to $6.0 million for the nine months ended
October 31, 1999. This increase primarily resulted from the addition of
personnel in our sales and marketing departments, and related costs, such as
increased sales commissions. Pro forma sales and marketing expenses were $9.4
million for the nine months ended October 31, 1999. We anticipate that these
sales and marketing expenses will increase in absolute dollar amounts in future
periods as we continue to expand our sales and marketing efforts. We added
approximately 30 Proamics sales and marketing personnel. Other than the costs
associated with this increase in personnel and costs associated with marketing
Niku products to Proamics customers, we do not expect to incur significant
additional sales and marketing expenses as a result of the Proamics acquisition,
as we do not intend to market Proamics' product line separately.
General and administrative. General and administrative expenses increased
from $720,000 for the period ended October 31, 1998 to $1.8 million for the nine
months ended October 31, 1999. This increase is attributable to an increase in
the number of administrative and professional services fees, and to a lesser
extent, communications costs, particularly to our remote offices and facility
costs. The number of employees engaged in general and administrative functions
increased from 7 as of January 31, 1999 to approximately 30 as of October 31,
1999. Pro forma general and administrative expenses were $4.3 million for the
nine months ended October 31, 1999. We expect general and administrative
expenses to increase in absolute dollars as we add personnel to support the
expansion of our operations,
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incur additional expenses related to the anticipated growth of our business, and
assume the responsibilities of a public company. We also added approximately 10
Proamics administrative personnel, which will contribute to our future general
and administrative expenses.
Stock-based compensation. During the nine months ended October 31, 1999, we
recorded approximately $2.0 million of stock-based compensation amortization
expense, representing $17,000 cost of revenues, $597,000 research and
development, $1.1 million sales and marketing and $264,000 general and
administrative expenses. During the nine month period ended October 31, 1998, we
recorded $77,000 of stock-based compensation amortization expense. Amortization
of the October 31, 1999 balance of deferred stock-based compensation for the
three months ending January 29, 2000, and for the fiscal years 2001, 2002, 2003
and 2004 will be approximately $1.3 million, $3.7 million, $1.5 million,
$613,000 and $75,000, respectively. We expect to record approximately $40.6
million of additional deferred stock-based compensation related to stock options
granted between November 1, 1999 and February 21, 2000, that will result in
additional amortization of deferred stock compensation of approximately $5.0
million for the three months ending January 29, 2000, $22.3 million for the 2001
fiscal year, $8.6 million for the 2002 fiscal year, $3.7 million for the 2003
fiscal year, and $1.0 million for the 2004 fiscal year.
Amortization of goodwill and other intangible assets. Amortization of
goodwill and other intangible assets was zero for the period ended October 31,
1998 and $184,000 for the nine months ended October 31, 1999. Pro forma
amortization of goodwill and other intangible assets as of October 31, 1999,
including amounts from the Proamics and Legal Anywhere acquisitions, will result
in pro forma expense totaling approximately $2.1 million, $19.3 million, $19.3
million, $18.0 million, $5.5 million and $4.2 million, for the three months
ending January 29, 2000, and the fiscal years 2001, 2002, 2003, 2004 and 2005,
respectively.
INTEREST AND OTHER
Interest and other consists of interest income, interest expense and other
non-operating expenses. Interest and other increased from $56,000 for the period
ended October 31, 1998 to $178,000 for the nine months ended October 31, 1999.
This increase is attributable primarily to interest income from average invested
cash proceeds from financing activities, partially offset by interest expense
related to equipment loans and subordinated debt, the proceeds of which were
used to purchase computer equipment and office furniture and equipment.
NET LOSSES
Net losses were $1.7 million and $13.5 million for the nine months ended
October 31, 1998 and 1999, respectively. Our losses are a result of costs
incurred to develop our technology, our products and iNiku website and to
recruit and train personnel for our engineering, sales, marketing, professional
services and administrative organizations. We expect to incur net losses in the
foreseeable future.
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QUARTERLY RESULTS OF OPERATIONS
The following tables set forth consolidated statement of operations data
for each of the three quarters in the period ended October 31, 1999. This
information has been derived from our unaudited consolidated financial
statements that, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this information. In addition, this information does not give
effect to our acquisitions of Proamics or Legal Anywhere, which are expected to
affect our future operating results. You should read this information in
conjunction with our annual audited consolidated financial statements and
related notes appearing elsewhere in this prospectus. We have experienced and
expect to continue to experience fluctuations in operating results from quarter
to quarter. We incurred net losses in each of the last three quarters and expect
to continue to incur losses in the foreseeable future. You should not draw any
conclusions about our future results from the results of operations for any
quarter, as quarterly results are not indicative of the results for a full
fiscal year or any other period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
APRIL 30, JULY 31, OCTOBER 31,
1999 1999 1999
--------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
License.............................................. $ 241 $ 355 $ 1,366
Services............................................. 132 232 650
------- ------- -------
Total revenues.................................... 373 587 2,016
Cost of revenues....................................... 89 187 327
------- ------- -------
Gross profit........................................... 284 400 1,689
------- ------- -------
Operating expense:
Research and development............................. 1,088 2,226 2,748
Sales and marketing.................................. 808 2,019 3,156
General and administrative........................... 325 464 1,048
Stock-based compensation............................. 313 596 1,109
Amortization of goodwill and other intangible
assets............................................ 61 61 62
------- ------- -------
Total operating expenses.......................... 2,595 5,366 8,123
------- ------- -------
Operating loss......................................... (2,311) (4,966) (6,434)
Interest and other..................................... (45) 127 96
------- ------- -------
Net loss............................................... $(2,356) $(4,839) $(6,338)
======= ======= =======
</TABLE>
THREE QUARTERS IN THE PERIOD ENDED OCTOBER 31, 1999
REVENUES
License. License revenues increased in each of the three quarters in the
period ended October 31, 1999. Our sales headcount increased from six at April
30, 1999 to 27 at July 31, 1999, and to 51 at October 31, 1999 which led to the
increase in the number of our customers.
Services. Services revenues increased in each of the three quarters in the
period ended October 31, 1999. During this time, we provided implementation
services at most of our customer locations. Our services revenues increased as
the number of active implementations increased during this three quarter period.
Revenues from nonmonetary exchanges of our products for customer products
or services were $282,000 for the three months ended April 30, 1999, $343,000
for the three months ended July 31, 1999 and $746,000 for the three months ended
October 31, 1999.
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COST OF REVENUES
Cost of revenues increased in each of the three quarters in the period
ended October 31, 1999. In the three months ended April 30, 1999, we began to
hire implementation and technical support personnel. In each subsequent quarter,
we hired additional implementation and technical support employees. In the three
months ended October 31, 1999, we began to hire training personnel to provide
training services to customers and third-party implementation partners. Our
implementation, technical support and training personnel increased from two at
April 30, 1999 to 15 at July 31, 1999, and to 21 at October 31, 1999.
OPERATING EXPENSES
Research and development. Research and development expenses increased in
each of the three quarters in the period ended October 31, 1999. Personnel
expenses, the largest single component of this expense category, increased from
$721,000 for the three months ended April 30, 1999 to $1.2 million for the three
months ended July 31, 1999, and to $1.5 million for the three months ended
October 31, 1999. During this time, we consistently increased our research and
development staff to develop subsequent releases of eNiku and to develop the
iNiku website. The market for qualified people in the San Francisco Bay Area is
competitive and costs associated with hiring and retaining key personnel are
high. The increased number of personnel and the increased cost per person have
contributed to the increase in research and development expenses.
Sales and marketing. Sales and marketing expenses increased in each of the
three quarters in the period ended October 31, 1999. This increase is primarily
attributable to increased sales compensation, increased marketing expenses, the
expansion of regional sales offices and the establishment of international
locations. Sales and marketing personnel costs increased from $383,000 for the
three months ended April 30, 1999 to $1.3 million for the three months ended
July 31, 1999, and to $1.6 million for the three months ended October 31, 1999.
Other sales and marketing costs increased primarily from advertising and
marketing facilities and travel and entertainment, from $425,000 for the three
months ended April 30, 1999 to $719,000 for the three months ended July 31,
1999, and to $1.6 million for the three months ended October 31, 1999.
General and administrative. General and administrative expenses increased
in each of the three quarters in the period ended October 31, 1999 as a result
of additional finance, human resource, legal, information technology and
administrative professionals required to create the business infrastructure.
During this time, general and administrative costs increased from $325,000 for
the three months ended April 30, 1999 to $464,000 for the three months ended
July 31, 1999, and to $1.0 million for the three months ended October 31, 1999.
Stock-based compensation. Stock-based compensation was $313,000 for the
three months ended April 30, 1999, $596,000 for the three months ended July 31,
1999 and $1.1 million for the three months ended October 31, 1999.
Amortization of goodwill and other intangible assets. Amortization of
goodwill and other intangible assets was $61,000 in each of the three months
ended April 30 and July 31, 1999 and $62,000 in the three months ended October
31, 1999.
Our results of operations could vary significantly from quarter to quarter.
We expect to incur significant sales and marketing expenses to promote our brand
and our products and services. Therefore, our quarterly operating results are
likely to be particularly affected by the number of customers licensing our
products during any quarter as well as sales and marketing, research and
development and other expenses for a particular period. If revenues fall below
our expectations, we will not be able to reduce our spending rapidly in response
to the shortfall.
We expect to experience seasonality in the sales of our products and
services. Seasonal variations in our sales may lead to fluctuations in our
quarterly results. For example, we expect
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that sales may decline during summer months, particularly in European markets.
We also anticipate that sales may be lower in our first fiscal quarter due to
patterns in the capital budgeting and purchasing cycles of our current and
prospective customers as well as due to our sales commission structure. We also
anticipate that our sales will have long sales cycles. Therefore, the timing of
future customer contracts could be difficult to predict, making it very
difficult to predict revenue between quarters and, our operating results may
vary significantly.
Other factors that could affect our quarterly operating results include
those described below and elsewhere in this prospectus:
- our ability to attract new customers, including Proamics customers, and
retain current customers which could lead to changes in our revenues;
- the announcement or introduction of new products or services by us or our
competitors which could also lead to changes in our revenues;
- changes in the pricing of our products and services or those of our
competitors;
- variability in the mix of our products and services revenues in any
quarter which could affect our margins; and
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business.
Due to these and other factors, we believe that period-to-period
comparisons of our results of operations are not meaningful and should not be
relied upon as indicators of our future performance. It is possible that in some
future periods, our results of operations may be below the expectations of
investors. If this occurs, the price of our common stock may decline.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through private sales of
capital stock, with net proceeds of $28.2 million through October 31, 1999, bank
loans and equipment leases. As of October 31, 1999, we had $19.3 million in
cash, cash equivalents and short-term investments and $10.3 million in working
capital. In November 1999, we sold 7,998,012 shares of Series D preferred stock
for $5.00 per share for total cash proceeds of approximately $39.9 million.
Net cash used in operating activities was $2.8 million in the period ended
January 31, 1999 and $8.8 million in the nine months ended October 31, 1999. Net
cash flows from operating activities in each period reflect increasing net
losses and, to a lesser extent, accounts receivable offset in part by increases
in accrued compensation and liabilities. Net cash flows from operating
activities in the period ended October 31, 1999 reflects $1.4 million of
deferred revenue from customers that were not recognized as revenue.
Net cash used in investing activities was $366,000 in the period ended
January 31, 1999 and $5.6 million in the nine months ended October 31, 1999.
Cash used in investing activities reflects purchases of property and equipment
in each period and purchases of short-term investments in the nine months ended
October 31, 1999.
Capital expenditures were $193,000 in the period ended January 31, 1999 and
$2.9 million in the nine months ended October 31, 1999. Our capital expenditures
consisted of purchases of operating resources to manage our operations,
including computer hardware and software, office furniture and equipment and
leasehold improvements. We expect that our capital expenditures will continue to
increase in the future. Since inception, we have generally funded capital
expenditures either through the use of working capital or with capital leases.
Net cash from financing activities was $8.3 million in the period ended
January 31, 1999 and $26.4 million in the nine months ended October 31, 1999.
These cash flows reflect primarily proceeds from private sales of preferred
stock.
In September 1999, we entered into a loan and security agreement with a
bank providing a line of credit of up to $4.0 million. Any borrowings under the
line of credit bear interest at the
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bank's prime lending rate plus 1.0%. As of October 31, 1999, we had borrowed
$3.8 million under the line of credit with an interest rate of 8.25% as of
October 31, 1999, and $200,000 was available for borrowing. The agreements for
these loans contain covenants requiring that we satisfy certain financial ratios
and maintain a minimum tangible net worth. As of October 31, 1999, we were in
material compliance with these covenants. This loan is secured by our assets.
In February 1999, we entered into a term loan with another lender,
providing us with a bridge loan of up to $3.0 million. Any borrowings under this
term loan bear interest at 12.0%. As of October 31, 1999, we had borrowed $2.8
million under this term loan, and $200,000 was available for borrowing. Also in
February 1999, we entered into a lease line with the same institution, providing
us with an equipment lease line of credit of up to $500,000. Any drawings under
this lease line bear interest at 8.0%. As of October 31, 1999, we had leased
$345,000 of equipment under this lease line, and $155,000 was available. We
issued warrants to purchase shares of our preferred stock to this institution.
Using the Black-Scholes methodology, the warrants were valued at $510,000,
increasing our effective interest rate by approximately 5%. These loans are
secured by our assets.
As of September 30, 1999 Proamics had debt obligations of approximately
$3.2 million. In connection with the acquisition of Proamics, $2.0 million was
repaid using Proamics' cash on hand. In addition, as of September 30, 1999,
Proamics had $349,000 of reserves for doubtful accounts receivable and as of
October 31, 1999, Niku had $100,000 of reserves for doubtful accounts
receivable.
We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, for the
foreseeable future in order to execute our business plan. As a result, we
anticipate that operating expenses, as well as planned capital expenditures,
will constitute a material use of our cash resources. In addition, we may
utilize cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines. We believe that cash from operations
and existing cash will be sufficient to meet our working capital and expense
requirements for at least the next 12 months. After that time, we may find it
necessary to obtain additional equity or debt financing to fund our working
capital and expense requirements. We have no current plans to undertake any
future equity or debt financing. In the event additional financing is required,
we may not be able to raise it on acceptable terms or at all. If we raise
additional funds through the issuance of equity securities, the percentage
ownership of our stockholders would be reduced. Furthermore, these equity
securities may have rights, preferences and privileges senior to our common
stock.
YEAR 2000 READINESS
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of lawsuits against other software vendors.
Because of the unprecedented nature of this litigation, it is uncertain whether
or to what extent we may be affected by it.
We designed all of our products to be Year 2000 compliant when configured
and used in accordance with related documentation, and provided that the
underlying operating system of the host machine and any other software and
hardware used with or in the host machine or our products are Year 2000
compliant. Additionally, we have tested Niku products for Year 2000 compliance
and determined they are Year 2000 compliant.
Prior to the acquisitions of Proamics and Legal Anywhere, we determined
that Proamics and Legal Anywhere had tested their currently deployed products
for Year 2000 compliance. We also
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obtained representations and warranties from Proamics and Legal Anywhere in the
respective merger agreement relating to the Proamics and Legal Anywhere
acquisitions.
We have defined Year 2000 compliant as the ability to:
- Correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
- Function according to the product documentation provided for this date
change, without changes in operation resulting from the advent of a new
century, assuming correct configuration;
- Respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined and predetermined manner;
- Store and provide output of date information in ways that are unambiguous
as to century if that date elements in interfaces and data storage
specify the century; and
- Recognize year 2000 as a leap year;
provided that all other products such as hardware, software and firmware, used
with our products properly exchange and recognize date data.
We have tested software obtained from third parties that is incorporated
into our products as to their Year 2000 compliance and to date, we have not
experienced any material Year 2000 issues with respect to this software. Despite
testing by us and current and potential customers, and assurances from
developers of products incorporated into our products, our products may contain
undetected errors or defects associated with Year 2000 date functions. Known or
unknown errors of defects in our products could result in delay of loss of
revenues, diversion of development resources, damage to our reputation,
increased service and warranty costs, or liability from our customers, any of
which could seriously harm our business. Furthermore, our software products
either interact with or are integrated into customers' computer systems, which
often involve sophisticated hardware and complex software that we cannot
guarantee for Year 2000 compliance. Although we have not received any Year
2000-related claims to date, we could face claims based on Year 2000 problems in
other companies' products, or issues arising from integration of multiple
products within an overall system, even if our products are otherwise Year 2000
compliant.
We have completed an assessment of our material internal information
systems and believe them to be Year 2000 compliant. We have not initiated an
assessment of our non-information and technology systems, although we have
received a favorable assessment of the Year 2000 compliance of our new
headquarters in Redwood City, California. We have completed testing of our
information technology systems. To the extent that we have not been able to test
the technology provided by third-party vendors, we are seeking assurances from
these vendors that their systems are Year 2000 compliant. To date, we have not
experienced any material Year 2000 issues with respect to these systems. In
addition, we have not experienced any, and we are not currently aware of any
material operational issues or costs associated with preparing our internal
information technology and non-informational technology systems for the Year
2000. However, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in our internal
information technology and non-information technology systems.
We do not currently have any information concerning the Year 2000
compliance status of our customers, however, to date we have not been informed
of any material Year 2000 issues of our customers. Our current or future
customers may incur significant expenses to achieve Year 2000 compliance. If our
customers are not Year 2000 compliant, they may experience material costs to
remedy problems, or they may face litigation costs. In either case, Year 2000
issues could reduce or eliminate the budgets that current or potential customers
could have for, or delay purchases of, our products and services. As a result,
our business could be seriously harmed.
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We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. To date, these costs have not
been material. We may incur additional costs related to the Year 2000 plan for
administrative personnel, outside contractor assistance, technical support for
our products, product engineering and customer satisfaction if we experience
material Year 2000 issues. Although we have not experienced any material Year
2000 problems to date, we may experience material problems and costs in
connection with the Year 2000 compliance that could seriously harm our business.
We have not yet fully developed a contingency plan to address situations
that may result if we are unable to achieve Year 2000 readiness of our critical
operations, and we do not anticipate the need to do so. The cost of developing
and implementing such a plan may itself be material. Finally, we are also
subject to external forces that might generally affect industry and commerce,
such as utility or transportation company Year 2000 compliance failure
interruptions.
Year 2000 issues affecting our business, if not adequately addressed by us,
our third party vendors or suppliers or our customers, could have a number of
"worst case" consequences. These include:
- the inability of our customers to use our products and services to
procure and manage their operating resources;
- claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our products and services
to function properly, and any resulting settlements or judgments; and
- our inability to manage our own business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes accounting and reporting standards for derivative securities
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. We do not believe this will have a material
effect on our operations as we do not engage in hedging activities.
Implementation of this standard has recently been delayed by the FASB for a
12-month period. We will now adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2002.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in North
America, and to a lesser extent, Europe and the Asia-Pacific region. As a
result, our financial results could be affected by factor 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. We do not expect
any material adverse effect on our consolidated financial position, results of
operations or cash flows due to movements in any specific foreign currency. We
currently do not use financial instruments to hedge operating expenses by our
European and Asia-Pacific subsidiaries. We intend to assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, particularly since the majority of our investments are in short-term
instruments. Due to the short-term nature of our investments, we believe that
there is no material risk exposure. Therefore no quantitative tabular
disclosures are required.
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<PAGE> 43
BUSINESS
OVERVIEW
We provide Internet software products and an online marketplace for the
sourcing, management and delivery of professional services. Professional
services include consulting, financial services, medicine, law, engineering,
advertising and other industries in which intellectual capital is an important
element of the services provided. Our Internet software products are designed to
automate the core business processes of professional services organizations,
professional services providers within enterprises, and small businesses and
individual professionals. Our customers include consulting organizations as well
as enterprises such as Business Objects, Comdisco, Computer Associates, EMC,
Gateway 2000, SalesLogix, Sybase, Tibco Software, Trilogy Software,
USinternetworking and Xerox. As of January 29, 2000, our iNiku website had over
21,000 registered users.
Across industries, service businesses have common core requirements,
including the creation, storage and reuse of knowledge and information, the
management of human resources and projects, the tracking of time and expenses
and the analysis of resource utilization and productivity. We address these
requirements through an integrated set of products, eNiku, xNiku and iNiku.
Because of the common technology linking users of eNiku, xNiku and iNiku, all of
them can easily participate in the Niku Services Marketplace, a marketplace for
buyers and sellers of professional services. While we currently deliver our
products primarily to the IT consulting industry, we are extending these product
offerings to other service industries, including financial services, medicine,
law and advertising.
INDUSTRY BACKGROUND
THE GLOBAL SERVICES ECONOMY
Service businesses generated more than $2 trillion in revenues and employed
more workers than any other sector in the United States in 1997, according to
the Encyclopedia of American Industries. The professional services industry
represents a large part of the service economy. According to the U.S. Department
of Commerce, the gross domestic product of the professional services industry,
including business, legal, health and educational services, exceeded $900
billion in 1997. We believe the professional services industry will grow
rapidly, both in the United States and internationally, due to a number of
factors, including:
- the increasing importance of knowledge and information to business
success;
- the growing complexity and pace of business projects;
- the increasing need for specialization; and
- the growing acceptance of outsourcing, both in the United States and
internationally.
The professional services industry is undergoing significant change. To
succeed, service businesses must increasingly manage their knowledge,
information and human resources effectively. We believe the need for effective
business management in the professional services industry is becoming more
intense as a result of a number of key factors, including:
- increasing competition;
- growing project complexity;
- shorter project time frames;
- increasing collaboration requirements, particularly for small businesses
and individual professionals;
- growing use of non-employee consultants; and
- globalization of business.
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NEED FOR INTERNET-BASED SOFTWARE IN THE PROFESSIONAL SERVICES INDUSTRY
Unlike product-oriented businesses, which produce finished goods from raw
materials and component parts and sell these goods on a per-item basis,
professional services businesses create information-based deliverables using
human resources that are often billed at time-based rates. As a result,
professional services businesses require sophisticated applications that can
manage knowledge and information, including unstructured data, and their human
resources. However, service businesses often lack standardized and
cost-effective applications for core business processes such as:
- INTELLECTUAL CAPITAL MANAGEMENT -- Creation, storage and reuse of
knowledge, information and work product such as implementation plans,
case histories, proposals and contracts;
- RESOURCE MANAGEMENT -- Sourcing, hiring and training personnel and
allocating them across clients, projects and locations;
- PROJECT MANAGEMENT -- Tracking client communications, project status and
deliverables;
- FINANCE AND OPERATIONS MANAGEMENT -- Management of time and expenses and
billing and collections, and integration of these functions with other
financial systems;
- PRACTICE MANAGEMENT -- Review and analysis of business performance,
including resource utilization and individual and group productivity, and
- BUSINESS DEVELOPMENT -- Identifying potential customers, making proposals
and finalizing contracts.
As a result of the need for these applications, the automation of the
business processes of professional services businesses represents a large market
opportunity. International Data Corporation estimates that the service
industries supply-chain-automation packaged application market will grow from
approximately $600 million in 1999 to approximately $12 billion by 2003,
representing a five-year compound annual growth rate of approximately 108%.
THE INTERNET AS A PLATFORM FOR THE PROFESSIONAL SERVICES INDUSTRY
The advent of the Internet has provided a technology platform for
automation of the professional services industry using Internet software and
online marketplaces. Traditionally, companies seeking to improve their
operations have implemented applications based on computer networks using a
client-server design, in which a significant portion of an application must be
loaded on each user's computer. With the emergence of the Internet, companies
are now able to make business applications available to internal and external
users without installing software on the many different computers throughout an
organization, allowing significantly broader deployments and constant updating
of content. The Internet also enables applications to be accessed by any device
with a web browser, making it possible for the many mobile professionals in
professional services organizations to benefit from these applications. As a
result of these factors, we believe that applications using the Internet offer
significant advantages over those based on a client-server design.
In addition to these architectural advantages, the Internet provides a
common platform through which organizations and individual professionals can
communicate and collaborate. This platform is particularly important in light of
the emergence of an economy characterized by a geographically dispersed, mobile
and fluid workforce. By enabling increased communication and collaboration, the
Internet creates new ways for businesses to source, manage and deliver services,
and facilitates an efficient marketplace for services. Forrester Research
expects the market for business-to-business electronic commerce for services to
increase from approximately $22 billion in 1999 to approximately $220 billion by
2003, representing a compound annual growth rate of approximately 78%.
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THE NIKU SOLUTION
We provide Internet software products and an online marketplace for the
professional services industry, enabling organizations and individual
professionals to efficiently source, manage and deliver professional services.
Our products are designed for deployment on corporate intranets, extranets and
the Internet. These platforms connect people inside and outside organizations,
enable professional services businesses to operate their businesses more
efficiently and facilitate the creation of a marketplace for buyers and sellers
of professional services. Our Internet software products are based on a
proprietary design that eliminates the need for businesses to install software
on multiple computers across an organization using client-server computer
networks. While we currently deliver our products and services primarily to the
IT consulting industry, we are extending and plan to extend them to other
professional services industries, including financial services, medicine, law
and advertising.
We believe our products and services offer the following key benefits to
our users:
SIGNIFICANTLY ENHANCED CLIENT SERVICE. Our Internet software products allow
users to manage their knowledge and information and human resources effectively.
With our products, service businesses can capture, share and reuse information
and provide higher-quality work product to customers. Our products also enable
service businesses to focus the most appropriate resources on projects, allowing
them to provide superior customer service.
SUBSTANTIALLY EXPANDED REVENUE OPPORTUNITIES. Our Internet software
products and online marketplace are designed to allow users to expand their
revenue opportunities. The Niku Services Marketplace is designed to allow
service providers to access a central source of projects and customers within
their area of expertise. Through our knowledge and information management
capabilities, service businesses can create standardized product offerings,
allowing them to provide services to additional customers and accommodate
additional projects. Using the resource and practice management functions of our
products, service businesses can optimize allocation of resources and increase
utilization rates, avoiding downtime and increasing revenues.
INCREASED PROFITABILITY. Our Internet software products are designed to
allow users in our target industries to increase their profitability. Service
businesses can work more efficiently by reducing the time spent on tasks that
cannot be billed to clients. Service providers can also enhance their efficiency
by building upon standardized product offerings. We also offer extensive
practice management capabilities that allow an organization to draw on its
experience, allowing it to present accurate cost estimates and timelines to
customers and to avoid potential problems.
IMPROVED RECRUITMENT AND RETENTION. The Niku Services Marketplace is
designed to allow organizations to reach potential new employees and contractors
with needed expertise and to allow employees and contractors to find new work
opportunities. Companies seeking professional services providers can post
detailed descriptions of projects for which they need assistance or can search
postings of profiles of professional service providers that detail their work
experience, expertise, geographic location and availability. As of January 29,
2000, iNiku had more than 21,000 registered users and, for the month of December
1999, delivered over 350,000 page views. Additionally, in organizations using
our Internet software products, employees can benefit from an environment in
which the amount of time spent on mundane and repetitive tasks is dramatically
reduced, work product can be saved and reused and skills are better matched with
projects.
THE NIKU GROWTH STRATEGY
Our goal is to be the leading provider of Internet software products and
related services for the sourcing, management and delivery of professional
services in a number of professional services industries. Key elements of our
strategy to achieve this goal are as follows:
TARGET LEADING ENTERPRISE CUSTOMERS. We will continue to target leading
enterprise customers. We believe that large enterprises will seek to take
advantage of the Internet to
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efficiently source, manage and deliver professional services and can provide us
with a large and growing source of demand. We also believe that large
enterprises can provide valuable sales references and drive product
enhancements. We intend to market our extranet software products to enterprises
as we believe these customers can drive usage of our products and services among
their business partners, customers and suppliers. We also believe that
enterprise customers, as large users of professional services, can be large
buyers within the Niku Services Marketplace.
ENHANCE iNIKU. We will continue to aggressively expand our iNiku website by
deploying additional content, services and industry-specific functionality. We
have entered into agreements with over 40 providers of content and services
useful to small businesses and individual professionals. In addition, we have
entered into agreements with other websites, such as CNET, to distribute and
promote iNiku. We intend to continue to aggressively enhance iNiku and pursue
additional distribution and promotion agreements.
EXPAND THE NIKU SERVICES MARKETPLACE. The Niku Services Marketplace is
designed to provide businesses and individual professionals with an online
marketplace for buying and selling professional services. We plan to populate
the Niku Services Marketplace with both enterprise customers and iNiku users. We
believe that the benefits of our Internet software and iNiku will create a
growth cycle that increases the value of the Niku Services Marketplace to both
buyers and sellers of professional services over time. As buyers benefit from
the efficiencies of our online marketplace, we believe sellers will be drawn to
the marketplace by the aggregated purchasing power of the buyers participating
in that marketplace. As more sellers offer services through the marketplace,
more buyers will be encouraged to join the marketplace.
TARGET ADDITIONAL PROFESSIONAL SERVICES INDUSTRIES. We currently deliver
our products and services primarily to the IT consulting industry. However, our
products are designed in a flexible, modular format and we plan to leverage this
architecture to deliver our products and services to other professional services
industries. For example, in January 2000, we acquired Legal Anywhere, a provider
of Internet collaboration software for the legal profession.
PURSUE ACQUISITIONS OF COMPLEMENTARY BUSINESSES. We believe that strategic
acquisitions can provide us with access to additional customers, domain
expertise and technology that will enhance our existing solutions and allow us
to enter new markets. We recently acquired Proamics, a provider of finance and
operations software to the professional services industry as well as Legal
Anywhere. We plan to continue pursuing acquisitions of complementary businesses,
products and technologies.
EXPAND GLOBAL OPERATIONS. With the global reach of the professional
services industry, we believe that there are significant opportunities to
deliver our products and services in Europe and the Asia-Pacific region, where
we have approximately 25 employees. We intend to grow our presence in Europe and
the Asia-Pacific region by expanding our field sales, marketing and service
organizations. We also plan to continue to expand our other operations needed to
support us as a global concern, including administrative infrastructure,
technology infrastructure, facilities and services.
NIKU PRODUCTS AND SERVICES
Our products and services enable users to source, manage and deliver
professional services. We currently deliver our solutions to the IT consulting
industry and plan to extend these solutions to other professional services
industries. The core functionality available across our products is divided into
the following modules:
- INTELLECTUAL CAPITAL MANAGEMENT. Our intellectual capital management
module provides extensive functionality for capturing, managing,
retrieving and utilizing the knowledge and experience of an organization
that is contained in documents such as implementation plans, case
histories, proposals and contracts. Unlike legacy document management
systems, our intellectual capital management module utilizes a
data-tagging feature to
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capture documents or other work products as they are created. This module
employs an easy-to-use search engine for information retrieval, allowing
users to retrieve and leverage organizational knowledge regardless of
where or when they need it.
- RESOURCE MANAGEMENT. Our resource management module offers extensive
capabilities for ensuring that the right people are working on the right
projects at the right time at the right billing rate. This module also
allows users to view and manage project and resource schedules and
reserve and assign resources in real time through a browser-based
interface. More effective resource management offers better business
predictability and increased client satisfaction, personnel utilization
and employee job satisfaction.
- PROJECT MANAGEMENT. Our project management module allows users to manage
projects from origination to completion. This module brings the employee
and non-employee participants, such as consultants or other service
providers, together for a project. This module also includes features for
managing ongoing client communications, project status and deliverables.
The project management module interfaces with the resource management
module and allows the sharing of information with third-party project
management applications.
- FINANCE AND OPERATIONS MANAGEMENT. Our finance and operations management
module allows users to capture, manage and report their time spent on
projects, as well as ongoing expenses, through the incorporation in our
products of Extensity time and expense software. This module also
provides capabilities for project and practice accounting, including
functionality for managing project budgets, external contractors, cost
estimates, departmental charges and invoicing. This module can also
integrate with popular third-party back-office financial packages.
- PRACTICE MANAGEMENT. Our practice management module provides users with
information and analysis with respect to important issues such as
variances between standard and actual costs and the profitability of
business units, practice groups and individual personnel. This enables
better resource utilization and implementation of best practices across
the entire organization. The practice management module helps
organizations turn projects into products by capturing detailed
information on deliverables, risks, project changes, personnel and costs.
Using this module, service providers can supply customers with more
accurate project cost estimates and timelines, enhancing customer
satisfaction and enabling increased profitability.
- BUSINESS DEVELOPMENT. Our business development module automates and
manages the business development process, including gathering and
analyzing information on potential customers, creating proposals,
developing sales presentations and creating and finalizing contracts.
We have three integrated product offerings for the sourcing, management and
delivery of professional services. These are designed to provide benefits to the
entire spectrum of professional services providers using the same core
architecture:
- eNIKU. eNiku allows organizations to automate core business processes.
eNiku is deployed on corporate intranets, internal Internet
protocol-based computer networks, allowing the sharing of information,
creation of teams and reduction of costs associated with personnel and
project management across multiple organizations. eNiku customers pay
license fees as well as annual maintenance fees. Licenses and related
services of our eNiku products accounted for all of our total revenues
for the nine months ended October 31, 1999. Prior to that time, we had
not recognized any revenues from licenses of eNiku.
- xNIKU. xNiku allows businesses to extend eNiku to partners, customers and
suppliers using corporate extranets, private Internet protocol-based
networks reaching beyond the enterprise. xNiku enables the delivery of
information to geographically-dispersed offices and remote users, as well
as to users of different computing systems and platforms.
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xNiku customers will pay a license and implementation fee as well as a
monthly subscription fee based on the number of non-employee users.
Through October 31, 1999, we had not derived any revenues for our xNiku
product. Subsequent to that date, we have licensed xNiku to three
customers.
- iNIKU. iNiku is a website which allows small businesses and individual
professionals to access content and services and operate their businesses
online. iNiku allows users to market themselves, find projects, post
projects and perform work. iNiku allows larger organizations to share
information and content with these smaller businesses and individual
professionals, facilitating the creation of a professional services
community. iNiku also provides a suite of online services for running
small businesses, including Internet-based document and file sharing,
project management and collaboration. Pre-packaged templates make it easy
to develop standardized business documents, including project proposals,
contracts and reports. In addition to services offered directly to iNiku
users, we have agreements with over 40 Internet-based content and service
providers, offering small businesses and independent professionals a
single destination where they can find many of the third-party content
and services they require to run their businesses. Content available
through iNiku includes information resources from leading industry
analysts and publishers such as Forrester Research, Gartner Group and
Nolo.com. Services available through iNiku include printing, insurance,
benefits, travel planning, finance, mail services and electronic
commerce. Through October 31, 1999, we have not derived any significant
revenues from iNiku.
THE NIKU SERVICES MARKETPLACE
The Niku Services Marketplace enables users of eNiku, xNiku or iNiku to
participate in a marketplace of buyers and sellers of professional services. The
technology linking eNiku, xNiku and iNiku allows users to participate in this
marketplace without the need to integrate computer systems with each
participant. Through the Niku Services Marketplace, service providers can find
project work in their area of expertise and organizations can find professionals
to complete their projects. Buyers of professional services can post detailed
descriptions of projects, and sellers of professional services can post personal
or business profiles detailing their work experience, preferred project types
and locations, as well as availability.
As of January 29, 2000, the Niku Services Marketplace had more than
approximately 32,000 projects available to its users and more than 21,000 iNiku
registered users. We believe that the benefits of our Internet software and
iNiku will create a growth cycle that increases the value of our the Niku
Services Marketplace to both buyers and sellers of professional services over
time. As buyers benefit from the efficiencies of the marketplace, we believe
sellers will be drawn to the marketplace by the aggregated purchasing power of
the buyers participating in that marketplace. As more sellers offer services
through the Niku Services Marketplace, more buyers are encouraged to join the
marketplace.
PROFESSIONAL SERVICES
We offer professional services to assist in the successful implementation
and use of our Internet software products. Our professional services consultants
assist customers in all aspects of the implementation process, including
requirements assessment, implementation planning and design, content design and
creation, data migration, systems integration, deployment and training. As of
January 29, 2000, we had approximately 70 full-time professional services
consultants.
Our professional services consultants also customize and deliver training
for systems administrators and end-users. We provide technical instruction for
customers, including implementation, deployment and maintenance of our Internet
software products. We also provide comprehensive end-user training programs to
allow professionals to begin using our Internet software products quickly and
easily. Services revenues accounted for all of our total revenues
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for the fiscal year ended January 31, 1999 and approximately 34% of our total
revenues for the nine months ended October 31, 1999.
We have created the Niku Partners Network to extend our ability to deliver
professional services to our customers. This network includes IT consultants
with expertise in implementing and customizing our Internet software products.
Current Niku Partners include Bristlecone, DataStudy, Management Share, Neptune
Technologies, Net-Centric Consulting Group, SE Technologies, ShaktiSoft, Sierra
Atlantic, Softgate Technologies, Sogyo Information Engineering and
Technopreneurs.
STRATEGIC RELATIONSHIPS
We have entered into a number of strategic relationships to expand our
business, including the following:
USINTERNETWORKING
We have entered into a three-year hosting agreement with USi, a leading
application service provider which hosts business applications over the Internet
for a fee. Under our hosting agreement with USi, entered into in June 1999 and
amended in September 1999, USi will host and manage iNiku and our corporate
website. We will pay USi a monthly service fee aggregating over $2.5 million
during the term of the hosting agreement for USi's hosting and servicing of our
websites, and will pay additional monthly fees if we request upgrade components
to the USi services we use. The hosting agreement may be extended beyond the
initial term upon mutual written agreement of the parties. In addition, in
August 1999, we entered into a separate three-year managed services agreement
with USi under which USi will promote and market eNiku products to potential
customers. Under the managed services agreement, we license to USi the right to
install and use our eNiku product on one of their servers so that they may
provide the product to USi customers. We will provide maintenance services for
the eNiku product and will train USi's sales force on the product. USi will
provide initial levels of customer support on the product for USi customers, and
we will provide support to USi. USi will pay us license, customer support and
service fees. The managed services agreement will automatically be extended for
one year periods unless either party terminates the agreement on 60 days prior
written notice. We have also entered into a software license agreement with USi
to license our eNiku product for their internal use. Under the software license
agreement, USi will pay us over $1.1 million in total license and support fees
during the term of the agreement. For the nine months ended October 31, 1999, we
recorded $441,000 of revenues relating to license sales to USi for its internal
use under our software license agreement.
CNET
We have entered into an agreement with CNET, a leading computer information
network, to deliver a co-branded edition of the iNiku website to CNET users.
According to Media Metrix, CNET had over nine million unique Internet users in
October 1999. The co-branded site, www.iniku.cnet.com, offers CNET users all the
features of iNiku, such as online business applications, content and business
services. The promotion agreement, entered into in September 1999, has a
two-year term from the date that the co-branded site was made generally
available to CNET users but may be terminated on July 5, 2000 if the co-branded
website fails to meet performance standards that are mutually agreed upon. Under
the promotion agreement, we will host the co-branded site on our servers. In
addition, we will purchase certain amounts of promotions on Internet sites
operated by CNET, CNET will purchase promotions on our iNiku website, and CNET
will also purchase promotions for the co-branded site on third-party websites
and through other media. Under the promotion agreement, during the term of the
agreement, we will pay CNET an aggregate of up to $15.0 million on integration
fees and promotions on Internet sites operated by CNET, and CNET will pay an
aggregate of $5.0 million to us and to third parties for engineering and
maintenance fees and for promotions on our site, on third party websites and
through other media. The promotion agreement will continue following its initial
term on a month-to-month basis unless terminated by either party upon 30 days
prior written
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notice. CNET participated in our Series D preferred stock financing in November
1999. No revenues were derived from the co-branded website as of October 31,
1999.
CONTENT AND SERVICE PROVIDERS
We have contracts with over 40 Internet-based content and service providers
for iNiku. These content and service providers promote their offerings on iNiku.
These contracts typically provide that we will receive a percentage, typically
between 5% and 10%, of any revenues generated by these parties from customers
directed through iNiku. However, to date, we have not generated any significant
revenues from these relationships. These agreements are typically terminable by
either party either at any time or upon giving up to 90 days prior notice. These
content and service providers include:
<TABLE>
<S> <C> <C>
1-800-Gift Certificate Forrester Research Net-Temps
Accompany Gartner Group NewsReal
Amazon.com General Magic NextCard
AmeriCom Goto.com Nolo.com
Beyond.com Informative onlineofficesupplies.com
Bigstep.com InsWeb PalmOrganizers.com
CNET iPrint.com Qspace.com
Compubank iShip.com SmartAgreements
Cyberian Outpost JFAX.com SPARC Product Directory
Dell LendingTree TimeBills.com
Device Driver Guide Maps.com Travelocity.com
Economist Mastering Linux TSCentral
ELetter NetAbacus Tutorials.com
Fatbrain.com Net Earnings zapdata.com
</TABLE>
CUSTOMERS
We target independent professional services organizations, professional
services providers within enterprises and small businesses and individual
professionals. Our customers who have purchased more than $25,000 of Niku
products, and customers who purchased at least $75,000 of the Proamics finance
and operations management module, and related services, include:
<TABLE>
<S> <C> <C>
IT CONSULTING COMPUTER SOFTWARE COMPUTER HARDWARE
AMX International Business Objects EMC
Analysts International* Computer Associates* Gateway 2000
Belenos Geac* OTHER
Bristlecone Neon Central Intelligence Agency
Comdisco* NetDialog (Kana Communications) Clear Ink
DataStudy OneSoft
DST International* Pixion
Electron Economy Project Software Development*
eXcelon SalesLogix
Information Systems Sybase
Management* Tibco Software
Inforte TIS Worldwide
Inteliant* Trilogy Software
Jansen MI Consultants USinternetworking
Management Share Vantive (PeopleSoft)
MicroAge Canada* Walker Interactive**
Navisys*
Net-Centric Consulting
Pecoma Holdings
SE Technologies
Sierra Atlantic
Softgate Technologies
Sogyo Information Engineering
Tata Consultancy
TekEdge
Tier Technologies*
Xerox*
</TABLE>
- ---------------
* Indicates a customer of Proamics.
** Indicates a customer of both Niku and Proamics.
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Proamics has additional customers in other industries such as business
consulting, medicine and advertising. Legal Anywhere's customers include law
firms and corporate legal departments.
USi accounted for approximately 18%, Sybase accounted for approximately 22%
and SalesLogix accounted for approximately 10% of Niku's total revenues for the
nine months ended October 31, 1999.
TECHNOLOGY
The Niku technology platform is comprised of two key components: the Niku
application framework and individual applications that can be tailored to the
key business processes for a specific industry.
The Niku application framework is an Internet-computing environment that
manages unstructured data, including that found in proposals, contracts,
presentations, and status reports as well as structured data such as that found
in staffing or sales forecasts. It enables intellectual assets to be captured
automatically, while enabling accurate measurement, analysis, reporting and
reuse of this unstructured information. This framework is open standards-based,
enabling Niku and its partners to develop customized Niku-based solutions and
extensions of existing Niku applications. These extensions can include
additional application modules or interfaces to legacy applications.
NIKU APPLICATION FRAMEWORK FEATURES
The Niku application framework has the following features:
WEB BROWSER ACCESS TO APPLICATIONS. Our software is accessed through a web
browser, which allows easy access and end-user navigation. The familiar web
browser interface allows users to access the application from any personal
computer, computer network or computing device, such as a personal digital
assistant, independent of physical location. The Niku application framework also
allows updates to software and applications to be made centrally at the server
rather than at each user's computer. This ensures that each user has the latest
application version and significantly reduces distribution and installation
costs.
WALK-UP USER INTERFACE. Our user interface is designed to enable users
throughout an organization, as well as independent professionals, to easily
access the functionality provided by our products and services. Our user
interface is automatically customized to a user's requirements because it is
driven by user-specific parameters, which are defined based on the user's role,
responsibilities and workflow content.
OPEN STANDARDS. Our Internet software is designed to support open
standards. The software we use for the server computers that deliver our
applications is written in the Java programming language. We also support
electronic commerce protocols such as extensible markup language, or XML, and
secure socket layer, or SSL. Our support of open standards allows customers with
disparate computer systems and networks to utilize our applications without the
need to upgrade computer systems, software or equipment.
REMOTE AND OFF-LINE USERS. Professional services personnel often work at
remote locations, and therefore it is important that they be able to access
company or industry-specific knowledge and data from any location. Our
technology provides support for virtual private networks and connections from
the Internet, allowing access to be extended to remote users. Our technology
also facilitates work by users who are not connected to an organization's
network.
MULTI-TIER ARCHITECTURE. The Niku application framework is designed in
components, making it easier for customers to implement solutions engineered
around customized workflows, user interfaces and content. In addition, the
component-based architecture makes it easier to maintain
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and support the applications. Using these components, a variety of applications
can be written quickly by changing only the application modules without
modifying the entire system.
DISTRIBUTED PROCESSING. Distributed processing allows a user to communicate
with a group of servers simultaneously in a coordinated way. A customer can
access distributed legacy applications, as well as individual Niku applications,
through the Niku application framework, creating a seamless interface for the
user. The distributed processing architecture also enables customers to add
users, computing devices or locations to an application. This architecture also
facilitates the addition of servers and databases to the application, allowing
the application to grow and change with the organization.
DISTRIBUTED OBJECTS SUPPORT. Distributed objects support allows a variety
of functionality, from data storage and access to information content, to be
integrated into an application. The use of distributed objects also allows
applications to use commonly-used software programs in different parts of one
application. This protects investments in existing systems and reduces the need
for redundant storage of programs, while significantly increasing overall
functionality.
NIKU APPLICATION FRAMEWORK COMPONENTS
The Niku application framework has the following main components:
- Niku Adaptable KnowledgeStore, or NAKS;
- Niku FrontWorks;
- Niku ImportWorks;
- Niku DataLink adapters; and
- Industry-specific application modules.
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The following diagram illustrates how these components are related in the
Niku application framework.
NIKU APPLICATION FRAMEWORK DIAGRAM
The Niku Adaptable KnowledgeStore coordinates the synchronization of the
information stored in the relational database management system and file system
and coordinates access to relational database management system and the file
system by the search engine. The relational database managed system stores
structured data, such as financial information. The file system stores
unstructured data, such as documents. The search engine allows users to search
the structured data, and unstructured data. The Applications Modules contain the
commands for the operation of the specific application and accesses structured
and unstructured data through the Niku Adaptable KnowledgeStore. The FrontWorks
communicates with the Applications Modules and generates the displays, or user
interfaces, based on user defined preferences and actions. The ImportWorks
allows the importation of external documents into the Niku Adaptable
KnowledgeStore. The DataLink adapters allow the Niku application to communicate
with other third party software products.
NIKU ADAPTABLE KNOWLEDGESTORE. The foundation of the Niku application
framework is the Niku Adaptable KnowledgeStore, or NAKS. Intellectual assets are
created during everyday business interactions at any place, time or level within
an organization. For this reason, standard communication protocols are used to
ensure that NAKS is easily accessible to all users, regardless of location, and
that information is easily captured and delivered.
Users can contribute information to NAKS by saving a document, forwarding
an e-mail message or leaving a voice message, all without disrupting normal
workflow. To store data and provide services for the other software components,
NAKS combines a data tagging system with a universal repository to capture data
intelligently while managing it flexibly. Data tagging is central to our
products and provides structure and form to otherwise unstructured data,
allowing information to be stored, measured, queried and shared. Tags are
customized for each set of industry-specific application modules to capture
specific data intelligently and provide a valuable store of otherwise
disconnected types of information. Data and tags can also be customized for an
individual company's needs. Customers can establish document templates, such as
a type of contract, defining specific attributes or data within the document
template, such as pricing terms. As the template documents are used, the
attribute or data is automatically extracted for efficient retrieval and reuse
of information.
Because an organization can produce a diverse range of information, NAKS
supports tags for voice messages, e-mail messages and a wide variety of document
file formats.
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NIKU FRONTWORKS. Niku FrontWorks is a collection of reusable components for
building and running end-user applications. FrontWorks supports the unique
functionality of each application module set that comprises a vertical
application, allowing it to share common functionality like security, searching
and user management. In doing so, FrontWorks eliminates duplication of system
resources and provides a consistent interface across applications. FrontWorks
can also dynamically generate a user interface based on user-specific data.
NIKU IMPORTWORKS. Niku ImportWorks automates the input of documents, files
and other types of data into NAKS. ImportWorks supports several document types
and formats. When a user imports a document directly to NAKS, ImportWorks
operates in the background to receive the document, process it if requested, and
store the document in NAKS with the appropriate tags.
NIKU DATALINK ADAPTERS. Niku DataLink adapters provide integration between
NAKS and outside data repositories, including relational databases, document
management systems and file directories. This integration allows legacy
applications to send information directly to NAKS. Data stored in a linked
repository can then be seamlessly incorporated into the Niku application
interface. Niku DataLink adapters are designed to scale smoothly from a
workgroup to an enterprise. Adapters integrate NAKS with existing enterprise
resource planning applications, such as SAP or PeopleSoft, or with groupware and
collaboration software, such as Lotus Notes and Microsoft Exchange, enabling
otherwise stand-alone applications to appear as a single application when
presented to the user. Custom DataLink adapters can also be created to interface
with other applications.
SALES AND FIELD OPERATIONS
We market our products and services primarily through our worldwide direct
sales force. In addition, we have a strategic business development group focused
on developing relationships with market-leading organizations and potential
development partners.
We also have dedicated technical pre-sales professionals who assist with
creating customer-tailored business proposals, product demonstrations and
presentations that address the specific needs of each prospective customer. We
have technical pre-sales professionals deployed regionally across the United
States as well as internationally in Canada, The Netherlands, United Kingdom,
Germany and Australia. In addition to the direct sales organization, we have a
small telesales operation, along with external telesales vendors, to develop
qualified leads and obtain users for iNiku. As of January 29, 2000, our sales
department had approximately 75 personnel.
CUSTOMER SERVICE AND SUPPORT
We offer multiple customer support options, with customer support
professionals on call 24 hours a day, seven days a week and available through a
toll-free call center. Depending on the support level a customer chooses, we
will also assign a single account management point of contact for the customer
which will oversee all support issues and drive resolution. Our support options
also include proactive account management and new version migration planning.
Our iNiku website is hosted by USi, which provides additional support services.
As of January 29, 2000, we had approximately 10 customer service and support
personnel.
COMPETITION
The market for our products and services is competitive, dynamic and
subject to frequent technological changes. The intensity of competition and the
pace of change are expected to increase in the future. Our Internet software
products primarily compete with solutions that have been developed by potential
customers' in-house developers and IT departments. In addition, we
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face competition from a number of competitors offering products and services
that vary in functionality. These include:
- developers of professional services automation software and related
Internet-based applications;
- providers of hosted software for IT consultants;
- operators of Internet-based job boards;
- developers of project management software; and
- enterprise resource planning software companies that may decide to
develop software or applications for the professional services industry.
We believe that there are a number of companies that offer products that
provide some of the functionality of our products. However, we do not believe
that any one company has a dominant position in our market as a whole.
We expect additional competition from other established and emerging
companies as the professional services automation market continues to develop.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm our
business.
We believe that the primary competitive factors in our market include:
- a significant base of reference customers;
- breadth and depth of the solution;
- critical mass of individual professionals using the solutions;
- product quality and performance;
- customer service and support;
- core technology;
- product features and functionality;
- product usability; and
- ease of implementation.
We believe our current products and services compete favorably with respect
to these factors; however, this market is relatively new and changing rapidly.
We may not be able to maintain our competitive position against current or
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other resources. Competitors with
these greater resources may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential employees, distributors, resellers or content services or
other strategic partners.
INTELLECTUAL PROPERTY
We regard substantial elements of our products and services as proprietary,
and protect them by relying primarily on patent, trademark, service mark,
copyright and trade secret laws and restrictions, as well as confidentiality
procedures and contractual provisions.
We license rather than sell all our Internet software products and require
our customers to enter into license agreements, which impose restrictions on
their ability to utilize the software. With respect to iNiku, substantially all
of our iNiku users' usage of our services is governed by Internet-based license
agreements, rather than by a means of a formal, written contract. Users "click"
on a dialog box and are deemed to agree to the terms and conditions posted on
iNiku. Because these agreements are not signed, there is a possibility that a
court, arbitrator or regulatory body could deem this type of agreement to be
invalid or determine that the terms and conditions governing the agreement do
not fully protect our intellectual property rights. Therefore,
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we cannot assure you that this user agreement will afford us significant
protection. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including but not limited to, requiring those persons
with access to our proprietary information to execute confidentiality agreements
with us and restricting access to our source code. We seek to protect our
software, documentation, templates and other written materials and content under
trade secret and copyright laws, which afford only limited protection.
We have applied for four U.S. patents. We cannot assure you that these
applications will be approved, that any patents that may issue will protect our
intellectual property or that any issued patents will not be challenged by third
parties. Furthermore, other parties may independently develop similar or
competing technologies or design around any patents that may be issued. It is
possible that any patent issued to us may not provide any competitive
advantages, that we may not develop future proprietary products or technologies
that are patentable, and that the patents of others may seriously limit our
ability to do business. In this regard, we have not performed any comprehensive
analysis of patents of others that may limit our ability to do business.
We have applied for registration of the trademarks Niku and iNiku with the
U.S. Patent and Trademark Office. In addition, we have applied for trademarks in
foreign countries. These trademark applications are subject to review by the
applicable governmental authority, may be opposed by private parties, and may
not be issued. Therefore, we cannot assure you that these registrations would,
if issued, provide us with significant protection for our trademarks.
We cannot assure you that any of our proprietary rights with respect to our
products or services will be viable or be of value in the future since the
validity, enforceability and type of protection of proprietary rights in
Internet-related industries are uncertain and still evolving.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
its software exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect proprietary
rights to as great an extent as do the laws of the United States. Our means of
protecting our proprietary rights may not be adequate.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights, particularly in our
software and Internet industries. We could become subject to intellectual
property infringement claims as the number of our competitors grows and our
products and services overlap with competitive offerings. These claims, even if
not meritorious, could be expensive and divert management's attention from
operating our company. If we become liable to third parties for infringing their
intellectual property rights, we could be required to pay a substantial damage
award and to develop noninfringing technology, obtain a license or cease selling
the products that contain the infringing intellectual property. We may be unable
to develop noninfringing technology or obtain a license on commercially
reasonable terms, if at all.
EMPLOYEES
As of January 29, 2000, we had a total of approximately 400 employees,
including approximately 140 in research and development, approximately 120 in
sales and marketing, approximately 10 in customer support, approximately 70 in
professional services and training and approximately 60 in administration and
finance. Of these employees, approximately 370 were located in the United States
and approximately 30 were located outside the United States. None of our
employees is represented by a collective bargaining agreement, nor have we
experienced any work stoppage. We consider our relations with our employees to
be good. Our future success depends on our continuing ability to attract and
retain highly qualified technical, sales and senior management personnel.
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FACILITIES
Our principal executive offices occupy 55,870 square feet in Redwood City,
California under a lease that expires in June 2005. We also lease an office in
the Chicago metropolitan area that occupies approximately 21,630 square feet and
have additional facilities in the Atlanta, Amsterdam, Pointe-Claire, Portland,
Quebec and Sydney metropolitan areas. We believe that our current facilities are
adequate to meet our needs for the foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of January 29, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Farzad Dibachi....................... 35 Chief Executive Officer and Chairman of the Board
Joshua Pickus........................ 38 President, Vertical Markets
Mark Nelson.......................... 40 Chief Financial Officer
Rhonda Dibachi....................... 38 Senior Vice President of Development
Kenneth Johnson...................... 42 Senior Vice President of Sales
Harold Slawik........................ 39 Senior Vice President of Corporate Development
Michael Brooks....................... 54 Director
John Chen............................ 44 Director
Terence Garnett...................... 42 Director
William Raduchel..................... 53 Director
Maynard Webb......................... 44 Director
</TABLE>
Farzad Dibachi has served as the chief executive officer and chairman of
the board of directors of Niku since he co-founded Niku in January 1998. Before
co-founding Niku, from October 1995 to August 1997, Mr. Dibachi was a co-founder
and the president and chief executive officer of Diba, Inc., an information
appliance software company, until it was sold to Sun Microsystems, Inc. in
August 1997. From June 1994 to November 1995, he served as senior vice
president, new media division for Oracle Corporation, a database company. From
June 1993 to June 1994, he was vice president, marketing for Oracle's tools
division and senior director of product development in Oracle's desktop products
division. Mr. Dibachi holds a B.S. in mechanical engineering and a B.A. in
computer science from San Jose State University. Mr. Dibachi is married to
Rhonda Dibachi, senior vice president of development of Niku.
Joshua Pickus has served as president, vertical markets of Niku since
November 1999. Before joining Niku, from April 1999 to November 1999, Mr. Pickus
was a general partner of the Spinnaker Crossover Fund of Bowman Capital
Management, a technology investment firm. From January 1994 to March 1999, he
was a partner at Venture Law Group, a Silicon Valley law firm. Prior to joining
Venture Law Group, Mr. Pickus was a partner at Morrison & Foerster, an
international law firm. Mr. Pickus holds an A.B. from Princeton University and a
J.D. from the University of Chicago Law School.
Mark Nelson has served as the chief financial officer of Niku since August
1999. Before joining Niku, from May 1998 to August 1999, Mr. Nelson was the vice
president, finance and corporate controller at Synopsys, Inc., a software
company. From June 1995 to May 1998, he served as corporate controller and chief
accounting officer at Plantronics, Inc., a telecommunications equipment
manufacturer. From September 1991 to June 1995, he held several director level
positions at Conner Peripherals, Inc., a disk drive manufacturer, most recently
serving as group controller from July 1994 to June 1995. Mr. Nelson holds a B.A.
in accounting from Michigan State University and is a certified public
accountant.
Rhonda Dibachi has served as the senior vice president of development of
Niku since May 1998. Before joining Niku, from October 1997 to April 1998, Ms.
Dibachi was the director of quality assurance at Webvan Group, Inc., an
Internet-based retailer of groceries. From July 1996 to October 1997, Ms.
Dibachi served as a software testing consultant at Software Development
Technologies, a software technology company. From September 1989 to May 1996,
she worked at the applications division of Oracle where she held a number of
positions, including development manager, architect and director of testing. Ms.
Dibachi holds a B.S. in nuclear engineering from Northwestern University and an
M.B.A. from Santa Clara University. Ms. Dibachi is married to Farzad Dibachi,
chief executive officer and chairman of the board of
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directors of Niku, and is the sister-in-law of Harold Slawik, senior vice
president of corporate development of Niku.
Kenneth Johnson has served as the senior vice president of sales of Niku
since January 1999. Before joining Niku, from May 1995 to December 1998, Mr.
Johnson held various positions at Baan Company N.V., a software company, most
recently serving as vice president, electronics industry and western region from
July 1998 to December 1998. From May 1994 to April 1995, Mr. Johnson was a sales
executive at Ramco Systems Corporation, an India-based start-up company. Prior
to joining Ramco Systems, Mr. Johnson was a sales executive at SAP America,
Inc., a software company. Mr. Johnson holds a B.S. in biochemistry from
California Polytechnic State University in San Luis Obispo.
Harold Slawik has served as the senior vice president of corporate
development of Niku since he co-founded Niku in February 1998. Before
co-founding Niku, from August 1997 to February 1998, Mr. Slawik served as
associate general counsel at Sun Microsystems, Inc., a software technology
company. From June 1996 to August 1997, he was vice president and general
counsel at Diba. From July 1995 to April 1996, he served as associate general
counsel at Ensodex, Inc., a software development company. From February 1990 to
July 1995, Mr. Slawik was an attorney in private practice in St. Paul,
Minnesota. Mr. Slawik holds a B.A. in philosophy from the University of St.
Thomas and a J.D. from William Mitchell College of Law. Mr. Slawik is the
brother-in-law of Rhonda Dibachi, senior vice president of development of Niku.
Michael Brooks has been a director of Niku since May 1999. Mr. Brooks has
been a partner of J.H. Whitney & Co., a venture capital firm, since January
1985. He also serves as a director of Homestore.com, Inc., Pegasus
Communications Corporation, Media Metrix, Inc., SunGard Data Systems Inc.,
USinternetworking, Inc., VitaminShoppe.com, Inc. and several other private
companies. Mr. Brooks holds a B.A. in history from Yale College and an M.B.A.
from Harvard Business School.
John Chen has been a director of Niku since March 1998. Mr. Chen has been
the president, chief executive officer and the chairman of the board of
directors of Sybase, Inc., a database company, since August 1997. From March
1995 to July 1997, he was president and chief executive officer of the open
enterprise computing division of Siemens Nixdorf, an electrical engineering and
electronics company, as well as president, chief executive officer and chairman
of Siemens Pyramid, a subsidiary of Siemens Nixdorf. Mr. Chen also serves as a
director of Beyond.com Corporation. Mr. Chen holds a B.S. in electrical
engineering from Brown University and a M.S. in electrical engineering from the
California Institute of Technology.
Terence Garnett has been a director of Niku since February 1998. Mr.
Garnett has been a managing director of Garnett Capital since January 2000.
Before joining Garnett Capital, from April 1995 to December 1999, Mr. Garnett
was a venture partner of Venrock Associates, a venture capital firm. From August
1994 to April 1995, Mr. Garnett was a private investor. From October 1991 to
August 1994, he was senior vice president of worldwide marketing and business
development and senior vice president of the new media division at Oracle. He
also serves as a director of Neoforma.com, Inc., CrossWorlds Software, Inc. and
several other private companies. Mr. Garnett holds a B.S. from the University of
California, Berkeley and an M.B.A. from Stanford Graduate School of Business.
Mr. Garnett is the brother-in-law of Angelina Schutz, our vice president of
business development.
William Raduchel has been a director of Niku since January 1999. Mr.
Raduchel has been the senior vice president and chief technology officer of
America Online, Inc. since September 1999. From January 1998 to September 1999,
he was the chief strategy officer at Sun Microsystems. From July 1991 to January
1998, he served variously as vice president of corporate planning and
development, chief financial officer, acting vice president of human resources
and chief information officer at Sun Microsystems. Mr. Raduchel also serves as a
director of MIH Limited, OpenTV, Inc. and Chordiant Software Inc. Mr. Raduchel
holds a B.A. in
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economics from Michigan State University and a M.A. and Ph.D. in economics from
Harvard University.
Maynard Webb has been a director of Niku since April 1998. Mr. Webb has
been the president of eBay Technology, a division of eBay Inc., an
Internet-based auction company, since August 1999. Before joining eBay, he was
senior vice president and chief information officer at Gateway 2000 Inc., a
computer company, from July 1998 to August 1999. From April 1995 to July 1998,
he was vice president and chief information officer at Bay Networks, Inc., a
network equipment provider. Mr. Webb also serves as a director of Extensity,
Inc. Mr. Webb holds a B.A. in criminal justice from Florida Atlantic University.
BOARD COMPOSITION
Our bylaws currently provide for a board of directors consisting of six
members. The term of each of our current directors will expire at the next
annual meeting of stockholders. Following this offering, the board will consist
of six directors divided into three classes, Class I, Class II and Class III,
with each class serving staggered three-year terms. The Class I directors,
initially Messrs. Brooks and Dibachi, will stand for reelection or election at
the 2000 annual meeting of stockholders. The Class II directors, initially
Messrs. Raduchel and Webb, will stand for reelection at the 2001 annual meeting
of stockholders. The Class III directors, initially Messrs. Chen and Garnett,
will stand for reelection or election at the 2002 annual meeting of
stockholders. Messrs. Garnett and Brooks serve on the board of directors under
the terms of a voting agreement among us and some of our principal stockholders.
This voting agreement will terminate upon completion of this offering.
BOARD COMMITTEES
Our board of directors has a compensation committee and an audit committee.
Following this offering, our board of directors will also have a transaction
committee.
Compensation Committee. The current members of our compensation committee
are Messrs. Chen and Webb. The compensation committee reviews and makes
recommendations to our board concerning salaries and incentive compensation for
our officers. The compensation committee also administers our stock plans.
Audit Committee. The current members of our audit committee are Messrs.
Brooks, Garnett and Raduchel. Our audit committee reviews and monitors our
financial statements and accounting practices, makes recommendations to our
board regarding the selection of independent auditors and reviews the results
and scope of the audit and other services provided by our independent auditors.
Transaction Committee. Following this offering, the members of our
transaction committee will be Messrs. Dibachi and Garnett. Subject to certain
limitations, our transaction committee will review and authorize acquisitions of
or mergers with other companies, investments in other companies or businesses,
the incurrence of debt, bank financing or equipment lease financing and other
financing transactions.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee has at any time since our
formation been an officer or employee of ours. None of our executive officers
currently serves or in the past has served as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving on our board or compensation committee. Prior to the creation of our
compensation committee, all compensation decisions were made by our full board.
Mr. Dibachi did not participate in discussions by our board with respect to his
compensation.
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DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses in attending board
and board committee meetings. In March 1998, we granted options to purchase
100,000 shares of our common stock to Mr. Chen at an exercise price of $0.10 per
share. In April 1998, we granted options to purchase 100,000 shares of our
common stock to Maynard Webb at an exercise price of $0.10 per share. In January
1999, we granted options to purchase 100,000 shares of our common stock to
William Raduchel at an exercise price of $0.10 per share.
Members of the board who are not employees of Niku, or any parent,
subsidiary or affiliate of Niku, will be eligible to participate in the 2000
Equity Incentive Plan. The option grants under the plan are automatic and
nondiscretionary, and the exercise price of the options is the fair market value
of the common stock on the date of grant.
Each non-employee director who becomes a member of the board on or after
the effective date of the registration statement of which this prospectus forms
a part, will be granted an option to purchase 50,000 shares of our common stock.
Also, each eligible director who became a member of the board prior to the
effective date of the registration statement of which this prospectus forms a
part and who did not receive an option grant will receive an option to purchase
50,000 shares of our common stock. Immediately following each annual meeting of
our stockholders, each eligible director will automatically be granted an
additional option to purchase 25,000 shares of our common stock if the director
has served continuously as a member of the board since the date of the prior
annual meeting. All options to be granted to each eligible director will have an
exercise price equal to the fair market value of our common stock on the date of
grant. The board of directors may make discretionary supplemental grants to an
eligible director who has served for less than one year from the date of such
director's initial grant, provided that no director may receive options to
purchase more than 75,000 shares of our common stock in any calendar year. The
options have 10 year terms, and will terminate three months following the date
the director ceases to be a director or a consultant or 12 months if the
termination is due to death or disability. All options granted under the
directors plan will become exercisable over a three-year period at a rate of
2.778% per month so long as he or she continues as a member of the board or as a
consultant. In the event of our dissolution or liquidation or a "change in
control" transaction, options granted under the plan will become 100% vested and
exercisable in full.
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EXECUTIVE COMPENSATION
The following table presents compensation information for our fiscal year
ended January 29, 2000 paid or accrued by our chief executive officer and each
of our other executive officers. The compensation table excludes other
compensation in the form of perquisites and other personal benefits that
constituted less than 10% of the total annual salary and bonus of each of the
named executive officers in the fiscal year ended January 29, 2000. Mr. Pickus
joined us in November 1999 at an annual base salary of $300,000. Mr. Nelson
joined us in August 1999 at an annual base salary of $200,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------- ------------------------
ALL OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION AWARDS OPTIONS
---------------------------- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Farzad Dibachi................ $180,000 $180,000 -- -- --
Chief Executive Officer
Joshua Pickus................. 75,000 25,000 -- 1,250,000(1) --
President, Vertical Markets
Mark Nelson................... 93,974 45,000 -- 350,000(2) --
Chief Financial Officer
Rhonda Dibachi................ 173,333 100,000 -- -- --
Senior Vice President of
Development
Kenneth Johnson............... 200,000 200,000 -- 250,000(3) --
Senior Vice President
of Sales
Harold Slawik................. 173,333 100,000 -- -- --
Senior Vice President
of Corporate Development
</TABLE>
- ---------------
(1) In November 1999, Mr. Pickus purchased 1,250,000 shares of our restricted
common stock at $1.00 per share. These shares are subject to our right of
repurchase that lapses as to 33.33% of the shares upon the first anniversary
of the grant date and as to 2.77% of the shares each month after that time.
Our right of repurchase lapses as to all of these shares in the event of a
change of control.
(2) In November 1999, Mr. Nelson purchased 350,000 shares of our restricted
common stock at $1.00 per share. These shares are subject to our right of
repurchase that lapses as to 25% of the shares upon the first anniversary of
the grant date and as to 2.083% of the shares each month after that time.
Our right of repurchase lapses as to all of these shares in the event of a
change of control.
(3) In March 1999, Mr. Johnson purchased 250,000 shares of our restricted common
stock at $0.10 per share. These shares are subject to our right of
repurchase that lapses as to 25% of the shares upon the first anniversary of
the grant date and as to 2.083% of the shares each month after that time.
During the fiscal year ended January 29, 2000, we did not grant any stock
options to our chief executive officer or our other executive officers.
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<PAGE> 63
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED JANUARY 29, 2000
AND OPTION VALUES AT JANUARY 29, 2000
The following table presents the number of shares acquired and the value
realized upon exercise of stock options during the fiscal year ended January 29,
2000 and the number of shares of our common stock subject to "exercisable" and
"unexercisable" stock options held as of January 29, 2000 by our chief executive
officer and each of our other executive officers. Also presented are values of
"in-the-money" options, which represent the positive difference between the
exercise price of each outstanding stock option and an assumed initial public
offering price of $21.00 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS
SHARES JANUARY 29, 2000 AT JANUARY 29, 2000
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Farzad Dibachi....... -- $ -- -- -- $ -- $ --
Joshua Pickus........ -- -- -- -- -- --
Mark Nelson.......... -- -- -- -- -- --
Rhonda Dibachi....... -- -- -- -- -- --
Kenneth Johnson...... -- -- -- -- -- --
Harold Slawik........ 167,708 40,250 7,292 175,000 152,986 3,671,500
</TABLE>
EMPLOYEE BENEFIT PLANS
1998 Stock Plan. As of January 29, 2000, options to purchase 4,921,236
shares of our common stock were outstanding under our 1998 Stock Plan and
647,148 shares of our common stock remained available for issuance upon the
exercise of options that may be granted in the future. The options outstanding
as of January 29, 2000 had a weighted average exercise price of $1.03 per share.
Our 1998 Stock Plan will terminate upon this offering, at which time, our 2000
Equity Incentive Plan will become effective. As a result, no options will be
granted under our 1998 Stock Plan after this offering. However, termination will
not affect outstanding options, all of which will remain outstanding and subject
to our 1998 Stock Plan and stock option agreements until exercise or until they
terminate or expire by their terms. Options granted under our 1998 Stock Plan
are subject to terms substantially similar to those described below with respect
to options granted under our 2000 Equity Incentive Plan.
2000 Equity Incentive Plan. Our 2000 Equity Incentive Plan will become
effective on the date of this prospectus and will serve as the successor to our
1998 Stock Plan. We have reserved 6,000,000 shares of our common stock to be
issued under this plan. In addition, shares available for grant under the 1998
Stock Plan on the date of this prospectus and any shares issued under the 1998
Stock Plan that are forfeited or repurchased by us or that are issuable upon
exercise of options that expire or become unexercisable for any reason without
having been exercised in full will be available for grant and issuance under our
2000 Equity Incentive Plan. Shares will again be available for grant and
issuance under our 2000 Equity Incentive Plan that:
- are subject to issuance upon exercise of an option granted under our 2000
Equity Incentive Plan that cease to be subject to the option for any
reason other than exercise of the option;
- have been issued upon the exercise of an option granted under our 2000
Equity Incentive Plan that are subsequently forfeited or repurchased by
us at the original purchase price;
- are subject to an award granted pursuant to a restricted stock purchase
agreement under our 2000 Equity Incentive Plan that are subsequently
forfeited or repurchased by us at the original issue price; or
- are subject to stock bonuses granted under our 2000 Equity Incentive Plan
that terminate without shares being issued.
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<PAGE> 64
On each January 1, the aggregate number of shares reserved for issuance
under our 2000 Equity Incentive Plan will increase automatically by a number of
shares equal to 5% of our outstanding shares on December 31 of the preceding
year.
Our 2000 Equity Incentive Plan will terminate 10 years from the date our
board of directors approved the plan, unless it is terminated earlier by our
board of directors. The plan will authorize the award of options, restricted
stock awards and stock bonuses. No person will be eligible to receive more than
2,000,000 shares in any calendar year under the plan other than a new employee
of Niku, who will be eligible to receive up to 2,500,000 shares in the calendar
year in which the employee commences employment.
Our 2000 Equity Incentive Plan will be administered by our board of
directors. The board will have the authority to construe and interpret the plan,
grant awards and make all other determinations necessary or advisable for the
administration of the plan. Also, our non-employee directors are entitled to
receive automatic annual grants of options to purchase shares of our common
stock, as described under "Management -- Director Compensation."
Our 2000 Equity Incentive Plan will provide for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees of Niku or of a parent or subsidiary of Niku. All other awards other
than incentive stock options may be granted to employees, officers, directors
and consultants of Niku or any parent or subsidiary of Niku, provided the
consultants render bona fide services not in connection with the offer and sale
of securities in a capital-raising transaction. The exercise price of incentive
stock options must be at least equal to the fair market value of our common
stock on the date of grant. The exercise price of incentive stock options
granted to 10% stockholders must be at least equal to 110% of that value. The
exercise price of nonqualified stock options must be at least equal to 85% of
the fair market value of our common stock on the date of grant.
Options may be exercisable only as they vest or may be immediately
exercisable with the shares issued subject to our right of repurchase that
lapses as the shares vest. In general, options will vest over a four-year
period. The maximum term of options granted under our 2000 Equity Incentive Plan
is 10 years.
Awards granted under our 2000 Equity Incentive Plan may not be transferred
in any manner other than by will or by the laws of descent and distribution.
They may be exercised during the lifetime of the optionee only by the optionee.
The compensation committee may determine otherwise and provide for these
provisions in the award agreement, but only with respect to awards that are not
incentive stock options. Options granted under our 2000 Equity Incentive Plan
generally may be exercised for a period of time after the termination of the
optionee's service to Niku or a parent or subsidiary of Niku. Options will
generally terminate immediately upon termination of employment for cause.
The purchase price for restricted stock will be determined by our
compensation committee. Stock bonuses may be issued for past services or may be
awarded upon the completion of certain services or performance goals.
If we dissolve or liquidate or have a "change in control" transaction, the
vesting of all outstanding awards will accelerate as to an additional 25% of the
shares that are unvested on the date of the change in control, and thereafter
all outstanding awards will continue to vest in equal monthly installments over
the remaining original vesting term as set forth in the award agreement. In the
discretion of the compensation committee, the vesting of these awards may be
further accelerated upon one of these transactions.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
will become effective on the first day on which price quotations are available
for our common stock on the Nasdaq National Market. We have initially reserved
1,000,000 shares of our common stock under this plan. On each January 1, the
aggregate number of shares reserved for issuance under our
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<PAGE> 65
2000 Employee Stock Purchase Plan will increase automatically by a number of
shares equal to 1% of our outstanding shares on December 31 of the preceding
year. Our board of directors or compensation committee may reduce the amount of
the increase in any particular year. The aggregate number of shares reserved for
issuance under our 2000 Employee Stock Purchase Plan may not exceed 10,000,000
shares.
Our 2000 Employee Stock Purchase Plan will be administered by our
compensation committee. Our compensation committee will have the authority to
construe and interpret the plan, and its decisions will be final and binding.
Employees generally will be eligible to participate in our 2000 Employee
Stock Purchase Plan if they are employed before the beginning of the applicable
offering period, are customarily employed by us, or our parent or any
subsidiaries that we designate, for more than 20 hours per week and more than
five months in a calendar year and are not, and would not become as a result of
being granted an option under the plan, 5% stockholders of us or our parent or
designated subsidiaries. Participation in our 2000 Employee Stock Purchase Plan
will end automatically upon termination of employment for any reason.
Under our 2000 Employee Stock Purchase Plan, eligible employees will be
permitted to acquire shares of our common stock through payroll deductions.
Eligible employees may select a rate of payroll deduction between 1% and 10% of
their compensation and are subject to maximum purchase limitations.
Except for the first offering period, each offering period under our 2000
Employee Stock Purchase Plan will be for two years and consist of four six-month
purchase periods. The first offering period is expected to begin on the first
business day on which price quotations for our common stock are available on the
Nasdaq National Market. Offering periods and purchase periods will begin on
March 1 and September 1 of each year. However, because the first day on which
price quotations for our common stock will be available on the Nasdaq National
Market may not be March 1 or September 1, the length of the first offering
period may be more or less than two years, and the length of the first purchase
period may be more or less than six months.
Our 2000 Employee Stock Purchase Plan will provide that, in the event of
our proposed dissolution or liquidation, each offering period that commenced
prior to the closing of the proposed event will continue for the duration of the
offering period, provided that the compensation committee may fix a different
date for termination of the plan. The purchase price for our common stock
purchased under the plan will be 85% of the lesser of the fair market value of
our common stock on the first day of the applicable offering period or the last
day of the applicable purchase period. The compensation committee will have the
power to change the offering dates, purchase dates and duration of offering
periods without stockholder approval, if the change is announced prior to the
beginning of the affected date or offering period.
Our 2000 Employee Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code.
The plan will terminate 10 years from the date the plan was adopted by our
board, unless it is terminated earlier under the terms of the plan. The board
will have the authority to amend, terminate or extend the term of the plan,
except that no action may adversely affect any outstanding options previously
granted under the plan.
Except for the automatic annual increase of shares described above,
stockholder approval will be required to increase the number of shares that may
be issued or to change the terms of eligibility under Our 2000 Employee Stock
Purchase Plan. The board will be able to make amendments to the plan as it
determines to be advisable if the financial accounting treatment for the plan is
different from the financial accounting treatment in effect on the date the plan
was adopted by the board.
401(k) Plan. We sponsor a defined contribution plan intended to qualify
under Section 401 of the Internal Revenue Code, or a 401(k) plan. Employees who
are at least 21 years old and
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<PAGE> 66
who have been employed with us for at least one year are generally eligible to
participate and may enter the plan as of January 1 and July 1 of each year.
Participants may make pre-tax contributions to the plan of up to 12% of their
eligible earnings, subject to a statutorily prescribed annual limit. Each
participant is fully vested in his or her contributions and the investment
earnings. There are no matching contributions under the plan. Contributions by
the participants to the plan, and the income earned on these contributions, are
generally not taxable to the participants until withdrawn. Participant
contributions are held in trust as required by law. Individual participants may
direct the trustee to invest their accounts in authorized investment
alternatives.
EMPLOYMENT ARRANGEMENTS
All of our employees are at-will employees.
We have executed an offer letter with Harold Slawik, our senior vice
president of corporate development. This letter, effective January 1998,
established Mr. Slawik's initial annual base salary at $144,000. Mr. Slawik also
received a sign-on bonus of $50,000. In the fiscal year ended January 31, 2000,
Mr. Slawik received a salary of $173,333. As a co-founder of Niku, we granted
Mr. Slawik the opportunity to purchase 87,500 shares of our common stock which
he bought under a common stock purchase agreement in February 1998 at a purchase
price of $0.01 per share. These shares were subject to a right of repurchase
upon termination of his employment. Our right of repurchase has now lapsed as to
all of these shares. Under an option agreement, in January 1998, we granted to
Mr. Slawik an option to purchase 350,000 shares of our common stock at an
exercise price of $0.01 per share. This option is exercisable as to 25% of the
shares upon the first anniversary of the grant date and as to 2.083% of the
shares subject to the option each month thereafter. Mr. Slawik has exercised
167,708 of the shares subject to this option.
We have executed an offer letter with Rhonda Dibachi, our senior vice
president of development. This letter, effective May 1998, established Ms.
Dibachi's initial annual base salary at $144,000. In the fiscal year ended
January 31, 2000, Ms. Dibachi received a salary of $173,333.
We have executed an offer letter with Kenneth Johnson, our senior vice
president of sales. This letter, effective January 1999, established Mr.
Johnson's annual base salary at $200,000. Under a restricted stock purchase
agreement, in March 1999, Mr. Johnson purchased 250,000 shares of our restricted
common stock at a purchase price of $0.10 per share. These shares are subject to
our right to repurchase upon termination of his employment. Our right of
repurchase lapses as to 25% of the shares upon the first anniversary of the
grant date and as to 2.083% of the shares each month thereafter. In March 1999,
we loaned Mr. Johnson $24,975, secured by a pledge and security agreement, in
connection with his purchase of shares of our restricted common stock. The loan
accrues interest at a rate of 4.77% and is due on or before January 4, 2003.
We have executed an offer letter with Mark Nelson, our chief financial
officer. This letter, effective August 1999, established Mr. Nelson's annual
base salary at $200,000. Under a restricted stock purchase agreement, in
November 1999, Mr. Nelson purchased 350,000 shares of our restricted common
stock at a purchase price of $1.00 per share. These shares are subject to our
right to repurchase upon termination of his employment. Our right of repurchase
lapses as to 25% of the shares upon the first anniversary of the grant date and
as to 2.083% of the shares each month thereafter. Our right of repurchase lapses
as to all of the shares in the event of a change of control. In November 1999,
we loaned Mr. Nelson $349,965, secured by a stock pledge agreement, in
connection with his purchase of shares of our restricted common stock. The loan
accrues interest at a rate of 6.08% and is due on or before November 18, 2002.
We have executed an offer letter with Joshua Pickus, our president,
vertical markets. This letter, effective November 1999, established Mr. Pickus'
annual base salary at $300,000. This agreement also provides that we will make
Mr. Pickus a separate payment of $25,000 for every
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<PAGE> 67
three months of employment during his first two years of employment with us.
Under a restricted stock purchase agreement, in November 1999, Mr. Pickus
purchased 1,250,000 shares of our restricted common stock at a purchase price of
$1.00 per share. These shares are subject to our right to repurchase upon
termination of his employment. Our right of repurchase lapses as to 33.33% of
the shares upon the first anniversary of employment and as to 2.77% of the
shares each month thereafter. Our right of repurchase lapses as to all of the
shares in the event of a change of control. In November 1999, we loaned Mr.
Pickus $1,249,875, secured by a stock pledge agreement, in connection with his
purchase of shares of our restricted common stock. The loan accrues interest at
a rate of 6.08% and is due on or before November 1, 2002. Under a separate loan
agreement, we loaned Mr. Pickus $200,000. The loan accrues interest at a rate of
8.0% and is due on or before November 11, 2002.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages resulting from breach of
his fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to very
limited exceptions;
- we may indemnify our employees and agents to the fullest extent permitted
by the Delaware General Corporation Law, subject to very limited
exceptions;
- we are required to advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding;
- we may advance expenses, as incurred, to our employees and agents in
connection with a legal proceeding; and
- the rights conferred in the bylaws are not exclusive.
In addition to the indemnification required in our certificate of
incorporation and bylaws, we have entered into indemnity agreements with each of
our current directors and executive officers. These agreements provide for the
indemnification of our officers and directors for all expenses and liabilities
incurred in connection with any action or proceeding brought against them by
reason of the fact that they are or were our agents. We also intend to obtain
directors' and officers' insurance to cover our directors, officers and some of
our employees for liabilities, including liabilities under securities laws. We
believe that these indemnification provisions and agreements and this insurance
are necessary to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against directors and
officers, even though an action, if successful, might benefit us and other
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors
and officers as required by these indemnification provisions. At present, there
is no pending litigation or proceeding involving any of our directors, officers
or employees regarding which indemnification by us is sought, nor are we aware
of any threatened litigation that may result in claims for indemnification.
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<PAGE> 68
CERTAIN TRANSACTIONS
Other than the employment arrangements described in "Management" and the
transactions described below, since we were formed, there has not been nor is
there currently proposed any transaction or series of similar transactions to
which we were or will be a party:
- in which the amount involved exceeds or will exceed $60,000; and
- in which any director, executive officer, holder of more than 5% of our
common stock or any member of their immediate family had or will have a
direct or indirect material interest.
COMMON STOCK TRANSACTIONS
In January 1998, Farzad Dibachi, our chief executive officer and chairman
of the board of directors, purchased 4,000,000 shares of our common stock at a
purchase price of $0.01 per share. In January 1998, the Garnett 1996 Children's
Trust UTA for the benefit of the children of Terence Garnett, one of our
directors, purchased 500,000 shares of our common stock at a purchase price of
$0.01 per share. In February 1998, Joshua Pickus, our president, vertical
markets, purchased 10,000 shares of our common stock at a purchase price of
$0.01 per share and Harold Slawik, our vice president of corporate development,
purchased 87,500 shares of our common stock at a purchase price of $0.01 per
share.
PREFERRED STOCK FINANCINGS
In January 1998, we sold a total of 10,000,000 shares of our Series F
preferred stock at a purchase price of $0.05 per share. In February, April and
May 1998, we sold a total of 5,142,851 shares of our Series A preferred stock at
a purchase price of $0.35 per share. In October, November and December 1998, we
sold a total of 7,999,992 shares of our Series B preferred stock at a purchase
price of $0.75 per share. In May 1999, we sold a total of 9,987,439 shares of
our Series C preferred stock at a purchase price of $1.99 per share. In November
1999, we sold a total of 7,998,012 shares of our Series D preferred stock at a
purchase price of $5.00 per share.
Purchasers of our preferred stock include, among others, the following
executive officers, directors and holders of more than 5% of our outstanding
stock or entities affiliated with them:
<TABLE>
<CAPTION>
SERIES F SERIES A SERIES B SERIES C SERIES D
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCKHOLDER STOCK STOCK STOCK STOCK STOCK
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Farzad and Rhonda Dibachi.............. 7,500,000 291,428 666,666 -- --
Joshua Pickus.......................... -- 28,571 13,333 -- --
Mark Nelson............................ -- -- -- -- 10,000
Harold Slawik.......................... 2,000,000 5,714 -- -- --
John Chen.............................. -- 285,714 -- -- --
Terence Garnett........................ 2,000,000 1,857,142 493,333 577,890 500,000
William Raduchel....................... -- 285,714 66,666 -- --
Maynard Webb........................... -- 285,714 133,333 50,251 --
Vector Capital II, L.P................. -- -- -- -- 6,226,195
Entities associated with Venrock
Associates........................... -- -- 5,173,333 2,437,186 388,000
Entities associated with J.H.
Whitney.............................. -- -- -- 4,522,613 768,208
</TABLE>
Shares for Farzad and Rhonda Dibachi include 1,500,000 shares of our Series
F preferred stock and 5,714 shares of our Series A preferred stock held by
Florence V, LLC. Mr. Dibachi disclaims beneficial ownership of shares held by
Florence V, LLC except to the extent of his percentage interest.
Shares for Harold Slawik include 1,500,000 shares of our Series F preferred
stock and 5,714 shares of our Series A preferred stock held by Florence V, LLC.
Mr. Slawik disclaims
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<PAGE> 69
beneficial ownership of shares held by Florence V, LLC except to the extent of
his percentage interest. Also includes 500,000 shares held by the Franklin David
Dibachi 1996 Trust, of which Mr. Slawik serves as the trustee.
Vector Capital II, L.P. acquired its shares as part of the Proamics
acquisition.
LOANS TO EXECUTIVE OFFICERS
In March 1999, we loaned to Kenneth Johnson, our senior vice president of
sales, $24,975, secured by a pledge and security agreement, in connection with
his purchase of our restricted common stock. This loan accrues interest at a
rate of 4.77% and is due on or before January 4, 2003.
In November 1999, we loaned to Mark Nelson, our chief financial officer,
$349,965, secured by a stock pledge agreement, in connection with his purchase
of our restricted common stock. The loan accrues interest at a rate of 6.08% and
is due on or before November 18, 2002.
In November 1999, we loaned to Joshua Pickus, our president, vertical
markets, $1,249,875, secured by a stock pledge agreement, in connection with his
purchase of our restricted common stock. The loan accrues interest at a rate of
6.08% and is due on or before November 1, 2002. We also loaned $200,000 to Mr.
Pickus in November 1999 under a separate agreement, and this loan accrues
interest at a rate of 8.0% and is due on or before November 11, 2002.
ACQUISITION OF PROAMICS
In December 1999, we acquired Proamics. In connection with our acquisition
of Proamics, Vector Capital II, L.P. received 6,226,195 shares of our Series D
preferred stock of which 1,245,239 are held in escrow to secure indemnification
obligations of the former stockholders of Proamics. Each share of Series D
preferred stock will be converted into one share of our common stock upon the
closing of this offering.
PERSONS OR ENTITIES RELATED TO OUR DIRECTORS
In December 1998, we entered into a software license and services agreement
with Sybase pursuant to which we granted Sybase a license to make, install and
use copies of our software. We paid Sybase a license fee of $142,500 under this
agreement. We paid Sybase an additional $34,644 in support fees. In March 1999,
we entered into a software license agreement pursuant to which Sybase granted us
a license to use Sybase software. John Chen, one of our directors, is the
president, chief executive officer and the chairman of the board of directors of
Sybase.
We executed an offer letter with Angelina Schutz, our vice president of
business development. This letter, effective June 1999, established Ms. Schutz's
annual base salary at $150,000 and qualified her to receive $150,000 as
commission if she meets her revenue quota and management deliverables, and in
excess of this amount if she exceeds her targets. Under an option agreement, in
June 1999, we granted to Ms. Schutz an option to purchase 150,000 shares of our
common stock at an exercise price of $0.25 per share. This option is exercisable
as to 25% of the shares upon the first anniversary of the grant date and as to
2.083% of the shares subject to the option each month thereafter. Ms. Schutz is
the sister-in-law of Terence Garnett, one of our directors.
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<PAGE> 70
PRINCIPAL STOCKHOLDERS
The following table presents information as to the beneficial ownership of
our common stock as of January 29, 2000 and as adjusted to reflect the sale of
our common stock in this offering by:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of our directors;
- each of our executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless indicated below, to our knowledge, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of January 29, 2000 are deemed to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Unless indicated below, the address for each listed
stockholder is c/o Niku Corporation, 305 Main Street, Redwood City, California
94063.
The percentage of common stock outstanding as of January 29, 2000 is based
on 61,044,235 shares of common stock outstanding on that date, assuming that all
outstanding preferred stock has been converted into common stock.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
SHARES BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
Farzad and Rhonda Dibachi(1)............ 11,558,094 18.9% 16.7%
Entities and individuals associated with
Venrock Associates(2)................. 7,998,519 13.1 11.6
2499 Sand Hill Road, Suite 200
Menlo Park, CA 94025
Vector Capital II, L.P.(3).............. 6,226,195 10.2 9.0
465 Montgomery Street, 19th Floor
San Francisco, CA 94104
Terence Garnett(4)...................... 5,908,365 9.7 8.6
Entitles and individuals associated with
J.H. Whitney(5)....................... 5,290,821 8.7 7.7
177 Broad Street
Stamford, CT 06901
Michael Brooks(6)....................... 5,290,821 8.7 7.7
Harold Slawik(7)........................ 2,385,297 3.9 3.5
Joshua Pickus(8)........................ 1,296,904 2.1 1.9
Maynard Webb(9)......................... 533,187 * *
Mark Nelson(10)......................... 360,000 * *
John Chen(11)........................... 352,381 * *
William Raduchel(12).................... 344,269 * *
Kenneth Johnson(13)..................... 250,000 * *
All directors and executive officers as
a group (11 persons)(14).............. 26,773,604 43.7 38.7
</TABLE>
- ---------------
* Less than 1%.
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<PAGE> 71
(1) Represents 10,052,380 shares held by The Dibachi Family Trust UDT and
1,505,714 shares held by Florence V, LLC. Mr. Dibachi disclaims beneficial
ownership of shares held by Florence V, LLC except to the extent of his
percentage interest.
(2) Represents 3,478,372 shares held by Venrock Associates, 4,500,747 shares
held by Venrock Associates II, L.P. and 19,400 shares held by Venrock
Entrepreneurs Fund.
(3) Represents 6,226,195 shares held by Vector Capital II, L.P.
(4) Represents 1,200,000 shares held by the Garnett Children's Trust UTA,
4,632,988 shares held by the Garnett Family Trust and 75,377 shares held by
Mr. Garnett. This number does not include 3,478,372 shares held by Venrock
Associates, 4,500,747 shares held by Venrock Associates II, L.P. nor 19,400
shares held by Venrock Entrepreneurs Fund. Mr. Garnett, one of our
directors, is a consultant to Venrock Associates, Venrock Associates II,
L.P. and Venrock Entrepreneurs Fund but does not share voting or
dispositive power over the shares held by these entities.
(5) Represents 5,166,333 shares held by J.H. Whitney III, L.P. and 124,488
shares held by Whitney Strategic Partners III, L.P.
(6) Represents 5,166,333 shares held by J.H. Whitney III, L.P. and 124,488
shares held by Whitney Strategic Partners III, L.P. Mr. Brooks, one of our
directors, is a managing member of the general partner of these entities.
Mr. Brooks disclaims beneficial ownership of shares held by these entities
except to the extent of his pecuniary interest in them.
(7) Represents 282,708 shares held by Harold Slawik, 75,000 shares held as
custodian for Alexander, Cecilia and Abigail Slawik, 1,505,714 shares held
by Florence V, LLC, 500,000 shares held by the Franklin David Dibachi 1996
Trust and 21,875 shares subject to options exercisable within 60 days of
January 29, 2000 held by Mr. Slawik. Mr. Slawik disclaims beneficial
ownership of shares held by Florence V, LLC except to the extent of his
percentage interest. Mr. Slawik serves as the trustee of the Franklin David
Dibachi 1996 Trust.
(8) Represents 1,296,904 shares held by the Pickus Family Trust.
(9) Represents 469,298 shares held by The Webb Family Trust and 63,889 shares
subject to options exercisable within 60 days of January 29, 2000 held by
Mr. Webb.
(10) Represents 360,000 shares held by Mark Nelson.
(11) Represents 285,714 shares held by the John S. and Sherry H. Chen Family
Trust and 66,667 shares subject to options exercisable within 60 days of
January 29, 2000 held by Mr. Chen.
(12) Represents 238,714 shares held by The William J. Raduchel Revocable Trust,
38,889 shares subject to options exercisable within 60 days of January 29,
2000 held by Mr. Raduchel and 66,666 shares held by Mr. Raduchel.
(13) Represents 250,000 shares held by Kenneth Johnson.
(14) Represents 26,582,284 shares held by all directors and executive officers
as a group and 191,320 shares subject to options exercisable within 60 days
of January 29, 2000 held by all directors and executive officers as a
group.
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<PAGE> 72
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 250,000,000 shares of common stock, $0.0001 par value per
share, and 10,000,000 shares of preferred stock, $0.0001 par value per share. As
of January 29, 2000, and assuming the conversion of all outstanding preferred
stock into common stock, there were outstanding 61,044,235 shares of our common
stock held by approximately 263 stockholders, of which 2,437,083 shares were
subject to our right of repurchase, options to purchase 4,921,236 shares of our
common stock and warrants to purchase 630,000 shares of our common stock.
COMMON STOCK
Dividend rights. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of assets legally
available at the times and in the amounts as our board of directors may
determine.
Voting rights. Each holder of our common stock is entitled to one vote for
each share of common stock held on all matters submitted to a vote of
stockholders. Cumulative voting for the election of directors is not provided
for in our certificate of incorporation. In addition, our certificate of
incorporation and bylaws require the approval of two-thirds, rather than a
majority, of the shares entitled to vote for certain matters. For a description
of these matters, see "-- Anti-Takeover Provisions."
No preemptive or similar rights. Our common stock is not entitled to
preemptive rights and is not subject to conversion or redemption.
Right to receive liquidation distributions. Upon a liquidation, dissolution
or winding-up of Niku, the holders of our common stock are entitled to share
ratably among themselves in all assets remaining after payment of all
liabilities and the liquidation preferences of any outstanding preferred stock.
Each outstanding share of our common stock is, and all shares of our common
stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, each outstanding share of our preferred
stock will be converted into shares of our common stock. See Note 6 of notes to
financial statements for a description of our preferred stock.
Following the offering, we will be authorized, subject to limitations
imposed by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in each series,
and to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations or restrictions. The
board of directors can also increase or decrease the number of shares of any
series, but not below the number of shares of such series then outstanding,
without any further vote or action by the stockholders. The board may authorize
the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of the common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring or preventing a change in
control of Niku and may adversely affect the market price of the our common
stock and the voting and other rights of the holders of our common stock. We
have no current plan to issue any shares of preferred stock.
WARRANTS
In February 1999, we issued to Comdisco a warrant to purchase 30,000 shares
of our Series B preferred stock at an exercise price of $0.75 per share. If not
sooner exercised, this warrant will remain outstanding for three years after the
completion of this offering unless the
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<PAGE> 73
underwriters request that Comdisco exercise this warrant, in which case the
warrant will expire immediately after the completion of this offering.
In February 1999, we also issued to Comdisco a warrant to purchase 600,000
shares of our Series B preferred stock at an exercise price of $0.75 per share.
If not sooner exercised, this warrant will remain outstanding for three years
after the completion of this offering unless the underwriters request that
Comdisco exercise this warrant, in which case the warrant will expire
immediately after the completion of this offering.
REGISTRATION RIGHTS
As a result of an amended and restated investors' rights agreement dated
November 17, 1999, as amended December 8, 1999, among us and some of our
stockholders, the holders of 51,319,497 shares of our common stock will be
entitled to rights with respect to the registration of these shares under the
Securities Act, as described below.
Demand registration rights. At any time after six months following this
offering, the holders of at least 50% of the shares having registration rights
can request that we register all or a portion of their shares, so long as such
registration covers at least 20% of their shares and the total offering price of
the shares to the public is at least $20 million. We will only be required to
file two registration statements in response to their demand registration
rights. We may postpone the filing of a registration statement for up to 120
days twice in a 12 month period if we determine that the filing would be
seriously detrimental to us and our stockholders.
Piggyback registration rights. If we register any securities for public
sale, the stockholders with registration rights will have the right to include
their shares in the registration statement. The managing underwriter of any
underwritten offering will have the right to limit the number of shares
registered by these holders to be included in the registration statement due to
marketing reasons.
Form S-3 registration rights. The holders of the shares having registration
rights can request that we register their shares if we are eligible to file a
registration statement on Form S-3 and if the total price of the shares offered
to the public is at least $2 million. We may postpone the filing of a
registration statement for up to 120 days twice in a 12 month period if we
determine that the filing would be seriously detrimental to us and our
stockholders.
We will pay all expenses incurred in connection with the registrations
described above, except for underwriters' and brokers' discounts and
commissions, which will be paid by the selling stockholders.
The registration rights described above will expire with respect to a
particular stockholder if it can sell all of its shares in a three month period
under Rule 144 of the Securities Act. In any event, the registration rights
described above will expire five years after this offering is completed.
Holders of these registration rights have waived the exercise of these
registration rights for 180 days following the date of this prospectus.
ANTI-TAKEOVER PROVISIONS
The provisions of Delaware law, our certificate of incorporation and our
bylaws may have the effect of delaying, deferring or discouraging another person
from acquiring control of our company.
DELAWARE LAW
We will be subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents some
Delaware corporations from engaging, under some circumstances, in a "business
combination," which includes a merger or sale of more than 10% of the
corporation's assets with any "interested stockholder," meaning a
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<PAGE> 74
stockholder who owns 15% or more of the corporation's outstanding voting stock,
as well as affiliates and associates of the stockholder, for three years
following the date that the stockholder became an "interested stockholder"
unless:
- the transaction is approved by the board of directors prior to the date
the interested stockholder attained that status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or subsequent to such date the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by at least two-thirds of the outstanding voting stock that
is not owned by the interested stockholder.
A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate or incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
However, we have not opted out of this provision. The statute could prohibit or
delay mergers or other takeover or change-in-control attempts and, accordingly,
may discourage attempts to acquire us.
CHARTER AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws provide that:
- following the completion of this offering, no action shall be taken by
stockholders except at an annual or special meeting of the stockholders
called in accordance with our bylaws and that stockholders may not act by
written consent;
- following the completion of this offering, the approval of holders of
two-thirds of the shares entitled to vote at an election of directors
shall be required to adopt, amend or repeal our bylaws or amend or repeal
the provisions of our certificate of incorporation regarding the election
and removal of directors and ability of stockholders to take action;
- stockholders may not call special meetings of the stockholders without
advance notice and approval of the stockholders holding at least a
majority of the outstanding shares of stock;
- stockholders may not fill vacancies on the board;
- following the completion of this offering, our board of directors will be
divided into three classes, each serving staggered three-year terms,
which means that only one class of directors will be elected at each
annual meeting of stockholders, with the other classes continuing for the
remainder of their respective terms, and directors may only be removed
for cause by the holders of two-thirds of the shares entitled to vote at
an election of directors; and
- we will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their
services to us, which may include services in connection with takeover
defense measures.
These provisions of our certificate of incorporation and bylaws may have
the effect of delaying, deferring or discouraging another person from acquiring
control of our company.
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<PAGE> 75
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Harris Trust &
Savings Bank.
LISTING
We have applied to list our common stock on the Nasdaq National Market
under the trading symbol "NIKU."
A public market for the trading of our common stock has not existed prior
to this offering. Although this offering will result in a trading market for our
common stock, we do not know how liquid that market might be. The initial public
offering price for our common stock will be determined through negotiations
between the underwriters and us. If you purchase shares of our common stock, you
may not be able to resell those shares at or above the initial public offering
price.
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<PAGE> 76
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of our equity
securities.
Upon the completion of this offering, we will have shares of our common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of the outstanding shares, all of
the shares sold in this offering will be freely tradable, except that any shares
held by our "affiliates," as that term is defined in Rule 144 promulgated under
the Securities Act, may only be sold in compliance with the limitations
described below. The remaining 61,044,235 shares of our common stock will be
deemed "restricted securities" as defined under Rule 144. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144, 144(k) or 701 promulgated under the
Securities Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES DATE
--------- ----
<C> <S>
8,000,000 After the date of this prospectus, freely tradable shares
sold in this offering and shares saleable under Rule 144(k)
that are not subject to the 180-day lock-up
40,722,293 After 180 days from the date of this prospectus, the 180-day
lock-up terminates and these shares are saleable under Rule
144 (subject in some cases to volume limitations) or Rule
144(k) or Rule 701 (subject in some cases to a right of
repurchase by Niku)
8,356,137 After November 17, 2000, the one year anniversary of our
Series D preferred stock financing, these shares are
saleable under Rule 144 and Rule 701
8,289,236 After December 8, 2000, the one year anniversary of our
acquisition of Proamics, these shares are saleable under
Rule 144 and Rule 701
167,384 After January 31, 2001, the shares held in escrow pursuant
to our Legal Anywhere acquisition are released and these
shares are saleable under Rule 144 and Rule 701
64,930 After February 24, 2001, one year after the effective date,
these shares are saleable under Rule 144 and Rule 701
2,245,643 After June 8, 2001, the shares held in escrow pursuant to
our Proamics acquisition are released and these shares are
saleable under Rule 144 and Rule 701
1,198,612 Thereafter, these shares are saleable under Rule 144 and
Rule 701
</TABLE>
In connection with the purchase of 1,250,000 shares of our restricted
common stock by Joshua Pickus, our president, vertical markets, we loaned Mr.
Pickus $1,249,875 secured by a stock pledge agreement. In connection with the
purchase of 350,000 shares of our restricted common stock by Mark Nelson, our
chief financial officer, we loaned Mr. Nelson $349,965 secured by a stock pledge
agreement. The 1,250,000 shares of restricted common stock held by Mr. Pickus
and the 350,000 shares of restricted common stock held by Mr. Nelson will be
freely tradeable one year after each repays his respective loan in full.
However, we intend to file a registration statement on Form S-8 for the resale
of these shares 180 days from the date of this prospectus.
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<PAGE> 77
RULE 144
In general, under Rule 144 as currently in effect, a person, or group of
persons whose shares are required to be aggregated, including an affiliate of
Niku, who has beneficially owned shares for at least one year is entitled to
sell within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then-outstanding shares of our common stock, which will be approximately
690,442 shares immediately after this offering, or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of the sale is filed. In addition, a person who is not deemed to
have been an affiliate at any time during the 90 days preceding a sale and who
has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell these shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from one
of our affiliates, a person's holding period for the purpose of effecting a sale
under Rule 144 would commence on the date of transfer from the affiliate.
STOCK OPTIONS
As of January 29, 2000, options to purchase a total of 4,921,236 shares of
our common stock were outstanding, all of which were currently exercisable. We
intend to file a registration statement on Form S-8 under the Securities Act to
register all shares of our common stock subject to outstanding options and all
shares of our common stock issuable under our stock option and employee stock
purchase plans. Accordingly, shares of our common stock issued under these plans
will be eligible for sale in the public markets, subject to vesting restrictions
and the lock-up agreement described below. See "Management -- Employee Benefit
Plans."
LOCK-UP AGREEMENTS
We, each of our officers and directors and substantially all of our
securityholders have agreed, subject to specified exceptions, not to, without
the prior written consent of Goldman, Sachs & Co., offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any shares of our
common stock or options to acquire shares of our common stock during the 180-day
period following the date of this offering. Goldman, Sachs & Co. may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements. See "Underwriting."
Following this offering, subject to specified blackout periods, holders of
51,319,497 shares of our outstanding common stock will have two demand
registration rights with respect to their shares of our common stock, subject to
the 180-day lock-up arrangement described above, to require us to register their
shares of our common stock under the Securities Act, or rights to participate in
any future registration of securities by us. If the holders of these registrable
securities request that we register their shares, and if the registration is
effected, these shares will become freely tradable without restriction under the
Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Capital Stock -- Registration Rights."
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<PAGE> 78
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will pass upon the validity of
the issuance of the shares of common stock offered by this prospectus. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Shearman & Sterling, Menlo Park, California. As of January 29,
2000, three investment partnerships associated with Fenwick & West LLP
beneficially owned an aggregate of 55,126 shares of our common stock.
EXPERTS
The consolidated balance sheets of Niku Corporation and subsidiaries as of
January 31, 1999, and October 31, 1999, and the consolidated statements of
operations, stockholders' equity, and cash flows for the year ended January 31,
1999, and the nine months ended October 31, 1999, have been included herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent auditors, and upon the authority of said firm as experts in
accounting and auditing.
The consolidated balance sheets of Proamics Corporation and subsidiaries as
of December 31, 1998 and September 30, 1999, and the consolidated statements of
operations, shareholders' deficit, and cash flows for the years ended December
31, 1997 and 1998, and the nine months ended September 30, 1999, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent auditors, and upon the authority of said firm as experts
in accounting and auditing.
The balance sheets of Legal Anywhere, Inc. (formerly Legal Anywhere LLC) as
of December 31, 1998 and 1999, and the related statements of operations,
stockholders' and members' equity (deficit), and cash flows for the years then
ended, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, and upon the authority of
said firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In August 1999, we engaged Ernst & Young LLP as our principal accountant to
commence an audit of our financial statements. However, on November 22, 1999,
prior to the completion of an audit and the issuance of any opinion, we
dismissed Ernst & Young LLP as our principal accountant. On November 22, 1999,
we engaged KPMG LLP as our principal accountant. The board of directors has
approved the appointment of KPMG LLP as our principal accountant.
In connection with the services conducted by Ernst & Young LLP for any
period there were no disagreements with Ernst & Young LLP on any matter of
accounting principles or practices or auditing scope or procedures, which, if
not resolved to Ernst & Young LLP's satisfaction, would have caused them to
reference the subject matter of the disagreement in their opinion, had the audit
been completed on the date of their dismissal.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common stock.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the filed exhibit.
The registration statement, including exhibits and schedules, may be inspected
without charge at the
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<PAGE> 79
principal office of the Securities and Exchange Commission in Washington, D.C.,
and copies of all or any part of it may be obtained from that office after
payment of fees prescribed by the Securities and Exchange Commission. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission at
http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports containing unaudited financial data for the first three
quarters of each year.
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<PAGE> 80
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NIKU CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS
Independent Auditors' Report........................... F-2
Consolidated Balance Sheets............................ F-3
Consolidated Statements of Operations.................. F-4
Consolidated Statements of Stockholders' Equity
(Deficit)............................................. F-5
Consolidated Statements of Cash Flows.................. F-6
Notes to Consolidated Financial Statements............. F-7
PROAMICS CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS
Independent Auditors' Report........................... F-23
Consolidated Balance Sheets............................ F-24
Consolidated Statements of Operations.................. F-25
Consolidated Statements of Shareholders' Deficit....... F-26
Consolidated Statements of Cash Flows.................. F-27
Notes to Consolidated Financial Statements............. F-28
LEGAL ANYWHERE, INC. FINANCIAL STATEMENTS
Independent Auditors' Report........................... F-37
Balance Sheets......................................... F-38
Statements of Operations............................... F-39
Statements of Stockholders' and Members' Equity
(Deficit)............................................. F-40
Statements of Cash Flows............................... F-41
Notes to Financial Statements.......................... F-42
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Condensed
Financial Statements.................................. F-50
Unaudited Pro Forma Combined Condensed Balance Sheet... F-51
Unaudited Pro Forma Combined Condensed Statement of
Operations............................................ F-52
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements.................................. F-54
</TABLE>
F-1
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Niku Corporation:
We have audited the accompanying consolidated balance sheets of Niku
Corporation and subsidiaries (the Company) as of January 31, 1999 and October
31, 1999, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the year ended January 31, 1999, and for
the nine months ended October 31, 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Niku
Corporation and subsidiaries as of January 31, 1999 and October 31, 1999, and
the results of their operations and their cash flows for the year ended January
31, 1999, and for the nine months ended October 31, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
December 17, 1999, except as to Note 9(d), which is
as of January 31, 2000, and Note 9(e), which
is as of February 24, 2000.
F-2
<PAGE> 82
NIKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 31, OCTOBER 31, AS OF
1999 1999 OCTOBER 31, 1999
----------- ---------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 5,147 $ 17,154
Short-term investments................................... -- 2,175
Accounts receivable...................................... 165 2,754
Prepaid expenses and other current assets................ 133 1,258
------- --------
Total current assets................................. 5,445 23,341
Deposits and other assets.................................. -- 160
Property and equipment, net................................ 394 4,406
Goodwill and other intangible assets, net.................. 716 831
------- --------
$ 6,555 $ 28,738
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 145 $ 3,817
Accrued liabilities...................................... 17 1,753
Current portion of long-term obligations................. -- 5,502
Deferred revenue......................................... 497 1,946
------- --------
Total current liabilities............................ 659 13,018
Long-term obligations, less current portion................ -- 968
------- --------
Total liabilities.................................... 659 13,986
------- --------
Commitments
Redeemable convertible preferred stock and warrants,
$0.0001 par value; actual -- 23,400,000 and 34,272,843
shares authorized as of January 31, 1999 and October 31,
1999, respectively; 23,142,843 and 33,130,282 shares
issued and outstanding as of January 31, 1999 and October
31, 1999, respectively; aggregate liquidation preference
of $8,300 and $33,269 as of January 31, 1999 and October
31, 1999, respectively; pro forma -- no shares
authorized, issued or outstanding........................ 8,259 28,580 $ --
------- --------
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; actual -- no shares
authorized, issued or outstanding; pro forma --
10,000,000 shares authorized; no shares issued and
outstanding............................................ -- -- --
Common stock, $0.0001 par value; actual -- 50,000,000
shares authorized as of January 31, 1999 and October
31, 1999; 5,959,995 and 7,106,118 shares issued and
outstanding as of January 31, 1999 and October 31,
1999, respectively; pro forma -- 100,000,000 shares
authorized; 48,234,412 shares issued and outstanding... 1 1 5
Additional paid-in capital............................... 2,277 10,100 38,676
Treasury stock........................................... -- (30) (30)
Deferred stock-based compensation........................ (1,576) (7,238) (7,238)
Notes receivable from stockholders....................... (45) (108) (108)
Accumulated deficit...................................... (3,020) (16,553) (16,553)
------- -------- --------
Total stockholders' equity (deficit)................. (2,363) (13,828) $ 14,752
------- -------- ========
Total liabilities and stockholders' equity
(deficit).................................................. $ 6,555 $ 28,738
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 83
NIKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JANUARY 31, ----------------------
1999 1998 1999
----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
License............................................. $ -- $ -- $ 1,962
Services............................................ 15 -- 1,014
------- ------- --------
Total revenues................................... 15 -- 2,976
------- ------- --------
Cost of revenues:
License............................................. -- -- 174
Services............................................ 4 -- 429
------- ------- --------
Total cost of revenues........................... 4 -- 603
------- ------- --------
Gross profit..................................... 11 -- 2,373
------- ------- --------
Operating expenses:
Research and development............................ 1,610 849 6,062
Sales and marketing................................. 290 75 5,983
General and administrative.......................... 996 720 1,837
Stock-based compensation............................ 245 77 2,018
Amortization of goodwill and other intangible
assets........................................... 20 -- 184
------- ------- --------
Total operating expenses......................... 3,161 1,721 16,084
------- ------- --------
Operating loss................................... (3,150) (1,721) (13,711)
Interest income....................................... 130 56 519
Interest expense...................................... -- -- (341)
------- ------- --------
Net loss......................................... $(3,020) $(1,665) $(13,533)
======= ======= ========
Basic and diluted net loss per share.................. $ (0.62) $ (0.35) $ (2.31)
======= ======= ========
Shares used in computing basic and diluted net loss
per share........................................... 4,882 4,800 5,871
======= ======= ========
Pro forma basic and diluted net loss per share........ $ (0.14) $ (0.38)
======= ========
Shares used in computing pro forma basic and diluted
net loss per share.................................. 20,853 35,306
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 84
NIKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
------------------ PAID-IN TREASURY STOCK-BASED FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCK COMPENSATION STOCKHOLDERS DEFICIT
--------- ------ ---------- -------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founding
investors............................... 3,962,500 $ 1 $ 38 $ -- $ -- $ -- $ --
Issuance of common stock................. 850,000 -- 9 -- -- -- --
Issuance of common stock for note
receivable.............................. 450,000 -- 45 -- -- (45) --
Issuance of common stock in connection
with the exercise of employee stock
options................................. 172,500 -- 10 -- -- -- --
Issuance of common stock in connection
with the acquisition of Alyanza
Corporation............................. 524,995 -- 354 -- -- -- --
Deferred compensation related to stock
option grants........................... -- -- 1,733 (1,733) -- --
Amortization of stock-based
compensation............................ -- -- -- 157 -- --
Non-employee stock compensation.......... -- -- 88 -- -- -- --
Net loss................................. -- -- -- -- -- -- (3,020)
--------- ---- ------- ------- ------- ----- --------
Balances as of January 31, 1999.......... 5,959,995 1 2,277 (1,576) (45) (3,020)
Issuance of common stock for notes
receivable.............................. 700,000 -- 93 -- -- (93) --
Issuance of common stock in connection
with the exercise of employee stock
options................................. 746,123 -- 50 -- -- -- --
Repurchase of common stock in settlement
of notes receivable from stockholders... (300,000) -- -- (30) -- 30 --
Deferred stock compensation related to
stock option grants..................... -- -- 7,554 (7,554) -- --
Amortization of stock-based
compensation............................ -- -- -- -- 1,892 -- --
Non-employee stock compensation.......... -- -- 126 -- -- -- --
Net loss................................. -- -- -- -- -- -- (13,533)
--------- ---- ------- ------- ------- ----- --------
Balances as of October 31, 1999.......... 7,106,118 $ 1 $10,100 $ (30) $(7,238) $(108) $(16,553)
========= ==== ======= ======= ======= ===== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Issuance of common stock to founding
investors............................... $ 39
Issuance of common stock................. 9
Issuance of common stock for note
receivable.............................. --
Issuance of common stock in connection
with the exercise of employee stock
options................................. 10
Issuance of common stock in connection
with the acquisition of Alyanza
Corporation............................. 354
Deferred compensation related to stock
option grants........................... --
Amortization of stock-based
compensation............................ 157
Non-employee stock compensation.......... 88
Net loss................................. (3,020)
--------
Balances as of January 31, 1999.......... (2,363)
Issuance of common stock for notes
receivable.............................. --
Issuance of common stock in connection
with the exercise of employee stock
options................................. 50
Repurchase of common stock in settlement
of notes receivable from stockholders... --
Deferred stock compensation related to
stock option grants..................... --
Amortization of stock-based
compensation............................ 1,892
Non-employee stock compensation.......... 126
Net loss................................. (13,533)
--------
Balances as of October 31, 1999.......... $(13,828)
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 85
NIKU CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR NINE MONTHS ENDED
ENDED OCTOBER 31,
JANUARY 31, -----------------------
1999 1998 1999
----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(3,020) $(1,665) $(13,533)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization....................... 28 16 300
Amortization of stock-based compensation............ 157 77 1,892
Revenue resulting from non-monetary exchange for
computer equipment and software and services..... -- -- (1,170)
Expense resulting from non-monetary exchange for
services......................................... -- -- 154
Amortization of debt discount....................... -- -- 128
Amortization of goodwill and other intangible
assets........................................... 20 -- 184
Non-employee stock-based compensation expense....... 88 -- 126
Changes in operating assets and liabilities:
Accounts receivable.............................. (165) (13) (2,590)
Prepaid expenses and other current assets........ -- (13) (1,141)
Accounts payable................................. -- 2 3,665
Accrued liabilities.............................. -- -- 1,739
Deferred revenue................................. 88 -- 1,449
------- ------- --------
Net cash used for operating activities......... (2,804) (1,596) (8,797)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment................... (193) (119) (2,935)
Purchases of short-term investments................... -- -- (2,175)
Other assets.......................................... -- -- (160)
Cash portion of Alyanza acquisition................... (173) -- --
Purchase of intangible asset.......................... -- -- (301)
------- ------- --------
Net cash used for investing activities......... (366) (119) (5,571)
------- ------- --------
Cash flows from financing activities:
Net proceeds from sale of redeemable convertible
preferred stock..................................... 8,259 7,627 19,811
Issuance of common stock.............................. 58 48 56
Proceeds from debt and detachable warrants............ -- -- 7,643
Repayment of debt and capital lease obligations....... -- -- (1,135)
------- ------- --------
Net cash provided by financing activities...... 8,317 7,675 26,375
------- ------- --------
Net increase in cash and cash equivalents................. 5,147 5,960 12,007
Cash and cash equivalents at beginning of period.......... -- -- 5,147
------- ------- --------
Cash and cash equivalents at end of period................ $ 5,147 $ 5,960 $ 17,154
======= ======= ========
Noncash financing and investing activities:
Property and equipment acquired under capital lease
obligations......................................... $ -- $ -- $ 345
======= ======= ========
Common stock issued for notes receivable.............. $ 45 $ 45 $ 93
======= ======= ========
Common stock issued for acquisition................... $ 354 $ -- $ --
======= ======= ========
Repurchase of common stock in settlement of notes
receivable from stockholders........................ $ -- $ -- $ 30
======= ======= ========
Deferred stock-based compensation..................... $ 1,821 $ -- $ 7,680
======= ======= ========
Deferred revenue resulting from non-monetary exchange
for computer equipment, software and maintenance.... $ 362 $ -- $ --
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 86
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Niku Corporation (Niku or the Company) was incorporated in Delaware on
January 8, 1998. Niku provides Internet software and offers an online
marketplace for the sourcing, management and delivery of professional services.
Niku's operations for the period from January 8, 1998, (inception) through
January 31, 1998, were not significant and are included in the Company's results
of operations for the year ended January 31, 1999.
The Company has a fiscal year that ends on the Saturday nearest January 31.
Fiscal year 1999 was a 52-week year. For presentation purposes, the consolidated
financial statements and notes refer to the calendar month end.
(b) BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Niku and its wholly-owned subsidiaries, Niku Canada, Niku Europe and Niku
Australia. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(c) REVENUE RECOGNITION
The Company has adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9, since inception. SOP 97-2, as
amended, generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
value of the elements.
To date, the Company has derived its revenue from licenses of its eNiku
products, maintenance and support and delivery of implementation consulting
services. The Company sells its products primarily through its direct sales
force.
Revenue recognized from multiple-element software arrangements are
allocated to each element of the arrangement based on the fair values of the
elements, such as software products, maintenance and support, and consulting
services. The determination of fair value is based on objective evidence which
is specific to the Company.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant Niku
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. In addition, sales to channel
partners are recognized upon sell-through to the end-user customer. The Company
considers all arrangements with payment terms extending beyond three months and
other arrangements with payment terms longer than normal not to be fixed or
determinable. If the fee is not fixed or determinable, revenue is recognized as
payments become due from the customer. As payments become due from the customer,
the initial amounts are first allocated to deferred revenue elements such as
maintenance and support and consulting services. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are considered essential, revenue under the
arrangement is recognized using contract accounting. When services are not
considered essential, the revenue allocable to the software services is
recognized as the services are performed. Maintenance and support revenue is
deferred and recognized on a straight-line basis over the life of the related
agreement, which is typically one year.
F-7
<PAGE> 87
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
Arrangements involving nonmonetary exchanges of the Company's products for
customer products or services are recognized as revenue when the following three
conditions have been met: (1) The fair value of the products received is
objectively determinable; (2) The product received will not be incorporated into
or integrated with Niku products; and (3) The product received will be used
internally by Niku in a manner consistent with its fair value.
The Company recognizes revenue on a sale to an application service provider
customer as this customer either deploys the Company's software internally or as
the customer sells through the software to end users. The Company also entered
into a three year hosting agreement with this customer that initially rendered
the combined arrangement a nonmonetary transaction, as the Company's license fee
was substantially identical to its commitments under the hosting agreement. A
subsequent modification to this hosting agreement, where the Company committed
to pay this customer for the hosting arrangement significantly more than the
Company's license fee, caused the Company to account for its revenue with this
partner as monetary, in accordance with Emerging Issues Task Force Issue No.
86-29, Nonmonetary Transactions: Magnitude of Boot and Exceptions to the Use of
Fair Value, interpretation of Accounting Principles Board No. 29, Accounting for
Nonmonetary Transactions.
The Company also enters into arrangements with consulting organizations
considered Niku Partner Network (NPN) customers. NPN arrangements exist when
Niku enters into an arrangement with a consulting organization, who has become a
customer of Niku, to use the NPN's consultants as preferred third party
providers for implementation services to Niku customers or to use the NPN's
consultants internally as codevelopment experts in developing future versions of
Niku product functionality. In most of the NPN customer arrangements Niku
commits to the use of a minimum dollar value of the NPN customer's professional
services. NPN customer transactions in which Niku commits to the use of a
minimum dollar value of an NPN customer's professional services are considered
either monetary or nonmonetary depending on whether the net cash received or
paid by Niku (representing the excess of Niku's product sale to the NPN over the
fair value of the committed professional services or the excess of the fair
value of the committed professional services over the Niku product sale,
respectively) exceeds 25% of the fair value of the exchange. If the net cash
received or paid by Niku exceeds 25% of the fair value of the exchange, the
exchange is considered monetary and the Company will recognize revenue in
accordance with EITF No. 86-29. This revenue to be recognized is limited at any
time to the fair value of the NPN's professional services used by Niku. If the
net cash received or paid by Niku does not exceed 25% of the fair value of the
exchange, the exchange is considered nonmonetary and revenue is only recognized
when Niku uses the NPN's professional services time for internal use as
codevelopment experts in developing future versions of Niku product
functionality.
Deferred revenue includes amounts billed to customers for which revenues
have not been recognized which generally results from the following: (1)
Deferred maintenance and support; (2) Consulting services not yet rendered; (3)
Amounts billed to channel partners for Niku products not yet sold through to
end-user customers; (4) Amounts billed to customers with extended payments terms
which are not yet due; and (5) Amounts billed under monetary NPN arrangements in
excess of NPN professional services used by Niku.
Revenue recognized during the nine months ended October 31, 1999, from
arrangements involving nonmonetary exchanges of the Company's products for
customer products and services totaled approximately $1,371,000. There were no
corresponding cost of revenues related to these transactions. An aggregate of
$1,032,000 of equipment and software was
F-8
<PAGE> 88
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
acquired for internal use as part of these arrangements, and $154,000 of
research and development expenses was recorded for the nine months ended October
31, 1999 relating to NPN professional services for internal use as codevelopment
experts. Revenue recognized during the nine months ended October 31, 1999, from
monetary NPN customer arrangements and the arrangement with the application
service provider totaled approximately $676,000. There were no corresponding
cost of revenues relating to these transactions.
(d) INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET INFORMATION
In fiscal 2000, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC) that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering (IPO). Following the closing
of the Company's IPO, the number of authorized shares of preferred stock and
common stock will be 10,000,000 and 250,000,000, respectively. If the offering
is consummated under the terms presently anticipated, all the then outstanding
shares of the Company's redeemable convertible preferred stock will
automatically convert into shares of common stock on a one-for-one basis upon
the closing of the proposed IPO. The pro forma balance sheet information
reflects the conversion of all of the redeemable convertible preferred stock as
if it had occurred on October 31, 1999.
(e) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with remaining maturities of less than 90 days at the date of purchase. The
Company is exposed to credit risk in the event of default by the financial
institutions or the issuers of these investments to the extent of the amounts
recorded on the balance sheet in excess of amounts that are insured by the FDIC.
As of January 31, 1999, and October 31, 1999, cash equivalents consisted
principally of a money market account and commercial paper. As defined in a debt
agreement with a lender, the Company is required to maintain a cash balance with
the lender of $6.0 million.
(f) ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company classifies its investments in debt securities as
available-for-sale. Available-for-sale securities are carried at fair value,
with any unrealized gains or losses recorded as a component of other cumulative
comprehensive income (loss).
(g) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments and accounts receivable
approximates fair market value. Financial instruments that subject the Company
to concentration of credit risk consist primarily of cash and cash equivalents
and trade accounts receivable.
The Company sells its products principally to independent professional
services organizations, professional service organizations of product companies,
internal IT departments and individual professionals. Credit risk is
concentrated in North America. The Company performs ongoing credit evaluations
of its customers' financial condition and, generally, requires no collateral
from its customers. The Company has had no write-offs of accounts receivable
and, based on an ongoing evaluation of its accounts receivable collectibility
and customer creditworthiness, has recorded a $100,000 allowance for doubtful
accounts receivable during the period ended October 31, 1999.
F-9
<PAGE> 89
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
(h) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the respective assets, generally three years.
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the assets or the lease term.
(i) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were generated in the acquisition of
Alyanza Software Corporation (Alyanza). Such assets are being amortized on a
straight-line basis over three years and consist of goodwill, developed
technology, and assembled workforce.
(j) IMPAIRMENT OF LONG-LIVED ASSETS
Niku evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of any asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(k) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with the establishment of technological
feasibility and, accordingly, no development costs have been capitalized.
(l) ADVERTISING COSTS
Niku's policy is to expense advertising costs as incurred. Niku's
advertising and promotion expense was $-- and $599,000 for the year ended
January 31, 1999, and the nine months ended October 31, 1999, respectively.
(m) USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(n) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
F-10
<PAGE> 90
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
the enactment date. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts to be recovered.
(o) STOCK-BASED COMPENSATION
The Company uses the intrinsic-value method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized on an accelerated basis over the vesting period
of the individual award consistent with the method described in Financial
Accounting Standards Board (FASB) Interpretation No. 28.
(p) FOREIGN CURRENCY TRANSACTIONS
The functional currency for the Company's foreign subsidiaries is the U.S.
dollar. Accordingly, such entities remeasure monetary assets and liabilities at
exchange rates in effect as of each reporting date while nonmonetary items are
remeasured at historical rates. Income and expense accounts are remeasured at
the average rates in effect during each such period, except for depreciation,
which is remeasured at historical rates. Remeasurement adjustments and
transactions gains and losses are recognized in income in the period of
occurrence and have not been significant to date.
(q) COMPREHENSIVE LOSS
The Company did not have any significant components of other comprehensive
loss for the year ended January 31, 1999, and the nine months ended October 31,
1999.
(r) UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, the accompanying
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the Company's results of operations and its cash flows for the nine
months ended October 31, 1998.
(s) NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding shares of restricted stock subject
to repurchase summarized below. Diluted net loss per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential common shares from options and warrants to purchase common
stock using the treasury stock method and from convertible securities using the
if-converted basis. The following potential common shares have been
F-11
<PAGE> 91
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been anti-dilutive (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31,
JANUARY 31, ---------------------
1999 1998 1999
----------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C>
Shares issuable under stock options................. 3,474 2,089 3,629
Shares of restricted stock subject to repurchase.... 450 450 959
Shares issuable pursuant to warrants to purchase
convertible preferred stock....................... -- -- 630
Shares of redeemable convertible preferred stock on
an "as if converted" basis........................ 23,143 22,103 33,130
</TABLE>
The weighted-average exercise price of stock options was $0.08 for the
years ended January 31, 1999, and $0.06 and $0.26 for the nine months ended
October 31, 1998 and 1999, respectively. The weighted-average purchase price of
restricted stock was $0.10 for the year ended January 31, 1999, and $0.10 and
$0.12 for the nine months ended October 31, 1998 and 1999, respectively. The
exercise price of warrants was $0.75 for the nine months ended October 31, 1999.
Pro forma basic and diluted net loss per share is presented for the year
ended January 31, 1999, and the nine months ended October 31, 1999, to reflect
per share data assuming the conversion of all outstanding shares of redeemable
convertible preferred stock into common stock on a one-for-one basis, as if the
conversion had taken place at the beginning of fiscal 1999 or at the date of
issuance if later. This data is unaudited.
(t) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards for derivative
financial instruments and hedging activities related to those instruments, as
well as other hedging activities. Because the Company does not currently hold
any derivative instruments and does not engage in hedging activities, the
Company expects that the adoption of SFAS No. 133 will not have a material
impact on its consolidated financial position, results of operations, or cash
flows. The Company will be required to adopt SFAS No. 133 in fiscal 2001.
(2) BALANCE SHEET COMPONENTS
(a) SHORT-TERM INVESTMENTS
All of the Company's investments are considered available-for-sale
securities and consisted of corporate bonds and commercial paper as of October
31, 1999. The entire short-term investment balance is due within one year.
Investments totaling $6.4 million are included in cash and cash equivalents at
October 31, 1999. Realized and unrealized gains and losses for
available-for-sale securities were immaterial for all periods presented.
F-12
<PAGE> 92
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
(b) PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1999 1999
----------- -----------
<S> <C> <C>
Computer equipment and office equipment..................... $314 $1,179
Software.................................................... 95 1,191
Furniture and fixtures...................................... 13 1,404
Leasehold improvements...................................... -- 960
---- ------
422 4,734
Accumulated depreciation and amortization................... 28 328
---- ------
$394 $4,406
==== ======
</TABLE>
Equipment under capital leases aggregated $345,000 as of October 31, 1999.
Accumulated amortization on the assets under capital leases aggregated $35,000
as of October 31, 1999.
(3) ACQUISITION OF ALYANZA
In December 1998, Niku completed the acquisition of Alyanza, a privately
held software company in San Diego, California. Niku issued 525,000 shares of
its common stock and paid $135,000 cash for all of Alyanza's outstanding capital
stock. In addition, Niku assumed certain liabilities of Alyanza totaling
$208,000 and incurred merger-related costs of approximately $38,000. The
transaction was accounted for as a purchase. The purchase price of approximately
$735,000 was allocated $100,000 to developed technology, $200,000 to assembled
workforce, and $435,000 goodwill. Pro forma revenues, net loss and basic and
diluted net loss per share for the year ended January 31, 1999, would have been
$95,000, $3,652,000 and $0.69, respectively. The pro forma amounts give effect
to the acquisition of Alyanza as it had occurred on February 1, 1998.
(4) DEBT
In February 1999, the Company entered into an agreement with a lender for a
$3,000,000 loan with an annual interest rate of 12%. The agreement calls for
equal monthly payments of principal and interest beginning July 1999 through
February 2002. The Company has the option to prepay the loan after 12 months
from the loan commencement date with a prepayment penalty of 1% of the then
outstanding balance (along with any unpaid accrued interest). The prepayment
penalty does not apply if the prepayment is in conjunction with a merger or
initial public offering. In connection with the $3,000,000 loan, the Company
issued warrants to purchase 600,000 shares of its Series B redeemable
convertible preferred stock at an exercisable price of $0.75 per share. The
warrant expires the earlier of February 2006, or three years after an initial
public offering of the Company's common stock. The fair value of the warrants
issued, calculated using the Black-Scholes option pricing model, using $1.10 as
the fair value of the underlying redeemable convertible preferred stock and the
following weighted-average assumptions: no dividends; contractual life of seven
years; risk-free interest rate of 6.00%; expected volatility of 70%, was
$510,000. This amount will be amortized on a straight-line basis over the term
of the loan. As of October 31, 1999, the aggregate future maturities for the
three months ended January 31, 2000, and for fiscal 2001 and 2002 were $350,000,
$1,140,000, and $1,284,000, respectively. This loan is secured by our net
tangible assets.
F-13
<PAGE> 93
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
In September 1999, the Company entered into a revolving line of credit
agreement with a lender for a line of credit up to $4,000,000 bearing interest
at the prime rate plus 1% (8.25% October 31, 1999). As of October 31, 1999, the
Company has an outstanding principal balance of approximately $3,771,000.
Interest payments are due monthly with the outstanding principal balance due
October 1, 2000. This debt agreement contains certain financial covenants
requiring that the Company maintain a minimum cash balance of $6.0 million and a
tangible net worth of $9.0 million. This loan is secured by our tangible assets.
(5) LEASES AND COMMITMENTS
In February 1999, the Company entered into a master lease agreement for
equipment specifically approved by the lessor up to an aggregate price of
$500,000. As of October 31, 1999, the Company had drawn down approximately
$345,000 related to this agreement. In conjunction with the agreement, the
Company granted the lessor warrants to purchase 30,000 shares of its Series B
redeemable convertible preferred stock at an exercise price of $0.75 per share.
The warrants expire the earlier of February 2006, or three years after an
initial public offering of the Company's common stock. The fair value of the
warrants issued, calculated using the Black-Scholes option pricing model, using
$1.10 as the fair value of the underlying redeemable convertible preferred stock
and the following weighted-average assumptions: no dividends; contractual life
of seven years; risk-free interest rate of 6.00%; expected volatility of 70%,
was not material.
In May 1999, Niku entered into a noncancelable operating lease for its
facilities expiring in August 2005.
Future minimum lease payments as of October 31, 1999, were as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
2000 (three months)......................................... $ 38 $ 959
2001........................................................ 149 952
2002........................................................ 140 1,985
2003........................................................ 12 2,059
2004........................................................ -- 2,140
Thereafter.................................................. -- 3,748
---- -------
Total minimum lease payments.............................. 339 $11,843
=======
Less amount representing imputed interest................... 30
----
Present value of minimum lease payments..................... 309
Less current portion........................................ 132
----
Capital lease obligation, less current portion.............. $177
====
</TABLE>
The Company's rent expense was $79,000 for the year ended January 31, 1999
and $61,000 and $501,000 for the nine months ended October 31, 1998 and 1999,
respectively.
The Company has entered into certain strategic relationships with its NPN
customers, an application service provider, and CNET. As part of these
arrangements the Company has committed to pay these entities for services
amounts aggregating $2,450,000 for the period from November 1, 1999 to January
31, 2000, and $4,013,000 and $952,000 for fiscal years 2001 and 2002
respectively.
F-14
<PAGE> 94
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
(6) STOCKHOLDERS' EQUITY
(a) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
Redeemable convertible preferred stock outstanding as of October 31, 1999,
is as follows:
<TABLE>
<CAPTION>
ISSUED
SHARES AND CARRYING
DESIGNATED OUTSTANDING VALUE
---------- ----------- -----------
<S> <C> <C> <C>
Series:
Series F....................................... 10,000,000 10,000,000 $ 493,000
Series A....................................... 5,142,851 5,142,851 1,791,000
Series B....................................... 8,629,992 7,999,992 5,975,000
Series C....................................... 10,500,000 9,987,439 19,811,000
---------- ---------- -----------
34,272,843 33,130,282 $28,070,000
========== ========== ===========
</TABLE>
The Company has warrants to purchase 630,000 shares of Series B redeemable
convertible preferred stock outstanding as of October 31, 1999, with a carrying
value of $510,000. (See Notes 4 and 5)
The rights, preferences, and privileges of the holders of Series F, A, B,
and C redeemable convertible preferred stock are as follows:
- Dividends are noncumulative and payable only upon declaration by the
Company's Board of Directors at a rate of $0.0025, $0.0175, $0.0375, and
$0.10 per share for Series F, A, B, and C redeemable convertible
preferred stock, respectively.
- Holders of Series F, A, and B redeemable convertible preferred stock have
a liquidation preference of $0.05, $0.35, and $0.75, respectively, plus
any declared but unpaid dividends, over holders of common stock. Holders
of Series C redeemable convertible preferred stock have a liquidation
preference of $2.50 per share through the first anniversary date of the
issuance, $3.125 per share through the second anniversary date of the
issuance, and $3.91 per share through the third anniversary date of the
issuance, plus any declared but unpaid dividends, over holders of common
stock.
- Each share of Series F, A, B, and C convertible preferred stock is
convertible at any time into one share of common stock subject to certain
antidilution provisions.
- Each holder of convertible preferred stock has voting rights equal to the
number of shares of common stock into which such shares could be
converted.
- At any time after May 13, 2006, upon notification by not less than
two-thirds of the holders of the Series C redeemable convertible
preferred stock, the Company must redeem all of the outstanding
redeemable convertible preferred stock in four equal installments
beginning on the first anniversary of the date of redemption by paying in
cash a sum per share equal to the original issuance price plus declared
but unpaid dividends.
(b) STOCK PLANS
The Company is authorized to issue up to 8,000,000 shares of common stock
in connection with its 1998 stock option plan (the 1998 Plan) to directors,
employees, and consultants. The Plans provide for the issuance of stock purchase
rights, incentive stock options, or nonstatutory stock options.
F-15
<PAGE> 95
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
The stock purchase rights are subject to a restricted stock purchase
agreement whereby the Company has the right to repurchase the stock upon the
voluntary or involuntary termination of the purchaser's employment with the
Company at the original issuance cost. The Company's repurchase right lapses at
a rate determined by the stock plan administrator, but at a minimum rate of 20%
per year. Through October 31, 1999, the Company has issued 1,445,750 shares
under restricted stock purchase agreements, of which 300,000 shares have been
repurchased and 959,000 shares are subject to repurchase at a weighted-average
price of $0.12 per share. Certain of these restricted shares were issued to
officers of the Company for full recourse promissory notes with interest rates
ranging from 4.77% to 6.08% and terms of four years.
Under the Plan, the exercise price for incentive stock options is at least
100% of the stock's fair market value on the date of grant for employees owning
10% or less of the voting power of all classes of stock, and at least 110% of
the fair market value on the date of grant for employees owning more than 10% of
the voting power of all classes of stock. For nonstatutory stock options, the
exercise price is also at least 110% of the fair market value on the date of
grant for employees owning more than 10% of the voting power of all classes of
stock and no less than 85% for employees owning 10% or less of the voting power
of all classes of stock.
Under the Plan, options generally expire in 10 years. However, the term of
the options may be limited to 5 years if the optionee owns stock representing
more than 10% of the voting power of all classes of stock. Vesting periods are
determined by the Company's Board of Directors and generally provide for shares
to vest ratably over a 5-year period.
As of October 31, 1999, there were 2,302,250 additional shares available
for grant under the 1998 stock option plans.
(c) STOCK-BASED COMPENSATION
The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options granted or restricted stock sold because
the exercise price of each option or purchase price of each share of restricted
stock equaled or exceeded the fair value of the underlying common stock as of
the grant date for each stock option or purchase date of each restricted stock
share, except for stock options granted and restricted stock sold from January
31, 1998 through October 31, 1999. With respect to the stock options granted and
restricted stock sold from January 31, 1998 to October 31, 1999, the Company
recorded deferred stock compensation of $9,287,000 for the difference at the
grant or issuance date between the exercise price of each stock option granted
or purchase price of each restricted share sold and the fair value of the
underlying common stock. This amount is being amortized on an accelerated basis
over the vesting period, generally four to five years, consistent with the
method described in FASB Interpretation No. 28. Amortization of the October 31,
1999 balance of deferred stock-based compensation for the three months ended
January 29, 2000, fiscal years ended 2001, 2002, 2003 and nine months ended
October 31, 2003 would approximate $1,300,000, $3,700,000, $1,500,000, $613,000
and $75,000, respectively. The amortization of deferred stock compensation,
combined
F-16
<PAGE> 96
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
with the expense associated with stock options granted to non-employees, relates
to the following items in the accompanying consolidated statements of operations
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED --------------------------
JANUARY 31, OCTOBER 31, OCTOBER 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cost of revenues.............................. $ -- $-- $ 17
Research and development...................... 90 28 597
Sales and marketing........................... 56 7 1,140
General and administrative.................... 99 42 264
---- --- ------
Total....................................... $245 $77 $2,018
==== === ======
</TABLE>
Had compensation costs been determined in accordance with SFAS No. 123 for
all of the Company's stock-based compensation plans, net loss (in thousands) and
basic and diluted net loss per share would have been as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JANUARY 31, OCTOBER 31,
1999 1999
----------- -----------
<S> <C> <C>
Net loss:
As reported.............................................. $(3,020) $(13,533)
Pro forma................................................ $(3,031) $(13,607)
Basic and diluted net loss per share:
As reported.............................................. $ (0.62) $ (2.31)
Pro forma................................................ $ (0.62) $ (2.32)
</TABLE>
The fair value of each option was estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividends; risk-free interest rate of 4.97% and 5.78% for the year ended January
31, 1999, and the nine months ended October 31, 1999, respectively; and expected
life of 4 years for the year ended January 31, 1999, and the nine months ended
October 31, 1999, respectively.
F-17
<PAGE> 97
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
A summary of the status of the Company's options under the Plans, is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, 1999 OCTOBER 31, 1999
---------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year/period............................ -- $ -- 3,473,500 $0.08
Granted.................................. 4,277,000 0.08 1,973,500 0.54
Forfeited................................ (181,000) 0.10 (371,750) 0.10
Exercised................................ (622,500) 0.08 (1,446,123) 0.14
---------- ----------
Outstanding at end of year/period........ 3,473,500 0.08 3,629,127 0.26
========== ==========
Options exercisable at end of
year/period............................ 893,249 0.10 241,678 0.07
========== ==========
Weighted-average fair value of options
granted during the period with exercise
prices equal to fair value at date of
grant.................................. 1,512,500 0.02 -- --
Weighted-average fair value of options
granted during the period with exercise
prices less than fair value at date of
grant.................................. 2,764,500 0.73 1,973,500 3.37
</TABLE>
As of October 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ---------------------
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE OF LIFE EXERCISE OF EXERCISE
PRICES SHARES (YEARS) PRICE SHARES PRICE
-------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 517,709 8.19 $0.01 85,417 $0.01
$0.10 1,431,668 8.92 0.10 150,011 0.10
$0.25 1,158,000 9.61 0.25 6,250 0.25
$1.00 521,750 10.00 1.00 -- --
--------- ----- ------- -----
3,629,127 $0.26 241,678 $0.07
========= ===== ======= =====
</TABLE>
(7) INCOME TAXES
The differences between the income tax expense (benefit) computed at the
federal statutory rate and the Company's tax provision for all periods presented
primarily relate to net operating losses not benefited.
F-18
<PAGE> 98
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
The individual components of the Company's deferred tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1999 1999
----------- -----------
<S> <C> <C>
Net operating loss carryovers............................... $ 1,071 $ 5,451
Credit carryforward......................................... 129 129
Other....................................................... -- 97
------- -------
Total deferred tax assets......................... 1,200 5,677
Valuation allowance......................................... (1,200) (5,677)
------- -------
Net deferred tax assets........................... $ -- $ --
======= =======
</TABLE>
The net changes in the valuation allowance for the year ended January 31,
1999 and for the nine months ended October 31, 1999 were increases of $1.2
million and $4.5 million, respectively. We believe sufficient uncertainty exists
regarding our ability to realize our deferred tax assets and, accordingly, a
valuation allowance has been established against the net deferred tax assets.
As of October 31, 1999, the Company had approximately $13.7 million of net
operating loss carryforwards for both federal and state purposes available to
offset taxable income in future years. The federal net operating loss
carryforwards expire if not utilized by 2006. In addition, the company had
approximately $61,000 and $47,000 of tax credit carryforwards for increased
research expenditures for federal and state purposes, respectively. The federal
increased research credits expire if not utilized by 2019 and the state
increased research credit can be carried over indefinitely. The Company also had
approximately $21,000 of manufacturer's investment credit carryforward for state
purpose, which may expire if not utilized by 2001.
Federal and state laws impose substantial restrictions on the utilization
of net operating loss and tax credit carryforwards in the event of an "ownership
change," as defined in Section 382 of the Internal Revenue Code. The Company has
not yet determined whether an ownership change occurred due to significant stock
transactions in each of the reporting years disclosed. If an ownership change
has occurred, utilization of the net operating loss and tax credit carryforwards
could be significantly reduced.
(8) SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING
During 1999 the Company adopted the provisions of SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The consolidated financial information reviewed
by the CEO is identical to the information presented in the accompanying
consolidated statements of operations and the Company has no significant foreign
F-19
<PAGE> 99
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
operations. Therefore, the Company operates in a single operating segment:
Internet software. Disaggregated information is as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
OCTOBER 31,
YEAR ENDED --------------
JANUARY 31, 1999 1998 1999
---------------- ---- ------
<S> <C> <C> <C>
Revenues:
License.............................................. $-- $-- $1,962
Services:
Consulting........................................ 15 -- 886
Maintenance....................................... -- -- 128
--- --- ------
$15 $-- $2,976
=== === ======
</TABLE>
Significant customer information is as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL REVENUE
---------------------------------- PERCENT
NINE MONTHS OF TOTAL
ENDED ACCOUNTS
YEAR ENDED OCTOBER 31, RECEIVABLE
JANUARY 31, ------------------- OCTOBER 31,
1999 1998 1999 1999
----------- ----------- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A.................................... 100% -- -- --
Customer B.................................... -- -- 22% 24%
Customer C.................................... -- -- 18% 6%
Customer D.................................... -- -- 10% 12%
</TABLE>
For the nine months ended October 31, 1999, 39% of the Company's total
revenue was from customers with an officer and/or director serving as a board
member of the Company.
(9) SUBSEQUENT EVENTS
(a) ISSUANCE OF SERIES D REDEEMABLE CONVERTIBLE PREFERRED STOCK
In November 1999, the Company issued 7,998,012 shares of Series D
redeemable convertible preferred stock at $5.00 per share for net proceeds of
approximately $39,930,000. The rights, preferences, and privileges of the Series
D redeemable convertible preferred stock are the same as the Series F, A, B and
C redeemable convertible preferred stock except that the annual dividend rate is
$0.25 per share and the liquidation preference is $6.25 per share.
(b) ACQUISITION OF PROAMICS
On December 8, 1999, the Company acquired Proamics Corporation (Proamics),
a privately held company in Chicago, Illinois. Proamics is a provider of project
accounting, time and expense, and billing solutions to professional services
organizations. Niku issued 3,501,938 shares of its common stock and 6,491,203
shares of the Company's Series D redeemable convertible preferred stock with a
combined value of approximately $49,966,000 for all of Proamics's outstanding
capital stock. The transaction is to be accounted for as a purchase.
F-20
<PAGE> 100
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
The approximately $50 million purchase price will be allocated to acquired net
tangible and intangible assets, including goodwill.
(c) STOCK PLANS
In December 1999, the Company's Board of Directors approved, subject to
shareholder approval, the 2000 Equity Incentive Plan (2000 Plan). The Company
has reserved 6,000,000 shares of common stock for issuance under the 2000 Plan.
Shares under the 1998 Stock Plan (1998 Plan) that are not issued or subject to
outstanding options at the date the 2000 Plan is effective will no longer be
available under the 1998 Plan and will become available for grant under the 2000
Plan. On each January 1, the aggregate number of shares reserved for issuance
under the 2000 Plan will increase automatically by a number of shares equal to
5% of the outstanding shares on December 31 of the preceding year. The 2000 Plan
will terminate 10 years from the date the Company's Board of Directors approved
the plan.
Under the 2000 Plan, the exercise price for incentive stock options is at
least 100% of the stock's fair market value on the date of grant for employees
owning 10% or less of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for employees owning more than 10% of the voting power of all
classes of stock and no less than 85% for employees owning 10% or less of the
voting power of all classes of stock.
Under the 2000 Plan, options generally expire in 10 years. However, the
term of the options may be limited to 5 years if the optionee owns stock
representing more than 10% of the voting power of all classes of stock. Vesting
periods are determined by the Company's Board of Directors and generally provide
for shares to vest ratably over a 4-year period.
In December 1999, the Company's Board of Directors approved, subject to
shareholder approval, the 2000 Employee Stock Purchase Plan (the Purchase Plan)
and reserved a total of 1,000,000 shares of the Company's common stock for
issuance under the Purchase Plan. On each January 1, the aggregate number of
shares reserved for issuance under the Purchase Plan will increase automatically
by a number of shares equal to 1% of the total outstanding shares on December 31
of the preceding year. The aggregate number of shares reserved for issuance
under the Purchase Plan may not exceed 10,000,000 shares. Generally, the
offering period is 24 months in length. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock at the
beginning of the applicable offering period or the end of the applicable
purchase period.
(d) ACQUISITION OF LEGAL ANYWHERE
On January 31, 2000, the Company acquired Legal Anywhere, Inc. (Legal
Anywhere), a privately-held company in Portland, Oregon. Legal Anywhere provides
Internet-based "collaborative tools" to law firms and corporate legal
departments. Niku issued 853,689 shares of its common stock for all of Legal
Anywhere's outstanding capital stock and assumed all outstanding Legal Anywhere
stock options. The transaction is to be accounted for as a purchase. The
approximately $21 million purchase price will be allocated to acquired net
tangible and intangible assets, including goodwill.
F-21
<PAGE> 101
NIKU CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1999 AND OCTOBER 31, 1999
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998, IS UNAUDITED.)
(e) DEFERRED STOCK COMPENSATION
During the period from November 1, 1999 through February 21, 2000, the
Company will record additional deferred stock compensation of approximately $
40,600,000 related to approximately 3,680,000 stock options granted and
1,912,000 shares of restricted stock sold during that period. Amortization of
total deferred stock compensation recorded through February 21, 2000, will be
approximately $6,300,000 during the three-month period ended January 29, 2000,
and approximately $26,000,000, $10,100,000, $4,300,000 and $1,100,000 will be
amortized during fiscal 2001, 2002, 2003, and 2004, respectively.
F-22
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Proamics Corporation:
We have audited the accompanying consolidated balance sheets of Proamics
Corporation and subsidiaries as of December 31, 1998 and September 30, 1999, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for each of the years in the two-year period ended December 31, 1998
and for the nine months ended September 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Proamics
Corporation and subsidiaries as of December 31, 1998 and September 30, 1999, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1998 and for the nine months ended
September 30, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
December 20, 1999
F-23
<PAGE> 103
PROAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,340,807 $ 3,247,556
Accounts receivable, net of allowance for doubtful
accounts of $694,306 and $348,939, respectively......... 2,564,836 3,864,390
Inventory................................................. 99,410 41,066
Prepaid expenses.......................................... 18,030 61,911
Other current assets...................................... -- 26,568
----------- ------------
Total current assets............................... 4,023,083 7,241,491
----------- ------------
Property and equipment...................................... 1,509,176 2,276,764
Less accumulated depreciation and amortization.............. (697,078) (1,035,826)
----------- ------------
Net property and equipment......................... 812,098 1,240,938
----------- ------------
Other noncurrent assets..................................... 181,928 192,321
----------- ------------
Total assets....................................... $ 5,017,109 $ 8,674,750
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT:
Current liabilities:
Notes payable to shareholders............................. $ -- $ 500,000
Current portion of long-term debt......................... 1,050,000 --
Accounts payable.......................................... 1,162,528 871,825
Accrued expenses.......................................... 944,844 1,387,886
Deferred revenue.......................................... 1,552,890 1,498,795
Current portion of capital lease obligations.............. 248,377 386,017
----------- ------------
Total current liabilities.......................... 4,958,639 4,644,523
Long-term debt, less current portion, net of unamortized
discount of $595,382 and $12,099, respectively............ 6,055,800 1,987,901
Deferred rent............................................... 16,869 27,172
Capital lease obligations, less current portion............. 428,382 351,330
----------- ------------
Total liabilities.................................. 11,459,690 7,010,926
----------- ------------
Mandatorily redeemable Series A cumulative preferred stock,
$0.00001 par value; 117,000 shares authorized; 103,500
shares issued and outstanding at September 30, 1999,
redemption at face value including accrued dividends of
$781,161.................................................. -- 11,131,161
------------
Mandatorily redeemable Series C cumulative preferred stock,
$0.00001 par value; 24,000 shares authorized; 24,000
shares issued and outstanding at September 30, 1999,
redemption at face value including accrued dividends of
$58,389................................................... -- 1,258,389
------------
Shareholders' deficit:
Series B convertible preferred stock, $0.00001 par value;
9,833,585 shares authorized; 8,698,941 shares issued and
outstanding at September 30, 1999....................... -- 87
Common stock, no par value and $0.00001 par value at
December 31, 1998 and September 30, 1999, respectively;
21,000,000 and 40,000,000 shares authorized at December
31, 1998 and September 30, 1999, respectively;
11,290,541 and 11,669,328 shares issued and outstanding
at December 31, 1998 and September 30, 1999,
respectively............................................ -- 117
Additional paid-in capital................................ 2,019,752 2,929,899
Accumulated deficit....................................... (8,462,333) (13,428,911)
Treasury stock, at cost; 2,269,175 shares at September 30,
1999.................................................... -- (226,918)
----------- ------------
Total shareholders' deficit........................ (6,442,581) (10,725,726)
----------- ------------
Total liabilities and shareholders' deficit........ $ 5,017,109 $ 8,674,750
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE> 104
PROAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
License fees........................... $1,867,426 $ 3,164,872 $2,438,790 $ 2,496,671
Service fees........................... 4,705,296 7,038,547 5,036,496 6,084,532
Maintenance and support fees........... 555,181 661,748 479,641 617,662
---------- ----------- ---------- -----------
Total revenues................. 7,127,903 10,865,167 7,954,927 9,198,865
---------- ----------- ---------- -----------
Cost of revenues:
Cost of license fees................... 410,678 190,307 150,874 118,565
Cost of service fees................... 3,015,046 4,497,043 3,104,520 4,842,221
Cost of maintenance and support fees... 279,295 460,138 323,033 461,546
---------- ----------- ---------- -----------
Total cost of revenues......... 3,705,019 5,147,488 3,578,427 5,422,332
---------- ----------- ---------- -----------
Gross profit........................ 3,422,884 5,717,679 4,376,500 3,776,533
---------- ----------- ---------- -----------
Operating expenses:
Sales and marketing.................... 1,582,506 2,687,646 2,093,637 3,067,505
Research and development............... 1,046,225 1,349,341 1,065,315 2,009,534
General and administrative............. 981,980 2,348,726 1,483,439 2,214,751
---------- ----------- ---------- -----------
Total operating expenses....... 3,610,711 6,385,713 4,642,391 7,291,790
---------- ----------- ---------- -----------
Loss from operations................ (187,827) (668,034) (265,891) (3,515,257)
---------- ----------- ---------- -----------
Other income (expense):
Interest income........................ 18,031 32,330 19,712 93,628
Interest expense....................... (169,299) (311,291) (210,234) (294,532)
Amortization of discount on long-term
debt................................ (291,051) (202,708) (151,767) (19,593)
Other expense.......................... (9,658) (3,799) -- --
---------- ----------- ---------- -----------
Total other expense............ (451,977) (485,468) (342,289) (220,497)
---------- ----------- ---------- -----------
Net loss before extraordinary
gain.............................. (639,804) (1,153,502) (608,180) (3,735,754)
Extraordinary gain on early
extinguishment of long-term debt....... -- -- -- 2,381,812
---------- ----------- ---------- -----------
Net loss....................... $ (639,804) $(1,153,502) $ (608,180) $(1,353,942)
========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 105
PROAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES B
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
--------- ------ ---------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........................... -- $-- 10,540,541 $ -- $ 1,188 $(6,669,027)
Net loss............................................... -- -- -- -- -- (639,804)
Debt and accrued interest contributed to paid-in
capital.............................................. -- -- -- -- 1,982,947 --
--------- --- ---------- ---- ---------- ------------
Balance at December 31, 1997........................... -- -- 10,540,541 -- 1,984,135 (7,308,831)
Net loss............................................... -- -- -- -- -- (1,153,502)
Common stock warrants.................................. -- -- -- -- 15,617 --
Issuance of shares to consultant....................... -- -- 750,000 -- 20,000 --
--------- --- ---------- ---- ---------- ------------
Balance at December 31, 1998........................... -- -- 11,290,541 -- 2,019,752 (8,462,333)
Reincorporation of Company............................. -- -- -- 113 (113) --
Distribution to shareholders of affiliated entity...... -- -- -- -- -- (2,773,086)
Issuance of Series B convertible preferred stock....... 8,698,941 87 -- -- 1,149,913 --
Dividends on mandatorily redeemable Series A cumulative
preferred stock...................................... -- -- -- -- -- (781,161)
Dividends on mandatorily redeemable Series C cumulative
preferred............................................ -- -- -- -- -- (58,389)
Issuance of shares in settlement of long-term debt..... -- -- 378,787 4 37,875 --
Preferred stock issuance costs......................... -- -- -- -- (277,528) --
Net loss............................................... -- -- -- -- -- (1,353,942)
Purchase of treasury stock............................. -- -- -- -- -- --
--------- --- ---------- ---- ---------- ------------
Balance at September 30, 1999.......................... 8,698,941 $87 11,669,328 $117 $2,929,899 $(13,428,911)
========= === ========== ==== ========== ============
<CAPTION>
TREASURY STOCK
---------------------
SHARES AMOUNT TOTAL
--------- --------- ------------
<S> <C> <C> <C>
Balance at December 31, 1996........................... -- $ -- $ (6,667,839)
Net loss............................................... -- -- (639,804)
Debt and accrued interest contributed to paid-in
capital.............................................. -- -- 1,982,947
--------- --------- ------------
Balance at December 31, 1997........................... -- -- (5,324,696)
Net loss............................................... -- -- (1,153,502)
Common stock warrants.................................. -- -- 15,617
Issuance of shares to consultant....................... -- -- 20,000
--------- --------- ------------
Balance at December 31, 1998........................... -- -- (6,442,581)
Reincorporation of Company............................. -- -- --
Distribution to shareholders of affiliated entity...... -- -- (2,773,086)
Issuance of Series B convertible preferred stock....... -- -- 1,150,000
Dividends on mandatorily redeemable Series A cumulative
preferred stock...................................... -- -- (781,161)
Dividends on mandatorily redeemable Series C cumulative
preferred............................................ -- -- (58,389)
Issuance of shares in settlement of long-term debt..... -- -- 37,879
Preferred stock issuance costs......................... -- -- (277,528)
Net loss............................................... -- -- (1,353,942)
Purchase of treasury stock............................. 2,269,175 (226,918) (226,918)
--------- --------- ------------
Balance at September 30, 1999.......................... 2,269,175 $(226,918) $(10,725,726)
========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 106
PROAMICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (639,804) $(1,153,502) $ (608,180) $(1,353,942)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 120,431 235,070 149,441 338,748
Amortization of discount on long-term debt....... 291,051 202,708 151,767 19,593
Extraordinary gain on early extinguishment of
long-term debt................................. -- -- -- (2,381,812)
Expense related to issuance of common stock for
services....................................... -- 20,000 -- --
Changes in assets and liabilities:
Accounts receivable, net....................... (1,799,211) 450,615 355,694 (1,488,674)
Inventory...................................... (121,525) 106,815 85,519 58,344
Prepaid expenses............................... -- -- 40 (43,881)
Other assets................................... (124,973) (3,050) 7,259 (36,961)
Accounts payable............................... 292,037 92,493 98,357 (119,384)
Accrued expenses............................... 391,005 94,708 447,750 443,042
Deferred revenue............................... 1,029,781 (184,132) (103,093) (54,095)
Deferred rent.................................. -- 16,869 11,808 10,303
Other liabilities.............................. 12,680 (17,315) (17,315) --
----------- ----------- ---------- -----------
Net cash provided by (used in) operating
activities................................... (548,528) (138,721) 579,047 (4,608,719)
----------- ----------- ---------- -----------
Cash flows from investing activities -- purchases of
property and equipment............................... (63,623) (167,567) (79,490) (425,398)
----------- ----------- ---------- -----------
Cash flows from financing activities:
Payments on capital lease obligations................ (62,901) (126,732) (86,303) (281,602)
Payments on long-term debt........................... -- -- -- (1,500,000)
Proceeds from issuance of preferred stock, net....... -- -- -- 11,222,472
Distributions to shareholders of affiliated entity... -- -- -- (2,773,086)
Purchase of treasury stock........................... -- -- -- (226,918)
Proceeds from issuance of notes payable to
shareholders....................................... -- -- -- 500,000
Proceeds from issuance of long-term debt............. 1,000,000 1,000,000 -- --
----------- ----------- ---------- -----------
Net cash provided by (used in) financing
activities................................... 937,099 873,268 (86,303) 6,940,866
----------- ----------- ---------- -----------
Net increase in cash and cash equivalents...... 324,948 566,980 413,254 1,906,749
Cash and cash equivalents at beginning of period....... 448,879 773,827 773,827 1,340,807
----------- ----------- ---------- -----------
Cash and cash equivalents at end of period............. $ 773,827 $ 1,340,807 $1,187,081 $ 3,247,556
=========== =========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for -- interest.......... $ 178,084 $ 284,470 $ 328,273 $ 318,327
=========== =========== ========== ===========
Noncash financing activities:
Capital lease obligations.......................... $ 320,256 $ 523,447 $ 182,540 $ 342,190
=========== =========== ========== ===========
Debt and accrued interest converted into
contributed capital.............................. $ 1,982,947 $ -- $ -- $ --
=========== =========== ========== ===========
Accounts receivable reduced with early
extinguishment of long-term debt................. $ -- $ -- $ -- $ 189,120
=========== =========== ========== ===========
Accounts payable reduced with early extinguishment
of long-term debt................................ $ -- $ -- $ -- $ 172,500
=========== =========== ========== ===========
Long-term debt converted into mandatorily
redeemable Series C cumulative preferred stock... $ -- $ -- $ -- $ 1,200,000
=========== =========== ========== ===========
Long-term debt converted into common stock......... $ -- $ -- $ -- $ 37,879
=========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 107
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Proamics Corporation and subsidiaries (Proamics or the Company) are engaged
in the business of developing software applications for resale and in providing
consulting services related to the installation of their software. The Company's
products are sold to end-users throughout the world directly through its
internal sales force as well as third-party distributors. The historical
consolidated financial statements of Proamics include the financial position and
results of operations of Isthmus Corporation (Isthmus). Proamics and Isthmus
were separate legal entities which had the same shareholders with substantially
the same ownership percentages. On February 23, 1999, Isthmus merged with and
into Proamics with Proamics being the surviving corporation. All of the issued
and outstanding shares of common stock of Isthmus were canceled in connection
with the merger. The merger was a combination of entities under common control
and has been accounted for on an "as if" pooling-of-interests basis with the
accompanying financial statements restated for all periods presented. In
addition, on March 5, 1999, the Company purchased all outstanding shares of
Lotzoff & Associates, Inc. (an affiliated entity).
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements for the nine months ended September 30, 1998 are
unaudited. In the opinion of the Company's management, the unaudited interim
financial statements include adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for that period.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Proamics
Corporation and its wholly owned subsidiaries, Proamics Canada Ltd. and Proamics
UK, Ltd. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
(d) REVENUE RECOGNITION
The Company has adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9. Revenue from license fees is
recognized when persuasive evidence of an agreement exists, delivery of the
product has occurred, no significant Company obligations with regard to
implementation remain, the fee is fixed or determinable, and collectibility is
probable. Maintenance and support fees are recognized ratably over the term of
the maintenance and support period. Service fees are derived from the Company's
consulting services and are comprised of both time and expense contracts and
fixed-price contracts. Time and expense contract revenues are recognized as the
services are performed. Fixed-price contract revenues are recognized based on
the percentage-of-completion method.
Deferred revenue includes amounts billed to customers for which revenues
have not been recognized which generally results from the following: (1)
deferred maintenance and support; (2) consulting services not yet rendered; and
(3) license fees from distribution agreements with third-party software vendors.
F-28
<PAGE> 108
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(e) CASH EQUIVALENTS
Cash equivalents are comprised of certain highly liquid investments with
original maturities of generally three months or less. As of September 30, 1999,
cash equivalents consisted principally of a money market account and U.S.
government securities.
(f) INVENTORIES
Inventories of shrink-wrapped software are stated at the lower of cost,
determined on a first-in, first-out basis, or market.
(g) PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment is computed using
the straight-line method based on the estimated useful lives, ranging from three
to five years, of the various classes of property.
(h) SOFTWARE DEVELOPMENT COSTS
Costs associated with the planning and designing phase of software
development, including coding and testing activities necessary to establish
technological feasibility, are classified as research and development costs and
are charged to costs and expenses as incurred. Once technological feasibility
has been determined, significant costs incurred in the construction phase of
software development, including coding and testing and product quality
assurance, are capitalized. To date, no software development costs have been
capitalized as technological feasibility has been achieved substantially
concurrent with the general release of the Company's software products.
(i) INCOME TAXES
Prior to March 8, 1999, the Company was an S Corporation under the
provisions of Subchapter S of the Internal Revenue Code, whereby its income was
not subject to Federal income taxes and was allocated and taxed to its
shareholders by inclusion in the individuals' Federal income tax return.
Accordingly, the statements of operations for the years ended December 31, 1997
and 1998 do not include a provision for Federal, foreign and state income taxes.
The S Corporation election was terminated on March 7, 1999.
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. SFAS No. 109 requires the asset and
liability method of accounting for income taxes in which deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
F-29
<PAGE> 109
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(k) CAPITAL LEASES
The Company classifies a lease as a capital lease if (1) the lease
transfers ownership of the property to the Company by the end of the lease term,
(2) the lease contains an option to purchase the leased property at a bargain
price, (3) the lease term is equal to or greater than 75 percent of the
estimated economic life of the leased property, or (4) the present value of
rental and other minimum lease payments equals or exceeds 90 percent of the fair
value of the leased property. For those leases classified as capital leases, the
Company records the present value of future minimum lease payments as an asset
and as a capital lease obligation.
(2) PROPERTY AND EQUIPMENT
Property and equipment at cost, less accumulated depreciation and
amortization, are summarized as follows as of December 31, 1998 and September
30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer equipment......................................... $1,265,277 $ 1,652,015
Office furniture and fixtures.............................. 87,793 147,361
Computer software.......................................... 142,629 376,176
Leasehold improvements..................................... 13,477 101,212
---------- -----------
1,509,176 2,276,764
Less accumulated depreciation and amortization............. (697,078) (1,035,826)
---------- -----------
$ 812,098 $ 1,240,938
========== ===========
</TABLE>
F-30
<PAGE> 110
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LONG-TERM DEBT AND NOTES PAYABLE TO SHAREHOLDERS
In July 1997, the Company borrowed $1,000,000 from Sirrom Capital
Corporation (Sirrom). In connection with this borrowing, the Company issued
common stock warrants to Sirrom representing 3.5% of the Company's ownership
capital on a fully diluted basis. The common stock warrants issued to Sirrom had
a de minimus value at the date of issuance.
In November 1998, the Company borrowed an additional $1,000,000 from
Sirrom. In connection with this borrowing, Proamics issued common stock warrants
to Sirrom representing an additional 1.5% of the Company's ownership capital on
a fully diluted basis. Using the Black-Scholes option-pricing model, a value of
$15,617 was assigned to the warrants and recorded as additional paid-in capital
and discount on long-term debt. The discount is being amortized over the life of
the long-term debt. The $2,000,000 of notes payable to Sirrom bear interest at a
rate of 13% per annum, are due on July 31, 2002, and are secured by a security
interest in corporate assets. (See Note 13)
On March 5, 1999, the Company had an outstanding note payable to Platinum
Software Corporation (Platinum) for $3,936,310, net of unamortized discount of
$563,690. On March 5, 1999, Proamics entered into a payoff and termination
agreement with Platinum whereby Proamics paid $1,000,000 and issued 378,787
shares of Proamics common stock with an estimated fair value of $37,879 to
Platinum in March 1999 and paid $500,000 to Platinum in June 1999 in complete
satisfaction of its note payable to Platinum as well as a contingent $1,000,000
royalty payable to Platinum. Accordingly, the Company recorded an extraordinary
gain on early extinguishment of long-term debt of $2,381,812 representing the
difference between the Company's $3,936,310 note payable balance and the fair
value of the consideration paid to Platinum.
On March 3 1999, the Company borrowed a total of $500,000 from two
shareholders. Such borrowings are due on demand and bear interest at a rate of
10%.
(4) LEASE COMMITMENTS
The Company entered into capital leases for property and equipment during
1999 and prior years. Leased property and equipment capitalized and included in
the Company's consolidated balance sheets at December 31, 1998 and September 30,
1999 was $611,411 and $703,601, respectively.
The Company leases office facilities and certain equipment under
noncancelable operating leases. Rent expense under operating leases for the
years ended December 31, 1997 and 1998 and for the nine months ended September
30, 1999 was $215,067, $319,122, and $345,872 respectively.
F-31
<PAGE> 111
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum annual rental commitments under noncancelable leases at
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL OPERATING
------------ -------- ----------
<S> <C> <C>
1999 (3 months)............................................. $128,663 $ 95,485
2000........................................................ 425,875 386,798
2001........................................................ 319,787 350,750
2002........................................................ 19,851 302,446
2003........................................................ -- 53,820
-------- ----------
894,176 $1,189,299
==========
Less amounts representing interest.......................... 156,829
--------
Present value of minimum lease payments................... 737,347
Less current maturities..................................... 386,017
--------
$351,330
========
</TABLE>
(5) EQUITY TRANSACTIONS AND MANDATORILY REDEEMABLE PREFERRED STOCK
On January 1, 1997, the Company, its shareholders, and Cramlo Investments,
Ltd. entered into an agreement whereby $1,982,947 of debt and accrued interest
were contributed to paid-in capital of the Company.
In December 1998, Proamics granted 750,000 shares of common stock to an
individual in connection with a consulting agreement. As of December 31, 1998,
the consultant had vested in 250,000 shares. In March 1999, the Company
repurchased 500,000 unvested shares and 50,000 vested shares of Proamics common
stock from the consultant at a purchase price of $0.01 per share. Included in
the Company's 1998 consolidated statement of operations is $20,000 of general
and administrative expense representing the estimated fair value of the equity
granted to the consultant.
On March 5, 1999, Proamics entered into a stock purchase agreement with
Lotzof & Associates, Inc. (an affiliated entity) whereby Proamics purchased all
of the issued and outstanding shares of common stock of Lotzof & Associates,
Inc. for $2,773,086. Lotzof & Associates, Inc. became a wholly owned subsidiary
of Proamics. The principal asset acquired as a result of this acquisition was a
contingent royalty obligation owed by Proamics to Lotzof & Associates, Inc. of
up to $3,500,000 for 5% of the Company's net revenues from the licensing of
certain software products for a seven-year period ending in October 2000. The
purchase price was recorded as a distribution to Proamics shareholders.
On March 9, 1999, Proamics entered into stock redemption agreements with
certain shareholders to purchase an aggregate 2,269,175 shares of its common
stock for an aggregate purchase price of $226,918.
On March 9, 1999, Proamics changed its state of incorporation from Illinois
to Delaware. All of the outstanding shares of Proamics-Illinois common stock
were converted, on a one for one basis, into shares of common stock of
Proamics-Delaware. Proamics also amended its charter and authorized 9,974,585
shares of preferred stock, $0.00001 par value, of which 117,000 are designated
as Series A, 9,833,585 are designated as Series B, and 24,000 are designated as
Series C. Proamics also authorized 40,000,000 shares of common stock with a par
value of $0.00001. The Series A preferred stock is senior in liquidation to the
Series C preferred stock
F-32
<PAGE> 112
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
while the Series C preferred stock is senior in liquidation to the Series B
preferred stock and common stock. The Series B preferred stock and common stock
are pari-passu in liquidation.
On March 9, 1999, Vector Capital II, L.P. and certain of its affiliates
(collectively, Vector) and Proamics entered into a preferred stock purchase
agreement whereby Proamics issued 90,000 shares of its Series A preferred stock
and 7,564,297 shares of its Series B preferred stock to Vector for $9,000,000
and $1,000,000, respectively. The preferred stock purchase agreement obligated
Vector to purchase an additional 13,500 shares of Series A preferred stock and
1,134,644 shares of Series B preferred stock for $1,350,000 and $150,000,
respectively, prior to June 9, 1999. In addition, Vector has the option to
purchase an additional 13,500 shares of Series A preferred stock and 1,134,644
shares of Series B preferred stock for $1,350,000 and $150,000, respectively, on
or prior to March 9, 2002. (See Note 13)
The Series A preferred stock issued to Vector accrues dividends at a rate
of 15% per annum for the period from March 1, 1999 to August 1, 2001, 5.45% per
annum for the period from August 1, 2001 to March 1, 2003, and 9% for the period
from March 1, 2003 until its scheduled redemption. Accrued dividends are payable
when and as declared by the Company's board of directors, but if they are not
paid quarterly, the accrued dividends will accumulate and further dividends will
accrue thereon.
Proamics shall redeem, at face value plus accrued dividends, 1/36 of the
outstanding shares of Series A preferred stock on March 1, 2004 and an equal
number of shares each month thereafter until all Series A shares have been
redeemed. Proamics has the right to redeem the Series A preferred stock on and
after February 1, 2002. Proamics is required to redeem all shares of Series A
preferred stock upon a public offering of its shares.
The Series B preferred stock issued to Vector is convertible into shares of
common stock on a one for one exchange basis subject to certain dilution
adjustments as outlined in the preferred stock purchase agreement.
On March 9, 1999, Proamics entered into a preferred stock purchase
agreement with members of the Cramlo Group and Cramlo Investments, Ltd.
(collectively, Cramlo) whereby Proamics issued 24,000 shares of its Series C
preferred stock in settlement of its aggregate $1,200,000 notes payable to
Cramlo.
The Series C preferred stock accrues dividends at a rate of 8.5% until its
scheduled redemption. Accrued dividends are payable when and as declared by the
Company's board of directors, but if they are not paid quarterly, the accrued
dividends will accumulate and further dividends will accrue thereon.
Proamics shall redeem, at face value plus accrued dividends, plus accrued
dividends 1/36 of the outstanding shares of Series C preferred stock on March 1,
2004 and an equal number of shares each month thereafter until all Series C
shares have been redeemed. Proamics has the right to redeem the Series C
preferred stock on and after February 1, 2002. Proamics is required to redeem
all shares of Series C preferred stock upon a public offering of its shares.
(6) 401(k) RETIREMENT PLAN
The Company has a profit-sharing plan that covers substantially all
employees who have satisfied minimum age and service requirements. Employees
elect to contribute to the plan through salary deferrals pursuant to Section
401(k) of the Internal Revenue Code. The Company has the right, on a
discretionary basis, to match employee contributions. No matching contributions
were made in 1997, 1998, and 1999.
F-33
<PAGE> 113
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) PHANTOM STOCK AND STOCK OPTION PLANS
The Company maintains a plan under which certain employees are awarded
stock appreciation rights. Under this nonqualified plan, compensation is payable
only when the Company has a positive book value and certain other conditions are
met. Compensation may be paid in the form of either cash or Company stock, at
the Company's option, to rights holders based upon the difference between book
value at date of grant and book value at date of payment. All shares awarded are
subject to a five-year vesting schedule. Vesting can be accelerated upon the
occurrence of various transactions relating to a change in control of the
Company. The Company accrues the value of these rights as compensation expense
in the period in which such value arises. No compensation expense was recognized
in 1997, 1998, and 1999.
During 1997, the Company increased the number of shares authorized for
issuance under the plan from 1,000,000 to 2,000,000.
On March 9, 1999, Proamics adopted a Stock Option Plan and reserved
6,353,522 shares of common stock for issuance under this plan. No options have
been issued or granted under the plan.
(8) SOFTWARE DEVELOPMENT AND DISTRIBUTION AGREEMENT
In July 1997, the Company entered into a software development and
distribution agreement with a third-party software vendor. Under the terms of
the agreement, each party was granted a worldwide, irrevocable, nonexclusive
right and license to sell the other party's software product in exchange for
royalties. The agreement also requires the software vendor to pay the Company
the greater of a nonrefundable minimum royalty of $1,000,000 or the royalties
which would otherwise be calculable based on a prescribed formula and which is
due upon the sale of the Company's products. In December 1998, the software
development and distribution agreement was amended to reduce the nonrefundable
minimum royalty to $800,000 and change the expiration date for the agreement
from February 28, 1999 to January 31, 1999. License fees from the nonrefundable
minimum royalty have been recognized ratably over the amended term of the
minimum royalty period. Beginning in February 1999, the software vendor paid the
Company royalties on a quarterly basis based on actual sales of the Company's
product.
In June 1998, the Company entered into a software development and
distribution agreement with a third-party software vendor. Under the terms of
the agreement, each party was granted a worldwide, irrevocable, nonexclusive
right and license to sell the other party's software product in exchange for
royalties. The agreement also requires the software vendor to pay the Company
the greater of a one-time nonrefundable minimum royalty of $1,000,000 or the
royalties which would otherwise be calculable based on a prescribed formula and
which is due upon the sale of the Company's products. License fees from the
nonrefundable minimum royalty are recognized ratably over the 24-month term of
the minimum royalty period.
(9) SIGNIFICANT CUSTOMERS
The Company's two largest customers accounted for approximately 24% of
revenues for the year ended December 31, 1997 and the Company's largest customer
accounted for approximately 24% and 21% of revenues for the year ended December
31, 1998 and for the nine months ended September 30, 1999, respectively.
F-34
<PAGE> 114
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
One customer accounted for approximately 12% of accounts receivable at
December 31, 1998 and two customers accounted for approximately 31% of accounts
receivable at September 30, 1999.
(10) COMMITMENTS AND CONTINGENCIES
The Company is subject to potential legal actions which arise in the
ordinary course of business. In the opinion of management, the disposition of
all potential or threatened claims will not have a material impact on the
financial position of the Company.
(11) INCOME TAXES
The Company had no income tax expense for the years ended December 31, 1997
and 1998 and for the nine months ended September 30, 1999.
The reconciliation of the Company's income tax expense for the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1999 to
income taxes computed using the Federal statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
--------------------- SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
<S> <C> <C> <C>
Federal income tax benefit at the statutory rate... $(217,533) $(392,191) $ (460,340)
State income tax benefit, net of Federal tax
benefit.......................................... (6,335) (11,419) (161,567)
S Corporation earnings not taxed to the Company.... 217,533 392,191 (693,420)
Establishment of deferred tax assets on S
Corporation termination.......................... -- -- (1,038,684)
Research and experimentation credit................ -- -- (97,270)
Establishment of valuation allowance............... -- -- 2,437,681
Other.............................................. 6,335 11,419 13,600
--------- --------- -----------
$ -- $ -- $ --
========= ========= ===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 135,451
Depreciation and amortization............................. 4,894
Capitalized software...................................... 1,003,230
Accrued vacation.......................................... 96,011
Net operating loss carryforward........................... 1,100,825
Research and development credit........................... 97,270
-----------
Total deferred tax assets.............................. 2,437,681
Less valuation allowance.................................. (2,437,681)
-----------
Net deferred tax assets................................ $ --
===========
</TABLE>
F-35
<PAGE> 115
PROAMICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At September 30, 1999, the Company had net operating loss carryforwards for
income tax purposes of approximately $2,800,000 expiring in the year ending
December 31, 2019.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. Management has established a valuation for the full
amount of the deferred tax assets at September 30, 1999 due to the sufficient
uncertainty regarding the Company's ability to realize its deferred tax assets.
The net change in the valuation allowance during the nine months ended September
30, 1999 was an increase of $2,437,681.
(12) SUBSEQUENT EVENTS
On November 15, 1999, Vector purchased an additional 13,500 shares of the
Company's Series A preferred stock and 1,134,644 shares of the Company's Series
B preferred stock for $1,350,000 and $150,000, respectively.
On December 8, 1999, the Company was acquired by Niku Corporation. Proamics
received 3,501,938 shares of Niku common stock and 6,491,203 shares of Niku's
preferred stock for all of the Company's outstanding capital stock.
On December 8, 1999, the Company repaid $2,000,000 of notes payable to
Sirrom.
F-36
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Legal Anywhere, Inc. (Formerly
Legal Anywhere LLC):
We have audited the accompanying balance sheets of Legal Anywhere, Inc.
(formerly Legal Anywhere LLC) (the Company) as of December 31, 1998 and 1999,
and the related statements of operations, stockholders' and members' equity
(deficit), and cash flows for each of the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Legal Anywhere, Inc. (formerly
Legal Anywhere LLC) as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the years then ended in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Portland, Oregon
January 15, 2000, except as to Note 11, which is
as of January 31, 2000
F-37
<PAGE> 117
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 9,018 1,257,210
Accounts receivable, net.................................. 10,080 125,386
Other receivables......................................... -- 136,000
Prepaid and other current assets.......................... -- 59,715
--------- ----------
Total current assets.............................. 19,098 1,578,311
Property and equipment, net................................. 5,128 195,074
Other assets, net........................................... -- 39,722
--------- ----------
Total assets...................................... $ 24,226 1,813,107
========= ==========
LIABILITIES AND STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 4,384 58,182
Accrued expenses.......................................... -- 26,320
Deferred revenue.......................................... 5,977 54,067
Line of credit............................................ 64,000 --
--------- ----------
Total current liabilities......................... 74,361 138,569
Other liabilities........................................... -- 7,358
--------- ----------
Total liabilities................................. 74,361 145,927
--------- ----------
Commitments
Stockholders' and members' equity (deficit):
Members' contributions.................................... 443,231 --
Preferred stock, no par value. Authorized 5,000,000
shares; no shares issued and outstanding............... -- --
Common stock, no par value. Authorized 10,000,000 shares;
3,642,030 shares issued and outstanding at December 31,
1999................................................... -- 3,499,658
Deferred compensation..................................... -- (137,400)
Accumulated deficit....................................... (493,366) (1,695,078)
--------- ----------
Total stockholders' and members' equity
(deficit)....................................... (50,135) 1,667,180
--------- ----------
Total liabilities and stockholders' and members'
equity (deficit)................................ $ 24,226 1,813,107
========= ==========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 118
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1998 1999
--------- -----------
<S> <C> <C>
Revenue:
License................................................... $ 32,687 $ 201,128
Support and other......................................... 20,310 67,442
--------- -----------
52,997 268,570
--------- -----------
Cost of revenue:
License................................................... 4,550 1,045
Support and other......................................... 5,246 26,239
--------- -----------
9,796 27,284
--------- -----------
Gross profit........................................... 43,201 241,286
--------- -----------
Operating expenses:
Research and development.................................. 91,533 495,533
Sales and marketing....................................... -- 613,446
General and administrative................................ 63,664 365,680
--------- -----------
155,197 1,474,659
--------- -----------
Loss from operations................................... (111,996) (1,233,373)
--------- -----------
Other income (expense):
Interest income........................................... -- 33,075
Interest expense.......................................... (4,725) (1,414)
--------- -----------
(4,725) 31,661
--------- -----------
Net loss............................................... $(116,721) $(1,201,712)
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 119
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS'
MEMBERS' ------------------------- DEFERRED ACCUMULATED AND MEMBERS'
CONTRIBUTIONS SHARES AMOUNT COMPENSATION DEFICIT EQUITY (DEFICIT)
------------- ------------ ---------- ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... $ 335,204 -- $ -- $ -- $ (376,645) $ (41,441)
Members' contributions... 92,500 -- -- -- -- 92,500
Members' contributions of
consulting services.... 15,527 -- -- -- -- 15,527
Net loss................. -- -- -- -- (116,721) (116,721)
--------- --------- ---------- --------- ----------- -----------
Balance at December 31,
1998................... 443,231 -- -- -- (493,366) (50,135)
Reorganization as a C
Corporation............ (443,231) 1,114,022 443,231 -- -- --
Issuance of common
stock.................. -- 2,528,008 2,791,547 -- -- 2,791,547
Deferred compensation on
issuance of stock
options................ -- -- 193,650 (193,650) -- --
Amortization of deferred
compensation........... -- -- -- 56,250 -- 56,250
Noncash consulting
expense on issuance of
stock options.......... -- -- 71,230 -- -- 71,230
Net loss................. -- -- -- -- (1,201,712) (1,201,712)
--------- --------- ---------- --------- ----------- -----------
Balance at December 31,
1999................... $ -- 3,642,030 $3,499,658 $(137,400) $(1,695,078) $ 1,667,180
========= ========= ========== ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 120
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(116,721) $(1,201,712)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................ 1,900 38,072
Deferred rental expense.............................. -- 7,358
Allowance for doubtful accounts...................... 3,775 725
Noncash expense...................................... 15,527 71,230
Amortization of deferred compensation................ -- 56,250
Changes in assets and liabilities:
Accounts receivable............................... -- (116,031)
Other receivables................................. -- (136,000)
Prepaid and other assets.......................... (13,855) (90,438)
Accounts payable and accrued expenses............. (6,616) 80,118
Deferred revenue.................................. 5,977 48,090
--------- -----------
Net cash used by operating activities............. (110,013) (1,242,338)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment........................ (2,969) (227,017)
Trademark costs........................................... -- (10,000)
--------- -----------
Net cash used by investing activities............. (2,969) (237,017)
--------- -----------
Cash flows from financing activities:
(Repayment) borrowings on line of credit, net............. 29,500 (64,000)
Members' contributions.................................... 92,500 --
Proceeds of issuance of common stock...................... -- 2,791,547
--------- -----------
Net cash provided by financing activities......... 122,000 2,727,547
--------- -----------
Increase in cash.................................. 9,018 1,248,192
Cash at beginning of year................................... -- 9,018
--------- -----------
Cash at end of year......................................... $ 9,018 $ 1,257,210
========= ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 4,725 $ 1,414
========= ===========
Supplemental disclosure of noncash financing activities:
Deferred compensation on issuance of options.............. $ -- $ 193,650
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE> 121
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Legal Anywhere was founded as an Oregon limited liability company in 1996.
In January 1999, all assets and liabilities of Legal Anywhere LLC were
transferred to Legal Anywhere, Inc. (the Company), an Oregon Corporation.
The Company provides Internet-based "collaborative tools" to law firms and
corporate legal departments. Such tools enable lawyers to communicate and work
with other lawyers, clients and others concerning matters such as document
development, calendaring, case management, research and knowledge management.
(b) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(c) REVENUE RECOGNITION
The Company has adopted Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9, since inception. SOP 97-2, as
amended, generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
value of the elements.
To date, the Company has derived its revenue from licenses of its
collaborator product, maintenance and support, hosting services and delivery of
implementation consulting services. The Company sells its product primarily
through its direct sales force.
Revenue recognized from multiple-element software arrangements are
allocated to each element of the arrangement based on the fair values of the
elements, such as software products, maintenance and support, hosting services
and consulting services. The determination of fair value is based on objective
evidence which is specific to the Company.
Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable and collectibility is probable.
Revenue from hosting fees is recognized after services are provided and the
Company has no further obligation to perform services.
Deferred revenue includes amounts billed to customers for which revenues
have not been recognized which generally results from the deferred maintenance
and support or consulting services not yet rendered.
F-42
<PAGE> 122
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(d) RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred.
(e) SOFTWARE DEVELOPMENT COSTS
Costs associated with the planning and designing phase of software
development, including coding and testing activities necessary to establish
technological feasibility, are classified as research and development costs and
are charged to costs and expenses as incurred. Once technological feasibility
has been determined, significant costs incurred in the construction phase of
software development, including coding and testing and product quality
assurance, are capitalized. To date, no software development costs have been
capitalized as technological feasibility has been achieved substantially
concurrent with the general release of the Company's software product.
(f) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets as follows: computer hardware and software
over three years; furniture and equipment over five years; and leasehold
improvements over the remaining life of the lease or the useful life, whichever
is shorter. Maintenance and repairs are expensed as incurred.
(g) INCOME TAXES
Effective January 1999, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts to be recovered.
Prior to January 1999, the Company elected to be taxed under the
partnership provisions of the Internal Revenue Code. Under those provisions, the
Company did not pay federal or state corporate income taxes on its taxable
income. Instead, the stockholders were individually responsible for federal and
state income taxes. Accordingly, no provision for income taxes was made in the
accompanying financial statements.
(h) ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $3,775
and $4,500 at December 31, 1998 and 1999, respectively.
F-43
<PAGE> 123
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
(i) OTHER ASSETS, NET
Other assets consist of a lease deposit for office space and expenses
related to a trademark.
During 1999, the Company filed for a trademark. The expenses relating to
the trademark has been capitalized and is being amortized using the
straight-line method over five years. Amortization expense for the year ended
December 31, 1999 was $1,001.
The Company will assess impairment when events and circumstances indicate
that impairment might exist. To date, there has been no indication of
impairment.
(j) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. This statement permits a
company to choose either a fair-value-based method of accounting for its
stock-based compensation arrangements or to comply with the Accounting
Principles Board Opinion 25 (APB Opinion 25) intrinsic-value-based method adding
pro forma disclosures of net income computed as if the fair-value-based method
had been applied in the financial statements. The Company applies SFAS No. 123
by retaining the APB Opinion 25 method of accounting for stock-based
compensation for employees with annual pro forma disclosures of net income.
Stock-based compensation for non-employees is accounted for using the
fair-value-based method.
(k) ADVERTISING
The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was approximately $900 and $7,100 for the years ended
December 31, 1998 and 1999, respectively.
(l) COMPREHENSIVE LOSS
The Company did not have any significant components of other comprehensive
loss for the years ended December 31, 1998 and 1999.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term nature of
these instruments.
(n) SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information (SFAS 131), for the year ended December 31,
1999. Based on definitions contained within SFAS 131, the Company has determined
that it operates in one segment.
(o) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards for derivative
financial instruments and hedging
F-44
<PAGE> 124
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
activities related to those instruments, as well as other hedging activities.
Because the Company does not currently hold any derivative instruments and does
not engage in hedging activities, the Company expects that the adoption of SFAS
No. 133 will not have a material impact on its financial position, results of
operations or cash flows. The Company will be required to adopt SFAS No. 133 for
the year ended December 31, 2001 in accordance with FASB SFAS No. 137, which
delayed implementation of SFAS 133.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Computer hardware and software.............................. $ 5,133 $135,783
Furniture and equipment..................................... 2,969 83,700
Leasehold improvements...................................... -- 15,636
------- --------
8,102 235,119
Less accumulated depreciation and amortization.............. (2,974) (40,045)
------- --------
$ 5,128 $195,074
======= ========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1999 was
$1,900 and $37,071, respectively.
(3) LINE OF CREDIT
At December 31, 1998, the Company had a line of credit which allowed for
borrowings up to $75,000. The line bore interest at 0.5% plus the bank's prime
rate. There was $64,000 outstanding under the line of credit at December 31,
1998. The line of credit was secured by the assets of the Company and guaranteed
by a stockholder.
The line of credit was paid in full in 1999 and was cancelled in April
1999.
(4) STOCKHOLDERS' EQUITY
(A) PREFERRED STOCK
The Company has authorized 5,000,000 shares of no par value preferred
stock. The Board of Directors (the Board) of the Company has authority to divide
the preferred stock into as many series as it shall determine from time to time.
Each series of preferred stock shall have the powers, preferences and rights as
determined by the Board at its discretion. At December 31, 1998 and 1999, no
preferred stock had been issued.
(B) COMMON STOCK
The Company has authorized 10,000,000 shares of no par value common stock.
Each share of common stock has voting rights of one vote per share.
(5) STOCK INCENTIVE PLAN
Effective January 1999, the Company adopted the 1999 Stock Incentive Plan
(the Plan) which provides for the granting of stock options to employees,
directors and consultants. Under
F-45
<PAGE> 125
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
the terms of the Plan, eligible employees may receive statutory and nonstatutory
stock options, stock bonuses and stock appreciation rights for purchase of
shares of the Company's common stock at prices, vesting, exercisability and such
other terms as determined by the board of directors. Cancelled options are
available for future grant. The Company has reserved 908,000 shares of its
common stock for issuance under the Plan.
During 1999, the Company granted 322,750 options to certain key employees
and 37,750 options to consultants to purchase shares of the Company's common
stock at $0.40 per share. The options were issued at a price below the fair
market value of the Company's stock on the date of grant of $1.00. The
difference between the stock option grant price and the fair market value on the
date of grant has been included as deferred compensation for employees of
$193,650. The deferred compensation is recorded as compensation expense over the
vesting period of the options in the statements of operations. Total
amortization of deferred compensation recorded in the accompanying statement of
operations for the year ended December 31, 1999 was $56,250.
The Company has computed, for pro forma disclosure purposes, the value of
all options granted during the year ended December 31, 1999 using the minimum
value method using the following weighted average assumptions for grants for the
year ended December 31, 1999:
<TABLE>
<S> <C>
Divided yield..................................... $ --
Risk-free interest rate........................... 5.1%
Expected life..................................... 7 years
</TABLE>
The Company applies Accounting Principle Bulletin Opinion No. 25 in
accounting for stock options issued to employees and directors under the
Plan and, accordingly, no compensation expense has been recognized for
these stock options in the financial statements. Had the Company determined
compensation expense based on the fair value at the grant date for its
stock options under Statement of Financial Accounting Standards (SFAS) No.
123, the Company's net loss would have been increased to the pro forma
amount indicated below:
<TABLE>
<CAPTION>
NET LOSS
-----------
<S> <C>
Net loss:
As reported............................................... $(1,201,712)
Pro forma................................................. (1,388,140)
</TABLE>
F-46
<PAGE> 126
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
A summary of the status of the Company's Plan at December 31, 1999 and
changes during the year then ended is presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------- --------
<S> <C> <C>
Outstanding, January 22, 1999
(date of Plan adoption)............................ -- $ --
Granted.............................................. 472,000 0.54
Exercised............................................ -- --
Canceled............................................. -- --
------- ------
Outstanding, December 31, 1999....................... 472,000 $ 0.54
======= ======
</TABLE>
The outstanding stock options have an exercise price ranging from $0.40 to
$1.00 and a weighted average remaining contractual life of nine years. At
December 31, 1999, a total of 101,750 options were vested at a weighted average
exercise price of $0.45 per share and with a weighted average remaining
contractual life of nine years.
The per share average fair value of options granted during the year ended
December 31, 1999 was $0.69. The total fair value of options granted during the
year ended December 31, 1999 was $325,914, which would be amortized on a
straight-line basis over the vesting period of the options.
The following table sets forth as of December 31, 1999 the number of
options outstanding, exercise price, weighted average remaining contractual
life, weighted average exercise price, number of exercisable options and
weighted average exercise price of exercisable options by groups of similar
price and grant date:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
- ---------------------------------------------------- ------------------
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED WEIGHTED
OPTIONS AT REMAINING AVERAGE AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE VESTED EXERCISE
PRICE 1999 LIFE (YEARS) PRICE OPTIONS PRICE
-------- ------------ ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.01 - 0.50 360,500 9 $ .40 93,750 $ .40
0.51 - 1.00 111,500 9 1.00 8,000 1.00
</TABLE>
(7) INCOME TAXES
As described in note 1, prior to January 1999, the Company elected to be
taxed under the partnership provisions of the Internal Revenue Code.
Accordingly, the Company did not pay any federal or state corporate income
taxes.
F-47
<PAGE> 127
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
Due to the Company's losses before the provision for income taxes for the
year ended December 31, 1999, there has been no provision for federal and state
taxes. The reconciliation of the actual benefit to the "expected" benefit
computed by applying the U.S. federal corporate rate is as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Computed "expected" income tax benefit...................... (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit............ (4)
Change in valuation allowance............................. 38
---
--%
===
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $1,060,000 to offset against future income for federal and state
tax purposes. These carryforwards expire through 2019. A provision of the
Internal Revenue Code requires the utilization of net operating losses be
limited when there is a change of more than 50% in ownership of the Company.
Such a change occurred with the issuance of common stock in March of 1999.
Accordingly, the utilization of the net operating loss carryforwards generated
from periods prior to March of 1999 is limited.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets and deferred tax
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $408,000
Deferred compensation..................................... 49,000
Other..................................................... 2,000
--------
Total gross deferred tax assets........................ 459,000
Less valuation allowance.................................... 459,000
--------
Net deferred tax assets................................ $ --
========
</TABLE>
(8) SIGNIFICANT CUSTOMERS
During the years ended December 31, 1998 and 1999, one customer each year
accounted for 35% and 13%, respectively, of total revenue.
(9) COMMITMENTS AND CONTINGENCIES
(A) LEASES
The Company leases office space and equipment under non-cancelable
operating leases which expire at various dates through May 2004.
F-48
<PAGE> 128
LEGAL ANYWHERE, INC.
(FORMERLY LEGAL ANYWHERE LLC)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31:
2000........................................... $179,156
2001........................................... 177,616
2002........................................... 135,216
2003........................................... 110,516
2004........................................... 46,049
--------
$648,553
========
</TABLE>
Lease expense totaled $101,457 in 1999. The Company did not have any
operating leases during the year ended December 31, 1998 and, accordingly, did
not incur any lease expense for 1998.
(B) ROYALTIES
In April 1999, the Company entered into a royalty agreement to pay
royalties based on the number of licenses sold including that technology. The
Company's new release, expected in May 2000, will be the first version to
include this technology, therefore, there were no royalty payments under the
agreement for the year ended December 31, 1999.
(10) RELATED PARTY TRANSACTIONS
For the year ended December 31, 1999, the Company purchased accounting
services in the amount of approximately $40,000 from a company owned by a
shareholder.
The Company issued stock options to purchase 318,750 shares of common stock
to certain key members of management of the Company who are also stockholders
during the year ended December 31, 1999.
(11) SUBSEQUENT EVENTS
On January 31, 2000, Niku Corporation acquired all the issued and
outstanding shares of the Company in exchange for 853,689 shares of Niku common
stock valued at approximately $17,927,000. In addition, all outstanding stock
options of the Company will be assumed by Niku.
In January 2000, the Company issued 119,000 stock options to employees with
an exercise price below the deemed fair market value. In connection with the
grants, the Company will recognize approximately $83,000 in deferred
compensation.
F-49
<PAGE> 129
NIKU CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the combined financial position or results of operations for future periods
or the results of operations or financial position that actually would have been
realized had Niku, Proamics and Legal Anywhere been a combined company during
the specified periods. The unaudited pro forma combined condensed financial
statements, including the related notes, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical financial
statements and related notes thereto of Niku, Proamics and Legal Anywhere,
included elsewhere in this filing. The following unaudited pro forma combined
condensed financial statements give effect to the acquisition of Proamics and
Legal Anywhere by Niku using the purchase method of accounting. The unaudited
pro forma combined condensed financial statements are based on the respective
historical audited and unaudited financial statements and related notes of Niku,
Proamics and Legal Anywhere.
The pro forma adjustments are preliminary and based on management's
estimates of the value of the tangible and intangible assets acquired. The
actual adjustments may differ materially from those presented in these pro forma
financial statements. A change in the pro forma adjustments would result in a
reallocation of the purchase price affecting the value assigned to the long-term
tangible and intangible assets or, in some circumstances, resulting in a charge
to the statement of operations. The effect of these changes on the statement of
operations will depend on the nature and amounts of the assets and liabilities
adjusted. For example, if all goodwill and intangible assets resulting from the
acquisitions of Proamics and Legal Anywhere were amortized over three years it
would have resulted in a charge to the unaudited pro forma statements of
operations of $22,612,000 and $16,959,000 for the year ended January 31, 1999,
and the nine months ended October 31, 1999, respectively. See notes 2(d) and
2(f) to the unaudited pro forma combined condensed financial statements.
The unaudited pro forma combined condensed balance sheet assumes that the
acquisitions took place on October 31, 1999, and combines Niku's audited October
31, 1999 consolidated balance sheet with Proamics' audited September 30, 1999
consolidated balance sheet and Legal Anywhere's unaudited September 30, 1999
balance sheet. The unaudited pro forma combined condensed statements of
operations assumes the acquisitions took place on February 1, 1998, and combines
Niku's audited consolidated statement of operations for the year ended January
31, 1999, with Proamics' audited consolidated statement of operations and Legal
Anywhere's audited statement of operations for the year ended December 31, 1998,
and Niku's audited consolidated statement of operations for the nine months
ended October 31, 1999, with Proamics' audited consolidated statement of
operations for the nine months ended September 30, 1999, and Legal Anywhere's
unaudited statement of operations for the nine months ended September 30, 1999.
F-50
<PAGE> 130
NIKU CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
OCTOBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ------------------------
NIKU PROAMICS LEGAL ANYWHERE ADJUSTMENTS COMBINED
-------- -------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 17,154 $ 3,248 $ 816 $ $ 21,218
Short-term investments............ 2,175 -- -- 2,175
Accounts receivable............... 2,754 3,864 33 6,651
Prepaid expenses and other current
assets.......................... 1,258 130 41 1,429
-------- -------- ------- -------- ---------
Total current assets....... 23,341 7,242 890 -- 31,473
Deposits and other assets........... 160 192 40 392
Property and equipment, net......... 4,406 1,241 191 5,838
Goodwill and other intangible
assets, net....................... 831 -- -- 47,802(a)
20,034(c) 68,667
-------- -------- ------- -------- ---------
$ 28,738 $ 8,675 $ 1,121 $ 67,836 $ 106,370
======== ======== ======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................. $ 3,817 $ 872 $ 90 $ $4,779
Accrued liabilities............... 1,753 1,388 16 500(a)
500(c) 4,157
Current portion of long-term
obligations..................... 5,502 886 -- 6,388
Deferred revenue.................. 1,946 1,499 15 (1,000)(b) 2,460
-------- -------- ------- -------- ---------
Total current
liabilities.............. 13,018 4,645 121 -- 17,784
Long-term obligations, less current
portion........................... 968 2,366 7 3,341
-------- -------- ------- -------- ---------
Total liabilities.......... 13,986 7,011 128 -- 21,125
-------- -------- ------- -------- ---------
Redeemable convertible preferred
stock and warrants................ 28,580 12,390 -- (12,390)(a)
-------- -------- -------
32,456(a) 61,036
-------- ---------
Stockholders' equity (deficit):
Common stock...................... 1 -- 2,442 (2,442)(c) 1
Additional paid-in capital........ 10,100 2,930 -- (2,930)(a)
17,510(a)
20,527(c) 48,137
Treasury stock.................... (30) (227) 227(a) (30)
Deferred stock compensation....... (7,238) -- (137) 137(c) (7,238)
Notes receivable from
stockholders.................... (108) -- -- (108)
Accumulated deficit............... (16,553) (13,429) (1,312) 13,429(a)
-- 1,312(c) (16,553)
-------- -------- ------- -------- ---------
Total stockholders' equity
(deficit)................ (13,828) (10,726) 993 47,770 24,209
-------- -------- ------- -------- ---------
$ 28,738 $ 8,675 $ 1,121 $ 67,836 $ 106,370
======== ======== ======= ======== =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-51
<PAGE> 131
NIKU CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------- -----------------------
NIKU PROAMICS LEGAL ANYWHERE ADJUSTMENTS COMBINED
------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
License................... $ -- $ 3,165 $ 33 $ $ 3,198
Services.................. 15 7,700 20 7,735
------- ------- ------- -------- --------
Total revenues....... 15 10,865 53 -- 10,933
Cost of revenues:
License................... -- 190 5 195
Services.................. 4 4,957 5 4,966
------- ------- ------- -------- --------
Total cost of
revenues.......... 4 5,147 10 -- 5,161
------- ------- ------- -------- --------
Gross profit......... 11 5,718 43 -- 5,772
Operating expenses:
Research and development.. 1,610 1,349 91 3,050
Sales and marketing....... 290 2,688 -- 2,978
General and
administrative......... 996 2,349 64 3,409
Stock-based compensation.. 245 -- -- -- 245
Amortization of goodwill
and other intangible
assets................. 20 -- -- 12,371(d)
6,678(f) 19,069
------- ------- ------- -------- --------
Total operating
expenses........ 3,161 6,386 155 19,049 28,751
------- ------- ------- -------- --------
Operating loss.... (3,150) (668) (112) (19,049) (22,979)
Interest and other income
(expense), net......... 130 (486) (5) (361)
------- ------- ------- -------- --------
Net loss.......... $(3,020) $(1,154) $ (117) $(19,049) $(23,340)
======= ======= ======= ======== ========
Basic and diluted net
loss per share....... $ (0.62) $ (1.48)
======= ========
Shares used to compute
basic and diluted net
loss per share....... 4,882 9,993(e)
=======
854(g) 15,729
========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-52
<PAGE> 132
NIKU CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ----------------------
NIKU PROAMICS LEGAL ANYWHERE ADJUSTMENTS COMBINED
-------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
License................... $ 1,962 $ 2,497 $ 117 $ $ 4,576
Services.................. 1,014 6,702 40 7,756
-------- ------- ----- -------- --------
Total revenues....... 2,976 9,199 157 -- 12,332
Cost of revenues:
License................... 174 119 -- 293
Services.................. 429 5,303 20 5,752
-------- ------- ----- -------- --------
Total cost of
revenues.......... 603 5,422 20 -- 6,045
-------- ------- ----- -------- --------
Gross profit......... 2,373 3,777 137 -- 6,287
Operating expenses:
Research and
development............ 6,062 2,010 295 8,367
Sales and marketing....... 5,983 3,068 366 9,417
General and
administrative......... 1,837 2,214 262 4,313
Stock-based
compensation........... 2,018 -- 56 -- 2,074
Amortization of goodwill
and other intangible
assets................. 184 -- -- 9,278(d)
5,009(f) 14,471
-------- ------- ----- -------- --------
Total operating
expenses........ 16,084 7,292 979 14,287 38,642
-------- ------- ----- -------- --------
Operating loss.... (13,711) (3,515) (842) (14,287) (32,355)
Interest and other income
(expense), net......... 178 (220) 24 (18)
-------- ------- ----- -------- --------
Net loss.......... $(13,533) $(3,735) $(818) $(14,287) $(32,373)
======== ======= ===== ======== ========
Basic and diluted net
loss per share....... $ (2.31) $ (1.94)
========
Shares used to compute
basic and diluted net
loss per share....... 5,871 9,993(e)
========
854(g) 16,718
========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
statements.
F-53
<PAGE> 133
NIKU CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
On December 8, 1999, the Company acquired Proamics Corporation (Proamics),
a privately-held company in Chicago, Illinois. Niku issued 3,501,938 shares of
its common stock and 6,491,203 shares of the Company's Series D redeemable
convertible preferred stock for all of Proamics' outstanding capital stock
valued at approximately $49,966,000 for all of Proamics' outstanding capital
stock. On January 31, 2000, the Company acquired Legal Anywhere, Inc. (Legal
Anywhere), a privately-held company in Portland, Oregon. The Company issued
853,689 shares of its common stock value at approximately $17,927,000 for all of
Legal Anywhere's outstanding capital stock and assumed all outstanding Legal
Anywhere stock options. Both transactions are to be accounted for as a purchase.
The pro forma combined condensed balance sheet as of October 31, 1999,
gives effect to the acquisitions as if they had occurred on October 31, 1999.
The following adjustment has been reflected in the unaudited pro forma
combined condensed balance sheet:
(a) To record common stock issued by Niku and record applicable purchase
accounting entries for the acquisition of Proamics.
Under purchase accounting, the total purchase price will be allocated
to Proamics' assets and liabilities based on their relative fair
values. Amounts allocated to current products and technology and
assembled workforce will be amortized on a straight-line basis over
estimated useful lives of 3 years and customers lists will be
amortized on a straight-line basis over estimated useful lives of 4
years. Goodwill will be amortized over an estimated useful life of 5
years. Allocations are subject to valuations as of the date of the
consummation of the acquisition. The amounts and components of the
estimated purchase price along with the preliminary allocation of the
estimated purchase price to assets purchased are as follows (in
thousands):
<TABLE>
<S> <C>
Common stock................................................ $17,927
Series D redeemable convertible preferred stock............. 32,456
Estimated transaction costs................................. 500
-------
Total purchase price.............................. $50,466
=======
Cash and cash equivalents................................... $ 3,248
Accounts receivable......................................... 3,864
Prepaid expenses and other current assets................... 130
Deposits and other assets................................... 192
Property and equipment and other noncurrent assets.......... 1,241
Accounts payable............................................ (872)
Accrued liabilities......................................... (1,388)
Deferred revenue (after adjustment (b) below)............... (499)
Long-term obligations....................................... (3,252)
-------
Fair value of net tangible assets of Proamics..... 2,664
Assembled workforce......................................... 1,445
Customer lists.............................................. 2,543
Current products and technology............................. 18,672
Goodwill.................................................... 25,142
-------
Net assets acquired.................................... $50,466
=======
</TABLE>
(b) To reflect the reduction of deferred revenue to its fair value.
F-54
<PAGE> 134
The actual allocation of the purchase price will depend upon the
composition of Proamics' net assets on the closing date and Niku's evaluation of
the fair value of the net assets as of the date indicated. Consequently, the
actual allocation of the purchase price could differ from that presented above.
(c) To record common stock and stock options issued by Niku and record
applicable purchase accounting entries for the acquisition of Legal
Anywhere. The fair value of the 141,282 stock options issued was
estimated using the Black-Scholes option pricing model using an assumed
fair value of $21.00 per share for the underlying common stock. Amounts
allocated to indentifiable intangible assets and goodwill will be
amortized on a straight-line basis over estimated useful lives of 3
years. Allocations are subject to valuations as of the date of the
consummation of the acquisition. The amounts and components of the
estimate purchase price along with the preliminary allocation of the
estimated purchase price to assets purchased are as follows (in
thousands):
<TABLE>
<S> <C>
Common stock................................................ $17,927
Estimated fair value of stock options assumed............... 2,600
Estimated transaction costs................................. 500
-------
$21,027
=======
Cash........................................................ $ 816
Accounts receivable......................................... 33
Prepaid expenses and other current assets................... 41
Property and equipment...................................... 191
Other assets................................................ 40
Accounts payable............................................ (90)
Accrued expenses............................................ (16)
Deferred revenue............................................ (15)
Long-term obligations....................................... (7)
-------
Fair value of net tangible assets of Legal Anywhere....... 993
Assembled workforce......................................... 300
Customer lists.............................................. 1,700
Trade name.................................................. 200
Current products and technology............................. 2,300
Goodwill.................................................... 15,534
-------
Net assets acquired....................................... $21,027
=======
</TABLE>
The actual allocation of the purchase price will depend on the
composition of Legal Anywhere's net assets on the closing date and Niku's
evaluation of the fair value of the net assets as of the date indicated.
Consequently, the actual allocation of the purchase price could differ from
that presented above.
(2) UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
The pro forma combined condensed statements of operations give effect to
the acquisitions as if they had occurred on February 1, 1998.
The pro forma combined condensed statements of operations do not include
amortization of deferred stock compensation related to stock options granted and
restricted stock sold through February 21, 2000, expected to be approximately
$6,300,000 during the three-month period ended January 29, 2000, and
$26,000,000, $10,100,000, $4,300,000 and $1,100,000 during fiscal 2001, 2002,
2003, and 2004, respectively.
F-55
<PAGE> 135
The following adjustments have been reflected in the unaudited pro forma
combined condensed statement of operations:
(d) Adjustment to record the amortization of goodwill and intangible assets
resulting from the preliminary allocation of the Proamics purchase
price calculated as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
VALUE USEFUL LIFE AMORTIZATION
------ ----------- ------------
<S> <C> <C> <C>
Assembled workforce.......................... $1,445 3 years $ 483
Customer lists............................... 2,543 4 years 636
Current products and technology.............. 18,672 3 years 6,224
Goodwill..................................... 25,142 5 years 5,028
-------
$12,371
=======
</TABLE>
(e) To reflect the shares of common stock to be issued as consideration for
the acquisition of Proamics and shares of Series D redeemable
convertible preferred stock to be issued as consideration for the
acquisition on an "as if converted" basis.
(f) Adjustment to record the amortization of goodwill and intangible assets
resulting from the preliminary allocation of Legal Anywhere purchase
price calculated as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
VALUE USEFUL LIFE AMORTIZATION
------- ----------- ------------
<S> <C> <C> <C>
Assembled workforce......................... $ 300 3 years $ 100
Customer lists.............................. 1,700 3 years 567
Trade name.................................. 200 3 years 67
Current products and technology............. 2,300 3 years 766
Goodwill.................................... 15,534 3 years 5,178
------
$6,678
======
</TABLE>
(g) To reflect the shares of common stock to be issued as consideration for
the acquisition of Legal Anywhere.
F-56
<PAGE> 136
UNDERWRITING
Niku and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to conditions
specified in the underwriting agreement, each underwriter has severally agreed
to purchase the number of shares indicated in the following table. Goldman,
Sachs & Co., Dain Rauscher Incorporated, Thomas Weisel Partners LLC and U.S.
Bancorp Piper Jaffray Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Dain Rauscher Incorporated..................................
Thomas Weisel Partners LLC..................................
U.S. Bancorp Piper Jaffray Inc. ............................
---------
Total..................................................... 8,000,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,200,000 shares from Niku to cover such sales. They may exercise that option
for 30 days. If any shares are purchased under this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Niku. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY NIKU
-------------------
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
The per share underwriting discounts and commission equals the public offering
price per share of common stock less the per share amount paid by the
underwriters to Niku.
In November 1999, Tailwind Capital Partners, L.P., an entity affiliated
with Thomas Weisel Partners LLC, purchased an aggregate of 150,000 shares of our
Series D preferred stock for an aggregate purchase price of $750,000. The shares
of our Series D preferred stock beneficially owned by this affiliate of Thomas
Weisel Partners LLC have been deemed by the National Association of Securities
Dealers, Inc. to be underwriting compensation and will be restricted from sale,
transfer, assignment or hypothecation for a period of one year from the date of
this offering, except as otherwise permitted by the National Association of
Securities Dealers, Inc. Conduct Rule 2710 (c)(7)(A).
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any of these
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial public
offering price, the representatives may change the offering price and the other
selling terms.
Niku and its directors, officers, employees and other stockholders have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior
U-1
<PAGE> 137
written consent of Goldman, Sachs & Co. This restriction does not apply to any
issuances under our existing employee benefit plans or, with respect to
individuals, transfers by gift, will or intestate succession, or with respect to
partnerships, transfers to partners, provided that in each case the transferee
agrees to be bound by the restriction for any remaining period, or pursuant to
an acquisition or strategic investment transaction, provided that any person who
acquires securities in an acquisition or strategic investment transaction agrees
to be bound by the restriction for any remaining period, or sale of up to 50,000
shares held by a charitable organization. See "Shares Eligible for Future Sale"
for a discussion of transfer restrictions.
Prior to this offering, there has been no public market for the shares. The
initial public offering price for the common stock in this offering will be
negotiated among Niku and the representatives. The factors to be considered in
determining the initial public offering price of the shares in addition to
prevailing market conditions, will be Niku's historical performance, estimates
of the business potential and earnings prospects of Niku, an assessment of
Niku's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
Niku has applied for approval for quotation of its common stock on the
Nasdaq National Market under the symbol "NIKU."
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of bids or purchases made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of this underwriter in stabilizing or short-sale covering
transactions.
These activities by the underwriters may stabilize, maintain or affect the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Niku has requested the underwriters to reserve for sale, at the initial
public offering price, approximately 400,000 shares of common stock offered in
this offering for business partners, suppliers and other associates of Niku and
its management who have expressed an interest in purchasing the shares of common
stock in the offering. In addition, Niku has requested the underwriters to
reserve for sale, at the initial public offering price, approximately 500,000
shares of common stock offered in this offering to be offered to Dell USA L.P.,
which has indicated an interest in purchasing these shares. However, it is
possible that Dell USA L.P. will not purchase these shares. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares which are not
purchased by these persons will be offered by the underwriters to the general
public on the same terms as the other shares offered in this offering.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters of this offering. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the representatives to underwriters that may make Internet distributions on the
same basis as other allocations.
U-2
<PAGE> 138
Niku estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,000,000.
Niku has agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act of 1933.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on
approximately 78 public offerings of equity securities that have been completed.
Thomas Weisel Partners does not have any material relationship with Niku or any
of its officers, directors or other controlling person, except with respect to
(1) its contractual relationship with Niku pursuant to the underwriting
agreement entered into in connection with this offering and (2) the relationship
of its affiliate with Niku as the holder of 150,000 shares of our Series D
preferred stock.
U-3
<PAGE> 139
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 7
Special Note Regarding Forward-
Looking Statements................. 21
Use of Proceeds...................... 22
Dividend Policy...................... 22
Capitalization....................... 23
Dilution............................. 25
Selected Consolidated Financial
Data............................... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
Business............................. 42
Management........................... 57
Certain Transactions................. 67
Principal Stockholders............... 69
Description of Capital Stock......... 71
Shares Eligible for Future Sale...... 75
Legal Matters........................ 77
Experts.............................. 77
Change in Accountants................ 77
Where You Can Find Additional
Information........................ 77
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
-------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
8,000,000 Shares
NIKU CORPORATION
Common Stock
-------------------------
[NIKU LOGO]
-------------------------
GOLDMAN, SACHS & CO.
DAIN RAUSCHER WESSELS
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
Representatives of the Underwriters
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 140
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 53,434
NASD filing fee............................................. 20,740
Nasdaq National Market initial filing fee................... 1,000
Accounting fees and expenses................................ 350,000
Legal fees and expenses..................................... 350,000
Road show expenses.......................................... 30,000
Printing and engraving expenses............................. 150,000
Blue sky fees and expenses.................................. 600
Transfer agent and registrar fees and expenses.............. 1,000
Miscellaneous............................................... 43,226
----------
Total..................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability:
- for any breach of the director's duty of loyalty to the Registrant or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
- for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Registrant's
Bylaws provide that:
- the Registrant is required to indemnify its directors and officers to the
fullest extent permitted by the Delaware General Corporation Law, subject
to certain very limited exceptions;
- the Registrant may indemnify its other employees and agents to the
fullest extent permitted by the Delaware General Corporation Law, subject
to very limited exceptions;
- the Registrant is required to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding;
II-1
<PAGE> 141
- the Registrant may advance expenses, as incurred, to its employees and
agents in connection with a legal proceeding; and
- the rights conferred in the Bylaws are not exclusive.
The Registrant has entered into Indemnification Agreements with each of its
current directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification set
forth in the Registrant's Certificate of Incorporation and to provide additional
procedural protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Registrant regarding which
indemnification is sought, nor is the Registrant aware of any threatened
litigation that may result in claims for indemnification.
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, Bylaws and the Indemnification
Agreements entered into between the Registrant and each of its directors and
officers may be sufficiently broad to permit indemnification of the Registrant's
directors and officers for liabilities arising under the Securities Act.
The Registrant maintains directors' and officers' liability insurance and
expects to obtain a rider to such coverage for securities matters.
See also the undertakings set out in response to Item 17.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT NUMBER
---------------- ------
<S> <C>
Form of Underwriting Agreement.............................. 1.01
Registrant's Certificate of Incorporation................... 3.01
Registrant's Bylaws......................................... 3.03
Form of Indemnification Agreement........................... 10.01
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years prior to the effective date of this Registration
statement, the Registrant has issued and sold the following unregistered
securities:
1. In January 1998, the Registrant issued and sold 10,000,000 shares of
Series F preferred stock to a group of four individual investors, each
of which is a trust controlled by two of the founders of the Registrant,
and one venture capital fund and 3,962,500 shares of common stock to a
group of eight individual investors, consisting of two trusts controlled
by two of the founders and six employees of the Registrant, for an
aggregate consideration of $539,625 in cash. This sale of preferred
stock was made in reliance on Section 4(2) and/or Rule 506 of Regulation
D under the Securities Act.
2. In February 1998, the Registrant issued and sold 4,285,709 shares of
Series A preferred stock to a group of thirteen individual investors,
consisting of two trusts controlled by members of the board of directors
of the Registrant, five employees of the Registrant and six unrelated
individual investors, and three venture capital funds for an aggregate
consideration of $1,499,998.15 in cash. In April and May of 1998, the
Registrant issued and sold an additional 857,142 shares of Series A
preferred stock to a group of three individual investors, each of which
is a trust controlled by a member of the board of directors of the
Registrant, for an aggregate consideration of $299,999.70 in cash. This
sale of preferred stock was made in reliance on Section 4(2) and/or Rule
506 of Regulation D under the Securities Act.
II-2
<PAGE> 142
3. In October 1998, the Registrant issued and sold 6,959,997 shares of
Series B preferred stock to a group of five individual investors, four
of which are trusts controlled by three members of the board of
directors of the Registrant, and three venture capital funds for an
aggregate consideration of $5,219,997.75 in cash. In November 1998, the
Registrant issued and sold an additional 426,665 shares of Series B
preferred stock to a group of three individual investors, consisting of
a member of the board of directors of the Registrant and two employees
of the Registrant, and one venture capital fund for an aggregate
consideration of $319,998.75 in cash. In December 1998, the Registrant
issued and sold an additional 613,330 shares of Series B preferred stock
to a group of five individual investors, consisting of four employees of
the Registrant and another unrelated individual investor, two venture
capital funds and one corporate investor, Comdisco, Inc., for an
aggregate consideration of $459,997.50 in cash. The sale of these shares
was made in reliance on Section 4(2) and/or Rule 506 of Regulation D
under the Securities Act.
4. In December 1998, in connection with its acquisition of Alyanza Software
Corporation, the Registrant issued 524,995 shares of common stock to a
group of nine individuals, all of whom were former stockholders of
Alyanza. The sale of these shares was made in reliance on Section 4(2)
and/or Rule 506 of Regulation D under the Securities Act.
5. In February 1999, the Registrant issued to Comdisco, Inc. warrants to
purchase up to 630,000 shares of Series B Preferred Stock at an exercise
price of $0.75 per share which expires, if not earlier exercised, upon
the earlier of February 2, 2006 or three years from the effective date
of the Registrant's initial public offering.
6. In May 1999, the Registrant issued and sold 9,987,439 shares of Series C
preferred stock to a group of twelve individual investors, consisting of
one member of the board of directors of the Registrant, two trusts
controlled by two members of the board of directors of the Registrant
and nine employees of the Registrant, thirteen venture capital funds and
one corporate investor, Comdisco, Inc., for an aggregate consideration
of $19,875,003.61 in cash. The sale of these shares was made in reliance
on Section 4(2) and/or Rule 506 of Regulation D under the Securities
Act.
7. In November 1999, the Registrant issued and sold 7,998,012 shares of
Series D preferred stock to a group of thirty unrelated individual
investors, twenty-nine venture capital funds and two corporate
investors, Comdisco, Inc. and CNET Investments, for an aggregate
consideration of $39,930,060 in cash. The sale of these shares was made
in reliance on Section 4(2) and/or Rule 506 of Regulation D under the
Securities Act.
8. In November 1999, in connection with its acquisition of Proamics
Corporation, the Registrant issued 3,501,938 shares of common stock and
6,491,203 shares of Series D preferred stock to a group of twenty-six
individual investors, two venture capital funds and one corporate
investor, Epicor Software Inc., all of whom were former stockholders of
Proamics. The sale of these shares was made in reliance on Section 4(2)
and/or Rule 506 of Regulation D under the Securities Act.
9. From its inception on January 8, 1998 through January 29, 2000, the
Registrant has issued 2,848,750 shares of common stock to its employees,
consultants and other service providers through restricted stock
purchases or pursuant to stock purchase agreements.
10. From its inception on January 8, 1998 through January 29, 2000,
Registrant has issued 1,091,566 shares of common stock to its employees
upon exercise of options, and as of January 29, 2000, 4,921,236 shares
of common stock were issuable upon exercise of outstanding options. All
sales of common stock made pursuant to the exercise of stock options
were made in reliance on Rule 701 under the Securities Act.
II-3
<PAGE> 143
11. In January 2000, in connection with its acquisition of Legal Anywhere,
Inc., the Registrant issued 853,689 shares of common stock to a group
of forty-four individual investors, three venture capital funds and one
corporate investor, FJF, Inc., all of whom were former stockholders of
Legal Anywhere. The sale of these shares was made in reliance on
Section 3(a)(10) under the Securities Act.
The recipients of securities in each transaction listed above represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution and appropriate legends
were affixed to the share certificates issued in these transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.01+ Form of Underwriting Agreement.
2.01+ Agreement and Plan of Reorganization with Alyanza Software
Corporation, dated December 10, 1998.
2.02+ Agreement and Plan of Reorganization with Proamics
Corporation, dated November 16, 1999.
2.03+ Agreement and Plan of Reorganization with Legal Anywhere,
Inc., dated January 19, 2000.
3.01+ Registrant's Amended and Restated Certificate of
Incorporation.
3.02+ Form of Registrant's Amended and Restated Certificate of
Incorporation (to be filed immediately after the closing of
this offering).
3.03+ Registrant's Amended and Restated Bylaws.
3.04+ Registrant's Amended and Restated Bylaws (to be filed
immediately after the closing of this offering).
4.01+ Form of Specimen Certificate for Registrant's common stock.
4.02+ Fourth Amended and Restated Investors' Rights Agreement,
dated November 18, 1999, as amended December 8, 1999.
4.03+ Series F Preferred Stock Purchase Agreement, dated January
23, 1998.
4.04+ Series A Preferred Stock Purchase Agreement, dated February
13, 1998.
4.05+ Series B Preferred Stock Purchase Agreement, dated October
13, 1998.
4.06+ Series C Preferred Stock Purchase Agreement, dated May 13,
1999.
4.07+ Series D Preferred Stock Purchase Agreement, dated November
18, 1999.
5.01+ Opinion of Fenwick & West LLP regarding legality of the
securities being registered.
10.01+ Form of Indemnification Agreement entered into between
Registrant and its directors and executive officers.
10.02+ 1998 Stock Plan, as amended.
10.03+ Form of 2000 Equity Incentive Plan.
10.04+ Form of 2000 Employee Stock Purchase Plan.
10.05+ Business Loan Agreement, dated September 23, 1999, by and
between Mid-Peninsula and Registrant.
10.06+ Subordinated Loan and Security Agreement, dated as of
February 2, 1999, by and between Comdisco, Inc. and
Registrant.
10.07**+ iMap Agreement, dated June 30, 1999, by and between
USinternetworking, Inc. and Registrant.
10.08**+ Software License Agreement, dated June 30, 1999, by and
between USinternetworking, Inc. and Registrant.
10.09**+ Managed Services Agreement dated August 19, 1999, by and
between USinternetworking, Inc. and Registrant.
</TABLE>
II-4
<PAGE> 144
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
10.10**+ Promotion Agreement dated September 10, 1999 by and between
CNET, Inc. and Registrant.
10.11+ Software License and Services Agreement, dated December 22,
1998, by and between Registrant and Sybase, Inc.
10.12+ Software License Agreement, dated March 19, 1999, by and
between Sybase, Inc. and Registrant.
10.13+ Offer Letter for Joshua Pickus.
10.14+ Offer Letter for Mark Nelson.
10.15+ Offer Letter for Rhonda Dibachi.
10.16+ Offer Letter for Kenneth Johnson.
10.17+ Offer Letter for Harold Slawik.
10.18+ Restricted Stock Purchase Agreement, dated November 1, 1999,
by and between Joshua Pickus and Registrant.
10.19+ Restricted Stock Purchase Agreement, dated November 18,
1999, by and between Mark Nelson and Registrant.
10.20+ Full Recourse Promissory Note, dated November 11, 1999, by
and between Joshua Pickus and Registrant.
16.01+ Letter from Ernst & Young LLP.
21.01+ List of Registrant's Subsidiaries.
23.01+ Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent accountants.
23.03 Consent of KPMG LLP, independent accountants.
23.04 Consent of KPMG LLP, independent accountants.
24.01+ Power of Attorney.
27.01+ Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
** Confidential treatment has been requested with regard to certain portions of
this document. Such portions were filed separately with the Securities and
Exchange Commission.
(b) The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
Other financial statement schedules are omitted because the information called
for is not required or is shown either in the financial statements or the notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court
II-5
<PAGE> 145
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective;
and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Redwood City,
State of California, on this 24th day of February, 2000.
NIKU CORPORATION
By: /s/ FARZAD DIBACHI
------------------------------------
Farzad Dibachi
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ FARZAD DIBACHI Chief Executive Officer and Director February 24, 2000
- ------------------------------------------
Farzad Dibachi
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ MARK NELSON Chief Financial Officer February 24, 2000
- ------------------------------------------
Mark Nelson
ADDITIONAL DIRECTORS:
* Director February 24, 2000
- ------------------------------------------
Michael Brooks
* Director February 24, 2000
- ------------------------------------------
John Chen
* Director February 24, 2000
- ------------------------------------------
Terence Garnett
* Director February 24, 2000
- ------------------------------------------
William Raduchel
* Director February 24, 2000
- ------------------------------------------
Maynard Webb
*By: /s/ MARK NELSON Attorney-in-fact February 24, 2000
- -----------------------------------------
Mark Nelson
</TABLE>
II-7
<PAGE> 147
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
1.01+ Form of Underwriting Agreement.
2.01+ Agreement and Plan of Reorganization with Alyanza Software
Corporation, dated December 10, 1998.
2.02+ Agreement and Plan of Reorganization with Proamics
Corporation, dated November 16, 1999.
2.03+ Agreement and Plan of Reorganization with Legal Anywhere,
Inc., dated January 19, 2000.
3.01+ Registrant's Amended and Restated Certificate of
Incorporation.
3.02+ Form of Registrant's Amended and Restated Certificate of
Incorporation (to be filed immediately after the closing of
this offering).
3.03+ Registrant's Amended and Restated Bylaws.
3.04+ Registrant's Amended and Restated Bylaws (to be filed
immediately after the closing of this offering).
4.01+ Form of Specimen Certificate for Registrant's common stock.
4.02+ Fourth Amended and Restated Investors' Rights Agreement,
dated November 18, 1999, as amended December 8, 1999.
4.03+ Series F Preferred Stock Purchase Agreement, dated January
23, 1998.
4.04+ Series A Preferred Stock Purchase Agreement, dated February
13, 1998.
4.05+ Series B Preferred Stock Purchase Agreement, dated October
13, 1998.
4.06+ Series C Preferred Stock Purchase Agreement, dated May 13,
1999.
4.07+ Series D Preferred Stock Purchase Agreement, dated November
18, 1999.
5.01+ Opinion of Fenwick & West LLP regarding legality of the
securities being registered.
10.01+ Form of Indemnification Agreement entered into between
Registrant and its directors and executive officers.
10.02+ 1998 Stock Plan, as amended.
10.03+ Form of 2000 Equity Incentive Plan.
10.04+ Form of 2000 Employee Stock Purchase Plan.
10.05+ Business Loan Agreement, dated September 23, 1999, by and
between Mid-Peninsula and Registrant.
10.06+ Subordinated Loan and Security Agreement, dated as of
February 2, 1999, by and between Comdisco, Inc. and
Registrant.
10.07**+ iMap Agreement, dated June 30, 1999, by and between
USinternetworking, Inc. and Registrant.
10.08**+ Software License Agreement, dated June 30, 1999, by and
between USinternetworking, Inc. and Registrant.
10.09**+ Managed Services Agreement dated August 19, 1999, by and
between USinternetworking, Inc. and Registrant.
10.10**+ Promotion Agreement dated September 10, 1999 by and between
CNET, Inc. and Registrant.
10.11+ Software License and Services Agreement, dated December 22,
1998, by and between Registrant and Sybase, Inc.
10.12+ Software License Agreement, dated March 19, 1999, by and
between Sybase, Inc. and Registrant.
10.13+ Offer Letter for Joshua Pickus.
10.14+ Offer Letter for Mark Nelson.
10.15+ Offer Letter for Rhonda Dibachi.
10.16+ Offer Letter for Kenneth Johnson.
10.17+ Offer Letter for Harold Slawik.
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
------ -------------
<S> <C>
10.18+ Restricted Stock Purchase Agreement, dated November 1, 1999,
by and between Joshua Pickus and Registrant.
10.19+ Restricted Stock Purchase Agreement, dated November 18,
1999, by and between Mark Nelson and Registrant.
10.20+ Full Recourse Promissory Note, dated November 11, 1999, by
and between Joshua Pickus and Registrant.
16.01+ Letter from Ernst & Young LLP.
21.01+ List of Registrant's Subsidiaries.
23.01+ Consent of Fenwick & West LLP (included in Exhibit 5.01).
23.02 Consent of KPMG LLP, independent accountants.
23.03 Consent of KPMG LLP, independent accountants.
23.04 Consent of KPMG LLP, independent accountants.
24.01+ Power of Attorney.
27.01+ Financial Data Schedule.
</TABLE>
- ---------------
+ Previously filed.
** Confidential treatment has been requested with regard to certain portions of
this document. Such portions were filed separately with the Securities and
Exchange Commission.
<PAGE> 1
EXHIBIT 23.02
CONSENT OF KPMG LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors
Niku Corporation:
We consent to the use of our report included herein dated December 17, 1999,
except as to Note 9(d), which is as of January 31, 2000, and Note 9(e), which is
as of February 21, 2000,relating to the consolidated balance sheets of Niku
Corporation and subsidiaries as of January 31, 1999, and October 31, 1999, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the year ended January 31, 1999, and the nine
months ended October 31, 1999. We also consent to the use of our firm under the
headings "Selected Consolidated Financial Data" and "Experts."
/s/ KPMG LLP
Mountain View, California
February 24, 2000
<PAGE> 1
EXHIBIT 23.03
CONSENT OF KPMG LLP, INDEPENDENT ACCOUNTANTS
The Board of Directors
Proamics Corporation:
We consent to the use of our report included herein dated December 20, 1999,
relating to the consolidated balance sheets of Proamics Corporation and
subsidiaries as of December 31, 1998 and September 30, 1999, and the related
consolidated statements of operations, shareholders' deficit and cash flows for
each of the years in the two-year period ended December 31, 1998, and for the
nine months ended September 30, 1999. We also consent to the reference of our
firm under the heading "Experts."
/s/ KPMG LLP
- ---------------------------------
Chicago, Illinois
February 24, 2000
<PAGE> 1
EXHIBIT 23.04
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Legal Anywhere, Inc:
We consent to the use of our report included herein dated January 15, 2000,
except as to Note 11, which is as of January 31, 2000, relating to the balance
sheets of Legal Anywhere, Inc. (formerly Legal Anywhere LLC) as of December 31,
1998 and 1999, and the related statements of operations, stockholders' and
members' equity (deficit), and cash flows for each of the years then ended. We
also consent to the reference of our firm under the heading "Experts" in the
registration statement.
/s/ KPMG LLP
Portland, Oregon
February 24, 2000
